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Article by DailyStocks_admin    (01-16-09 03:17 AM)

Filed with the SEC from Jan 01 to Jan 07:

99 Cents Only Stores (NDN)
Akre Capital Management reduced its holdings to 7.16 million shares (10.24%), from the 7.88 million (11.3%) it had reported owning on Aug. 21. Last January, Akre Capital urged NDN to formally reevaluate key decisions with "thorough financial analysis and the goal of maximizing intrinsic value per share." In the current filing, Akre said that there has been "no change" since it wrote to the company last year.

BUSINESS OVERVIEW

99¬Ę Only Stores (the ‚ÄúCompany‚ÄĚ) is an extreme value retailer of primarily consumable general merchandise with an emphasis on name-brand products selling at 99¬Ę or less. The Company‚Äôs stores offer a wide assortment of regularly available consumer goods as well as a broad variety of first-quality closeout merchandise. As of March 29, 2008, the Company operated 265 retail stores with 186 in California, 46 in Texas, 22 in Arizona, and 11 in Nevada. These stores averaged approximately 21,722 gross square feet. In fiscal 2008, the Company‚Äôs stores open for the full year generated average net sales per estimated saleable square foot of $263, which the Company believes is among the highest in the extreme value retail industry, and average net sales per store of $4.5 million, which the Company believes is the highest among all dollar store chains. In fiscal 2008, 210 non-Texas stores open for the full year averaged net sales of $4.9 million per store and $291 per estimated saleable square foot and the 39 Texas stores open for the full year averaged net sales of $2.6 million per store and $128 per estimated saleable square foot. The Company entered the Texas market in June 2003.

The Company competes in the extreme value retail industry, also known as the deep discount industry, which it believes is one of the fastest growing retail sectors in the United States. The Company opened its first 99¬Ę Only Store in 1982 and believes that it operates the nation‚Äôs oldest existing general merchandise chain where no item is sold for more than 99¬Ę. For fiscal 2008, the Company expanded its store base, opening 16 stores and closing two Texas stores. Of these newly opened stores, nine stores are located in California and seven in Texas. In fiscal 2009, the Company plans to open approximately 19 new stores with about 13 expected to be in California, 2-3 in Texas, and 2-3 in Arizona and one in Nevada.

The Company also sells merchandise through its Bargain Wholesale division at prices generally below normal wholesale levels to retailers, distributors and exporters. Bargain Wholesale complements the Company‚Äôs retail operations by exposing the Company to a broader selection of opportunistic buys and generating additional sales with relatively small incremental operating expenses and sometimes at prices higher than 99¬Ę. Bargain Wholesale represented 3.4% of the Company‚Äôs total sales in fiscal 2008. Further information on the Company‚Äôs two business segments, retail operations and wholesale distribution, is provided below in Item 8. Financial Statements and Supplementary Data.

Industry

The Company participates primarily in the extreme value retail industry, with its 99¬Ę Only Stores. Extreme value retail is distinguished from other retail formats in that substantial portions of purchases are acquired at prices substantially below original wholesale cost through closeouts, manufacturer overruns, and other special-situation merchandise transactions. As a result, a substantial portion of the product mix is comprised of a frequently changing selection of specific brands and products. Special-situation merchandise is complemented by re-orderable merchandise which is also often purchased below normal wholesale prices. Extreme value retail is also distinguished by offering this merchandise to customers at prices significantly below typical retail prices.

The Company considers closeout merchandise as any item that is not generally re-orderable on a regular basis. Closeout or special-situation merchandise becomes available for a variety of reasons, including a manufacturer‚Äôs over-production, discontinuance due to a change in style, color, size, formulation or packaging, changes in nutritional label guidelines, the inability to move merchandise effectively through regular channels, reduction of excess seasonal inventory, discontinuation of test-marketed items, products close to their ‚Äúbest when used by‚ÄĚ date, and the financial needs of the supplier.

Most extreme value retailers also sell merchandise that can be purchased from a manufacturer or wholesaler on a regular basis. Although this merchandise can often be purchased at less than normal wholesale and sold below normal retail, the discount, if any, is generally less than with closeout merchandise. Extreme value retailers sell regularly available merchandise to provide a degree of consistency in their product offerings and to establish themselves as a reliable source of basic goods.

The Company also sells wholesale merchandise, which is generally obtained through the same or shared purchases of the retail operations, through its Bargain Wholesale division. The Company maintains showrooms at its main distribution facility in California and at the Company’s distribution facility outside Houston, Texas. Additionally, the Company has a showroom located in Chicago. Advertising of wholesale merchandise is conducted primarily at trade shows and by catalog mailings to past and potential customers. Wholesale customers include a wide and varied range of major retailers, as well as smaller retailers, distributors, and wholesalers.

Wholesale sales are recognized in accordance with the shipping terms agreed upon on the sales order. Wholesale sales are generally recognized under FOB origin where title and risk of loss pass to the buyer when the merchandise leaves the Company’s distribution facility.

Business Mission and Strategy

The Company‚Äôs mission is to provide a primary shopping destination for price-sensitive consumers and a fun treasure-hunt shopping experience for other value conscious consumers for food and other basic household items. The Company‚Äôs core strategy is to offer only good to excellent values on a wide selection of quality food and basic household items with a focus on name brands and an exciting assortment of surprises, all for 99¬Ę or less, in attractively merchandised, clean and convenient stores. The Company‚Äôs strategies to achieve its mission include the following:

Focus on ‚ÄúName-Brand‚ÄĚ Consumables . The Company strives to exceed its customers‚Äô expectations of the range and quality of name-brand consumable merchandise that can be purchased for 99¬Ę or less. During fiscal 2008, the Company purchased merchandise from more than 999 suppliers, including 3M, Colgate-Palmolive, Con Agra, Dole, Energizer Battery, General Mills, Georgia Pacific, Hasbro, Heinz, Hershey Foods, Johnson & Johnson, Kellogg‚Äôs, Kraft, Nestle, Procter & Gamble, Revlon, and Unilever.

Broad Selection of Regularly Available Merchandise. The Company offers consumer items in each of the following staple product categories: food (including frozen, refrigerated, and produce items), beverages, health and beauty care, household products (including cleaning supplies, paper goods, etc.), housewares (including glassware, kitchen items, etc.), hardware, stationery, party goods, seasonal goods, baby products, toys, giftware, pet products, plants and gardening, clothing, electronics and entertainment. The Company carries name-brand merchandise, off-brands and its own private-label items. The Company believes that by consistently offering a wide selection of basic household consumable items, the Company encourages customers to shop at the stores for their everyday household needs, which the Company believes leads to an increased frequency of customer visits. The Company’s total retail sales by product category for fiscal years 2008, 2007 and 2006 are set forth below:

Fun Treasure-Hunt Shopping Experience . The Company‚Äôs practices of buying closeouts and other opportunistic purchases and selling them for 99¬Ę or less, typically dramatically below retail prices, helps to create a sense of fun and excitement. The constantly changing selection of these special extreme values, often in limited quantities, helps to create a sense of urgency when shopping and increase shopping frequency, while generating customer goodwill, loyalty and awareness via word-of-mouth.

Attractively Merchandised and Well-Maintained Stores. The Company strives to provide its customers an exciting shopping experience in customer-service-oriented and friendly stores that are attractively merchandised, brightly lit and well maintained. The Company’s stores are laid out with items in the same category grouped together. The shelves are generally restocked throughout the day. The Company believes that offering merchandise in an attractive, convenient and familiar environment creates stores that are appealing to a wide demographic of customers.

Strong Long-Term Supplier Relationships. The Company believes that it has developed a reputation as a leading purchaser of name-brand, re-orderable, and closeout merchandise at discounted prices. A number of consistent behaviors have contributed to building the Company’s reputation, including its willingness and consistent practice over many years to take on large volume purchases and take possession of merchandise immediately, its ability to pay cash or accept abbreviated credit terms, its commitment to honor all issued purchase orders, and its willingness to purchase goods close to a target season or out of season. The Company’s experienced buying staff, with the ability to make immediate buying decisions, also enhances its strong supplier relationships. The Company believes its relationships with suppliers are further enhanced by its ability to minimize channel conflict for the manufacturer. Additionally, the Company believes it has well-maintained, attractively merchandised stores that have contributed to a reputation among suppliers for protecting their brand image.

Complementary Bargain Wholesale Operation. Bargain Wholesale complements the Company’s retail operations by allowing the Company to be exposed to a broader selection of opportunistic buys and to generate additional sales with relatively small incremental operating expense. The Bargain Wholesale division sells to local, regional, national, and international accounts. The Company maintains showrooms in Los Angeles, where it is based, as well as Houston, and Chicago.

Savvy Purchasing. The Company purchases merchandise at substantially discounted prices as a result of its buyers’ knowledge and experience in their respective categories, its negotiating ability, and its established reputation among its suppliers. The Company applies its aggressive negotiating approach to its purchasing of corporate supplies, construction, and services and strives to maintain a lean operating environment to reinforce its negotiating posture with suppliers.

Store Location and Size . The Company‚Äôs 99¬Ę Only Stores are conveniently located in freestanding buildings, neighborhood shopping centers, regional shopping centers or downtown central business districts, all of which are locations where the Company believes consumers are likely to do their regular household shopping. As of March 29, 2008, the Company‚Äôs 265 existing 99¬Ę Only Stores averaged approximately 21,722 gross square feet and the Company currently targets new store locations between 15,000 and 19,000 gross square feet. The Company believes its larger store size versus that of other typical ‚Äúdollar store‚ÄĚ chains allows it to more effectively display a wider assortment of merchandise, carry deeper stock positions, and provide customers with a more inviting environment that the Company believes encourages customers to shop longer and buy more. In the past, as part of its strategy to expand retail operations, the Company has at times opened larger new stores in close proximity to existing smaller stores where the Company determined that the trade area could support a larger store. In some of these situations, the Company retained its existing store.

Growth Strategy

The Company’s long-term growth plan is to become a premier nationwide extreme value retailer. Management believes that shorter term growth, as of the date of this report, will primarily result from new store openings in its existing markets that include California, Texas, Arizona and Nevada.

Growth in Existing Markets. By continuing to develop new stores in its current markets, the Company believes it can leverage its brand awareness in these regions and take advantage of its existing warehouse and distribution facilities, regional advertising and other management and operating efficiencies. This focus on growth through existing distribution facilities will help management to focus on implementing scaleable systems. The Company will not expand substantially in Texas unless it confirms the viability of its business model in the Texas market.

Long -Term Geographic Expansion. The Company‚Äôs long-term plan is to become a nationwide retailer by opening clusters of stores in densely populated geographic regions across the country. The Company believes that its strategy of consistently offering a broad selection of name-brand consumables at value pricing in a convenient store format is portable to other densely populated areas of the United States. In 1999, the Company opened its first 99¬Ę Only Stores location outside the state of California in Las Vegas, Nevada; Arizona followed in 2001 and Texas in 2003.

Real Estate Acquisitions . The Company considers both real estate lease and purchase opportunities and may consider for future expansion the acquisitions of a chain, or chains, of retail stores in existing markets or other regions, primarily for the purpose of acquiring favorable locations in line with its expansion plans.

Retail Operations

The Company‚Äôs stores offer customers a wide assortment of regularly available consumer goods, as well as a broad variety of quality, closeout merchandise, generally at a significant discount from standard retail prices. All merchandise sold in the Company‚Äôs 99¬Ę Only Stores sells for 99¬Ę per item, two or more items for 99¬Ę and items priced from 9¬Ę up to 99¬Ę, as long as the price ends in a 9.
(a) Two underperforming stores closed in Houston, Texas due to lease expiration.

(b) Includes 39 Texas stores open for a full year. Texas stores open for the full year had average sales of $2.6 million per store for 12 months ended March 29, 2008 and average sales per estimated saleable square foot of $128. All non-Texas stores open for the full year had average sales of $4.9 million per store and $291 of average sales per estimated saleable square foot.

(c) Includes 36 Texas stores open for a full year. Texas stores open for the full year had average sales of $2.4 million per store for 12 months ended March 31, 2007 and average sales per saleable square foot of $120. All non-Texas stores open for the full year had average sales of $4.8 million per store and $284 of average sales per estimated saleable square foot.

(d) Store count includes store activity from January 1, 2005 through March 31, 2006 due to the change in fiscal year. The Company operated 223 stores as of March 31, 2005.

(e) One store closed due to relocation and one due to an eminent domain action for the construction of a light railway project.

(f) For stores open for the entire fiscal year.

(g) Includes 36 Texas stores open for a full year. Texas stores open for the full year had average sales of $2.3 million per store for 12 months ended March 31, 2006 and average sales per estimated saleable square foot of $111. All non-Texas stores open for the full year had average sales of $4.7 million per store and $283 of average sales per estimated saleable square foot.

(h) Two smaller stores closed due to the presence of larger nearby 99¬Ę Only Stores and one store closed due to eminent domain for the construction of a new public school.

(i) Includes 17 Texas stores open for a full year. Texas stores open for the full year had average sales of $2.2 million per store in 2004 and average sales per estimated saleable square foot of $101. All non-Texas stores open for the full year had average sales of $4.8 million per store and $293 of average sales per estimated saleable square foot.

(j) Change in comparable store net sales compares net sales for all stores open at least 15 months.

Merchandising. All of the Company‚Äôs stores offer a broad variety of first-quality, name-brand and other closeout merchandise as well as a wide assortment of regularly available consumer goods. The Company also carries private-label consumer products made for the Company. The Company believes that the success of its 99¬Ę Only Stores concept arises in part from the value inherent in selling consumable items for only 99¬Ę or less per item, many of which are name-brands, and most of which typically retail elsewhere from $1.19 to $9.99.

Approximately half of the merchandise purchased by the Company is available for reorder including many branded consumable items. The mix and the specific brands of merchandise frequently change, depending upon the availability of closeout and other special-situation merchandise at suitable prices. Since commencing its closeout purchasing strategy for its stores, which first opened in 1982, the Company has been able to obtain sufficient name-brand closeouts as well as re-orderable merchandise at attractive prices. Management believes that the frequent changes in specific name-brands and products found in its stores from one week to the next, encourage impulse and larger volume purchases, result in customers shopping more frequently, and help to create a sense of urgency, fun and excitement. Unlike many discount retailers, the Company rarely imposes limitations on the quantity of specific value-priced items that may be purchased by a single transaction.


The Company targets value-conscious consumers from a wide range of socio-economic backgrounds with diverse demographic characteristics. Purchases are by cash, credit card, debit card or EBT (electronic benefit transfers). The Company’s stores currently do not accept checks or manufacturer’s coupons. The Company’s stores are open every day except Christmas, with operating hours designed to meet the needs of families.

Store Size, Layout and Locations. The Company strives to provide stores that are attractively merchandised, brightly lit, well-maintained, ‚Äúdestination‚ÄĚ locations. The layout of each of the Company‚Äôs stores is customized to the configuration of the individual location. The interior of each store is designed to reflect a generally uniform format, featuring attractively displayed products in windows, consistent merchandise display techniques, bright lighting, lower shelving height that allows visibility throughout the store, customized check-out counters and a distinctive color scheme on its interior and exterior signage, price tags, baskets and shopping bags. The Company emphasizes a strong visual presentation in all key traffic areas of each store. Merchandising displays are maintained throughout the day, changed frequently, and often incorporate seasonal themes. The Company believes that the frequently changing value priced name-brands, convenient and inviting layout, and the lower shelving height, help encourage the typical customer to shop more of the whole store.

Advertising . Advertising expenditures were $5.4 million, $5.0 million and $4.4 million or 0.5%, 0.5% and 0.4% of net retail sales for fiscal 2008, 2007 and 2006, respectively. The Company allocates the majority of its advertising budget to print advertising. The Company‚Äôs advertising strategy emphasizes the offering of nationally recognized, name-brand merchandise at significant savings. The Company manages its advertising expenditures by an efficient implementation of its advertising program combined with word-of-mouth publicity, locations with good visibility, and efficient signage. Because of the Company‚Äôs distinctive grand opening promotional campaign, which usually includes the sale of nine iPods and other high value items for only 99¬Ę each, grand openings often attract long lines of customers and receive media coverage.

Purchasing

The Company believes a primary factor contributing to its success is its ability to identify and take advantage of opportunities to purchase merchandise with high customer appeal and interest at prices lower than regular wholesale. The Company purchases most merchandise directly from the manufacturer. Other sources of merchandise include wholesalers, manufacturers’ representatives, importers, barter companies, auctions, professional finders and other retailers. The Company develops new sources of merchandise primarily by attending industry trade shows, advertising, distributing marketing brochures, cold calling, and obtaining referrals.

The Company seldom has continuing contracts for the purchase of merchandise and must continuously seek out buying opportunities from both its existing suppliers and new sources. No single supplier accounted for more than 5% of the Company’s total purchases in fiscal 2008. During fiscal 2008, the Company purchased merchandise from more than 999 suppliers, including 3M, Colgate-Palmolive, Con Agra, Dole, Energizer Battery, General Mills, Georgia Pacific, Hasbro, Heinz, Hershey Foods, Johnson & Johnson, Kellogg’s, Kraft, Nestle, Procter & Gamble, Revlon, and Unilever. Many of these companies have been supplying products to the Company for over twenty years.

A significant portion of the merchandise purchased by the Company in fiscal 2008 was closeout or special-situation merchandise. The Company has developed strong relationships with many manufacturers and distributors who recognize that their special-situation merchandise can be moved quickly through the Company’s retail and wholesale distribution channels. The Company’s buyers search continuously for closeout opportunities. The Company’s experience and expertise in buying merchandise has enabled it to develop relationships with many manufacturers that frequently offer some or all of their closeout merchandise to the Company prior to attempting to sell it through other channels. The key elements to these supplier relationships include the Company’s (i) ability to make immediate buying decisions, (ii) experienced buying staff, (iii) willingness to take on large volume purchases and take possession of merchandise immediately, (iv) ability to pay cash or accept abbreviated credit terms, (v) commitment to honor all issued purchase orders and (vi) willingness to purchase goods close to a target season or out of season. The Company believes its relationships with its suppliers are further enhanced by its ability to minimize channel conflict for a manufacturer.

The Company‚Äôs strong relationships with many manufacturers and distributors, along with its ability to purchase in large volumes, also enable the Company to purchase re-orderable name-brand goods at discounted wholesale prices. The Company focuses its purchases of re-orderable merchandise on a limited number of Stock Keeping Units (‚ÄúSKU‚Äôs‚ÄĚ) per product category, which allows the Company to make purchases in large volumes.

The Company utilizes and develops private label consumer products to broaden the assortment of merchandise that is consistently available. The Company also imports merchandise, especially in product categories such as kitchen items, housewares, toys, seasonal products, pet-care and hardware which the Company believes are not brand sensitive to consumers.

Warehousing and Distribution

An important aspect of the Company’s purchasing strategy involves its ability to warehouse and distribute merchandise quickly and with flexibility. The Company’s distribution centers are strategically located to enable quick turnaround of time-sensitive product as well as to provide long-term warehousing capabilities for one-time closeout purchases and seasonal or holiday items. The large majority of the merchandise sold by the Company is received, processed for retail sale if necessary, and then distributed to the retail locations from Company-operated warehouse and distribution facilities.

The Company utilizes its internal fleet, outside carriers, and contracted or owner-operated trucks for both outbound shipping and a backhaul program. The Company also receives merchandise shipped by rail to its Commerce, California distribution center which has a railroad spur on the property. Historically, the Company primarily used common carriers or owner-operators to deliver to stores outside of Southern California including its stores in Texas, Arizona and Nevada. The Company believes that its current California and Texas distribution centers will be able to support its anticipated growth throughout fiscal 2009. However, there can be no assurance that the Company’s existing warehouses will provide adequate storage space for the Company’s long-term storage needs or to support maximum sales levels at peak seasons for perishable products, that an opportunistic purchase may not temporarily pressure warehouse capacity, or that the Company will not make changes, including capital expenditures, to expand or otherwise modify its warehousing and distribution operations.

The Company arranges with vendors of certain merchandise to ship directly to its store locations. The Company's primary distribution practice, however, is to have merchandise delivered from its vendors to the Company's warehouses, where it is stored for timely shipment to its store locations.

Information pertaining to warehouse and distribution facilities is described under Item 2. Properties.

Information Systems

During fiscal 2008, the Company continued to make significant investments in a variety of infrastructure and process areas. These improvements included upgrades to its data center, networking infrastructure, and Wide Area Network (‚ÄúWAN‚ÄĚ) intended to improve security and reliability of processing.

Also during this timeframe, the Company implemented Aspect’s Elite exception- based loss prevention system to help reduce theft and shrink at the store level. Aspect is an exception-based software program specifically designed for loss prevention and can also be used for investigations related to POS transactions. The software package helps loss prevention detect anomalies through the POS system for transactions such as line voids, post voids, transaction voids, employee purchases, gift card fraud, etc. The Company also implemented Business Objects’ Financial Planning and Analysis (FP&A) tool. The FP&A tool has increased the accuracy and flexibility of our planning and analysis functions by allowing a more detailed level forecast and the ability for timely reporting on variances to plan.


CEO BACKGROUND

Directors:
Name :

Age at
June 30, 2008

Year First
Elected or
Appointed
Director

Principal Occupation

David Gold

76

1965

David Gold has been Chairman of the Board since the founding of the Company in 1965. Mr. Gold has over 50 years of retail experience.

Jeff Gold

40

1991

Jeff Gold joined the Company in 1984 and has served in various managerial capacities. From 1991 to 2004 he served as Senior Vice President of Real Estate and Information Systems. In January 2005, he was promoted to President and Chief Operating Officer.

Eric Schiffer

47

1991

Eric Schiffer joined the Company in 1991 and has served in various managerial capacities. In March 2000, he was promoted to President and in January 2005 to Chief Executive Officer. From 1987 to 1991, he was employed by Oxford Partners, a venture capital firm. Mr. Schiffer is a graduate of the Harvard Business School.

Lawrence Glascott

74

1996

Lawrence Glascott serves on the Company‚Äôs Audit, Compensation and Nominating and Corporate Governance Committees. Mr. Glascott has also served as Chairman of the Board of Directors of General Finance Corporation since November 2005. Before Mr. Glascott retired in 1996, he had been Vice President ‚Äď Finance of Waste Management International, an environmental services company, since 1991. Prior thereto, Mr. Glascott was a partner at Arthur Andersen LLP and was the Arthur Andersen LLP partner in charge of the 99¬Ę Only Stores account for six years. Additionally, Mr. Glascott was in charge of the Los Angeles based Arthur Andersen LLP Enterprise Group practice for over 15 years.

Marvin Holen

78

1991

Marvin Holen serves on the Company’s Audit, Compensation and Nominating and Corporate Governance Committees. He is an attorney and in 1960 founded the law firm of Van Petten & Holen. He served on the Board of the Southern California Rapid Transit District from 1976 to 1993 (six of those years as the Board’s President). He served on the Board of Trustees of California Blue Shield from 1972 to 1978, on the Board of United California Savings Bank from 1992 to 1994 and has served on several other corporate, financial institution and philanthropic boards of directors. He currently serves on the Board of United Pacific Bank.

Eric G. Flamholtz

65



2004

Eric G. Flamholtz, Ph.D., serves on the Company’s Compensation and Nominating and Corporate Governance Committees. He has been a professor of management at the Anderson Graduate School of Management, University of California at Los Angeles since 1973 and in 2006 became Professor Emeritus. He is President of Management Systems Consulting Corporation, which he founded in 1978. He is the author of several books, including Growing Pains: Transitioning from an Entrepreneurship to a Professionally Managed Firm . As a consultant he has extensive experience with firms ranging from entrepreneurships to Fortune 500 companies, including Starbucks, Navistar, Inc., Baskin Robbins, Jamba Juice and Grocery Outlets.

Jennifer Holden Dunbar

45

2007

Jennifer Holden Dunbar serves on the Company’s Audit, Compensation and Nominating and Corporate Governance Committees. She has served as a director of Big 5 Sporting Goods Corp. since February 2004, as well as from 1992 to 1997. Ms. Dunbar has served as Principal and Managing Director of Dunbar Partners, LLC, an investment/advisory firm since 2005. From 1994 to 1998, she was a partner of Leonard Green & Partners, L.P., a private equity firm, which she joined in 1989. During the 1990s, she served as a director of several public and private companies including Thrifty Payless, Inc., Kash N’ Karry Food Stores, Inc. and Gart Sports Company. Ms. Dunbar received her MBA from the Stanford Graduate School of Business in 1989.

Peter Woo

59

2007

Peter Woo serves on the Company‚Äôs Compensation and Nominating and Corporate Governance Committees. He is a founder, co-owner and President of Megatoys, Inc., a toy and general merchandise manufacturer and import/export company headquartered in Los Angeles that he founded in 1989. Megatoys operates buying, logistics and export facilities in Hong Kong and mainland China, as well as warehouse and distribution facilities in the U.S. Mr. Woo was instrumental in the redevelopment of the downtown Los Angeles area now known as the ‚Äútoy district‚ÄĚ, and has served as an advisor on international trade to the City of Los Angeles.

Howard Gold

48

1991

Howard Gold joined the Company in 1982 and has served in various managerial capacities. In 1991 Mr. Gold was named Senior Vice President of Distribution, and in January 2005 he was named Executive Vice President of Special Projects. He has been an executive with the Company for over 20 years. He served as a director of the Company from 1991 until March 2005, and re-joined the Board of Directors in April 2007.

Other Executive Officers:


Robert Kautz

50

Robert Kautz joined the Company in November 2005 as Executive Vice President and Chief Financial Officer. He was the CEO/CFO of Taste Good LLC, a private start-up in food production and distribution, from September 2004 until he joined the Company. He was CFO and subsequently CEO for Wolfgang Puck Casual Dining and Wolfgang Puck Worldwide where he was employed from 1998 until July 2004. Mr. Kautz is a graduate of the Harvard Business School.

MANAGEMENT DISCUSSION FROM LATEST 10K

Directors:
Name :

Age at
June 30, 2008

Year First
Elected or
Appointed
Director

Principal Occupation

David Gold

76

1965

David Gold has been Chairman of the Board since the founding of the Company in 1965. Mr. Gold has over 50 years of retail experience.

Jeff Gold

40

1991

Jeff Gold joined the Company in 1984 and has served in various managerial capacities. From 1991 to 2004 he served as Senior Vice President of Real Estate and Information Systems. In January 2005, he was promoted to President and Chief Operating Officer.

Eric Schiffer

47

1991

Eric Schiffer joined the Company in 1991 and has served in various managerial capacities. In March 2000, he was promoted to President and in January 2005 to Chief Executive Officer. From 1987 to 1991, he was employed by Oxford Partners, a venture capital firm. Mr. Schiffer is a graduate of the Harvard Business School.

Lawrence Glascott

74

1996

Lawrence Glascott serves on the Company‚Äôs Audit, Compensation and Nominating and Corporate Governance Committees. Mr. Glascott has also served as Chairman of the Board of Directors of General Finance Corporation since November 2005. Before Mr. Glascott retired in 1996, he had been Vice President ‚Äď Finance of Waste Management International, an environmental services company, since 1991. Prior thereto, Mr. Glascott was a partner at Arthur Andersen LLP and was the Arthur Andersen LLP partner in charge of the 99¬Ę Only Stores account for six years. Additionally, Mr. Glascott was in charge of the Los Angeles based Arthur Andersen LLP Enterprise Group practice for over 15 years.

Marvin Holen

78

1991

Marvin Holen serves on the Company’s Audit, Compensation and Nominating and Corporate Governance Committees. He is an attorney and in 1960 founded the law firm of Van Petten & Holen. He served on the Board of the Southern California Rapid Transit District from 1976 to 1993 (six of those years as the Board’s President). He served on the Board of Trustees of California Blue Shield from 1972 to 1978, on the Board of United California Savings Bank from 1992 to 1994 and has served on several other corporate, financial institution and philanthropic boards of directors. He currently serves on the Board of United Pacific Bank.

Eric G. Flamholtz

65



2004

Eric G. Flamholtz, Ph.D., serves on the Company’s Compensation and Nominating and Corporate Governance Committees. He has been a professor of management at the Anderson Graduate School of Management, University of California at Los Angeles since 1973 and in 2006 became Professor Emeritus. He is President of Management Systems Consulting Corporation, which he founded in 1978. He is the author of several books, including Growing Pains: Transitioning from an Entrepreneurship to a Professionally Managed Firm . As a consultant he has extensive experience with firms ranging from entrepreneurships to Fortune 500 companies, including Starbucks, Navistar, Inc., Baskin Robbins, Jamba Juice and Grocery Outlets.

Jennifer Holden Dunbar

45

2007

Jennifer Holden Dunbar serves on the Company’s Audit, Compensation and Nominating and Corporate Governance Committees. She has served as a director of Big 5 Sporting Goods Corp. since February 2004, as well as from 1992 to 1997. Ms. Dunbar has served as Principal and Managing Director of Dunbar Partners, LLC, an investment/advisory firm since 2005. From 1994 to 1998, she was a partner of Leonard Green & Partners, L.P., a private equity firm, which she joined in 1989. During the 1990s, she served as a director of several public and private companies including Thrifty Payless, Inc., Kash N’ Karry Food Stores, Inc. and Gart Sports Company. Ms. Dunbar received her MBA from the Stanford Graduate School of Business in 1989.

Peter Woo

59

2007

Peter Woo serves on the Company‚Äôs Compensation and Nominating and Corporate Governance Committees. He is a founder, co-owner and President of Megatoys, Inc., a toy and general merchandise manufacturer and import/export company headquartered in Los Angeles that he founded in 1989. Megatoys operates buying, logistics and export facilities in Hong Kong and mainland China, as well as warehouse and distribution facilities in the U.S. Mr. Woo was instrumental in the redevelopment of the downtown Los Angeles area now known as the ‚Äútoy district‚ÄĚ, and has served as an advisor on international trade to the City of Los Angeles.

Howard Gold

48

1991

Howard Gold joined the Company in 1982 and has served in various managerial capacities. In 1991 Mr. Gold was named Senior Vice President of Distribution, and in January 2005 he was named Executive Vice President of Special Projects. He has been an executive with the Company for over 20 years. He served as a director of the Company from 1991 until March 2005, and re-joined the Board of Directors in April 2007.

Other Executive Officers:


Robert Kautz

50

Robert Kautz joined the Company in November 2005 as Executive Vice President and Chief Financial Officer. He was the CEO/CFO of Taste Good LLC, a private start-up in food production and distribution, from September 2004 until he joined the Company. He was CFO and subsequently CEO for Wolfgang Puck Casual Dining and Wolfgang Puck Worldwide where he was employed from 1998 until July 2004. Mr. Kautz is a graduate of the Harvard Business School.

Critical Accounting Policies and Estimates

The preparation of financial statements requires management to make estimates and assumptions that affect reported earnings. These estimates and assumptions are evaluated on an on-going basis and are based on historical experience and other factors that management believes are reasonable. Estimates and assumptions include, but are not limited to, the areas of inventories, long-lived asset impairment, legal reserves, self-insurance reserves, leases, taxes and share-based compensation.

The Company believes that the following represent the areas where more critical estimates and assumptions are used in the preparation of the financial statements:

Inventory valuation: Inventories are valued at the lower of cost (first in, first out) or market. Valuation allowances for obsolete and excess inventory and shrinkage are also recorded. Shrinkage is estimated as a percentage of sales for the period from the last physical inventory date to the end of the applicable period. Such estimates are based on experience and the most recent physical inventory results. The valuation allowances for obsolete and excess inventory in many locations (including various warehouses, store backrooms, and sales floors of all its stores), require management judgment and estimates that may impact the ending inventory valuation as well as gross margins. The Company does not believe that there is a reasonable likelihood that there will be a material change in the future estimates or assumptions that the Company uses to calculate these inventory valuation reserves. A 10% increase in our estimate of expected losses from inventory obsolescence and excess inventory at March 29, 2008, would have increased this reserve by approximately $0.2 million and reduced fiscal 2008 pre-tax earnings by the same amount.

Long-lived asset impairment : In accordance with Statement of Financial Accounting Standards (‚ÄúSFAS‚ÄĚ) No. 144, ‚ÄúAccounting for the Impairment or Disposal of Long-lived Assets,‚ÄĚ the Company assesses the impairment of long-lived assets annually or when events or changes in circumstances indicate that the carrying value may not be recoverable. Recoverability is measured by comparing the carrying amount of an asset to expected future net cash flows generated by the asset. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, the carrying amount is compared to its fair value and an impairment charge is recognized to the extent of the difference. Factors that the Company considers important which could individually or in combination trigger an impairment review include the following: (1) significant underperformance relative to expected historical or projected future operating results; (2) significant changes in the manner of the Company‚Äôs use of the acquired assets or the strategy for the Company‚Äôs overall business; and (3) significant changes in the Company‚Äôs business strategies and/or negative industry or economic trends. On a quarterly basis, the Company assesses whether events or changes in circumstances occur that potentially indicate that the carrying value of long-lived assets may not be recoverable . The primary factor that could impact the outcome of an impairment evaluation is the estimate of future cash flows expected to be generated by the asset being evaluated. Considerable management judgment is necessary to estimate the cash flows. Accordingly, if actual results fall short of such estimates, significant future impairments could result. In fiscal 2008, the Company recorded an asset impairment charge of $0.5 million related to one underperforming store in Texas. The Company concluded that there were no such events or changes in circumstances during fiscal 2007. In fiscal 2006, the Company recorded an asset impairment charge of $0.8 million related to one underperforming store in Texas. The Company has not made any material changes to its long-lived asset impairment methodology during fiscal 2008.

Legal reserves: In the ordinary course of its business, the Company is subject to various legal actions and claims. In connection with such actions and claims, the Company must make estimates of potential future legal obligations and liabilities, which requires management‚Äôs judgment on the outcome of various issues. Management also relies on outside legal counsel in this process. The ultimate outcome of various legal issues could be materially different from management‚Äôs estimates and adjustments to income could be required. The assumptions used by management are based on the requirements of SFAS No. 5, ‚ÄúAccounting for Contingencies‚ÄĚ. The Company will record, if material, a liability when it has determined that the occurrence of a loss contingency is probable and the loss amount can be reasonably estimated, and it will disclose the related facts in the notes to its financial statements. If the Company determines that the occurrence of a loss contingency is reasonably possible or that it is probable but the loss cannot be reasonably estimated, the Company will, if material, disclose the nature of the loss contingency and the estimated range of possible loss, or include a statement that no estimate of loss can be made. There were no material changes in the estimates or assumptions used to determine legal reserves during fiscal 2008.

Self-insured workers’ compensation liability : The Company self-insures for workers’ compensation claims in California and Texas. The Company establishes a reserve for losses of both estimated known claims and incurred but not reported insurance claims. The estimates are based on reported claims and actuarial valuations of estimated future costs of reported and incurred but not yet reported claims. Should the estimates fall short of the actual claims paid, the liability recorded would not be sufficient and additional workers’ compensation costs, which may be significant, would be incurred. The Company does not discount the projected future cash outlays for the time value of money for claims and claim related costs when establishing its workers’ compensation liability. At March 29, 2008, a 10% increase in our estimate of expected losses from workers compensation claims would have increased this reserve by approximately $ 4.2 million and reduced fiscal 2008 pre-tax earnings by the same amount.

Operating leases: The Company recognizes rent expense for operating leases on a straight-line basis (including the effect of reduced or free rent and rent escalations) over the applicable lease term. The difference between the cash paid to the landlord and the amount recognized as rent expense on a straight-line basis is included in deferred rent. Cash reimbursements received from landlords for leasehold improvements and other cash payments received from landlords as lease incentives are recorded as deferred rent. Deferred rent related to landlord incentives is amortized as an offset to rent expense using the straight-line method over the applicable lease term. The closing of stores in the future may result in the immediate write-off of associated deferred rent balances, if any. As of the end of fiscal 2008, the Company had not recorded any reserves for any potential future store closings.

Tax Valuation Allowances and Contingencies: The Company accounts for income taxes in accordance with SFAS No. 109, ‚ÄúAccounting for Income Taxes‚ÄĚ (‚ÄúSFAS No. 109‚ÄĚ), which requires that deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities. SFAS No. 109 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion or all of the net deferred tax assets will not be realized. The Company had approximately $57.1 million and $46.1 million in net deferred tax assets that are net of tax valuation allowances of $3.9 million and $4.0 million at March 29, 2008 and March 31, 2007, respectively. Management evaluated the available evidence in assessing the Company‚Äôs ability to realize the benefits of the net deferred tax assets at March 29, 2008 and concluded it is more likely than not that the Company will not realize a portion of its net deferred tax assets. The remaining balance of the net deferred tax assets should be realized through future operating results and the reversal of taxable temporary differences. Income tax contingencies are accounted for in accordance with FASB Interpretation No. 48, ‚ÄúAccounting for Uncertainty in Income Taxes‚ÄĚ (‚ÄúFIN 48‚ÄĚ), and may require significant management judgment in estimating final outcomes. The Company had approximately $1.4 million of unrecognized tax benefits related to uncertain tax positions at both March 29, 2008 and March 31, 2007. The Company believes it has adequately provided for any reasonably foreseeable outcome related to these matters. To the extent that the expected tax outcome of these matters changes, such changes in estimate will impact the income tax provision in the period in which such determination is made. See Note 5 ‚ÄúIncome Tax Provision‚ÄĚ to Consolidated Financial Statements.

Share-Based Compensation: In the first quarter of fiscal 2007, the Company adopted SFAS No. 123(R), ‚ÄúShare-Based Payment,‚ÄĚ (‚ÄúSFAS No. 123(R)‚ÄĚ), which requires the measurement at fair value and recognition of compensation expense for all share-based payment awards. The determination of the fair value of the Company‚Äôs stock options at the grant date requires judgment. The Company uses the Black-Scholes option pricing model to estimate the fair value of these share-based awards consistent with the provisions of SFAS No. 123(R). Option pricing models, including the Black-Scholes model, also require the use of input assumptions, including expected volatility, expected life, expected dividend rate, and expected risk-free rate of return. If factors change and the Company employs different assumptions in the application of SFAS 123(R) in future periods, the compensation expense recorded under SFAS 123(R) may differ significantly from the amount recorded in the current period. A 10% increase in the Company‚Äôs share-based compensation expense for the fiscal year ended March 29, 2008 would have affected pre-tax earnings by approximately $0.4 million. During fiscal 2008, expected stock price volatility increased significantly and the assumed risk free rate decreased significantly based upon recent historical trends. There were no other material changes in the estimates or assumptions used to determine stock-based compensation during fiscal 2008.

Results of Operations

The following discussion defines the components of the statement of income and should be read in conjunction with ‚ÄúItem 6. Selected Financial Data‚ÄĚ.

Net Sales: Revenue is recognized at the point of sale for retail sales. Bargain Wholesale sales revenue is recognized on the date merchandise is shipped. Bargain Wholesale sales are shipped free on board shipping point.

Cost of Sales : Cost of sales includes the cost of inventory, freight in, inter-state warehouse transportation costs, obsolescence, spoilage and inventory shrinkage, and is net of discounts and allowances. The Company receives various cash discounts, allowances and rebates from its vendors. Such items are included as a reduction of cost of sales as merchandise is sold. The Company does not include purchasing, receiving and distribution warehouse costs in its cost of sales, which totaled $71.7 million, $60.2 million and $44.8 million as of fiscal 2008, 2007 and 2006, respectively. Due to this classification, the Company's gross profit rates may not be comparable to those of other retailers that include costs related to their distribution network in cost of sales.

Selling, General, and Administrative Expenses : Selling, general, and administrative expenses include purchasing, receiving, inspection and warehouse costs, the costs of selling merchandise in stores (payroll and associated costs, occupancy and other store level costs), distribution costs (payroll and associated costs, occupancy, transportation to and from stores, and other distribution related costs), and corporate costs (payroll and associated costs, occupancy, advertising, professional fees, and other corporate administrative costs). Selling, general, and administrative expenses also include depreciation and amortization expense.

Other (Income) Expense: Other (income) expense relates primarily to the interest income on the Company’s marketable securities, net of interest expense on the Company’s capitalized leases and construction loan.

Fiscal Year Ended March 29, 2008 Compared to Fiscal Year Ended March 31, 2007

Net sales. Total net sales increased $94.7 million, or 8.6%, to $1,199.4 million in fiscal 2008 from $1,104.7 million in fiscal 2007. 99¬Ę Only Stores‚Äô net retail sales increased $94.4 million, or 8.9%, to $1,158.9 million in fiscal 2008 from $1,064.5 million in fiscal 2007. Of the $94.4 million increase in net retail sales, $41.8 million was due to a 4.0% increase in comparable stores net sales for all stores open at least 15 months in fiscal 2008 and 2007. The comparable stores net sales increase was attributable to a 3.0% increase in transaction counts as well as an increase in average ticket size by 1.0% to $9.45 from $9.36. The full year fiscal 2008 effect of stores opened in fiscal 2007 increased sales by $32.5 million and the effect of 16 new stores opened since the end of fiscal 2007 increased net retail sales by $23.6 million. Offsetting these increases was a $3.5 million decrease in net retail sales due to one less day in fiscal 2008 compared to fiscal 2007 as a result of the change in the Company‚Äôs fiscal year. Bargain Wholesale net sales increased $0.3 million, or 0.9%, to $40.5 million in fiscal 2008 from $40.2 million in fiscal 2007.
Since the end of fiscal 2007, the Company added 16 stores; seven stores were opened in Texas and nine in California. At the end of fiscal 2008, the Company had 265 stores compared to 251 as of the end of fiscal 2007. Gross retail square footage at the end of fiscal 2008 and fiscal 2007 was 5.76 million and 5.52 million, respectively. For 99¬Ę Only Stores open all of fiscal 2008, the average net sales per estimated saleable square foot was $263 and the average annual net sales per store were $4.5 million, including the Texas stores open for the full year. Non-Texas stores net sales averaged $4.9 million per store and $291 per square foot. Texas stores open for a full year averaged net sales of $2.6 million per store and $128 per square foot .

Gross profit. Gross profit increased $28.3 million, or 6.5%, to $460.9 million in fiscal 2008 from $432.6 million in fiscal 2007. As a percentage of net sales, overall gross margin decreased to 38.4% in fiscal 2008 from 39.2% in fiscal 2007. As a percentage of retail sales, retail gross margin decreased to 39.0% in fiscal 2008 from 39.9% in fiscal 2007. The decrease in gross profit margin was primarily due to an increase in spoilage/shrink to 3.8% of retail sales in fiscal 2008 compared to 3.0% in fiscal 2007. Spoilage increased primarily due to a shift in sales mix for grocery items which have a higher spoilage rate and shrink increased due to higher than expected losses in inventory. These items were partially offset by a decrease in cost of products sold to 56.9% for fiscal 2008 compared to 57.4% for fiscal 2007 due to changes in pricing strategy that were implemented in the second half of fiscal 2008. The remaining change was made up of increases and decreases in other less significant items included in cost of sales. The Bargain Wholesale margin increased to 21.3% in fiscal 2008 versus 20.0% in fiscal 2007, primarily due to price increases and product mix changes.

Operating expenses . Operating expenses increased $40.5 million, or 10.3%, to $433.9 million in fiscal 2008 from $393.4 million in fiscal 2007. As a percentage of net sales, operating expenses increased to 36.2% for fiscal 2008 from 35.6% for fiscal 2007. Of the 60 basis points increase in operating expenses as a percentage of sales, retail operating expenses increased by 9 basis points, distribution and transportation costs increased by 53 basis points, and corporate expenses decreased by 11 basis points. The remaining 9 basis points increase was primarily related to a one-time gain as a result of an eminent domain action in fiscal 2007 and other less significant items included in other operating expenses.

Retail operating expenses increased as a percentage of sales by 9 basis points to 25.3% of net sales, increasing by $24.9 million for fiscal 2008 compared to fiscal 2007. This is primarily as a result of an increase in retail store labor and related costs of $15.2 million associated with the opening of 16 new stores in fiscal 2008, and the full year effect of stores opened in fiscal 2007 as well as minimum wage increases. The remaining increases in retail operating expenses included rent, supplies, repairs and maintenance and other store operating expenses, primarily as a result of the increase in number of stores. Finally, retail operating expenses for fiscal 2008 also included an asset impairment charge of $0.5 million relating to one underperforming store in Texas.

Distribution and transportation costs increased as a percentage of sales by 53 basis points to 6.0% of net sales, increasing by $11.5 million for fiscal 2008 compared to fiscal 2007. This increase was primarily due to $4.9 million in increased labor costs to operate the warehouses, including labor to service the increased sales volume, impact of minimum wage increases and handling increased inventory levels. In addition, there were $4.1 million in increased delivery costs due to additional new store locations, increased perishable product sales and higher fuel costs and higher freight rates from our outside carriers.

Corporate operating expenses decreased as a percentage of sales by 11 basis points to 4.7% of net sales, increasing $3.3 million for fiscal 2008 compared to fiscal 2007, primarily due to higher salaries, benefits and legal costs, which were partially offset by lower consulting and professional fees.

The remaining 9 basis points increase was primarily related to a one-time gain as a result of an eminent domain action in fiscal 2007 and other less significant items included in other operating expenses.

Depreciation and amortization. Depreciation and amortization increased $0.6 million, or 2.0%, to $33.3 million in fiscal 2008 from $32.7 million in fiscal 2007 as a result of the 16 new stores opening since the end of fiscal 2007, the full year effect of fiscal 2007 store additions, and additions to existing stores and distribution centers. The increase was partially offset by fully depreciated assets in existing stores and the disposal of certain fixed assets. Operating loss. Operating loss was $6.4 million for fiscal 2008 compared to operating income of $6.6 million for fiscal 2007. Operating loss as a percentage of net sales was negative 0.5% in fiscal 2008 compared to operating income as percentage of net sales of 0.6% in fiscal 2007. This was primarily due to changes in gross margin and operating expenses as discussed above.

Other income, net. Other income decreased $0.7 million to $6.7 million in fiscal 2008 compared to $7.4 million in fiscal 2007. Interest income earned on the Company’s investments decreased to $7.2 million in fiscal 2008 from $7.9 million in fiscal 2007, primarily as a result of lower investment balances and decreases in interest rates. Interest expense which primarily relates to consolidated partnership line of credit with a bank was $1.0 million in fiscal 2008 compared to $1.2 million in fiscal 2007.

Provision (benefit) for income taxes. The income tax benefit in fiscal 2008 was $2.6 million compared to income tax expense of $4.2 million in fiscal 2007, due to the decrease in pre-tax income and a lower overall effective tax rate. The effective tax rate for fiscal 2008 was a benefit compared to the effective tax rate of 30.3% for fiscal 2007. Additionally, in fiscal 2008, the Company recorded a discrete tax benefit of approximately $1.3 million related to a change in the Texas net operating loss carry forward rules, compared to a discrete tax benefit recorded in fiscal 2007 related to prior year tax credits of approximately $0.3 million. The effective combined federal and state income tax rates are less than the statutory rates in each period due to tax credits and the effect of certain revenues and/or expenses that are not subject to taxation.

Net income. As a result of the items discussed above, net income decreased $6.9 million, or 70.3%, to $2.9 million in fiscal 2008 from $9.8 million in fiscal 2007. Net income as a percentage of net sales declined to 0.2% in fiscal 2008 from 0.9% in fiscal 2007.

Fiscal Year Ended March 31, 2007 Compared to Fiscal Year Ended March 31, 2006

Net sales. Total net sales increased $81.1 million, or 7.9%, to $1,104.7 million in fiscal 2007 from $1,023.6 million in fiscal 2006. 99¬Ę Only Stores‚Äô net retail sales increased $80.2 million, or 8.2%, to $1,064.5 million in fiscal 2007 from $984.3 million in fiscal 2006. Of the $80.2 million increase in net retail sales, $23.0 million was due to a 2.4% increase in comparable stores net sales for all stores open at least 15 months in fiscal 2007 and 2006. The comparable stores net sales increase was attributable to a 0.5% increase in transaction counts (primarily attributable to the Company‚Äôs Texas stores, due to additional operational improvements made in fiscal 2007 and where sales continued to benefit from an anniversary advertising campaign held in the fourth quarter of fiscal 2006), as well as an increase in average ticket size by 1.9% to $9.34 from $9.17. The effect of 19 new stores opened since the end of fiscal 2006 increased net retail sales by $38.8 million and the full year fiscal 2007 effect of stores opened in fiscal 2006 increased sales by $18.4 million. Bargain Wholesale net sales increased $0.9 million, or 2.2%, to $40.2 million in fiscal 2007 from $39.3 million in fiscal 2006, primarily due to new customers.

Since the end of fiscal 2006, the Company added 19 stores; five stores were opened in Texas, one in Arizona and 13 in California. At the end of fiscal 2007, the Company had 251 stores compared to 232 as of fiscal 2006. Gross retail square footage at the end of fiscal 2007 and fiscal 2006 was 5.52 million and 5.15 million, respectively. For 99¬Ę Only Stores open all of fiscal 2007, the average net sales per estimated saleable square foot was $254 and the average annual net sales per store were $4.4 million, including the Texas stores open for the full year. Non-Texas stores net sales averaged $4.8 million per store and $284 per square foot. Texas stores open for a full year averaged net sales of $2.4 million per store and $120 per square foot .

Gross profit. Gross profit increased $49.1 million, or 12.8%, to $432.6 million in fiscal 2007 from $383.4 million in fiscal 2006. As a percentage of net sales, overall gross margin increased to 39.2% in fiscal 2007 from 37.5% in fiscal 2006. As a percentage of retail sales, retail gross margin increased to 39.9% in fiscal 2007 from 38.2% in fiscal 2006. The increase in gross profit was primarily due to a reduction in excess and obsolete inventory reserves of 0.5% of retail sales in fiscal 2007 due to the sales of items previously reserved as excess and obsolete inventory following a more focused approach to merchandising those items compared to an increase in these reserves of 0.1% of retail sales in fiscal 2006, and due to a reduction of spoilage/shrink to 3.0% for fiscal 2007 from 3.7% for fiscal 2006. In addition, the increase in gross profit was due to a decrease in cost of products sold to 57.4% for fiscal 2007 compared to 57.6% for fiscal 2006 due to product cost changes. The remaining change was made up of increases and decreases in other less significant items included in cost of sales. The Bargain Wholesale margin increased to 20.0% in fiscal 2007 versus 19.6% in fiscal 2006, primarily due to product cost changes.

Operating expenses . Operating expenses increased $53.0 million, or 15.6%, to $393.4 million in fiscal 2007 from $340.4 million in 2006. As a percentage of net sales, operating expenses increased to 35.6% for fiscal 2007 from 33.3% for fiscal 2006. Of the 230 basis points increase in operating expenses as a percentage of sales, retail operating expenses increased by 8 basis points, distribution and transportation costs increased by 107 basis points, and corporate expenses increased by 87 basis points. The remaining 28 basis points increase was primarily related to a one time gain as a result of an eminent domain action in fiscal 2006.

Retail operating expenses increased as a percentage of sales by 8 basis points to 25.2% of net sales, increasing by $21.3 million for fiscal 2007 compared to fiscal 2006, primarily as a result of an increase in retail store labor and related costs of $13.0 million associated with the opening of 19 new stores in fiscal 2007 and the full year effect of stores opened in fiscal 2006. Retail store labor also increased due to costs associated with training and implementing new inventory control procedures in the stores, but were partially offset by lower workers’ compensation expenses primarily driven by the stabilization of reserve requirements and improvements in claims management and accident reporting. The remaining increases in retail operating expenses included rent, utilities and other store operating expenses.

Distribution and transportation costs increased as a percentage of sales by 107 basis points to 5.5% of net sales, increasing by $15.4 million for fiscal 2007 compared to fiscal 2006. This increase was primarily due to $7.7 million in increased labor costs to operate the warehouses, including labor to service the increased sales volume and implement various internal control initiatives, and $3.9 million in increased delivery costs due to additional new store locations and higher fuel costs.

Corporate operating expenses increased as a percentage of sales by 87 basis points to 4.8% of net sales, increasing $12.8 million for fiscal 2007 compared to fiscal 2006, primarily due to an increase in consulting and professional fees of $5.4 million as a result of costs associated with completing the fiscal year 2006 annual audit and in connection with implementing Sarbanes-Oxley requirements, an increase of $5.0 million for stock-based compensation, and an increase of $3.8 million for personnel added at the executive, management and staff levels to support the Company’s infrastructure and growth requirements. These were partially offset by lower legal costs. The increase in stock-based compensation expense is due to the adoption of SFAS No. 123(R) at the beginning of fiscal 2007, which requires the Company to recognize expense related to the estimated fair value of stock-based compensation awards. Stock-based compensation recognized in fiscal 2007 was $5.2 million compared to $0.2 million in fiscal 2006.

The remaining operating expenses increased by 28 basis points, which was primarily related to a difference in gains from consideration received in eminent domain actions in each of fiscal 2007 and fiscal 2006. Fiscal 2007 operating expense was reduced by $0.7 million by the gain from consideration for a store closure due to an eminent domain action. Fiscal 2006 operating expense was reduced by $4.2 million by a gain from consideration for a forced store closure due to a local government eminent domain action for the construction of a new public school.

Depreciation and amortization. Depreciation increased $1.3 million, or 4.0%, to $32.7 million in fiscal 2007 from $31.4 million in fiscal 2006 as a result of the net 19 new stores operating since the end of the fiscal 2006, the full year effect of fiscal 2006 store additions, and additions to existing stores and distribution centers. The increase was partially offset due to the disposal of certain fixed assets and fully depreciated assets.

Operating income. Operating income decreased $5.1 million, or 43.6%, to $6.6 million in fiscal 2007 from $11.7 million in fiscal 2006. Operating income as a percentage of net sales decreased to 0.6% in fiscal 2007 from 1.1% in fiscal 2006 primarily due to increases in operating expenses discussed above partially offset by the increase in the gross margin percentage on sales. Operating income in fiscal 2007 and 2006 benefited from net gains of $0.7 million and $4.2 million, respectively, for forced store closures due to local government eminent domain actions, which are included as an offset to selling, general, and administrative expenses.

Other income, net. Other income increased $2.3 million to $7.4 million in fiscal 2007 compared to $5.1 million in fiscal 2006. Interest income earned on the Company’s investments increased to $7.9 million in fiscal 2007 from $5.1 million in fiscal 2006, primarily as a result of increased interest rates. Interest expense which primarily relates to consolidated partnership line of credit with a bank was $1.2 million in fiscal 2007 compared to $0.1 million in fiscal 2006.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

General

99¬Ę Only Stores (the ‚ÄúCompany‚ÄĚ) is an extreme value retailer of primarily consumable general merchandise with an emphasis on name-brand products. The Company‚Äôs stores offer a wide assortment of regularly available consumer goods as well as a broad variety of first-quality closeout merchandise.

For the second quarter of fiscal 2009, the Company had net sales of $317.8 million, an operating loss of $11.8 million and a net loss of $9.4 million. Sales increased during the second quarter of fiscal 2009, primarily due to a 4.7% increase in same-store sales, the full quarter effect of 12 new stores opened in fiscal 2008 and six new stores opened in fiscal 2009. For the first half of fiscal 2009, the Company had net sales of $622.7 million, an operating loss of $13.7 million, and a net loss of $10.9 million. Sales increased during the first half of fiscal 2009, primarily due to a 2.1% increase in same-store sales, the full year effect of 14 new stores opened in fiscal 2008 and 14 new stores opened in fiscal 2009. Despite the overall growth in sales, the Company experienced a net loss for the second quarter and the first half of fiscal 2009 primarily due to an impairment charge of approximately $10.1 million related to leasehold improvements associated with leased stores of Company’s Texas operations due to the Company’s decision to exit the Texas Market on September 16, 2008.

For the first half of fiscal 2009, the Company opened nine stores in California, two stores in Texas, two in Arizona, and one in Nevada. The Company plans to open approximately five additional stores during the balance of fiscal 2009, all in California.

The Company believes that near-term growth in sales for the remainder of fiscal 2009 will result from new store openings in its existing states and increases in same-store sales.

Critical Accounting Policies and Estimates

The Company’s critical accounting policies reflecting management’s estimates and judgments are described in Item 7 (Management’s Discussion and Analysis of Financial Condition and Results of Operations) of its Annual Report on Form 10-K for the year ended March 29, 2008, filed with the Securities and Exchange Commission on June 11, 2008.

Results of Operations

The following discussion defines the components of the statement of income.

Net Sales: Revenue is recognized at the point of sale for retail sales. Bargain Wholesale revenue is recognized on the date merchandise is shipped. Bargain Wholesale sales are shipped free on board shipping point.

Cost of Sales : Cost of sales includes the cost of inventory, freight in, inter-state warehouse transportation costs, obsolescence, spoilage, and inventory shrinkage, and is net of discounts and allowances. The Company receives various cash discounts, allowances and rebates from its vendors. Such items are included as reductions of cost of sales as merchandise is sold. The Company does not include purchasing, receiving, distribution warehouse costs and transportation to and from stores in its cost of sales, which totaled $19.2 million and $18.3 million for the second quarter of fiscal 2009 and 2008, respectively and totaled $37.4 million and $35.8 million for the first half of fiscal 2009 and 2008, respectively. Due to this classification, the Company's gross profit rates may not be comparable to those of other retailers that include costs related to their distribution network in cost of sales.

Selling, General and Administrative Expenses : Selling, general, and administrative expenses include purchasing, receiving, inspection and warehouse costs, the costs of selling merchandise in stores (payroll and associated costs, occupancy and other store level costs), distribution costs (payroll and associated costs, occupancy, transportation to and from stores, and other distribution related costs), and corporate costs (payroll and associated costs, occupancy, advertising, professional fees, stock-based compensation expense and other corporate administrative costs). Depreciation and amortization is also included in selling, general and administrative expenses.

Other (Income) Expense: Other (income) expense relates primarily to the interest income on the Company’s marketable securities, net of interest expense on the Company’s capitalized leases and construction loan.

For the Second Quarter Ended September 27, 2008 Compared to the Second Quarter Ended September 30, 2007

Net Sales: Net sales increased $26.9 million, or 9.2%, to $317.8 million for the second quarter of fiscal 2009 compared to $290.9 million for the second quarter of fiscal 2008. Retail sales increased $26.8 million, or 9.5%, to $307.4 million for the second quarter of fiscal 2009 compared to $280.6 million for the second quarter of fiscal 2008. The full quarter effect of 12 stores opened in fiscal 2008 increased sales by $8.4 million for the second quarter of fiscal 2009 and the effect of six new stores opened in the second quarter of fiscal 2009 increased retail sales by $10.0 million. In addition, same-store sales were up 4.7% for the second quarter of fiscal 2009 compared to the second quarter of fiscal 2008, due to a 2.3% increase in transaction counts as well as 2.4% increase in average ticket size to $9.55 from $9.33, primarily driven by strong seasonal sales of produce. Bargain Wholesale net sales increased less than $0.1 million, or 0.8%, to $10.4 million for the second quarter of fiscal 2009 compared to $10.3 million for the second quarter of fiscal 2008, primarily due to new customer sales.

Gross Profit: Gross profit increased $14.6 million, or 13.5%, to $122.7 million for the second quarter of fiscal 2009 compared to $108.1 million for the second quarter of fiscal 2008. As a percentage of net sales, overall gross margin increased to 38.6% for the second quarter of fiscal 2009 compared to 37.2% for the second quarter of fiscal 2008. The increase in gross profit margin was primarily due to a decrease in spoilage/shrink to 2.9% of net sales in the second quarter of fiscal 2009 from 3.5% of net sales in the second quarter of fiscal 2008, primarily due to a decrease in recorded scrap from perishables and a reduction in the shrink reserves based on the trend of physical inventories taken during the second quarter of fiscal 2009. In addition, the increase in gross profit margin was also due to a decrease in cost of products sold to 58.1% for the second quarter of fiscal 2009 compared to 58.8% for the second quarter of fiscal 2008, due to the effect of the retail pricing strategy implemented in the second half of fiscal 2008. The remaining change was made up of increases and the decreases in other less significant items included in cost of sales.

Operating Expenses: Operating expenses increased by $16.2 million, or 14.7%, to $125.8 million for the second quarter of fiscal 2009 compared to $109.6 million for the second quarter of fiscal 2008. As a percentage of net sales, operating expenses increased to 39.6% for the second quarter of fiscal 2009 from 37.7% for the second quarter of fiscal 2008. Of the 190 basis points increase in operating expenses as a percentage of sales, retail operating expenses decreased by 40 basis points, corporate expenses decreased by 30 basis points and distribution and transportation decreased by 30 basis points. These decreases were offset by a 290 basis point increase in other items primarily related to impairment of Texas leasehold improvements included in other operating expenses.

Retail operating expenses decreased as a percentage of sales by 40 basis points to 25.6% of net sales, increasing by $5.6 million for the second quarter of fiscal 2009 compared to the second quarter of fiscal 2008. The decrease as a percentage of sales was primarily due to improvement in labor productivity, lower utilities and advertising expenses during the second quarter of fiscal 2009. The increase in retail operating expenses of $5.6 million was primarily due to a $2.6 million increase in store labor and related costs due to increases in minimum wage rates, benefit costs, and also due to an increase in retail store rent and related costs of $1.7 million associated with the full quarter effect of 12 stores opened in fiscal 2008 and the opening of six new stores in the second quarter of fiscal 2009.

Distribution and transportation expenses decreased as a percentage of sales by 30 basis points, increasing by $0.9 million for the second quarter of fiscal 2009 compared to the second quarter of fiscal 2008 and despite increases in fuel costs.

Corporate operating expenses decreased as a percentage of net sales by 30 basis points to 4.2% of net sales, increasing by $0.2 million for the second quarter of fiscal 2009 compared to the second quarter of fiscal 2008. The decrease as a percentage of sales was due primarily due to lower consulting and professional fees as well as lower repair and maintenance expenses.

The remaining operating expenses increased as a percentage of sales by 290 basis points, increasing by $9.5 million for the second quarter of fiscal 2009 compared to the second quarter of fiscal 2008. The increase in the other operating expenses was primarily due to an impairment charge of approximately $10.1 million related to leasehold improvements associated with leased stores of the Company’s Texas operations due to the Company’s decision to exit the Texas Market during the second quarter of fiscal 2009. Other operating expenses also included an asset impairment expense of approximately $0.2 million related to one underperforming store in California during the second quarter of fiscal 2009 compared to an asset impairment expense of $0.5 million related to one underperforming store in Texas during the second quarter of fiscal 2008. These increases were partially offset by a reduction in stock based expense of $0.4 million in the second quarter of fiscal 2009 compared to second quarter of fiscal 2008.

Depreciation and Amortization: Depreciation and amortization increased $0.4 million, or 5.1%, to $8.7 million for the second quarter of fiscal 2009 compared to $8.3 million for the second quarter of fiscal 2008, primarily as a result of six new stores opened during the second quarter of fiscal 2009, the full quarter effect of 12 new stores opened in fiscal 2008, and additions to existing stores, distribution centers and information technology systems. Depreciation as a percentage of sales decreased to 2.7% from 2.8%, primarily due to sales improvements.

Operating Loss: Operating loss was $11.8 million for the second quarter of fiscal 2009 compared to operating loss of $9.8 million for the second quarter of fiscal 2008. This was primarily due to an impairment charge of approximately $10.1 million during the second quarter of fiscal 2009, related to leasehold improvements associated with leased stores of the Company’s Texas operations due to the Company’s decision to exit the Texas Market. Operating loss as a percentage of net sales increased to negative 3.7% for the second quarter of fiscal 2009 from negative 3.4% for the second quarter of fiscal 2008.

Other Income, net: Other income decreased $2.8 million to a loss of $0.8 million for the second quarter of fiscal 2009 compared to income of $2.0 million for the second quarter of fiscal 2008. The decrease was primarily due to an impairment charge of approximately $1.7 million related to the Company’s available for sales securities during the second quarter of fiscal 2009, and lower interest income which decreased to $1.1 million for the second quarter of fiscal 2009 from $1.9 million for the second quarter of fiscal 2008, primarily due to lower interest rates. The remaining decrease in other income is due to increases and decreases in other less significant items included in other income.

Provision for Income Taxes: The provision for income taxes was a benefit of $3.1 million for the second quarter of fiscal 2009 compared to a benefit of $2.7 million for the second quarter of fiscal 2008, due to the increase in the pre-tax loss and a higher overall effective tax rate in fiscal 2009. The effective rate of the provision for income taxes was approximately 36.5% (excluding the discrete tax expense described below) and 33.9% for the second quarter of fiscal 2009 and 2008, respectively. The Company recorded a valuation allowance of approximately $1.4 million related to certain Texas tax credits during the second quarter of fiscal 2009. Due to the Company’s plan to exit the Texas market, the Company does not believe that it is more likely than not that it will be able to realize this benefit.

Net Loss: As a result of the items discussed above, net loss increased $4.2 million to a net loss of $9.4 million for the second quarter of fiscal 2009 compared to a net loss of $5.2 million for the second quarter of fiscal 2008.

CONF CALL

Eric Schiffer
Thank you very much. Thank you operator. Good afternoon everyone and thank you for joining us today. On today’s call I will begin by briefly discussing our first quarter results, including an update on shrinkage and then provide an update on our profit improvement plan. I will then turn the call over to our CFO Rob Kautz to review our financial results in more detail. And then I will make some closing remarks regarding our outlook before we open up the call to take questions.
For the first quarter of fiscal 2009 we reported a loss of $0.02 per diluted share. While we recognize our financial results for the first quarter of fiscal 2009 were not satisfactory we believe the first quarter was a step forward in accomplishing many of the goals set forth in our previously outlined profit improvement plan.
Despite the negative sales impact of the entire Easter sales shift, continued challenges in the consumer environment, and lack of extra dollars for discretionary purchases, our same-store sales for the first quarter decreased only 0.5% year-over-year. If you factor out the first two weeks of the quarter which were negatively impacted by the Easter selling season shifting into the fourth quarter of 2008 versus the first quarter of 2008 last year, our same-store sales for the remaining period were a positive 1.7%. With transactions up slightly year-over-year we believe our stores are continuing to attract new customers who are looking for ways to save in these difficult times, and we believe that once we attract new customers, those new customers become long-term customers.
As we mentioned in our fourth quarter sales release, we have been generating a great deal of publicity from local and national news regarding our amazingly low prices on basic household merchandize, including food. In this inflationary environment, we believe we are one of the leading retailers where you can find an expansive quality product assortment including many non-discretionary food and produce items for under a dollar. This is attributable to our experienced buying team and longstanding relationships with our vendors and highlights what we believe is our unique position in the market.
As we anticipated, our overall financial performance continues to be impacted by the high shrinkage that we discussed last quarter. Our shrinkage expense increased 80 basis points year-over-year, more than offsetting improvements we made in other areas of cost of goods sold such as product margins. During the first quarter we implemented a number of key measures to control and reduce our shrinkage and I am pleased to report that we recorded significantly reduced shrinkage expense compared to the fourth quarter or fiscal 2008, although, as mentioned, it was still higher than the first quarter of the prior fiscal year.
As an example of measures we have taken thus far to address our shrinkage issue, we significantly increased the number of our store physical inventories in comparison to our first quarter a year before. Another example is we have begun promptly reporting our inventory levels for all stores on a monthly basis, and for a set of targeted high shrinkage stores on a weekly basis. This has enabled us to identify suspicious build-ups in inventory levels and has empowered our operations to hold field managers accountable.
I would like to stress as has always been our Company’s practice, we will pursue prosecution of any criminal behavior. Rob Kautz will go into more detail on these and other key shrinkage control and reduction measures, shortly. However, I would like to note that we brought in outside resources to assist us in our shrinkage investigation. To-date, we have terminated a number of filed management personnel who were involved in large scale unauthorized removal of pallets of saleable merchandise from our stores. And we are continuing our investigations. We remain committed to reducing shrinkage for fiscal 2009.
In the first quarter we made progress with our profit improvement plan and made a number of key improvements to our operational efficiencies. However, rising food, commodity, and fuel prices offset the full positive impact of these improvements to financial performance. I would like to provide a brief update on each of our five key profit improvement initiatives and highlight specific areas of improvement in the quarter as well as the areas for which we believe we can continue to make improvements.
Our first key profit improvement initiative is our variable pricing and remerchandising plan. In the first quarter we improved our product margins by 30 basis points despite significant increases in food and commodity cost that resulted in price increases by some of our key vendors. This improvement underscores the success to-date of our variable pricing initiative. It is worth noting that selling certain items at $0.59 versus two for $0.99 has not had a negative impact on our overall sales.
Additionally, we have been and will continue working with our key vendors to improve our product assortment and packaging in order to enhance our margins. We also successfully tested several new merchandising initiatives and are rolling them out Company wide this summer.
Second, is store labor reduction. We focused on tighter management of store over time and overall store labor productivity and by doing so we improved our store labor costs year-over-year despite increases in minimum wage in January 2008 in California and Arizona, which were on top of increases in January of 2007. We are constantly evaluating additional ways to decrease store labor without compromising our customer experience. We are currently in the process of testing less labor-intensive merchandising, fixtures, and packaging, and will roll them out in the second and third quarters. As we begin implementing these Company wide we expect to see further store labor productivity improvements, which have offset minimum wage increases.
We have made progress on our initiatives to evaluate and update our store operating process and we continue to identify and plan the implementation of opportunities as they are identified.
Our third key initiative is improving our distribution and transportation costs. This is an area for which I am proud of our accomplishments in the first quarter. Through more effective delivery scheduling, trailer cube utilization, and reduced backhauls from stores, we managed to hold our distribution and transportation costs flat year-over-year in the face of rapidly rising fuel prices and freight costs.
This was also in spite of the costs and inefficiencies associated with racking our main distribution center. We have now substantially completed the racking of our main distribution center, which we believe will help further improve our distribution efficiencies going forward.
Our fourth key profit improvement initiative is a controlled new store expansion plan. We are maintaining a disciplined store growth plan and are selecting only Grade ‚ÄėA‚Äô location in markets within our existing distribution network. Year-to-date, we have opened 10 stores and expect to open nine additional stores for a total of 19 store openings for fiscal 2009.
Our next two stores, by the way, will open on August 21st, one in Redondo Beach, Southern California and one in Las Vegas, Nevada. Going forward, we expect to close a number of poor performing stores whose leases are coming due.
Our fifth key initiative is to increase profitability in our new markets. We are in the final stages of completing our strategic analysis of our Texas market. Over the past several months, members of our management team and Board of Directors have conducted an extensive evaluation of our operations in Texas and explored various courses of action. We will be finalizing our direction and expect to announce our future plans in Texas shortly before the date of our annual shareholder meeting September 23rd, 2008.
As a reminder, in June we announced the authorization of our share repurchase program, which allows to repurchase up to $30 million of our stock on the open market.
We remain intensely focused on improving our profitability and are continuingly exploring new ways to do so.
With that, I would like to now turn the call over to Rob Kautz to review our first quarter financial results. Rob?
Robert Kautz
Thank you, Eric. As Eric mentioned, for the quarter ended June 28th, 2008, we generated a loss per share of $0.02 on a net loss of $1.5 million. This compares to earnings of $0.04 per share on net earnings of $3 million in the prior year. Please note that last year’s Q1 earnings included a one-time discrete tax benefit that contributed about $1.4 million, or $0.02 per share to earnings. And that quarter also included a significant benefit from higher margin Easter sales.
So, starting from the top, total sales for the first quarter were $304.9 million, representing an increase of 4.1% year-over-year with retail sales up 4.2% at $294.7 million. As Eric also mentioned, the Easter shift had a negative impact on our sales results as was expected. Last year Easter fell eight days into the first quarter whereas now Easter sales were included this year. Our same-store sales for the fourth quarter increased 0.5% versus the prior year basically in line with our expectation for a flat comp. Same-store sales growth strengthened through the first quarter and continues to strengthen at this time.
Despite the combined effect of strong headwinds from rising prices, the gross margin impact of the full Easter shift, and shrinkage and scrap increasing by 80 basis points, our gross margin only declined by 30 basis points to 38.3%. This was primarily due to the success of variable pricing, which Eric discussed, and a great job by our buying team.
As Eric mentioned, I will give an update on the main points of our shrinkage reduction plan, which I specifically outlined during our last conference call. First point, we have been promptly reporting our inventory levels at each store to identify suspicious buildups in inventory levels. This has empowered our operations team to hold field managers accountable and helped to us focus our investigative efforts.
Two, we continue to refine our use of the loss prevention exception reporting software system to reduce theft at the store cash registers.
Three, we had established criteria for centralizing decisions regarding excess and obsolete inventory in the stores, which was previously managed at a local district level. Over time, we expect to improve discipline in this area.
Four, we are increasing the number of store physical counts and will count all of our warehouses again at the end of the second quarter.
And number five, lastly, we have substantially completed the racking of our distribution center and are implementing exception reporting and data integrity improvements. These will lay the foundation for fully remediating our inventory control systems and moving to a perpetual inventory in our Commerce distribution center in the future.
So, I would like to emphasize that although our buyers were faced with rising cost and the negative Easter shift, we still improved overall merchandise margin by 30 basis points, which Eric discussed in more detail.
Our SG&A expense as a percentage of sales increased overall by 30 basis points to 39.0%. Store operating costs increased about 30 basis points due to store non-labor expenses. About half of these were one-time lease cost adjustments, half in utilities, and also in controllable expenses. The good news, as mentioned by Eric, is that labor productivity improvements more than offset increases in minimum wages.
I would also like to add to Eric’s comments regarding our distribution and transportation costs remaining flat at 6% year-over-year. This was primarily achieved by increasing our revenue per pallet due to the variable pricing and through more efficient distribution methods.
In corporate G&A, we had a 50 basis point increase to 4.6% of sales, primarily increases in information technology staffing and related expenses relative to first quarter last year. Other SG&A cost increased stock based compensation were offset this year by the consolidation of a gain on the sale of a perspective property. This gain is partially by our partner’s minority interest in the gain represented separately on our income statement with no material net effect on our EPS.
So, in conclusion, our Company ended the quarter with approximately $130 million in cash and marketable securities and virtually no debt.
I would like to now turn the call back over to you Eric.
Eric Schiffer
Thanks, Rob. Before we open up the call to take questions, I would like to discuss our outlook. We are certainly operating in a very challenging economy although we are pleased to see that we are attracting new customers in these difficult times. I would like to briefly highlight several significant accomplishments.
As Rob noted, we have seen continued strengthening of our same-store sales for the current quarter. Despite significant pressure from vendor price increases and comparing against the period last year, which included the benefit of higher margin Easter sales, our buying team improved product cost margins by 30 basis points, which underscores the success of our variable pricing initiative.
Our store operating team offset minimum wage increases through store labor productivity improvements. Our Distribution and transportation team held their cost flat as a percentage of sales in the face of significantly higher fuel prices, a minimum increase, and the disruption caused by the racking of our main Commerce distribution center.
We remain committed to reducing shrinkage for fiscal 2009. Our team is increasingly focused on execution accountability and improving our operating efficiencies across the board. We continue to believe that we can achieve our previously quantified long-term profit improvement plan initiatives to increase earnings before taxes, and we are continuing our current strategic planning process and will aggressively look for and implement additional ways to improve our short-term and long-term profitability, and ultimately maximize shareholder value.
Thank you for calling in and thank you for listening. Now, let’s turn to the Q&A. operator?

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