Edgar Filing: BURLINGTON COAT FACTORY WAREHOUSE CORP

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Burlington Coat Factory--Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended July 30, 2011

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

For the transition period from to .

Commission File Number 1-37917

LOGO

BURLINGTON COAT FACTORY INVESTMENTS HOLDINGS, INC.

(Exact Name of Registrant as Specified in its Charter)


Delaware		20-4663833
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

1830 Route 130 North Burlington, New Jersey		08016
(Address of Principal Executive Offices)		(Zip Code)

Registrant’s Telephone Number, Including Area Code: (609) 387-7800

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ¨ No x

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

Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule g of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

As of September 13, 2011, the registrant has 1,000 shares of common stock outstanding, all of which are owned by Burlington Coat Factory Holdings, Inc., registrant’s parent holding company, and are not publicly traded.

BURLINGTON COAT FACTORY INVESTMENTS HOLDINGS, INC. AND SUBSIDIARIES

INDEX


	Page
Part I - Financial Information		3

Item 1. Financial Statements (unaudited)		3

Condensed Consolidated Balance Sheets as of July 30, 2011, January 29, 2011 and July 31, 2010		3

Condensed Consolidated Statements of Operations and Comprehensive Loss – Six and Three Months Ended July 30, 2011 and July 31, 2010		4

Condensed Consolidated Statements of Cash Flows - Six Months Ended July 30, 2011 and July 31, 2010		5

Notes to Condensed Consolidated Financial Statements		6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		30

Item 3. Quantitative and Qualitative Disclosures About Market Risk		49

Item 4. Controls and Procedures		50

Part II - Other Information		50

Item 1. Legal Proceedings		50

Item 1A. Risk Factors		51

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		51

Item 3. Defaults Upon Senior Securities		51

Item 4. Removed and Reserved		51

Item 5. Other Information		51

Item 6. Exhibits		52

SIGNATURES		53

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

BURLINGTON COAT FACTORY INVESTMENTS HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(All amounts in thousands)


	July 30, 2011			January 29, 2011			July 31, 2010
ASSETS
Current Assets:
Cash and Cash Equivalents	$	31,808		$	30,214		$	81,046
Restricted Cash and Cash Equivalents		37,271			30,264			35,397
Accounts Receivable, Net of Allowances for Doubtful Accounts		28,018			49,875			32,642
Merchandise Inventories		665,204			644,228			661,224
Deferred Tax Assets		22,313			24,835			31,216
Prepaid and Other Current Assets		38,137			36,109			34,922
Prepaid Income Taxes		45,696			16,447			37,286
Assets Held for Sale		1,113			2,156			521

Total Current Assets		869,560			834,128			914,254
Property and Equipment - Net of Accumulated Depreciation		858,161			857,589			850,484
Tradenames		238,000			238,000			238,000
Favorable Leases - Net of Accumulated Amortization		374,937			389,986			405,527
Goodwill		47,064			47,064			47,064
Other Assets		95,549			91,241			90,349

Total Assets	$	2,483,271		$	2,458,008		$	2,545,678

LIABILITIES AND STOCKHOLDER’S (DEFICIT) EQUITY
Current Liabilities:
Accounts Payable	$	415,086		$	190,460		$	458,489
Other Current Liabilities		214,733			212,944			235,613
Current Maturities of Long Term Debt		3,272			14,264			17,507

Total Current Liabilities		633,091			417,668			711,609
Long Term Debt		1,528,411			1,358,021			1,262,412
Other Liabilities		210,547			215,528			181,673
Deferred Tax Liabilities		275,872			279,279			270,064
Commitments and Contingencies (Notes 3, 12 and 13)
Stockholder’s (Deficit) Equity:
Common Stock (Par Value $0.01; 1,000 Shares Issued and Outstanding)		—			—			—
Capital in Excess of Par Value		468,412			466,754			465,326
Accumulated Deficit		(633,062	)		(279,242	)		(345,406	)

Total Stockholder’s (Deficit) Equity		(164,650	)		187,512			119,920

Total Liabilities and Stockholder’s (Deficit) Equity	$	2,483,271		$	2,458,008		$	2,545,678

See Notes to Condensed Consolidated Financial Statements.

BURLINGTON COAT FACTORY INVESTMENTS HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(Unaudited)

(All amounts in thousands)


	Six Months Ended						Three Months Ended
	July 30, 2011			July 31, 2010			July 30, 2011			July 31, 2010
REVENUES:
Net Sales	$	1,722,431		$	1,623,428		$	793,349		$	728,750
Other Revenue		14,343			14,075			7,095			6,795

Total Revenue		1,736,774			1,637,503			800,444			735,545
COSTS AND EXPENSES:
Cost of Sales (Exclusive of Depreciation and Amortization)		1,084,356			1,021,741			507,053			469,388
Selling and Administrative Expenses		565,533			550,308			276,705			271,779
Restructuring and Separation Costs (Note 4)		5,190			2,152			5,190			1,190
Depreciation and Amortization		73,987			72,235			37,367			35,506
Impairment Charges – Long-Lived Assets		34			258			25			73
Other Income, Net		(5,120	)		(6,444	)		(2,311	)		(3,478	)
Loss on Extinguishment of Debt		37,764			—			—			—
Interest Expense (Inclusive of Gain (Loss) on Interest Rate Cap Agreements)		63,164			53,422			32,310			26,057

Total Costs and Expenses		1,824,908			1,693,672			856,339			800,515
Loss Before Income Tax Benefit		(88,134	)		(56,169	)		(55,895	)		(64,970	)
Income Tax Benefit		(34,314	)		(20,903	)		(23,132	)		(24,491	)

Net Loss	$	(53,820	)	$	(35,266	)	$	(32,763	)	$	(40,479	)

Total Comprehensive Loss	$	(53,820	)	$	(35,266	)	$	(32,763	)	$	(40,479	)

See Notes to Condensed Consolidated Financial Statements.

BURLINGTON COAT FACTORY INVESTMENTS HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(All amounts in thousands)


	Six Months Ended
	July 30, 2011			July 31, 2010
OPERATING ACTIVITIES
Net Loss	$	(53,820	)	$	(35,266	)
Adjustments to Reconcile Net Loss to Net Cash Provided by Operating Activities:
Depreciation and Amortization		73,987			72,235
Impairment Charges – Long-Lived Assets		34			258
Amortization of Debt Issuance Costs		4,957			6,132
Accretion of New Senior Notes, Previous Senior Notes and Previous Discount Notes		825			356
Interest Rate Cap Agreement - Adjustment to Market		1,862			6,297
Provision for Losses on Accounts Receivable		793			909
Provision for Deferred Income Taxes		5			(14,743	)
Loss on Retirement of Fixed Assets		126			130
(Gain) on Investments in Money Market Fund		—			(240	)
Loss on Extinguishment of Debt – Write-off of Deferred Financing Fees		16,435			—
Excess Tax Benefit from Stock Based Compensation		(230	)		—
Non-Cash Stock Based Compensation Expense		900			837
Non-Cash Rent Expense		(2,536	)		(912	)
Changes in Assets and Liabilities:
Accounts Receivable		850			1,083
Merchandise Inventories		(20,976	)		(47,929	)
Prepaid and Other Current Assets		(31,958	)		(37,923	)
Accounts Payable		224,626			318,687
Other Current Liabilities and Income Tax Payable		4,110			(5,089	)
Deferred Rent Incentives		24,126			8,664
Other Long Term Assets and Long Term Liabilities		(3,263	)		558

Net Cash Provided by Operating Activities		240,853			274,044
INVESTING ACTIVITIES
Cash Paid for Property and Equipment		(68,169	)		(50,286	)
Proceeds Received from Sale of Property and Equipment		108			156
Increase in Restricted Cash and Cash Equivalents		(7,007	)		(32,793	)
Lease Acquisition Costs		(557	)		(224	)
Redemption of Investment in Money Market Fund		—			240
Other		33			35

Net Cash Used in Investing Activities		(75,592	)		(82,872	)
FINANCING ACTIVITIES
Proceeds from Long Term Debt – ABL Line of Credit		396,700			—
Proceeds from Long Term Debt – Notes Payable		450,000			—
Proceeds from Long Term Debt – Term Loan		990,000			—
Principal Payments on Long Term Debt – ABL Line of Credit		(486,300	)		(121,200	)
Principal Payments on Long Term Debt – Senior Discount Notes		(99,309	)		—
Principal Payments on Long Term Debt – Senior Notes		(302,056	)		—
Principal Payments on Long Term Debt		(413	)		(389	)
Principal Payments on Long Term Debt – Term Loan		(790,050	)		(12,202	)
Payment of Dividends		(297,917	)		(151	)
Stock Option Exercise and Related Tax Benefits		758			—
Debt Issuance Costs		(25,080	)		(934	)

Net Cash Used in Financing Activities		(163,667	)		(134,876	)
Increase in Cash and Cash Equivalents		1,594			56,296
Cash and Cash Equivalents at Beginning of Period		30,214			24,750

Cash and Cash Equivalents at End of Period	$	31,808		$	81,046

Supplemental Disclosure of Cash Flow Information
Interest Paid	$	45,283		$	39,353

Net Income Tax Payments	$	2,596		$	39,614

Non-Cash Investing Activities:
Accrued Purchases of Property and Equipment	$	11,907		$	19,985

See Notes to Condensed Consolidated Financial Statements.

BURLINGTON COAT FACTORY INVESTMENTS HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

July 30, 2011

(UNAUDITED)

1. Summary of Significant Accounting Policies

Basis of Presentation

These unaudited Condensed Consolidated Financial Statements include the accounts of Burlington Coat Factory Investments Holdings, Inc. and all of its subsidiaries (Company or Holdings). Holdings has no operations and its only asset is all of the stock of Burlington Coat Factory Warehouse Corporation. All discussions of operations in this report relate to Burlington Coat Factory Warehouse Corporation and its subsidiaries (BCFWC), which are reflected in the financial statements of Holdings. The Condensed Consolidated Financial Statements are unaudited, but in the opinion of management reflect all adjustments (which are of a normal and recurring nature) necessary for the fair presentation of the results of operations for the interim periods presented. Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) have been condensed or omitted. It is suggested that these Condensed Consolidated Financial Statements be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 29, 2011 (Fiscal 2010 10-K). The balance sheet at January 29, 2011 has been derived from the audited Consolidated Financial Statements contained in the Fiscal 2010 10-K. Because the Company’s business is seasonal in nature, the operating results for the three and six month periods ended July 30, 2011 are not necessarily indicative of results for the fiscal year ending January 28, 2012 (Fiscal 2011).

Accounting policies followed by the Company are described in Note 1 to the audited Consolidated Financial Statements contained in the Fiscal 2010 10-K.

There were no new accounting standards that had a material impact on the Company’s Condensed Consolidated Financial Statements during the quarter ended July 30, 2011 and there were no new accounting pronouncements that were issued but not yet effective as of July 30, 2011 that the Company expects to have a material impact upon becoming effective.

2. Stockholder’s (Deficit) Equity

Activity for the three and six month periods ended July 30, 2011 and July 31, 2010 in the Company’s common stock, capital in excess of par value, accumulated deficit, and total stockholder’s (deficit) equity are summarized below:


	*(in thousands)*
	Common Stock		Capital in Excess of Par Value		Accumulated Deficit			Total
Balance at January 29, 2011	$	—	$	466,754	$	(279,242	)	$	187,512
Net Loss		—		—		(21,057	)		(21,057	)
Excess Tax Benefit from Stock Based Compensation				448		—			448
Stock Based Compensation		—		705		—			705
Dividends (a)		—		—		(300,000	)		(300,000	)

Balance at April 30, 2011		—		467,907		(600,299	)		(132,392	)

Net Loss		—		—		(32,763	)		(32,763	)
Stock Options Exercised and Related Tax Benefits		—		310		—			310
Stock Based Compensation		—		195		—			195

Balance at July 30, 2011	$	—	$	468,412	$	(633,062	)	$	(164,650	)


	*(in thousands)*
	Common Stock		Capital in Excess of Par Value		Accumulated Deficit			Total
Balance at January 30, 2010	$	—	$	464,489	$	(309,989	)	$	154,500
Net Income		—		—		5,213			5,213
Stock Option Expense		—		233		—			233
Dividends		—		—		(151	)		(151	)

Balance at May 1, 2010		—		464,722		(304,927	)		159,795

Net Loss		—		—		(40,479	)		(40,479	)
Stock Option Expense		—		604		—			604

Balance at July 31, 2010	$	—	$	465,326	$	(345,406	)	$	119,920

(a)

Represents dividends payable to the equity holders of Burlington Coat Factory Holdings, Inc. (Parent) in conjunction with the Company’s February 2011 debt refinancing, of which $297.9 million was paid as of April 30, 2011, as further discussed in Note 3 of the Company’s Condensed Consolidated Financial Statements entitled “Long Term Debt.” The remaining $2.1 million is recorded in “Current Liabilities” on the Company’s Condensed Consolidated Balance Sheets as of July 30, 2011.

3. Long Term Debt

Long term debt consists of:


	*(in thousands)*
	July 30, 2011			January 29, 2011			July 31, 2010
$1,000,000 Senior Secured Term Loan Facility, LIBOR (with a floor of 1.50%) plus 4.75% due in quarterly payments of $2,500 from July 30, 2011 to January 28, 2017, matures on February 23, 2017.	$	978,265		$	—		$	—
$450,000 Senior Notes, 10%, due at maturity on February 15, 2019, semi-annual interest payments on August 15 and February 15, from August 15, 2011 to February 15, 2019.		450,000			—			—
$900,000 Senior Secured Term Loan Facility, LIBOR plus 2.3%.		—			777,550			852,550
$600,000 ABL Senior Secured Revolving Facility, LIBOR plus spread based on average outstanding balance, expires February 4, 2014.		79,000			168,600			—
Senior Notes, 11.1%.		—			301,997			301,620
Senior Discount Notes, 14.5%.		—			99,309			99,309
Industrial Revenue Bonds, 6.1%.		—			—			1,210
Promissory Note, non-interest bearing, due in monthly payments of $17 through January 1, 2012.		100			200			300
Promissory Note, 4.4% due in monthly payments of $8 through December 23, 2011.		38			82			125
Capital Lease Obligations		24,280			24,547			24,805

Total debt		1,531,683			1,372,285			1,279,919
Less: current maturities		(3,272	)		(14,264	)		(17,507	)

Long-term debt, net of current maturities	$	1,528,411		$	1,358,021		$	1,262,412

Senior Notes Offering

On February 24, 2011, BCFWC (exclusive of subsidiaries, referred to herein as “BCFW”) completed its sale of $450.0 million aggregate principal amount of 10% Senior Notes due 2019 at an issue price of 100% (the Notes) in a private offering exempt from the registration requirements of the Securities Act of 1933, as amended (the Securities Act), to qualified institutional buyers in accordance with Rule 144A and to persons outside of the United States pursuant to Regulation S under the Securities Act. The Notes were issued pursuant to an indenture, dated February 24, 2011 (the Indenture), among BCFW, the guarantors signatory thereto and Wilmington Trust FSB.

The Notes are senior unsecured obligations of BCFW and are guaranteed on a senior basis by BCFW, the Company and each of BCFW’s U.S. subsidiaries to the extent such guarantor is a guarantor of BCFW’s obligations under the New Term Loan Facility (as defined below). Interest is payable on the Notes on each February 15 and August 15, commencing August 15, 2011. BCFW may redeem some or all of the Notes at any time prior to February 15, 2015 at a price equal to 100% of the principal amount of the Notes redeemed plus accrued and unpaid interest, if any, and an applicable make-whole premium. On or after February 15, 2015, BCFW may redeem some or all of the Notes at redemption prices set forth in the Indenture. In addition, at any time prior to February 15, 2014, BCFW may redeem up to 35% of the aggregate principal amount of the Notes, at a specified redemption price with the net cash proceeds of certain equity offerings.

The Indenture contains covenants that, among other things, restrict the ability of BCFW and the ability of BCFW and certain of its subsidiaries to: incur, assume or guarantee additional indebtedness; pay dividends or redeem or repurchase capital stock; make other restricted payments; incur liens; redeem debt that is junior in right of payment to the Notes; sell or otherwise dispose of assets, including capital stock of subsidiaries; enter into mergers or consolidations; and enter into transactions with affiliates. These covenants are subject to a number of exceptions and qualifications.

In connection with the issuance of the Notes, on February 24, 2011, BCFW entered into a registration rights agreement relating to the Notes, pursuant to which BCFW agreed to use its reasonable best efforts to file, and did initially file on July 15, 2011, a registration statement with the SEC (as amended, the “Exchange Offer Registration Statement”), enabling holders to exchange the Notes for registered notes with terms substantially identical in all material respects to the Notes, except the exchange notes would be freely tradable. BCFW and the guarantors under the Indenture also agreed to use reasonable best efforts to cause the Exchange Offer Registration Statement to become effective under the Securities Act no later than 365 days after the initial issuance of the Notes.

Tender Offer and Redemption

In connection with the offering of the Notes, the application of proceeds therefrom and the previously announced early settlement of the cash tender offers of BCFW and the Company for any and all of the 11.1% Senior Notes (Previous Senior Notes) and 14.5% Senior Discount Notes (Previous Senior Discount Notes and, together with the Previous Senior Notes, the Previous Notes), respectively, on February 24, 2011, BCFW entered into a Second Supplemental Indenture, dated February 24, 2011 between BCFW, the guarantors signatory thereto and Wilmington Trust FSB, relating to an Indenture (as amended, supplemented or otherwise modified, the BCF Indenture), dated April 13, 2006, between BCFW, the guarantors signatory thereto and Wilmington Trust FSB (as successor trustee to Wells Fargo Bank, N.A.), and the Company entered into a First Supplemental Indenture, dated February 24, 2011 (the First Supplemental Indenture), between the Company and Wilmington Trust FSB, relating to an Indenture, dated April 13, 2006 (as amended, supplemented or otherwise modified, the Holdings Indenture), between the Company and the Wilmington Trust FSB (as successor trustee to Wells Fargo Bank, N.A.), to eliminate substantially all of the restrictive covenants, certain affirmative covenants, certain events of default and substantially all of the restrictions on the ability of BCFW or the Company, as applicable, to merge, consolidate or sell all or substantially all of their properties or assets contained in each indenture and the related Previous Notes.

In addition, in connection with the early tender and settlement of 100% of the Previous Senior Discount Notes by the noteholders of the Previous Senior Discount Notes on February 24, 2011, the Company satisfied and discharged its obligations under the Holdings Indenture and with respect to the Previous Senior Discount Notes.

Further, on February 24, 2011, BCFW delivered a notice of redemption for the remaining principal amount not purchased in the early tender and settlement of the Previous Senior Notes, and irrevocably deposited with Wilmington Trust FSB an amount of funds sufficient to pay the redemption price of the Previous Senior Notes to satisfy and discharge its obligations under the BCF Indenture and with respect to the Previous Senior Notes. On April 15, 2011, BCFW redeemed the remaining principal amount outstanding of the Previous Senior Notes at a redemption price equal to 102.781% of the aggregate principal amount of the Previous Senior Notes to be redeemed, plus accrued and unpaid interest on the Previous Senior Notes to the redemption date.

$1 Billion Senior Secured Term Loan Facility

In connection with the offering of the Notes, on February 24, 2011, BCFW refinanced its $900 Million Senior Secured Term Loan Facility (the Previous Term Loan Facility) with the proceeds of a new $1.0 Billion Senior Secured Term Loan Facility (New Term Loan or New Term Loan Facility).

On February 24, 2011, BCFW and the Company and the U.S. and Puerto Rican subsidiaries of BCFW from time to time party thereto, as facility guarantors (collectively, the Term Loan Guarantors) entered into a new credit agreement (the New Term Loan Credit Agreement) with JPMorgan Chase Bank, N.A., as administrative agent (in such capacity, the Term Loan Administrative Agent) and as collateral agent, the lenders party thereto, J.P. Morgan Securities LLC and Goldman Sachs Lending Partners LLC, as joint bookrunners and J.P. Morgan Securities LLC, Goldman Sachs Lending Partners LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Wells Fargo Securities, LLC, as joint arrangers, governing the terms of the New Term Loan Facility.

Like the Previous Term Loan Facility, the New Term Loan Facility is secured by (a) a perfected first priority lien on BCFW’s real estate, favorable leases, and machinery and equipment and (b) a perfected second priority lien on BCFW’s inventory and receivables, in each case subject to various limitations and exceptions. The New Term Loan Facility requires BCFW to maintain a minimum consolidated interest coverage ratio and a maximum consolidated leverage ratio (each measured quarterly). The New Term Loan Facility also contains limitations on BCFW’s ability to, among other things, incur indebtedness and liens, make investments, capital expenditures and restricted payments, sell assets and prepay certain indebtedness.

The New Term Loan Facility is to be repaid in quarterly payments of $2.5 million from July 30, 2011 to January 28, 2017, with the balance of the New Term Loan Facility due upon maturity on February 23, 2017. Beginning with the fiscal year ending on January 28, 2012, at the end of each fiscal year, BCFW is required to make a payment based on its available free cash flow (as defined in the credit agreement governing the New Term Loan Facility). This payment offsets future mandatory quarterly payments.

The New Term Loan Facility contains financial, affirmative and negative covenants and requires that BCFW, among other things, maintain on the last day of each fiscal quarter a consolidated leverage ratio not to exceed a maximum amount and maintain a consolidated interest coverage ratio of at least a certain amount. Specifically, the consolidated leverage ratio is our total debt to Adjusted EBITDA, as each term is defined in the New Term Loan Credit Agreement, for the trailing twelve months most recently ended on or prior to such date, that may not exceed 6.75 to 1 through October 27, 2012; 6.25 to 1 through November 2, 2013; 5.5 to 1 through November 1, 2014; 5.00 to 1 through October 31, 2015; and 4.75 to 1 at January 30, 2016 and thereafter. The consolidated interest coverage ratio is our consolidated interest expense to Adjusted EBITDA, as each term is defined in the New Term Loan Credit Agreement, for the trailing twelve months most recently ended on or prior to such date, that must exceed 1.75 to 1 through October 27, 2012; 1.85 to 1 through November 2, 2013; 2.00 to 1 through October 31, 2015; and 2.10 to 1 at January 30, 2016 and thereafter. Adjusted EBITDA is a non-GAAP financial measure of our liquidity. Adjusted EBITDA, as defined in the credit agreement governing our Term Loan, starts with consolidated net loss for the period and adds back (i) depreciation, amortization, impairments and other non-cash charges that were deducted in arriving at consolidated net loss, (ii) the (benefit) provision for taxes, (iii) interest expense, (iv) advisory fees, and (v) unusual, non-recurring or extraordinary expenses, losses or charges as reasonably approved by the administrative agent for such period.

The interest rates for the New Term Loan Facility are based on: (i) for LIBO rate loans for any interest period, at a rate per annum equal to (a) the greater of (x) the LIBO rate as determined by the Term Loan Administrative Agent, for such interest period multiplied by the Statutory Reserve Rate (as defined in the New Term Loan Credit Agreement) and (y) 1.50% (the Term Loan Adjusted LIBO Rate), plus an applicable margin; and (ii) for prime rate loans, a rate per annum equal to the highest of (a) the variable annual rate of interest then announced by JPMorgan Chase Bank, N.A. at its head office as its “prime rate,” (b) the federal funds rate in effect on such date plus 0.50% per annum, and (c) the Term Loan Adjusted LIBO Rate for the applicable class of term loans for one-month plus 1.00%, plus, in each case, an applicable margin. The interest rate on the New Term Loan Facility was 6.3% as of July 30, 2011.

In addition, the New Term Loan Facility provides for an uncommitted incremental term loan facility of up to $150.0 million that is available subject to the satisfaction of certain conditions. The New Term Loan Facility has a six year maturity, except that term loans made in connection with the incremental term loan facility or extended in connection with the extension mechanics of the New Term Loan Facility have the maturity dates set forth in the amendments applicable to such term loans.

BCFW used the net proceeds from the offering of the Notes, together with borrowings under the New Term Loan Facility and the ABL Line of Credit, to (i) repurchase any and all of the outstanding Previous Senior Notes and Previous Senior Discount Notes, pursuant to cash tender offers commenced by BCFW and the Company on February 9, 2011, and to redeem any Previous Notes that remained outstanding after the completion of the cash tender offers, and pay related fees and expenses, including tender or redemption premiums and accrued interest on the Previous Notes, (ii) to repay the indebtedness under Previous Term Loan Facility and (iii) to pay a special cash dividend of approximately $300.0 million in the aggregate to the equity holders of the Parent on a pro rata basis, and to pay related fees and expenses.

In accordance with ASC Topic No. 470-50, “Debt – Modifications and Extinguishments” (Topic No. 470), the transactions noted above were determined to be an extinguishment of the existing debt and an issuance of new debt. As a result, the Company recorded a loss on the extinguishment of debt in the amount of $37.8 million in the line item “Loss on Extinguishment of Debt” in

its Condensed Consolidated Statements of Operations and Comprehensive Loss. Of the $37.8 million loss on the extinguishment of debt, $21.4 million represented early call premiums that the Company paid to the holders of its Previous Senior Notes and Previous Senior Discount Notes as a result of repurchasing both notes prior to their maturity. The remaining $16.4 million represented the write off of deferred financing fees related to the extinguished debt facilities.

In conjunction with the issuance of the new debt facilities, the Company paid $25.3 million of legal, consulting, audit related and placement fees. These costs were all deferred and recorded in the line item “Other Assets” in the Company’s Condensed Consolidated Balance Sheets and will be amortized through the line item “Interest Expense” in the Company’s Condensed Consolidated Statements of Operations and Comprehensive Loss over the respective lives of the new debt facilities using the interest method.

ABL Line of Credit

The ABL Line of Credit carries an interest rate of LIBOR plus a spread which is determined by the Company’s annual average borrowings outstanding. Commitment fees of 0.75% to 1.0%, based on the Company’s usage of the line of credit, were charged on the unused portion of the facility and were included in the line item “Interest Expense” on the Company’s Consolidated Statements of Operations and Comprehensive Loss.

In connection with the offering of the Notes and the refinancing of the Term Loan Facility, on February 24, 2011, BCFW entered into a first amendment (the First Amendment) to the Amended and Restated Credit Agreement, dated January 15, 2010 (as amended, supplemented and otherwise modified, the Amended ABL Credit Agreement), among BCFW, as lead borrower, the borrowers party thereto, the facility guarantors party thereto, Bank of America, N.A. as administrative agent and collateral agent, the lenders party thereto, Wells Fargo Retail Finance, LLC and Regions Bank as co-syndication agents, J.P. Morgan Securities Inc. and UBS Securities LLC as co-documentation agents and General Electric Capital Corporation, US Bank, National Association and SunTrust Bank as senior managing agents, governing the ABL Line of Credit to permit BCFW to, among other things, (i) issue and guarantee the Notes, (ii) incur additional indebtedness in connection with the refinancing of the Previous Term Loan Facility by increasing the limitation on term loan indebtedness from $900.0 million to $1.0 billion, (iii) have additional flexibility to make investments, capital expenditures, and dividends and other distributions with respect to equity interests and (iv) make a cash dividend of approximately $300.0 million in the aggregate to the equity holders of Parent, on a pro rata basis. Borrowings on the ABL Line of Credit related to the refinancing transactions were $101.6 million.

At July 30, 2011, the Company had $272.3 million available under the ABL Line of Credit and $79.0 million of outstanding borrowings. The maximum borrowings under the facility during each of the three and six month periods ended July 30, 2011 amounted to $87.9 million and $184.9 million, respectively. Average borrowings during the three and six month periods ended July 30, 2011 amounted to $30.9 million and $51.5 million, respectively, at an average interest rate of 4.3% and 4.4%, respectively. At January 29, 2011, $168.6 million was outstanding under this credit facility. At July 30, 2011 the Company’s borrowing rate related to the ABL Line of Credit was 3.8%.

At July 31, 2010, the Company had $335.2 million available under the ABL Line of Credit and no borrowings outstanding. There were no borrowings under the facility during the three months ended July 31, 2010. Maximum borrowings under the facility during the six month period ended July 31, 2010 amounted to $121.2 million. Average borrowings during the six months ended July 31, 2010 amounted to $9.7 million at an average interest rate of 2.9%.

Both the New Term Loan and the ABL Line of Credit are fully, jointly, severally, unconditionally, and irrevocably guaranteed by all of the Company’s subsidiaries (with the exception of one immaterial non-guarantor subsidiary). The ABL Line of Credit is collateralized by a first lien on the Company’s inventory and receivables and a second lien on the Company’s real estate and property and equipment. The New Term Loan is collateralized by a first lien on the Company’s real estate, favorable leases, and machinery and equipment and a second lien on the Company’s inventory and receivables.

On September 2, 2011, the Company completed an amendment and restatement of the credit agreement governing the Company’s $600 million ABL Line of Credit, which, among other things, extended the maturity date to September 2, 2016. Refer to Note 13 to the Company’s Condensed Consolidated Financial Statements entitled “Subsequent Events” for further details.

As of July 30, 2011, the Company was in compliance with all of its debt covenants. The agreements regarding the ABL Line of Credit and the New Term Loan Facility, as well as the indenture governing the Notes, contain covenants that, among other things, limit the Company’s ability, and the ability of the Company’s restricted subsidiaries, to pay dividends on, redeem or repurchase capital stock; make investments; incur additional indebtedness or issue preferred stock; create liens; permit dividends or other restricted payments by the Company’s subsidiaries; sell all or substantially all of the Company’s assets or consolidate or merge with or into other companies; and engage in transactions with affiliates.

The Company had $33.1 million, $29.2 million and $35.1 million in deferred financing fees, net of accumulated amortization, as of July 30, 2011, January 29, 2011 and July 31, 2010, respectively, related to its debt instruments recorded in the line item “Other Assets” on the Company’s Condensed Consolidated Balance Sheets. Amortization of deferred financing fees amounted to $2.4 million and $3.1 million for the three month periods ended July 30, 2011 and July 31, 2010, respectively, and is included in the line

item “Interest Expense” in the Company’s Condensed Consolidated Statements of Operations and Comprehensive Loss. Amortization of deferred financing fees amounted to $5.0 million and $6.1 million for the six months ended July 30, 2011 and July 31, 2010, respectively. During the six months ended July 30, 2011, the Company recorded $25.3 million of new deferred financing costs related to the New Term Loan Facility and the Notes and wrote off $16.4 million of previously capitalized deferred debt costs related to the Previous Term Loan, the Previous Senior Notes and Previous Senior Discount Notes, which were all settled in connection with the refinancing transactions described above.

4. Restructuring and Separation

The Company accounts for restructuring and separation costs in accordance with ASC Topic No. 420, “Exit or Disposal Cost Obligations” (Topic No. 420). In an effort to improve workflow efficiencies and realign certain responsibilities, the Company effected a reorganization of certain positions within its stores and corporate locations. Changes in the Company’s workforce during the three and six months ended July 30, 2011 resulted in a severance charge during both periods of $5.2 million, which was recorded in the line item “Restructuring and Separation Costs” in the Company’s Condensed Consolidated Statement of Operations and Comprehensive Income. The Company expects to complete this restructuring during the third quarter of Fiscal 2011.

In comparison, severance charges for the three and six months ended July 31, 2010 were $1.2 million and $2.2 million, respectively. Severance charges for the three and six months ended July 31, 2010 were the result of the Company’s implementation of several initiatives, including some that resulted in the elimination of certain positions and the restructuring of certain other jobs and functions.

The table below summarizes the charges incurred related to the Company’s restructuring and separation costs, which are included in the line items “Other Current Liabilities” and “Other Liabilities” in the Company’s Condensed Consolidated Balance Sheet as of July 30, 2011 and July 31, 2010:


	*(in thousands)*
	January 29, 2011		Charges		Cash Payments			Other			July 30, 2011
Severance – Restructuring (a)	$	6	$	3,360	$	(1,729	)	$	—		$	1,637
Severance – Separation Cost (b)		1,231		1,830		(1,745	)		—			1,316

Total	$	1,237	$	5,190	$	(3,474	)	$	—		$	2,953


	*(in thousands)*
	January 30, 2010		Charges		Cash Payments			Other			July 31, 2010
Severance – Restructuring (a)	$	1,560	$	—	$	(1,042	)	$	(110	)	$	408
Severance – Separation Cost (b)		912		2,152		(788	)		—			2,276

Total	$	2,472	$	2,152	$	(1,830	)	$	(110	)	$	2,684

(a)	The balances as of January 30, 2010, July 31, 2010, January 29, 2011 and July 30, 2011 are recorded in the line item “Other Current Liabilities” in the Company’s Condensed Consolidated Balance Sheets.

(b)

The balances as of July 31, 2010, January 29, 2011 and July 30, 2011 are recorded in the line item “Other Current Liabilities” in the Company’s Condensed Consolidated Balance Sheets. Approximately $0.7 million and $0.2 million of the balance as of January 30, 2010 are recorded in the line items “Other Current Liabilities” and “Other Liabilities,” respectively, in the Company’s Condensed Consolidated Balance Sheets.

5. Fair Value Measurements

The Company accounts for fair value measurements in accordance with ASC Topic No. 820, “Fair Value Measurements and Disclosures,” (Topic No. 820) which defines fair value, establishes a framework for measurement and expands disclosure about fair value measurements. Topic No. 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price), and classifies the inputs used to measure fair value into the following hierarchy:


Level 1:		Quoted prices for identical assets or liabilities in active markets.

Level 2:		Quoted market prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.

Level 3:		Pricing inputs that are unobservable for the assets and liabilities and include situations where there is little, if any, market activity for the assets and liabilities.

The inputs into the determination of fair value require significant management judgment or estimation.

Financial Assets

The Company’s financial assets as of July 30, 2011 included cash equivalents, interest rate cap agreements and a note receivable. The Company’s financial liabilities are discussed below. The carrying value of cash equivalents approximates fair value due to its short-term nature. The fair values of the interest rate cap agreements are determined using quotes that are based on models whose inputs are observable LIBOR forward interest rate curves. To comply with the provisions of Topic No. 820, the Company incorporates credit valuation adjustments to appropriately reflect both the Company’s non-performance risk and the respective counterparty’s non-performance risk in the fair value measurements. In adjusting the fair value of the Company’s interest rate cap agreements for the effect of non-performance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees. As a result, the Company has determined that the inputs used to value this investment fall within Level 2 of the fair value hierarchy.

The fair value of the note receivable is based on a discounted cash flow analysis whose inputs are unobservable, and therefore it falls within Level 3 of the fair value hierarchy.

Although the Company has determined that the majority of the inputs used to value its interest rate cap agreements fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with the Company’s interest rate cap agreements utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default. As of July 30, 2011, the Company recorded credit valuation adjustments of less than $0.1 million to the overall valuation of the Company’s interest rate cap agreements. The credit valuation adjustment is not considered significant to the valuation of each of the individual interest rate cap agreements and as a result, the Company has determined that its interest rate cap agreement valuations in their entirety are classified as Level 2 within the fair value hierarchy.

The fair values of the Company’s financial assets and the hierarchy of the level of inputs are summarized below:


	*(in thousands)*
	Fair Value Measurements at
	July 30, 2011		January 29, 2011		July 31, 2010
Assets:
Level 1
Cash equivalents (including restricted cash)	$	37,359	$	30,331	$	91,020
Level 2
Interest rate cap agreements (a)	$	1,417	$	3,279	$	2,482
Level 3
Note Receivable (b)	$	1,099	$	1,090	$	1,407

(a)

Included in “Other Assets” within the Company’s Condensed Consolidated Balance Sheets (refer to Note 6 of the Company’s Condensed Consolidated Financial Statements, entitled “Derivative Instruments and Hedging Activities,” for further discussion regarding the Company’s interest rate cap agreements).

(b)

Included in “Prepaid and Other Current Assets” and “Other Assets” on the Company’s Consolidated Balance Sheets. The change in fair value of the Company’s Level 3 note receivable from January 29, 2011 to July 30, 2011 is related to unrealized gains. The change in fair value of the Company’s Level 3 note receivable from July 31, 2010 to January 29, 2011 is related to the Company receiving a partial payment in the amount of $0.5 million, which was partially offset by unrealized gains in the amount of $0.2 million.

Financial Liabilities

The fair value of the Company’s debt as of July 30, 2011, January 29, 2011 and July 31, 2010 is noted in the table below:


	*(in thousands)*
	July 30, 2011				January 29, 2011				July 31, 2010
	Carrying Amount (c)		Fair Value (c)		Carrying Amount (c)		Fair Value (c)		Carrying Amount (c)		Fair Value (c)
$1,000,000 Senior Secured Term Loan Facility, 6.25% due in quarterly payments of 2,500 from July 30, 2011 to January 28, 2017, matures on February 23, 2017.	$	978,265	$	978,265	$	—	$	—	$	—	$	—
$450,000 Senior Notes, 10% due at maturity on February 15, 2019, semi-annual interest payments on August 15 and February 15, from August 15, 2011 to February 15, 2019.		450,000		452,250		—		—		—		—
$900,000 Senior Secured Term Loan Facility, LIBOR plus 2.3%.		—		—		777,550		773,986		852,550		803,528
$600,000 ABL Senior Secured Revolving Facility, LIBOR plus spread based on average outstanding balance, expires February 4, 2014. (a)		79,000		79,000		168,600		168,600		—		—
Senior Notes, 11.1%.		—		—		301,997		313,322		301,620		312,177
Senior Discount Notes, 14.5%.		—		—		99,309		104,274		99,309		105,268
Other debt (b)		138		138		282		282		1,635		1,635

Total debt	$	1,507,403	$	1,509,653	$	1,347,738	$	1,360,464	$	1,255,114	$	1,222,608

(a)

The carrying value of the ABL Line of Credit approximates its fair value due to its short term nature (borrowings are typically done in increments of 30 days or less) and its variable interest rate. On September 2, 2011, the Company completed an amendment and restatement of the credit agreement governing the Company’s $600 million ABL Line of Credit, which, among other things, extended the maturity date to September 2, 2016. Refer to Note 13 to the Company’s Condensed Consolidated Financial Statements entitled “Subsequent Events” for further details.

(b)	Other debt includes the industrial revenue bonds and both promissory notes, as further described in Note 3 of the Company’s Condensed Consolidated Financial Statements entitled “Long Term Debt.”

(c)	Capital lease obligations are excluded from the table above.

As of July 30, 2011, the fair value of the Company’s debt, exclusive of capital leases, was $1,509.7 million compared to the carrying value of $1,507.4 million. The fair values presented herein are based on estimates using quoted market prices for the same or similar issues and other pertinent information available to management as of the respective period end dates. Although management is not aware of any factors that could significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these Condensed Consolidated Financial Statements since July 30, 2011, and current estimates of fair value may differ from amounts presented herein.

6. Derivative Instruments and Hedging Activities

The Company accounts for derivatives and hedging activities in accordance with ASC Topic No. 815 “Derivatives and Hedging” (Topic No. 815). Topic No. 815 provides disclosure requirements to provide users of financial statements with an enhanced understanding of: (i) How and why an entity uses derivative instruments; (ii) How derivative instruments and related hedged items are accounted for under Topic No. 815 and its related interpretations; and (iii) How derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows.

The Company is exposed to certain risks relating to its ongoing business operations, including market risks relating to fluctuations in interest rates. The Company’s senior secured credit facilities contain floating rate obligations and are subject to interest rate fluctuations. The Company uses interest rate cap agreements, which are designated as economic hedges, to manage interest rate risk associated with the Company’s variable-rate borrowings and to minimize the negative impact of interest rate fluctuations on its earnings and cash flows, thus reducing the Company’s exposure to variability in expected future cash flows attributable to the changes in LIBOR rates.

Topic No. 815 requires recognition of all derivative instruments as either assets or liabilities at fair value in the statement of financial position. The Company does not monitor its interest rate cap agreements for hedge effectiveness and therefore does not designate its interest rate cap agreements as cash flow hedges of certain future interest payments on variable-rate debt. Instead, the interest rate cap agreements are adjusted to market on a quarterly basis. As a result, gains or losses associated with the interest rate cap agreements are recorded in the line item “Interest Expense” on the Company’s Condensed Consolidated Statements of Operations and Comprehensive Loss and in the line item “Interest Rate Cap Contract – Adjustment to Market” on the Company’s Condensed Consolidated Statements of Cash Flows.

As of July 30, 2011, the Company was party to two outstanding interest rate cap agreements to manage the interest rate risk associated with future interest payments on variable-rate debt. As of January 29, 2011 and July 31, 2010, the Company was party to four outstanding interest rate cap agreements to manage the interest rate risk associated with future interest payments on variable-rate debt.

(in thousands)

Fair Values of Derivative Instruments

July 30, 2011

Asset Derivatives
January 29, 2011

July 31, 2010

Derivatives Not Designated as Hedging Instruments
Under Topic No. 815

Balance

Sheet

Location

Fair
Value

Balance
Sheet
Location

Fair
Value

Balance
Sheet
Location

Fair
Value

Interest Rate Cap Agreements

Other Assets

1,417

Other Assets

3,279

Other Assets

2,482

Liability Derivatives

July 30, 2011

January 29, 2011

July 31, 2010

Derivatives Not Designated as Hedging Instruments
Under Topic No. 815

Balance

Sheet

Location

Fair
Value

Balance
Sheet
Location

Fair
Value

Balance
Sheet
Location

Fair
Value

Interest Rate Cap Agreements

Other Liabilities

—

Other Liabilities

—

Other Liabilities

—


	Loss on Derivative Instruments
Derivatives Not Designated as Hedging Instruments Under Topic No. 815	Location of Loss Recognized in Income on Derivatives	Amount of Loss Recognized in Income on Derivatives
		Six Months Ended				Three Months Ended
		July 30, 2011		July 31, 2010		July 30, 2011		July 31, 2010
Interest Rate Cap Agreements	Interest Expense	$	1,862	$	6,297	$	610	$	1,705

On May 31, 2011, the Company’s $600 million and $300 million interest rate cap agreements, both with a cap rate of 7%, terminated and two new interest rate cap agreements became effective. Each agreement has a notional principal amount of $450 million with a cap rate of 7.0% and terminates on May 31, 2015. The Company has determined that it will not monitor them for hedge effectiveness. The Company will adjust these interest rate cap agreements to fair value on a quarterly basis and as a result, gains or losses associated with these agreements will be included in the line item “Interest Expense” on the Company’s Condensed Consolidated Statements of Operations and Comprehensive Loss and in the line item “Interest Rate Cap Contract – Adjustment to Market” on the Company’s Condensed Consolidated Statements of Cash Flows.

7. Income Taxes

As of July 30, 2011, the Company had a current deferred tax asset of $22.3 million and a non-current deferred tax liability of $275.9 million. As of January 29, 2011, the Company had a current deferred tax asset of $24.8 million and a non-current deferred tax liability of $279.3 million. As of July 31, 2010, the Company had a current deferred tax asset of $31.2 million and a non-current deferred tax liability of $270.1 million. Current deferred tax assets consisted primarily of certain operating costs and inventory related costs not currently deductible for tax purpose. Non-current deferred tax liabilities primarily related to rent expense, intangible costs, and depreciation expense where the Company has a future obligation for tax purpose.

In accordance with ASC Topic No. 270, Interim Reporting (Topic No. 270) and ASC Topic No. 740, Income Taxes (Topic No. 740), at the end of each interim period the Company is required to determine the best estimate of its annual effective tax rate and then apply that rate in providing for income taxes on a current year-to-date (interim period) basis. As of July 30, 2011, the Company’s best estimate of its annual effective income tax rate was 35.6%, excluding discrete items.

As of July 30, 2011, January 29, 2011 and July 31, 2010, valuation allowances amounted to $5.8 million. $5.8 million and $7.0 million, respectively, and related primarily to state tax net operating losses. The Company believes that it is more likely than not that a portion of the benefit of the state tax net operating losses will not be realized. The state net operating losses have been generated in a number of taxing jurisdictions and are subject to various expiration periods ranging from five to twenty years beginning with Fiscal 2011. Any future tax benefit recognized by the use of a state tax net operating loss where a valuation allowance has been established, will be recorded to the Company’s Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income according to the provisions of ASC Topic No. 805, “Business Combinations” (Topic No. 805). Within the next twelve months, the Company does not expect material changes in its liability for uncertain tax positions. During the second quarter of fiscal 2011, the Company closed federal income tax audits covering all fiscal periods through January 30, 2010.

8. Stock Option and Award Plans and Stock-Based Compensation

On April 13, 2006, Parent’s Board of Directors adopted the 2006 Management Incentive Plan (the Plan). The Plan provides for the granting of service-based and performance-based stock options, restricted stock and other forms of awards to key employees and directors of the Company or its affiliates. Grants made pursuant to the Plan are comprised of units of Parent’s common stock. Each “unit” consists of nine shares of Parent’s Class A common stock and one share of Parent’s Class L common stock. The shares comprising a unit are in the same proportion as the shares of Class A and Class L common stock held by all stockholders of the Parent. Options granted pursuant to the Plan are exercisable only for whole units and cannot be separately exercised for the individual classes of Parent’s common stock. As of July 30, 2011, there were 730,478 units reserved under the Plan consisting of 6,574,302 shares of Parent’s Class A common stock and 730,478 shares of Parent’s Class L common stock.

Non-cash stock compensation expense for the three and six months ended July 30, 2011 amounted to $0.2 million and $0.9 million, respectively. In comparison, non-cash stock compensation expense for the three and six months end July 31, 2010 amounted to $0.6 million and $0.8 million, respectively. The table below summarizes the types of stock compensation:


	*(in thousands)*
	Three Months Ended				Six Months Ended
Type of Non-Cash Stock Compensation	July 30, 2011		July 31, 2010		July 30, 2011		July 31, 2010
Stock Option Compensation (a)	$	82	$	422	$	545	$	425
Restricted Stock Compensation (a)		113		182		355		412

Total	$	195	$	604	$	900	$	837

(a)	Included in the line item “Selling and Administrative Expense” in the Company’s Condensed Consolidated Statements of Operations and Comprehensive Loss.

Stock Options

Options granted during the six month period ended July 30, 2011 were all service-based awards and were granted at exercise prices of $50 per unit and $120 per unit. Options granted during the six month period ended July 31, 2010 were all service-based awards and were granted at exercise prices of $90 per unit and $180 per unit.

In April 2011, the Parent’s Board of Directors, in order to reflect the dividends paid in connection with the debt refinancing, approved a reduction of the exercise prices of each then outstanding option from $90 per unit and $180 per unit, respectively, to $30.60 and $120.60 per unit, respectively, without affecting the existing vesting schedules thereof. Upon application of modification accounting, which contemplates fair value of awards both before and after the debt refinancing and related dividends, the stock compensation cost did not change as a result of this modification.

All of the service-based awards granted during the six month period ended July 30, 2011 and July 31, 2010 vest 40% on the second anniversary of the award with the remaining amount vesting ratably over the subsequent three years. The final exercise date for any option granted is the tenth anniversary of the grant date.

All options awarded pursuant to the Plan become exercisable upon a change of control. Unless determined otherwise by the plan administrator and except as otherwise set forth in the option holders’ stock agreement, upon cessation of employment, (1) options that have not vested will terminate immediately; (2) units previously issued upon the exercise of vested options will be callable at the Company’s option; and (3) unexercised vested options will be exercisable for a period of 60 days.

As of July 30, 2011, the Company had 499,830 options outstanding to purchase units, all of which are service-based awards. The Company accounts for awards issued under the Plan in accordance with ASC Topic No. 718, “Stock Compensation.” For the three and six months ended July 30, 2011, the Company recognized non-cash stock option compensation expense of $0.1 million (less than $0.1 million after tax) and $0.5 million ($0.2 million after tax), respectively, net of a $0.5 million and $0.7 million forfeiture adjustment. These forfeiture adjustments were the result of actual forfeitures being higher than initially estimated. For the three and six months ended July 31, 2010, the Company recognized non-cash stock option compensation expense of $0.4 million ($0.3 million after tax) and $0.4 million ($0.3 million after tax), respectively, net of a respective $0.2 million and $0.9 million forfeiture adjustment that was recorded as a result of actual forfeitures being higher than initially estimated.

As of July 30, 2011 there was approximately $5.3 million of unearned non-cash stock-based option compensation that the Company expected to recognize as expense over the next 5.0 years. The service-based awards are expensed on a straight-line basis over the requisite service period of five years. As of July 30, 2011, 42.2% percent of outstanding options to purchase units had vested.

Stock option transactions during the six month period ended July 30, 2011 are summarized as follows:


	Number of Units			Weighted Average Exercise Price Per Unit
Options Outstanding January 29, 2011		489,499		$	123.62
Options Granted		58,500			71.37
Options Forfeited		(36,172	)		(86.87	)
Options Exercised		(11,997	)		(43.11	)

Options Outstanding July 30, 2011		499,830		$	67.07

Non-vested stock option unit transactions during the six months ended July 30, 2011 are summarized below:


	Number of Units			Weighted Average Grant Date Fair Value Per Unit
Non-Vested Options Outstanding, January 29, 2011		324,100		$	38.28
Granted		58,500			13.73
Vested		(64,708	)		(39.52	)
Forfeited		(29,104	)		(36.66	)

Non-Vested Options Outstanding, July 30, 2011		288,788		$	33.61

The following table summarizes information about the exercise price and weighted average remaining contractual life of options to purchase units that were outstanding under the Plan as well as options that were exercisable under the Plan as of July 30, 2011:


	Options Outstanding				Options Exercisable
Exercise Prices	Number Outstanding At July 30, 2011		Weighted Average Remaining Contractual Life (Years)		Number Exercisable At July 30, 2011		Weighted Average Remaining Contractual Life (Years)
$30.60		294,550		7.3		137,421		5.9
$50.00		33,004		9.7		—		—
$120.00		16,496		9.7		—		—
$120.60		141,780		6.5		59,621		4.9
$270.00		14,000		1.8		14,000		1.8

		499,830				211,042

The following table summarizes information about the exercise prices and weighted average remaining contractual life of vested options and options expected to vest during the contractual term:


Exercise Prices	Options		Weighted Average Remaining Contractual Life (Years)		Weighted Average Exercise Price
Vested and Expected to Vest as of July 30, 2011
$30.60		238,643		7.2	$	30.60
$50.00		26,400		9.9	$	50.00
$120.00		13,200		9.9	$	120.00
$120.60		116,420		6.4	$	120.60
$270.00		14,000		1.8	$	270.00

		408,663

The fair value of each option granted is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants under the Plan during the six months ended July 30, 2011 and July 31, 2010:


	Six Months Ended
	July 30, 2011			July 31, 2010
Risk-Free Interest Rate		2.4 – 3.8	%		2.3 – 3.4	%
Expected Volatility		30.5	%		43.2	%
Expected Life (years)		6.4 – 10.0			6.6 – 9.5
Contractual Life (years)		10			10
Expected Dividend Yield		0.0	%		0.0	%
Weighted Average Grant Date Fair Value of Options Issued at an exercise price of:
$30.60	$	20.57		$	—
$50.00	$	14.35			—
$120.00	$	10.19			—
$120.60	$	12.64		$	—
$90.00	$	—		$	41.10
$180.00	$	—		$	28.33

The weighted average grant date fair value of options granted has varied from period to period due to changes in the Company’s business enterprise value resulting from changes in the Company’s business forecast, market conditions and the refinancing of the Company’s debt and related dividend payments (as further described in Note 3 to the Condensed Consolidated Financial Statements entitled “Long Term Debt”).

Restricted Stock Awards

Under the Plan, the Company also has the ability to grant restricted stock awards. Restricted stock awards typically vest 50% on the second anniversary of the grant and 50% on the third anniversary of the grant. Following a change of control, as defined by the Plan, all unvested units shall accelerate and vest as of the date of such change of control.

During the three and six month periods ended July 30, 2011, the Company recorded $0.1 million and $0.4 million, respectively, of non-cash restricted stock compensation expense, inclusive of forfeitures of $0.1 million and $0.1 million, respectively. During the three and six months ended July 31, 2010, the Company recorded $0.2 million and $0.4 million, respectively, of non-cash restricted stock compensation expense, inclusive of forfeitures of $0.1 million and $0.2 million, respectively. As of July 30, 2011, there was approximately $0.6 million of unearned non-cash stock-based compensation that the Company expects to recognize as expense over the next 0.9 years. Awards of restricted stock are expensed on a straight-line basis over the requisite service period of three years. At July 30, 2011, 58,871 of the outstanding awards of restricted stock were vested.

Restricted stock transactions for the six months ended July 30, 2011 are summarized below:


	Number of Awards
Restricted Stock Awards Outstanding January 29, 2011		98,367
Restricted Stock Awards Granted		—
Restricted Stock Awards Forfeited		(5,351	)

Restricted Stock Awards Outstanding July 30, 2011		93,016

Non-vested restricted stock transactions during the six months ended July 30, 2011 are summarized below:


	Number of Awards			Weighted Average Grant Date Fair Value Per Awards
Non-Vested Restricted Stock Awards Outstanding, January 29, 2011		71,140		$	47.27
Restricted Stock Awards Granted		—			—
Restricted Stock Awards Vested		(31,644	)		(45.93	)
Restricted Stock Awards Forfeited		(5,351	)		(45.80	)

Non-Vested Restricted Stock Awards Outstanding, July 30, 2011		34,145		$	48.74

9. Comprehensive Loss

The Company presents comprehensive loss on its Condensed Consolidated Statements of Operations and Comprehensive Loss in accordance with ASC Topic No. 220 “Comprehensive Income.” For the three and six month periods ended July 30, 2011 and July 31, 2010, comprehensive loss consisted of net loss.

10. Other Current Liabilities

Other current liabilities primarily consist of sales tax payable, liabilities due to customers, accrued payroll costs, self-insurance reserves, accrued operating expenses, payroll taxes payable, current portion of deferred rent expense and other miscellaneous items. Liabilities due to customers totaled $29.3 million, $30.2 million and $31.9 million as of July 30, 2011, January 29, 2011 and July 31, 2010, respectively.

The Company has risk participation agreements with insurance carriers with respect to workers’ compensation, general liability insurance and health insurance. Pursuant to these arrangements, the Company is responsible for paying individual claims up to designated dollar limits. The amounts included in costs related to these claims are estimated and can vary based on changes in assumptions or claims experience included in the associated insurance programs. An increase in worker’s compensation or health insurance claims by employees or general liability claims may result in a corresponding increase in costs related to these claims. Self-insurance reserves were $50.3 million, $49.6 million and $45.4 million, as of July 30, 2011, January 29, 2011 and July 31, 2010, respectively. At July 30, 2011, January 29, 2011 and July 31, 2010, the portion of self-insurance reserve expected to be paid in the next twelve months of $19.1 million, $19.1 million and $24.0 million, respectively, were recorded in the line item “Other Current Liabilities” in the Company’s Condensed Consolidated Balance Sheets. The remaining respective balances of $31.2 million, $30.5 million and $21.4 million were recorded in the line item “Other Liabilities” in the Company’s Condensed Consolidated Balance Sheets.

11. Segment Information

The Company reports segment information in accordance with ASC Topic No. 280 “Segment Reporting” (Topic No. 280). The Company has one reportable segment.

12. Commitments and Contingencies

Legal

The Company establishes reserves relating to legal claims, in connection with litigation to which the Company is party from time to time in the ordinary course of business. The aggregate amounts of such reserves were $7.1 million, $6.9 million and $17.5 million as of July 30, 2011, January 29, 2011 and July 31, 2010, respectively. The Company believes that potential liabilities in excess of those recorded will not have a material adverse effect on the Company’s Consolidated Financial Statements. However, there can be no assurances to this effect.

A putative class action lawsuit, entitled May Vang, and all others similarly situated, v. Burlington Coat Factory Warehouse Corporation, Case No. 09-CV-08061-CAS, was filed in the Superior Court of the State of California on September 17, 2009 and was amended and refiled on November 16, 2009 in the U.S. District Court for the Central District of California – Western Division. The named plaintiff purported to assert claims on behalf of all current, former, and future employees in the United States and the State of California for the relevant statutory time period. The amended complaint asserted claims for failure to pay all earned hourly wages in violation of the Fair Labor Standards Act (FLSA), failure to pay all earned hourly wages in violation of the California Labor Code, providing compensatory time off in lieu of overtime pay, forfeiture of vacation pay, failure to provide meal and rest periods, secret payment of lower wages than that required by statute or contract, failure to provide accurate, written wage statements, and unfair competition. The complaint sought certification as a class with respect to the FLSA claims, certification of a class with respect to California law claims, appointment of class counsel and class representative, civil penalties, statutory penalties, declaratory relief, injunctive relief, actual damages, liquidated damages, restitution, pre-judgment interest, costs of suit and attorney’s fees. On March 7, 2011, the United States District Court for the Central District of California – Western Division granted preliminary approval to a settlement agreement pursuant to which the Company will pay class members an immaterial amount in settlement of claims on a class basis. On June 27, 2011, the District Court granted final approval of the parties’ settlement agreement. Payment pursuant to the settlement agreement was made on August 25, 2011. This settlement was included in the Company’s $7.1 million legal reserve discussed above.

There have been no significant changes in the Company’s commitments and contingencies from those disclosed in the Fiscal 2010 10-K, except as noted below:

Lease Agreements

The Company enters into lease agreements during the ordinary course of business in order to secure favorable store locations. As of July 30, 2011, the Company was committed to 15 new lease agreements (exclusive of 3 relocations) for locations at which stores are expected to be opened during the remainder of Fiscal 2011. Inclusive of these new leases, the Company’s minimum lease payments for all operating leases are expected to be $102.0 million, $204.7 million, $194.9 million, $167.9 million, and $624.6 million for the remainder of the fiscal year ended January 28, 2012, and the fiscal years ended February 2, 2013, February 1, 2014, January 31, 2015 and January 30, 2016 and subsequent years thereafter, respectively.

Letters of Credit

The Company had letter of credit arrangements with various banks in the aggregate amount of $52.4 million and $52.1 million as of July 30, 2011 and July 31, 2010, respectively. Based on the terms of the credit agreement related to the ABL Line of Credit, the Company had available letters of credit of $272.3 million and $335.2 million as of July 30, 2011 and July 31, 2010, respectively. Among these arrangements as of July 30, 2011 and July 31, 2010, the Company had letters of credit in the amount of $32.1 million and $29.4 million, respectively, guaranteeing performance under various insurance contracts and utility agreements. The Company also had an outstanding letter of credit of $1.2 million at July 31, 2010 guaranteeing its Industrial Revenue Bonds. Finally, the Company had outstanding letters of credit agreements in the amount of $20.3 million and $21.5 million at July 30, 2011 and July 31, 2010, respectively, related to certain merchandising agreements.

The Company had irrevocable letters of credit in the amount of $39.6 million as of January 29, 2011. Based on the terms of the credit agreement relating to the ABL Line of Credit, the Company had available letters of credit of $180.0 million as of January 29, 2011. Letters of credit outstanding at January 29, 2011 amounted to $30.4 million, guaranteeing performance under various lease agreements, insurance contracts and utility agreements. The Company also had letters of credit in the amount of $9.2 million at January 29, 2011 related to certain merchandising agreements.

13. Subsequent Events

On September 2, 2011, the Company completed an amendment and restatement of the credit agreement governing the Company’s $600 million ABL Line of Credit, which, among other things, extended the maturity date to September 2, 2016. The aggregate amount of commitments under the amended and restated credit agreement is $600 million and, subject to the satisfaction of certain conditions, the Company may increase the aggregate amount of commitments up to $900 million. Interest rates under the amended and restated credit agreement are based on LIBO rates as determined by the administrative agent plus an applicable margin of 1.75% to 2.25% based on daily availability, or various prime rate loan options plus an applicable margin of 0.75% to 1.25% based on daily availability. The fee on the average daily balance of unused loan commitments is 0.375%.

The Company believes that the amended and restated credit agreement provides the liquidity and flexibility to meet its operating and capital requirements over the next five years. Further, the calculation of the borrowing base under the amended and restated credit agreement has been amended to allow for increased availability, particularly during the September 1st through December 15th period of each year. As a result of the amended and restated credit agreement, the Company will capitalize approximately $4 to $5 million in deferred debt charges that will be expensed over the life of the amended and restated credit agreement and has written off approximately $4 million in deferred charges from the existing credit agreement.

The amended and restated credit agreement follows certain other refinancing transactions completed by the Company in February 2011 (as discussed in Note 3 to the Company’s Condensed Consolidated Financial Statements entitled “Long Term Debt”), highlights of which are as follows:

•

The Company replaced its $900 million Senior Secured Term Loan Facility with a $1.0 billion senior secured term loan facility which matures on February 15, 2017. This facility has 1% annual amortization which is paid quarterly.

•

The Company’s 11.1% Senior Notes and Burlington Coat Factory Investments Holdings, Inc.’s 14.5% Senior Discount Notes were repurchased; and

•

BCFWC completed the sale of $450 million aggregate principal amount of 10% Senior Notes due February 15, 2019.

14. Condensed Guarantor Data

The following condensed consolidating financial statements present the financial position, results of operations and cash flows of Holdings, BCFWC (exclusive of subsidiaries, referred to herein as “BCFW”), and the guarantor subsidiaries. The Company has one immaterial non-guarantor subsidiary that is not wholly-owned and is considered to be “minor” as that term is defined in Rule 3-10 of Regulation S-X promulgated by the Securities and Exchange Commission.

Neither the Company nor any of its subsidiaries may declare or pay cash dividends or make other distributions of property to any affiliate unless such dividends are used for certain specified purposes including, among others, to pay general corporate and overhead expenses incurred by Holdings in the ordinary course of business, or the amount of any indemnification claims made by any director or officer of Holdings or the Company, or to pay taxes that are due and payable by Holdings or any of its direct or indirect subsidiaries.

Burlington Coat Factory Investments Holdings, Inc. and Subsidiaries

Condensed Consolidating Balance Sheets

(All amounts in thousands)


	As of July 30, 2011
	Holdings			BCFW			Guarantors		Eliminations			Consolidated
ASSETS
Current Assets:
Cash and Cash Equivalents	$	—		$	4,476		$	27,332	$	—		$	31,808
Restricted Cash and Cash Equivalents		—			34,800			2,471		—			37,271
Accounts Receivable		—			18,757			9,261		—			28,018
Merchandise Inventories		—			—			665,204		—			665,204
Deferred Tax Asset		—			7,903			14,410		—			22,313
Prepaid and Other Current Assets		—			15,774			22,363		—			38,137
Prepaid Income Tax		—			42,782			2,914		—			45,696
Assets Held for Sale		—			—			1,113		—			1,113

Total Current Assets		—			124,492			745,068		—			869,560
Property and Equipment - Net of Accumulated Depreciation		—			78,781			779,380		—			858,161
Tradenames		—			238,000			—		—			238,000
Favorable Leases - Net of Accumulation Amortization		—			—			374,937		—			374,937
Goodwill		—			47,064			—		—			47,064
Investment in subsidiaries		—			1,646,628			—		(1,646,628	)		—
Other Assets		—			38,608			236,924		(179,983	)		95,549

Total Assets	$	—		$	2,173,573		$	2,136,309	$	(1,826,611	)	$	2,483,271

LIABILITIES AND STOCKHOLDER’S EQUITY
Current Liabilities:
Accounts Payable	$	—		$	415,086		$	—	$	—		$	415,086
Other Current Liabilities		—			134,400			80,333		—			214,733
Current Maturities of Long Term Debt		—			2,500			772		—			3,272

Total Current Liabilities		—			551,986			81,105		—			633,091
Long Term Debt		—			1,504,765			23,646		—			1,528,411
Other Liabilities		—			193,080			197,450		(179,983	)		210,547
Deferred Tax Liability		—			88,392			187,480		—			275,872
Investment in Subsidiaries		164,650			—			—		(164,650	)		—
Stockholder’s (Deficit) Equity:
Common Stock		—			—			—		—			—
Capital in Excess of Par Value		468,412			468,412			864,202		(1,332,614	)		468,412
(Accumulated Deficit) Retained Earnings		(633,062	)		(633,062	)		782,426		(149,364	)		(633,062	)

Total Stockholder’s (Deficit) Equity		(164,650	)		(164,650	)		1,646,628		(1,481,978	)		(164,650	)

Total Liabilities and Stockholder’s (Deficit) Equity	$	—		$	2,173,573		$	2,136,309	$	(1,826,611	)	$	2,483,271

Burlington Coat Factory Investments Holdings, Inc. and Subsidiaries

Consolidated Balance Sheets

(All amounts in thousands)


	As of January 29, 2011
	Holdings			BCFW			Guarantors		Eliminations			Consolidated
ASSETS
Current Assets:
Cash and Cash Equivalents	$	—		$	7,168		$	23,046	$	—		$	30,214
Restricted Cash and Cash Equivalents		—			27,800			2,464		—			30,264
Accounts Receivable		—			19,691			30,184		—			49,875
Merchandise Inventories		—			—			644,228		—			644,228
Deferred Tax Assets		—			10,144			14,691		—			24,835
Prepaid and Other Current Assets		—			12,617			23,492		—			36,109
Prepaid Income Taxes		—			13,934			2,513		—			16,447
Assets Held for Disposal		—			—			2,156		—			2,156

Total Current Assets		—			91,354			742,774		—			834,128
Property and Equipment—Net of Accumulated Depreciation		—			68,181			789,408		—			857,589
Tradenames		—			238,000			—		—			238,000
Favorable Leases—Net of Accumulated Amortization		—			—			389,986		—			389,986
Goodwill		—			47,064			—		—			47,064
Investment in Subsidiaries		187,512			1,382,706			—		(1,570,218	)		—
Other Assets		—			48,441			52,800		(10,000	)		91,241

Total Assets	$	187,512		$	1,875,746		$	1,974,968	$	(1,580,218	)	$	2,458,008

LIABILITIES AND STOCKHOLDER’S EQUITY
Current Liabilities:
Accounts Payable	$	—		$	190,460		$	—	$	—		$	190,460
Other Current Liabilities		—			132,107			80,837		—			212,944
Current Maturities of Long Term Debt		—			—			14,264		—			14,264

Total Current Liabilities		—			322,567			95,101		—			417,668
Long Term Debt		—			1,248,147			109,874		—			1,358,021
Other Liabilities		—			28,442			197,086		(10,000	)		215,528
Deferred Tax Liability		—			89,078			190,201		—			279,279
Commitments and Contingencies		—			—			—		—			—
Stockholder’s (Deficit) Equity:
Common Stock		—			—			—		—			—
Capital in Excess of Par Value		466,754			466,754			663,151		(1,129,905	)		466,754
(Accumulated Deficit) Retained Earnings		(279,242	)		(279,242	)		719,555		(440,313	)		(279,242	)

Total Stockholder’s Equity (Deficit)		187,512			187,512			1,382,706		(1,570,218	)		187,512

Total Liabilities and Stockholder’s Equity (Deficit)	$	187,512		$	1,875,746		$	1,974,968	$	(1,580,218	)	$	2,458,008

Burlington Coat Factory Investments Holdings, Inc. and Subsidiaries

Condensed Consolidating Balance Sheets

(All amounts in thousands)


	As of July 31, 2010
	Holdings			BCFW			Guarantors		Eliminations			Consolidated
ASSETS
Current Assets:
Cash and Cash Equivalents	$	—		$	3,832		$	77,214	$	—		$	81,046
Restricted Cash and Cash Equivalents		—			32,816			2,581		—			35,397
Accounts Receivable		—			19,110			13,532		—			32,642
Merchandise Inventories		—			—			661,224		—			661,224
Deferred Tax Asset		—			9,976			21,240		—			31,216
Prepaid and Other Current Assets		—			17,376			17,546		—			34,922
Prepaid Income Tax		—			36,781			505		—			37,286
Assets Held for Sale		—			—			521		—			521

Total Current Assets		—			119,891			794,363		—			914,254
Property and Equipment - Net of Accumulated Depreciation		—			57,456			793,028		—			850,484
Tradenames		—			238,000			—		—			238,000
Favorable Leases - Net of Accumulation Amortization		—			—			405,527		—			405,527
Goodwill		—			47,064			—		—			47,064
Investment in Subsidiaries		119,920			1,469,926			—		(1,589,846	)		—
Other Assets		—			55,393			44,956		(10,000	)		90,349

Total Assets	$	119,920		$	1,987,730		$	2,037,874	$	(1,599,846	)	$	2,545,678

LIABILITIES AND STOCKHOLDER’S EQUITY
Current Liabilities:
Accounts Payable	$	—			458,489		$	—	$	—		$	458,489
Other Current Liabilities		—			145,570			90,043		—			235,613
Current Maturities of Long Term Debt		—			2,050			15,457		—			17,507

Total Current Liabilities		—			606,109			105,500		—			711,609
Long Term Debt		—			1,152,124			110,288		—			1,262,412
Other Liabilities		—			21,673			170,000		(10,000	)		181,673
Deferred Tax Liability		—			87,904			182,160		—			270,064
Stockholder’s Equity (Deficit):
Common Stock		—			—			—		—			—
Capital in Excess of Par Value		465,326			465,326			882,602		(1,347,928	)		465,326
(Accumulated Deficit) Retained Earnings		(345,406	)		(345,406	)		587,324		(241,918	)		(345,406	)

Total Stockholder’s Equity (Deficit)		119,920			119,920			1,469,926		(1,589,846	)		119,920

Total Liabilities and Stockholder’s Equity (Deficit)	$	119,920		$	1,987,730		$	2,037,874	$	(1,599,846	)	$	2,545,678

Burlington Coat Factory Investments Holdings, Inc. and Subsidiaries

Condensed Consolidating Statement of Operations

(All amounts in thousands)


	For the Six Months Ended July 30, 2011
	Holdings			BCFW			Guarantors			Eliminations			Consolidated
REVENUES:
Net Sales	$	—		$	—		$	1,722,431		$	—		$	1,722,431
Other Revenue		—			179			14,164			—			14,343

Total Revenue		—			179			1,736,595			—			1,736,774
COSTS AND EXPENSES:
Cost of Sales		—			—			1,084,356			—			1,084,356
Selling and Administrative Expenses		—			82,675			482,858			—			565,533
Restructuring and Separation Costs		—			3,920			1,270			—			5,190
Depreciation and Amortization		—			10,588			63,399			—			73,987
Impairment Charges – Long-Lived Assets		—			—			34			—			34
Other Income, Net		—			(3,016	)		(2,104	)		—			(5,120	)
Loss on Extinguishment of Debt					36,042			1,722			—			37,764
Interest Expense		—			61,059			2,105			—			63,164
Loss (Earnings) from Equity Investment		53,820			(62,871	)		—			9,051			—

Total Costs and Expenses		53,820			128,397			1,633,640			9,051			1,824,908
(Loss) Income Before (Benefit) Provision for Income Taxes		(53,820	)		(128,218	)		102,955			(9,051	)		(88,134	)
(Benefit) Provision for Income Taxes		—			(74,398	)		40,084			—			(34,314	)

Net (Loss) Income	$	(53,820	)	$	(53,820	)	$	62,871		$	(9,051	)	$	(53,820	)

Burlington Coat Factory Investments Holdings, Inc. and Subsidiaries

Condensed Consolidating Statement of Operations

(All amounts in thousands)


	For the Three Months Ended July 30, 2011
	Holdings			BCFW			Guarantors			Eliminations			Consolidated
REVENUES:
Net Sales	$	—		$	—		$	793,349		$	—		$	793,349
Other Revenue		—			95			7,000			—			7,095

Total Revenue		—			95			800,349			—			800,444
COSTS AND EXPENSES:
Cost of Sales		—			—			507,053			—			507,053
Selling and Administrative Expenses		—			43,523			233,182			—			276,705
Restructuring and Separation Costs		—			3,920			1,270			—			5,190
Depreciation and Amortization		—			5,709			31,658			—			37,367
Impairment Charges – Long-Lived Assets		—			—			25			—			25
Other Income, Net		—			(1,273	)		(1,038	)		—			(2,311	)
Interest Expense		—			31,791			519			—			32,310
Loss (Earnings) from Equity Investment		32,763			(13,704	)		—			(19,059	)		—

Total Costs and Expenses		32,763			69,966			772,669			(19,059	)		856,339
(Loss) Income Before (Benefit) Provision for Income Taxes		(32,763	)		(69,871	)		27,680			19,059			(55,895	)
(Benefit) Provision for Income Taxes		—			(37,108	)		13,976			—			(23,132	)

Net (Loss) Income	$	(32,763	)	$	(32,763	)	$	13,704		$	19,059		$	(32,763	)

Burlington Coat Factory Investments Holdings, Inc. and Subsidiaries

Condensed Consolidating Statement of Operations

(All amounts in thousands)


	For the Six Months Ended July 31, 2010
	Holdings			BCFW			Guarantors			Eliminations			Consolidated
REVENUES:
Net Sales	$	—		$	861		$	1,622,567		$	—		$	1,623,428
Other Revenue		—			233			13,842			—			14,075

Total Revenue		—			1,094			1,636,409			—			1,637,503
COSTS AND EXPENSES:
Cost of Sales		—			847			1,020,894			—			1,021,741
Selling and Administrative Expenses		—			86,270			464,038			—			550,308
Restructuring and Separation Costs		—			1,739			413			—			2,152
Depreciation and Amortization		—			8,113			64,122			—			72,235
Impairment Charges – Long-Lived Assets		—			—			258			—			258
Other Income, Net		—			(4,068	)		(2,376	)		—			(6,444	)
Interest Expense		—			44,901			8,521			—			53,422
(Earnings) Loss from Equity Investment		35,266			(50,567	)		—			15,301			—

Total Costs and Expenses		35,266			87,235			1,555,870			15,301			1,693,672
(Loss) Income Before Income Tax Expense (Benefit)		(35,266	)		(86,141	)		80,539			(15,301	)		(56,169	)
Income Taxes Expense (Benefit)		—			(50,875	)		29,972			—			(20,903	)

Net (Loss) Income	$	(35,266	)	$	(35,266	)	$	50,567		$	(15,301	)	$	(35,266	)

Burlington Coat Factory Investments Holdings, Inc. and Subsidiaries

Condensed Consolidating Statement of Operations

(All amounts in thousands)


	For the Three Months Ended July 31, 2010
	Holdings			BCFW			Guarantors			Eliminations			Consolidated
REVENUES:
Net Sales	$	—		$	500		$	728,250		$	—		$	728,750
Other Revenue		—			121			6,674			—			6,795

Total Revenue		—			621			734,924			—			735,545
COSTS AND EXPENSES:
Cost of Sales		—			500			468,888			—			469,388
Selling and Administrative Expenses		—			43,650			228,129			—			271,779
Restructuring and Separation Costs		—			872			318			—			1,190
Depreciation and Amortization		—			4,350			31,156			—			35,506
Impairment Charges – Long-Lived Assets		—			—			73			—			73
Other Income, Net		—			(1,947	)		(1,531	)		—			(3,478	)
Interest Expense		—			21,806			4,251			—			26,057
(Earnings) Loss from Equity Investment		40,479			(5,022	)		—			(35,457	)		—

Total Costs and Expenses		40,479			64,209			731,284			(35,457	)		800,515
(Loss) Income Before Income Tax Expense (Benefit)		(40,479	)		(63,588	)		3,640			35,457			(64,970	)
Income Taxes Expense (Benefit)		—			(23,109	)		(1,382	)		—			(24,491	)

Net (Loss) Income	$	(40,479	)	$	(40,479	)	$	5,022		$	35,457		$	(40,479	)

Burlington Coat Factory Investments Holdings, Inc. and Subsidiaries

Condensed Consolidating Statements of Cash Flows

(All amounts in thousands)


	For the Six Months Ended July 30, 2011
	Holdings			BCFW			Guarantors			Elimination			Consolidated
OPERATING ACTIVITIES
Net Cash Provided by Operating Activities	$	—		$	193,442		$	47,411		$	—		$	240,853
INVESTING ACTIVITIES
Cash Paid For Property and Equipment		—			(25,904	)		(42,265	)		—			(68,169	)
Proceeds Received from Sale of Fixed Assets		—			—			108			—			108
Lease Rights Acquired		—			—			(557	)		—			(557	)
Change in Restricted Cash and Cash Equivalents		—			(7,007	)		—			—			(7,007	)
Investing Activity-Other		—			33			—			—			33

Net Cash Used in Investing Activities		—			(32,878	)		(42,714	)		—			(75,592	)

FINANCING ACTIVITIES
Proceeds from Long Term Debt – ABL Line of Credit		—			396,700			—			—			396,700
Proceeds from Long Term Debt – Notes Payable		—			450,000			—			—			450,000
Proceeds from Long Term Debt – Term Loan		—			990,000			—			—			990,000
Principal Payments on Long Term Debt – ABL Line of Credit		—			(486,300	)		—			—			(486,300	)
Principal Payments on Long Term Debt – Senior Discount Notes		—			(99,309	)		—			—			(99,309	)
Principal Payments on Long Term Debt – Senior Notes		—			(302,056	)		—			—			(302,056	)
Principal Payments on Long Term Debt		—			—			(413	)		—			(413	)
Principal Payments on Long Term Debt – Term Loan		—			(790,050	)		—			—			(790,050	)
Debt Issuance Cost		—			(25,080	)		—			—			(25,080	)
Stock Option Exercise and Related Tax Benefits		—			758			—			—			758
Payment of Dividends		(297,917	)		(297,917	)		—			297,917			(297,917	)
Receipt of Dividends		297,917			—			—			(297,917	)		—

Net Cash Used In Financing Activities		—			(163,254	)		(413	)		—			(163,667	)
Increase in Cash and Cash Equivalents		—			(2,690	)		4,284			—			1,594
Cash and Cash Equivalents at Beginning of Period		—			7,168			23,046			—			30,214

Cash and Cash Equivalents at End of Period	$	—		$	4,478		$	27,330		$	—		$	31,808

Burlington Coat Factory Investments Holdings, Inc. and Subsidiaries

Condensed Consolidating Statements of Cash Flows

(All amounts in thousands)


	For the Six Months Ended July 31, 2010
	Holdings			BCFW			Guarantors			Elimination			Consolidated
OPERATING ACTIVITIES
Net Cash Provided by Operating Activities	$	—		$	178,980		$	95,064		$	—		$	274,044
INVESTING ACTIVITIES
Cash Paid For Property and Equipment		—			(12,057	)		(38,229	)		—			(50,286	)
Proceeds Received from Sale of Fixed Assets		—			—			156			—			156
Lease Acquisition Costs		—			—			(224	)		—			(224	)
Redemption of Investment in Money Market Fund		—			—			240			—			240
Change in Restricted Cash and Cash Equivalents		—			(32,815	)		22			—			(32,793	)
Investing Activity-Other		—			35			0			—			35

Net Cash Used in Investing Activities		—			(44,837	)		(38,035	)		—			(82,872	)
FINANCING ACTIVITIES
Proceeds from Long Term Debt – ABL Line of Credit		—			(12,202	)		—			—			(12,202	)
Principal Payments on Long Term Debt		—			—			(389	)		—			(389	)
Principal Payments on Long Term Debt – ABL Line of Credit					(121,200	)		—			—			(121,200	)
Debt Issuance Cost					(934	)		—			—			(934	)
Payment of Dividends		(151	)		(151	)		—			151			(151	)
Receipt of Dividends		151			—			—			(151	)		—

Net Cash Used In Financing Activities		—			(134,487	)		(389	)		—			(134,876	)
Increase in Cash and Cash Equivalents		—			(344	)		56,640			—			56,296
Cash and Cash Equivalents at Beginning of Period		—			4,176			20,574			—			24,750

Cash and Cash Equivalents at End of Period	$	—		$	3,832		$	77,214		$	—		$	81,046

BURLINGTON COAT FACTORY INVESTMENTS HOLDINGS, INC. AND SUBSIDIARIES

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

The Company’s management intends for this discussion to provide the reader with information that will assist in understanding the Company’s financial statements, the changes in certain key items in those financial statements from period to period, and the primary factors that accounted for those changes, as well as how certain accounting principles affect our financial statements. All discussions of operations in this report relate to Burlington Coat Factory Warehouse Corporation and its subsidiaries, which are reflected in the financial statements of Burlington Coat Factory Investments Holdings, Inc. and its subsidiaries (hereinafter we or our or Holdings). The following discussion contains forward-looking information and should be read in conjunction with the Condensed Consolidated Financial Statements and notes thereto included elsewhere in this report and in our Annual Report on Form 10-K related to the fiscal year ended January 29, 2011 (Fiscal 2010 10-K). Our actual results could differ materially from the results contemplated by these forward-looking statements due to various factors, including those discussed under the section of this Item 2 entitled “Safe Harbor Statement.”

Fiscal Year

We define the 2011 fiscal year (Fiscal 2011) and the 2010 fiscal year (Fiscal 2010) as the 52 week periods ending January 28, 2012 and January 29, 2011, respectively.

Overview

Three Month Period Ended July 30, 2011 Compared with the Three Month Period ended July 31, 2010

Consolidated net sales increased $64.5 million, or 8.9%, to $793.3 million for the three months ended July 30, 2011 from $728.8 million for the three months ended July 31, 2010. This increase was primarily attributable to a 4.0% increase in our comparative store sales as well as an increase in sales related to new stores and stores previously opened that are not included in our comparative store sales. We believe the comparative store sales increase was due primarily to our ongoing initiatives as discussed in further detail below (refer to the sections below entitled “Ongoing Initiatives for Fiscal 2011” and “Three Month Period Ended July 30, 2011 compared with the Three Month Period Ended July 31, 2010” for further explanation).

Cost of sales increased $37.7 million, or 8.0%, during the three month period ended July 30, 2011 compared with the three month period ended July 31, 2010. The dollar increase in cost of sales was primarily related to 15 net new stores that were opened since July 31, 2010 as well as our 4.0%, or $28.8 million, comparative store sales increase. Cost of sales as a percentage of net sales decreased to 63.9% during the three months ended July 30, 2011 compared with 64.4% during the three months ended July 31, 2010. The decrease in cost of sales as a percentage of net sales was a function of fewer markdowns taken and a lower shrink accrual rate during the three months ended July 30, 2011 compared with the three months ended July 31, 2010. Planned decreases in initial markup during the first quarter of Fiscal 2011, in order to be more aggressive in initial pricing, has reduced our need to take markdowns.

Total selling and administrative expenses increased $4.9 million, or 1.8%, during the three months ended July 30, 2011 compared with the three months ended July 31, 2010, primarily related to new stores and stores that were not operating for the full three months ended July 31, 2010 which did operate for the full three months ended July 30, 2011. Selling and administrative expenses as a percentage of sales improved to 34.9% during the three months ended July 30, 2011 from 37.3% during the three months ended July 31, 2010. This improvement was primarily driven by certain non-recurring costs incurred during the three months ended July 31, 2010 (refer to the section below entitled “Three Month Period Ended July 30, 2011 compared with the Three Month Period Ended July 31, 2010” for further explanation) as well as decreases in occupancy costs related to comparable stores and the leverage of selling and administrative expenses due to the increase in net sales.

We recorded a net loss of $32.8 million for the three month period ended July 30, 2011 compared with a net loss of $40.5 million for the three month period ended July 31, 2010. The improvement in our net loss position was primarily driven by the improvement in gross margin (refer to the section below entitled “Three Month Period Ended July 30, 2011 compared with the Three Month Period Ended July 31, 2010” for further explanation) and the non-recurring expenses incurred during the three months ended July 31, 2010 that did not repeat during the three months ended July 30, 2011, as further described below under the caption “Three Month Period Ended July 30, 2011 compared with the Three Month Period Ended July 31, 2010.”

Six Month Period Ended July 30, 2011 Compared with the Six Month Period ended July 31, 2010

Consolidated net sales increased $99.0 million, or 6.1%, to $1,722.4 million for the six months ended July 30, 2011 from $1,623.4 million for the six months ended July 31, 2010. This increase was primarily attributable to an increase in sales related to new stores, stores previously opened that are not included in our comparative store sales, and a 2.1% increase in our comparative store sales. We believe the comparative store sales increase was due primarily to our ongoing initiatives as discussed in further detail below (refer to the sections below entitled “Ongoing Initiatives for Fiscal 2011” and “Six Month Period Ended July 30, 2011 compared with the Six Month Period Ended July 31, 2010” for further explanation).

Cost of sales increased $62.6 million, or 6.1%, during the six month period ended July 30, 2011 compared with the six month period ended July 31, 2010. The dollar increase in cost of sales was primarily related to 15 net new stores that were opened since July 31, 2010 as well as our 2.1%, or $33.3 million, comparative store sales increase. Cost of sales as a percentage of net sales during the six months ended July 30, 2011 increased slightly to 63.0% from 62.9% for the six months ended July 31, 2010. The slight deterioration in cost of sales as a percentage of net sales was due to planned decreases in initial markup almost entirely offset by fewer markdowns taken and a lower shrink accrual rate during the six months ended July 30, 2011 compared with the six months ended July 31, 2010.

Total selling and administrative expenses increased $15.2 million, or 2.8%, during the six months ended July 30, 2011 compared with the six months ended July 31, 2010, primarily related to new stores. At July 30, 2011, we operated 462 stores compared with 447 stores at July 31, 2010. Selling and administrative expenses as a percentage of sales during the six months ended July 30, 2011 decreased to 32.8% compared with 33.9% during the six months ended July 31, 2010. This improvement was primarily driven by certain non-recurring costs incurred during the six months ended July 31, 2010 that did not repeat during the six months ended July 30, 2011 (refer to the section below entitled “Six Month Period Ended July 30, 2011 compared with the Six Month Period Ended July 31, 2010” for further explanation), as well as decreases in occupancy costs related to comparable stores and the leverage of selling and administrative expenses due to the increase in net sales.

We recorded a net loss of $53.8 million for the six month period ended July 30, 2011 compared with a net loss of $35.3 million for the six month period ended July 31, 2010. The change in our results during the six months ended July 30, 2011 compared with the six months ended July 31, 2010 was primarily attributable to a $37.8 million loss on extinguishment of debt that occurred during the six months ended July 30, 2011 related to our debt refinancing transactions, discussed in detail below under the caption “Long Term Borrowings, Lines of Credit and Capital Lease Obligations.”

Debt Refinancing and Dividend

During the six months ended July 30, 2011, we completed the refinancing of our $900 million Senior Secured Term Loan Facility (Previous Term Loan Facility), 11.1% Senior Notes (Previous Senior Notes), and 14.5% Senior Discount Notes (Previous Senior Discount Notes). As a result of these transactions, the Previous Senior Notes and Previous Senior Discount Notes, with carrying values at February 24, 2011 of $302.0 million and $99.3 million, respectively, were repurchased. In addition, BCFWC completed the sale of $450 million aggregate principal amount of 10% Senior Notes due 2019 (the Notes) at an issue price of 100%. Additionally, the Previous Term Loan with a carrying value of $777.6 million as of February 24, 2011 was replaced with a $1.0 billion senior secured term loan facility (New Term Loan Facility). Borrowings on the ABL Line of Credit related to the transaction were $101.6 million. In connection with the offering of the Notes and the refinancing of the Previous Term Loan Facility, a cash dividend of $300.0 million in the aggregate was declared to the equity holders of Burlington Coat Factory Holdings, Inc. (Parent) on a pro rata basis. In addition, on September 2, 2011, we completed an amendment and restatement of the credit agreement governing our $600 million ABL Line of Credit. Refer to the section below entitled “Liquidity and Capital Resources for further details.

Current Conditions

Store Openings, Closings, and Relocations.

During the six months ended July 30, 2011, we opened five Burlington Coat Factory Warehouse Stores (BCF Stores) and closed three stores. Among the closed stores were an MJM store and a Super Baby Depot which were in the same shopping center as an existing BCF store. The existing BCF store was expanded and remodeled to absorb the MJM and Super Baby Depot businesses. As of July 30, 2011, we operated 462 stores under the names “Burlington Coat Factory Warehouse” (447 stores), “Cohoes Fashions” (two stores) and “MJM Designer Shoes” (13 stores).

We continue to pursue our growth plans and invest in capital projects that meet our financial requirements. We currently plan to open 15 new stores (exclusive of 3 relocations) during the remainder of Fiscal 2011.

Ongoing Initiatives for Fiscal 2011

We continue to focus on a number of ongoing initiatives aimed at increasing our overall profitability by improving our comparative store sales trends, total sales growth and reducing expenses. These initiatives include, but are not limited to:

Offering a Leading Selection of Branded Apparel at Every Day Low Prices (EDLP): We offer a merchandise selection substantially broader than that of our off-price competitors and similar to the selection found at a department store. In contrast to merchandise at department and specialty stores, our merchandise is offered at EDLP, allowing customers to obtain the best value at our stores without waiting for sales or promotions. We focus on delivering exceptional values that fit within a good, better and best pricing strategy.

II.

Transition our Open to Buy Model and Improve Merchandising: Our “open to buy” paradigm, in which we purchase both pre-season and in-season merchandise, improves our receipt-to-reduction ratio and enables more flexibility for buying “wear-now” products. From Fiscal 2006 to Fiscal 2009, the majority of our purchasing was pre-season with the balance in-season and opportunistic. With our new model, we have moved towards purchasing less pre-season, with the majority in-season and opportunistically. This enables us to determine and stock for trends with better consumer data as well as drive better terms with our suppliers. By maximizing our in-season buys, we believe that we are able to take advantage of known trends and emerging businesses. We are also able to better focus on our core female customer by enhancing our merchandise content as well as keeping inventory fresh.

III.

Refining Our Store Experience Through the Eyes of the Customer: We have empowered our store teams to provide an outstanding customer experience for every customer in every store, every day. We will continue to streamline processes to create opportunities for fast and effective customer interactions. Our mission is to have stores that reflect clean, organized merchandise presentations that highlight the brands, value and diversity of our selection within our assortments. Through proper staffing flexibility we provide sales floor coverage during peak shopping hours to better serve the customer on the sales floor and at the check-out.

We plan to execute this initiative during Fiscal 2011 by:

Continuing with our in-store customer satisfaction program that measures 13 different aspects of customer satisfaction. Examples include: friendliness of associates, interior cleanliness and selection of merchandise.

Continuing the implementation of a store refresh program with respect to stores that we have identified as having certain needs such as new flooring, painting, fitting room improvements and various other improvements. We expect to continue an aggressive refresh program going forward.

Continuing the implementation of upgraded lighting retrofits in our stores which will make them more energy efficient and easier for customers to navigate. We expect to continue the lighting retrofit program through Fiscal 2011.

Implementing a plan to restructure our stores’ management hierarchy during Fiscal 2011 by adding additional territorial and regional oversight to provide more consistency in execution and other workflow efficiencies at the store level and to provide greater role clarity for our management team.

IV.

Deliver Consistent Merchandise Gross Margin: We continue to focus on having stable merchandise gross margin as a percentage of net sales.

We plan to execute this initiative by:

Implementing new software applications which will provide for enhanced functionality and improved analytics including the allocation of goods and markdown optimization, as well as providing more efficient planning and forecasting tools. The foundation of these systems has been completed and the new planning tools are expected to be operational during the second half of Fiscal 2011. The enhanced functionality and improved analytics around allocation of goods and markdown optimization are planned to be fully implemented during Fiscal 2012.

Continuing to manage our inventory receipt to reduction ratio. By matching receipt dollars to sales and markdown dollars we believe we will continue to maintain liquidity and will be able to take advantage of in season buying opportunities and to capitalize on those businesses that are trending well.

Continuing to ensure adequate open to buy and buying more opportunistically in season. By staying liquid, we believe we will put ourselves in a position to be able to take advantage of opportunistic in-season buys that will maximize our sales.

Continuing to improve the amount of current inventory as a percentage of our total inventory. By having more current inventory in our merchandise mix, we believe we will be afforded more pricing flexibility to provide additional value to our customers without reducing our overall merchandise margins.

Reducing our shrink as a percentage of net sales. We have added additional resources to help improve existing controls and processes to reduce our shrink as a percentage of net sales without negatively impacting the store experience. We expect improved results to occur over time, becoming apparent in Fiscal 2012.

V.	The Continued Reduction of Our Cost Structure:

Reduce store payroll costs. We are implementing an automated workforce scheduling system in our stores which is being rolled out in Fiscal 2011. We believe this new system will provide numerous efficiencies, without sacrificing our ability to serve our customers, including, but not limited to, better forecasting of volume and workload, and improved allocation of manpower to meet customer demand, and will support our store experience and service initiatives. The majority of these efficiencies are expected to be more fully recognized in Fiscal 2012.

Supply chain efficiencies. We continue to work on several initiatives to improve supply chain efficiencies and service levels. We are planning to make incremental investments during Fiscal 2011 that we believe will allow our distribution centers to handle increased volume. We are also reconfiguring our buildings to better support our off price model to enable our merchants to take advantage of more closeout opportunities. Additionally, we continue to refine our performance management program designed to drive productivity improvements within the four walls of our distribution centers.

Uncertainties and Challenges

As management strives to increase profitability through achieving positive comparative store sales and leveraging productivity initiatives focused on improving the in-store experience, more efficient movement of products from the vendors to the selling floors, and modifying our marketing plans to increase our core customer base and increase our share of our current customers’ spending, there are uncertainties and challenges that we face as an off-price retailer of apparel and accessories for men, women and children and home furnishings that could have a material impact on our revenues or income.

Consumer spending habits, including spending for the merchandise that we sell, are affected by, among other things, prevailing economic conditions, inflation, levels of employment, salaries and wage rates, prevailing interest rates, housing costs, energy costs, income tax rates and policies, consumer confidence and consumer perception of economic conditions. In addition, consumer purchasing patterns may be influenced by consumers’ disposable income, credit availability and debt levels. A continued or incremental slowdown in the U.S. economy, an uncertain economic outlook or an expanded credit crisis could adversely affect consumer spending habits resulting in lower net sales and profits than expected on a quarterly or annual basis.

We closely monitor our net sales, gross margin, expenses and working capital. We have performed scenario planning such that if our net sales decline, we have identified variable costs that could be reduced to partially mitigate the impact of these declines. If adverse economic trends continue to deteriorate, or if our efforts to counteract the impacts of these trends are not sufficiently effective, there could be a negative impact on our financial performance and position in future fiscal periods. For further discussion of the risks to us regarding general economic conditions, please refer to the section below entitled “Liquidity and Capital Resources” and the risks discussed in the Fiscal 2010 10-K.

Key Performance Measures

We consider numerous factors in assessing our performance. Key performance measures used by management include comparative store sales, gross margin, inventory levels, receipt-to-reduction ratio, liquidity and store payroll as a percentage of net sales.

Comparative Store Sales. Comparative store sales measure performance of a store during the current reporting period against the performance of the same store in the corresponding period of the previous year. The method of calculating comparative store sales varies across the retail industry. As a result, our definition of comparative store sales may differ from other retailers. We define comparative store sales as sales of those stores commencing on the first day of the fiscal month one year after the end of their grand opening activities, which normally conclude within the first two months of operations. For the three and six months ended July 30, 2011, we experienced increases in comparative store sales of 4.0% and 2.1%, respectively, compared with the three and six months ended July 31, 2010.

Various factors affect comparative store sales, including, but not limited to, weather conditions, current economic conditions, the timing of our releases of new merchandise and promotional events, the general retail sales environment, consumer preferences and buying trends, changes in sales mix among distribution channels, competition, and the success of marketing programs.

Gross Margin. Gross margin is a measure used by management to indicate whether we are selling merchandise at an appropriate gross profit. Gross margin is the difference between net sales and the cost of sales (exclusive of depreciation and amortization). Our cost of sales and gross margin may not be comparable to those of other entities, since some entities include all of the costs related to their buying and distribution functions in cost of sales. We include certain of these costs in the line items “Selling and Administrative Expenses” and “Depreciation and Amortization” in our Condensed Consolidated Statements of Operations and Comprehensive Loss. We include in our “Cost of Sales” line item all costs of merchandise (net of purchase discounts and certain vendor allowances), inbound freight, distribution center outbound freight and certain merchandise acquisition costs, primarily commissions and import fees. Gross margin as a percentage of net sales during the six months ended July 30, 2011 decreased slightly to 37.0% compared with 37.1% during the six months ended July 31, 2010 due to planned decreases in initial markup almost entirely offset by fewer markdowns taken and a lower shrink accrual rate during the period.

Inventory Levels. Inventory at July 30, 2011 was $665.2 million compared to $644.2 million at January 29, 2011. The increase of $21.0 million was the result of the seasonality of our business, as inventory is typically at its lowest levels in January, after the holiday selling season. The increase in inventory resulted in an increase of average store inventory (inclusive of stores and warehouse inventory) at July 30, 2011 of approximately 2.8% to $1.4 million per store compared with average store inventory at January 29, 2011.

Inventory at July 30, 2011 increased $4.0 million from $661.2 million at July 31, 2010 to $665.2 million at July 30, 2011. This increase was a result of the opening of 15 net new stores since July 31, 2010 and an increase in the level of inventory purchased and held as a result of opportunistic buys as of July 30, 2011 compared with July 31, 2010. Average store inventory (inclusive of store and warehouse inventory) at July 30, 2011 decreased 2.7% to $1.4 million per store compared with average store inventory of $1.5 million at July 31, 2010. Average inventory per comparative store decreased 6.0%.

In order to better serve our customers, and maximize sales, we continue to refine our merchandising mix and inventory levels within our stores. By managing our inventories conservatively we believe we will be better able to deliver a continual flow of fresh merchandise to our customers. We continue to move toward more productive inventories by increasing the amount of current inventory as a percent of total inventory.

Receipt-to-Reduction Ratio. We are in the process of refining a more consistent merchandise flow based on a receipt-to-reduction ratio. We are attempting to match forecasted levels of receipts to forecasted inventory outflows (inclusive of sales, markdowns, and inventory shrinkage) on a monthly basis. We believe this will result in a more normalized receipt cadence to support sales and will ultimately lead to an improved inventory turnover ratio.

Inventory turnover is a measure that indicates how efficiently inventory is bought and sold. It measures the length of time that we own our inventory. This is significant because usually the longer the inventory is owned, the more likely markdowns may be required to sell the inventory. Inventory turnover is calculated by dividing retail sales before sales discounts by the average retail value of the inventory for the period being measured. Our annualized inventory turnover rate as of July 30, 2011 and July 31, 2010 was 2.8 turns per year for both periods.

Liquidity. Liquidity measures our ability to generate cash. Management measures liquidity through cash flow and working capital position. Cash flow is the measure of cash generated from operating, financing, and investing activities. We experienced a decrease in cash flow of $54.7 million during the six month period ended July 30, 2011 compared with the cash flow generated during the six month period ended July 31, 2010. This decrease was primarily driven by a smaller increase in accounts payable from January 29, 2011 to July 30, 2011 compared with the accounts payable increase from January 30, 2010 to July 31, 2010 related to our working capital management strategy at the end of each fiscal year. Based on the working capital management strategy we accelerated certain payments at the end of each fiscal year that typically would not have been made until the first quarter of the next fiscal year, which lowered our accounts payable balances at the end of each fiscal year. As our accounts payable balances return to historical levels at the end of the first quarter of each fiscal year, this creates additional cash flow. The decrease during the six months ended July 30, 2011 compared with the six months ended July 31, 2010 was primarily driven by these accelerated payments during January of Fiscal 2010 compared with January of the Transition Period and the timing of payments. Also contributing to the decrease in cash flow during the six months ended July 30, 2011 compared with the six months ended July 31, 2010 was the impact of the debt refinancing and the subsequent payment of $297.9 million of dividends, which resulted in a net increase in cash used in financing activities of $28.8 million.

These reductions in cash flow were partially offset by less cash used in investing activities as a result of a smaller increase in restricted cash during the six months ended July 30, 2011 compared with the six months ended July 31, 2010. Cash and cash equivalents increased $1.6 million from January 29, 2011 to $31.8 million at July 30, 2011 (discussed in more detail under the caption below entitled “Liquidity and Capital Resources”).

Changes in working capital also impact our cash flows. Working capital equals current assets (exclusive of restricted cash and cash equivalents) minus current liabilities. Working capital at July 30, 2011 was $199.2 million compared with $386.2 million at January 29, 2011. The decrease in working capital from January 29, 2011 was primarily attributable to an increase in accounts payable related to our year end working capital management strategy.

Working capital at July 30, 2011 increased $32.0 million from $167.2 million at July 31, 2010 to $199.2 million. The increase in working capital was primarily attributable to decreases in accounts payable, resulting from the timing of payments, other current liabilities and current maturities of long term debt, partially offset by a decrease in cash and cash equivalents in connection with our debt refinancing transactions completed in February 2011.

Store Payroll as a Percentage of Net Sales. Store payroll as a percentage of net sales measures our ability to manage our payroll in accordance with increases or decreases in net sales. The method of calculating store payroll varies across the retail industry. As a result, our store payroll as a percentage of net sales may differ from other retailers. We define store payroll as regular and overtime payroll for all store personnel as well as regional and territory personnel, exclusive of payroll charges to corporate and warehouse employees. Store payroll as a percentage of net sales was 11.1% and 10.6% during the three and six months ended July 30, 2011 compared with 12.0% and 10.9% during the three and six months ended July 31, 2010, respectively.

Critical Accounting Policies and Estimates

Our Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect (i) the reported amounts of assets and liabilities; (ii) the disclosure of contingent assets and liabilities at the date of the consolidated financial statements; and (iii) the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to inventories, long lived assets, intangible assets, goodwill impairment, insurance reserves and income taxes. Historical experience and various other factors, that are believed to be reasonable under the circumstances, form the basis for making estimates and judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Our critical accounting policies and estimates are consistent with those disclosed in our Fiscal 2010 10-K.

Results of Operations

The following table sets forth certain items in the Condensed Consolidated Statements of Operations and Comprehensive Loss as a percentage of net sales for the three and six month periods ended July 30, 2011 and July 31, 2010.


	Percentage of Net Sales
	Six Months Ended						Three Months Ended
	July 30, 2011			July 31, 2010			July 30, 2011			July 31, 2010
Net Sales		100.0	%		100.0	%		100.0	%		100.0	%
Other Revenue		0.8			0.9			0.9			0.9

Total Revenue		100.8			100.9			100.9			100.9
Cost of Sales		63.0			62.9			63.9			64.4
Selling and Administrative Expenses		32.8			33.9			34.9			37.3
Restructuring and Separation Costs		0.3			0.1			0.7			0.2
Depreciation and Amortization		4.3			4.5			4.7			4.9
Impairment Charges – Long-Lived Assets		0.0			0.0			0.0			0.0
Other (Income) Expense, Net		(0.3	)		(0.4	)		(0.3	)		(0.5	)
Loss on Extinguishment of Debt		2.2			—			—			—
Interest Expense		3.7			3.3			4.1			3.5

Total Expense		106.0			104.3			108.0			109.8

Loss before Income Tax Benefit		(5.2	)		(3.4	)		(7.1	)		(8.9	)
Income Tax Benefit		(2.0	)		(1.3	)		(2.9	)		(3.4	)

Net Loss		(3.2	)%		(2.1	)%		(4.2	)%		(5.5	)%

Three Month Period Ended July 30, 2011 compared with the Three Month Period Ended July 31, 2010

Net Sales

We experienced an increase in net sales for the three months ended July 30, 2011 compared with the three months ended July 31, 2010. Consolidated net sales increased $64.5 million, or 8.9%, to $793.3 million for the three months ended July 30, 2011 from $728.8 million for the three months ended July 31, 2010. This increase was primarily attributable to a combination of the following:

•

an increase in comparative store sales of $28.8 million, or 4.0%, to $745.5 million,

•

an increase in net sales of $26.9 million from stores previously opened that were not included in our comparative store sales, and

•

an increase in net sales of $12.0 million related to five new stores open during the three months ended July 30, 2011 that were not open during the three months ended July 31, 2010; partially offset by

•

a decrease in net sales of $3.2 million from stores closed since the comparable period last year and other sales adjustments.

We believe the comparative store sales increase was due primarily to our ongoing initiatives as discussed previously under the caption entitled “Ongoing Initiatives for Fiscal 2011.”

Other Revenue

Other revenue (consisting of rental income from leased departments, sublease rental income, layaway, alteration and other service charges, and miscellaneous revenue items) for the three month period ended July 30, 2011 was $7.1 million compared with other revenue of $6.8 million for the three month period ended July 31, 2010. The increase in other revenue during the three months ended July 30, 2011 compared with the three months ended July 31, 2010 was primarily related to a $0.3 million increase in rental income from leased departments as a result of increased sales in our leased departments.

Cost of Sales

Cost of sales increased $37.7 million, or 8.0%, during the three month period ended July 30, 2011 compared with the three month period ended July 31, 2010. The dollar increase in cost of sales was primarily related to the increase in net sales as described above. Cost of sales as a percentage of net sales improved to 63.9% during the three months ended July 30, 2011 compared with the three months ended July 31, 2010 of 64.4%. The improvement in cost of sales as a percentage of net sales during the three months ended July 30, 2011 compared with the three months ended July 31, 2010 was primarily a function of fewer markdowns taken and a lower shrink accrual rate during the period as a result of our planned decreases in initial markup in order to be at EDLP in more merchandise areas of our stores.

Selling and Administrative Expenses

Selling and administrative expenses increased $4.9 million, or 1.8%, for the three month period ended July 30, 2011 compared with the three month period ended July 31, 2010. Selling and administrative expenses improved to 34.9% of net sales for the three month period ended July 30, 2011 compared with 37.3% of net sales for the three month period ended July 31, 2010 due to the leverage of selling and administrative expenses resulting from the increase in net sales over the comparable period and other changes discussed below. The increase in selling and administrative expenses is summarized in the table below:


	*(in thousands)*
	Three Months Ended
	July 30, 2011		July 31, 2010		$ Variance			% Change
Payroll and Payroll Related	$	128,846	$	121,869	$	6,977			5.7	%
Advertising		10,455		7,513		2,942			39.2
Occupancy		95,072		94,249		823			0.9
Benefit Costs		4,519		4,864		(345	)		(7.1	)
Business Insurance		6,434		6,988		(554	)		(7.9	)
Other		31,379		36,296		(4,917	)		(13.5	)

Selling & Administrative Expenses	$	276,705	$	271,779	$	4,926			1.8	%

The increase in payroll and payroll related expense of $7.0 million during the three months ended July 30, 2011 compared with the three months ended July 31, 2010 was primarily related to the addition of 15 new stores as well as stores that were operating for the full three months ended July 30, 2011 that were not operating for the full three months ended July 31, 2010. Amounts related to these stores resulted in an increase in payroll and payroll related costs of $5.2 million. Also contributing to the increase in payroll and payroll related costs was an increase in relocation expense of $1.4 million as a result of our expanded recruiting efforts to bring in high quality candidates.

The increase in advertising expense of $2.9 million during the three months ended July 30, 2011 compared with the three months ended July 31, 2010 was due to a planned incremental investment in marketing during the three months ended July 30, 2011 compared with the three months ended July 31, 2010 in an effort to build on the sales momentum that was generated during the first quarter of Fiscal 2011.

The increase in occupancy related costs of $0.8 million during the three months ended July 30, 2011 compared with the three months ended July 31, 2010 was primarily related to increases in new stores and stores that operated for the full three month period ended July 30, 2011 that were not operating for the full three months ended July 31, 2010 of $3.0 million and an increase in rent expense of $1.4 million, which was a function of our straight line rent expense. These increases were partially offset by a decrease in utilities expense of $1.6 million and a decrease in maintenance expense of $0.6 million, both as a result of our ongoing initiatives to reduce costs without sacrificing customer satisfaction, and a $1.5 million decrease in real estate taxes due to credits received as a result of successful audit appeals.

Other selling and administrative expenses decreased $4.9 million for the three months ended July 30, 2011 compared with the three months ended July 31, 2010. The decrease was primarily related to a $4.9 million charge related to a non-recurring litigation reserve and a $1.5 million non-recurring charge to miscellaneous taxes that both occurred during the three months ended July 31, 2010 and were not repeated in the three months ended July 30, 2011. These decreases were partially offset by a $0.9 million increase in credit card fees due to increased sales and a $0.7 million increase in recruiting costs as a part of our expanded recruiting efforts.

Restructuring and Separation Costs

Restructuring and separation costs totaled $5.2 million during the three months ended July 30, 2011 compared with $1.2 million during the three months ended July 31, 2010. During the three months ended July 30, 2011, in an effort to improve workflow efficiencies and realign certain responsibilities, we effected a reorganization of certain positions within our stores and corporate locations. As a result of this reorganization, we incurred a charge of $5.2 million.

Depreciation and Amortization

Depreciation and amortization expense related to the depreciation of fixed assets and the amortization of favorable and unfavorable leases amounted to $37.4 million during the three month period ended July 30, 2011 compared with $35.5 million during the three month period ended July 31, 2010. This increase was primarily related to 15 net new stores opened since July 31, 2010.

Impairment Charges - Long-Lived Assets

There were less than $0.1 million of impairment charges during the three months ended July 30, 2011, compared with $0.1 million incurred during the three month period ended July 31, 2010. The impairment charges for both periods were related to fixed asset additions at stores that had been previously impaired and therefore could not support the additional asset value. There were no triggering events during these periods that would have required us to perform additional impairment testing.

The recoverability assessment related to these store-level assets requires judgments and estimates of future revenues, gross margin rates and store expenses. We base these estimates upon our past and expected future performance. We believe our estimates are appropriate in light of current market conditions. However, future impairment charges could be required if we do not achieve our current revenue or cash flow projections for each store.

Other Income, Net

Other Income, Net (consisting of investment income, gains and losses on disposition of assets, breakage income and other miscellaneous items) decreased $1.2 million to $2.3 million for the three month period ended July 30, 2011 compared with the three month period ended July 31, 2010. This decrease was primarily related to insurance recoveries received during the three months ended July 31, 2010.

Interest Expense

Interest expense was $32.3 million for the three month period ended July 30, 2011 compared with $26.1 million for the three month period ended July 31, 2010. The $6.2 million increase in interest expense was primarily driven by higher average balances and higher interest rates related to our New Term Loan and our ABL Line of Credit, as a result of our refinancing transaction, resulting in a $10.9 million increase in interest expense, partially offset by;

•

a decrease in other interest of $1.9 million of non-recurring interest charges related to a litigation settlement and a tax settlement during the three months ended July 31, 2010 that did not repeat;

•

a decrease related to an adjustment of our interest rate cap agreements to fair value of $1.1 million;

•

a decrease of interest expense related to our Notes of $0.8 million as a result of our refinancing transactions completed in February 2011; and

•

a decrease in the amortization of debt fees, as a result of our refinancing transactions completed in February 2011;, in the amount of $0.7 million.

Adjustments of the interest rate cap agreements to fair value, which are recorded in the line item “Interest Expense” in our Condensed Consolidated Statements of Operations and Comprehensive Loss, amounted to a loss of $0.6 million for the three months ended July 30, 2011 compared with a loss of $1.7 million for the three months ended July 31, 2010. The loss recognized during the three months ended July 30, 2011 was primarily the result of a decrease in the underlying market rates, which in turn, decreased the value of the interest rate cap agreements. These charges resulted in a year over year decrease in interest expense of $1.1 million.

Our average interest rates and average balances related to our Term Loan and our ABL Line of Credit, for the three months ended July 30, 2011 compared with the three months ended July 31, 2010 are summarized in the table below:


	Three Months Ended
	July 30, 2011			July 31, 2010
Average Interest Rate – ABL Line of Credit		4.3	%		—	%
Average Interest Rate – Term Loan		6.4	%		3.2	%
Average Balance – ABL Line of Credit	$	30.9 million		$	—
Average Balance – Term Loan	$	995.9 million		$	852.6 million

Income Tax Benefit

Income tax benefit was $23.1 million for the three month period ended July 30, 2011. For the three months ended July 31, 2010 we recorded income tax benefit of $24.5 million. The effective tax rates for the three month periods ended July 30, 2011 and July 31, 2010 were 41.4% and 37.7% respectively. In accordance with ASC Topic No. 270, “Interim Reporting” (Topic No. 270) and ASC Topic No. 740, “Income Taxes” (Topic No. 740), at the end of each interim period we are required to determine the best estimate of our annual effective tax rate and then apply that rate in providing for income taxes on a current year-to-date (interim period) basis. We used this methodology during the second quarter of Fiscal 2011, resulting in the annual effective income tax rate of 35.6% (before discrete items) being our best estimate. The effective tax rate for the three months ended July 30, 2011 was impacted by discrete adjustments that increased the tax (benefit) by $2.3 million predominantly relating to state legislation enacted during the quarter, the accrual of interest related to unrecognized tax benefits established in prior years in accordance with Topic No. 740, and tax positions that are considered effectively settled as the result of the finalization of an IRS audit.

Our best estimate of the projected annual effective income tax rate as of July 31, 2010 was 37.8% (before discrete items). A discrete adjustments related to the accrual of interest related to unrecognized tax benefits established in prior years in accordance with Topic No. 740 was offset by a discrete adjustment related to prior year state income taxes.

Net Loss

Net loss amounted to $32.8 million for the three months ended July 30, 2011 compared with a net loss of $40.5 million for the three months ended July 31, 2010. The improvement in our net loss position of $7.7 million was primarily related to our improved gross margin and the leverage of selling and administrative expenses as a result of increased sales, partially offset by an increase in interest expense, as discussed above.

Six Month Period Ended July 30, 2011 compared with Six Month Period Ended July 31, 2010

Net Sales

We experienced an increase in net sales for the six months ended July 30, 2011 compared with the six months ended July 31, 2010. Consolidated net sales increased $99.0 million, or 6.1%, to $1,722.4 million for the six months ended July 30, 2011 from $1,623.4 million for the six months ended July 31, 2010. This increase was primarily attributable to a combination of the following:

•

an increase in net sales of $58.5 million from stores previously opened that were not included in our comparative store sales,

•

an increase in comparative store sales of $33.3 million, or 2.1%, to $1,631.6 million, and

•

an increase in net sales of $21.2 million related to five new stores opened during the six months ended July 30, 2011; partially offset by

•

a decrease in net sales of $14.0 million from stores closed since the comparable period last year and other sales adjustments.

We believe the comparative store sales increase was due primarily to our ongoing initiatives as discussed previously under the caption entitled “Ongoing Initiatives for Fiscal 2011.”

Other Revenue

Other revenue (consisting of rental income from leased departments, sublease rental income, layaway, alteration and other service charges, and miscellaneous revenue items) increased to $14.3 million for the six month period ended July 30, 2011 compared with $14.1 million for the six month period ended July 31, 2010, primarily driven by an increase in rental income from leased departments as a result of increased sales in our leased departments.

Cost of Sales

Cost of sales increased $62.6 million, or 6.1%, during the six month period ended July 30, 2011 compared with the six month period ended July 31, 2010. The dollar increase in cost of sales was primarily related to the increase in net sales during the six months ended July 30, 2011 compared to the six months ended July 31, 2010, as discussed above, under the caption entitled “Overview.” Cost of sales as a percentage of net sales during the six months ended July 30, 2011 increased slightly to 63.0% from 62.9% for the six months ended July 31, 2010. The slight increase in cost of sales as a percentage of net sales was due to planned decreases in initial markup due to our initiative to be more aggressive in initial pricing, which we believe will result in faster turnovers and reduced markdowns in future periods, almost entirely offset by fewer markdowns taken and a lower shrink accrual rate during the six months ended July 30, 2011 compared with the six months ended July 31, 2010.

Selling and Administrative Expenses

Selling and administrative expenses increased $15.2 million, or 2.8%, for the six month period ended July 30, 2011 compared with the six month period ended July 31, 2010. Selling and administrative expenses decreased to 32.8% of net sales for the six month period ended July 30, 2011 compared to 33.9% of net sales for the six month period ended July 31, 2010 due to the leverage of selling and administrative expenses resulting from the increase in net sales over the comparable period and other changes discussed below. The increase in selling and administrative expenses is summarized in the table below:


	*(in thousands)*
	Six Months Ended
	July 30, 2011		July 31, 2010		$ Variance		% Change
Payroll and Payroll Related	$	263,051	$	252,324	$	10,727		4.3	%
Occupancy		188,847		183,144		5,703

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