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

Forward-Looking Statements

Except for specific historical information, many of the matters discussed in this Form 10-Q may express or imply projections of revenues or expenditures, statements of plans and objectives for future operations, growth or initiatives, statements of future economic performance, or statements regarding the outcome or impact of pending or threatened litigation.  These and similar statements regarding events or results which the Company expects will or may occur in the future are forward-looking statements concerning matters that involve risks, uncertainties and other factors that may cause the actual performance of the Company to differ materially from those expressed or implied by these statements. All forward-looking information should be evaluated in the context of these risks, uncertainties and other factors. The words “believe,” “anticipate,” “project,” “plan,” “expect,” “estimate,” “objective,” “forecast,” “goal,” “intend,” “will likely result,” or “will continue” and similar expressions generally identify forward-looking statements. The Company believes the assumptions underlying these forward-looking statements are reasonable; however, any of the assumptions could be inaccurate, and therefore, actual results may differ materially from those projected in the forward-looking statements.

Factors that may result in actual results differing from such forward-looking information include, but are not limited to:

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transportation and distribution delays or interruptions both domestically and internationally;

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labor shortages in the trucking industry;

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the Company’s ability to negotiate effectively the cost and purchase of merchandise;

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prolonged or repeated price increases of certain raw materials that could affect vendors’ product costs;

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inventory risks due to shifts in market demand;

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changes in product mix;

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interruptions in suppliers' businesses;

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the inability to execute operating initiatives;

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costs and potential problems and interruptions associated with implementation of new or upgraded systems and technology or with maintenance or adequate support of existing systems;

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fuel price and interest rate fluctuations;

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a continued rise in health insurance costs or workers’ compensation costs;

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a deterioration in general economic conditions whether caused by acts of war, terrorism or other factors;

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changes in demand due to unexpected or unusual weather patterns;

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seasonality of the Company’s business such as a sales shortfall during the holiday selling season;

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unanticipated changes in the federal or state minimum wage or living wage requirements;

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changes in federal or state regulations governing the sale of the Company’s products, particularly “over-the-counter” medications or health products;

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excessive costs and delays associated with building, opening and operating new stores;

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excessive costs and delays associated with building, opening, expanding or converting new or existing distribution centers (“DCs”);

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the reputational and financial impact of the Securities and Exchange Commission (“SEC”) inquiry related to the restatement of certain of the Company’s financial statements further described in Part II, Item 1 of this Form 10-Q;

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results of other legal proceedings and claims; and

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other factors described under “Critical Accounting Policies and Estimates” below or described in the Company’s Form 10-K for the fiscal year ended January 30, 2004, filed with the SEC on March 16, 2004, and from time to time in the Company’s other filings with the SEC, press releases and other communications.

Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Form 10-Q. Except as may be required by law, the Company undertakes no obligation to publicly update or revise any forward-looking statements contained herein to reflect events or circumstances occurring after the date of this Form 10-Q or to reflect the occurrence of unanticipated events. Readers are advised, however, to consult any further disclosures the Company may make on related subjects in its public disclosures or documents filed with the SEC.

Accounting Periods

The following text contains references to years 2004, 2003 and 2002, which represent fiscal years with 52-week accounting periods ending or ended January 28, 2005, January 30, 2004 and January 31, 2003, respectively.

Results of Operations

The following discussion of the Company’s financial performance should be read with, and is qualified in its entirety by, the condensed consolidated financial statements set forth herein. The nature of the Company’s business is moderately seasonal.  Historically, sales in the fourth quarter have been higher than sales achieved in each of the first three quarters of the fiscal year. Expenses, and to a greater extent operating income, vary by quarter.  Results of a period shorter than a full year may not be indicative of results expected for the entire year.  Furthermore, the seasonal nature of the Company’s business may affect comparisons between periods. The following table contains results of operations data for the first 13 and 39 weeks of each of 2004 and 2003, and the dollar and percentage variances among those periods:

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13 WEEKS ENDED OCTOBER 29, 2004 AND OCTOBER 31, 2003

Net Sales .  Increases in net sales resulted primarily from opening additional stores, including 604 net new stores in the preceding twelve month period, and a same-store sales increase of 3.4% for the 2004 period compared to the 2003 period. Same-store sales calculations for a given period include only those stores that were open both at the end of that period and at the beginning of the preceding fiscal year. The increase in same-store sales accounted for $53.0 million of the increase in sales while stores opened since the beginning of 2003 were the primary contributors to the balance of the sales increase of $140.8 million during the current year period. The increase in same-store sales is primarily attributable to an increase in the number of customer transactions.

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The Company monitors its sales internally by the four major categories noted in the table above. The Company’s sales increase in the 2004 period compared to the 2003 period was primarily attributable to sales in the highly consumable category, which increased by $174.2 million, or 16.2%. The Company continually reviews its merchandise mix and adjusts it when deemed necessary as a part of its ongoing efforts to improve overall sales and gross profit. These ongoing reviews may result in a shift in the Company’s merchandising strategy which could increase permanent markdowns in the future.

Gross Profit .  The gross profit rate decreased in the 2004 period as compared with the 2003 period primarily due to the following factors: the increase in the percentage of sales in the highly consumable category in the 2004 period compared with the 2003 period (as noted above) which generally has gross profit rates that are lower than the Company’s average, and higher transportation expenses which are primarily attributable to higher fuel costs, the combination of which accounted for approximately half of the decline in the gross profit rate; and a nonrecurring favorable inventory adjustment in the 2003 period representing a change in the Company’s estimated provision for shrinkage, which was the other primary contributor to the decline in the gross profit rate. Both of these factors were partially offset by a reduction in markdowns taken during the current year period.

Selling, General and Administrative (“SG&A”) Expense .  The increase in SG&A expense as a percentage of sales in the 2004 period as compared with the 2003 period was due to a number of factors, including but not limited to increases in the following expense categories that were in excess of the 11.5 percent increase in sales: store occupancy costs (increased 16.6%) primarily due to rising average monthly rentals associated with the Company’s leased store locations; an increase in purchased services (increased 66.9%) due primarily to fees associated with the increased customer usage of debit cards; and increased costs for inventory services (increased 103.2%) due to both an increased number of physical inventories and a higher average cost per physical inventory. Also during the current year period, the Company recorded a $4.5 million charge for increased sales and use tax accruals due to an increase in potential exposures in certain jurisdictions, a $3.1 million charge related to the expiration of a lease for and subsequent purchase of the Company’s airplane, and an increase in disaster losses of $2.1 million during the current year period primarily related to hurricane damages. Partially offsetting these increases was a reduction in accruals for employee bonus expenses (declined 50.5%) primarily related to higher bonus accruals in the prior year period resulting from the Company’s strong year-over-year financial performance during that period.

Interest Expense, Net . The decrease in net interest expense in the 2004 period compared to the 2003 period is due primarily to capitalized interest on certain of the Company’s DC construction and expansion projects totaling $1.1 million in the 2004 period. The Company had no capitalized interest in the 2003 period.

Provision for Taxes on Income.   The effective income tax rates for the 2004 and 2003 periods were 33.9% and 36.9%, respectively. During the current quarter, the Company lowered its estimated annualized effective income tax rate by 57 basis points, which had the effect of reducing its effective tax rate in the current quarter by 111 basis points. This reduction was primarily the result of the retroactive reinstatement of certain federal jobs credits for employees hired after December 31, 2003. In addition, the Company recorded a favorable adjustment, net of

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the federal income tax effect, of approximately $1.9 million, or 173 basis points, primarily as the result of the Company filing its income tax returns in October 2004 and its related reconciliation of previously recorded tax accruals. The effective tax rate in the prior year period was negatively impacted by an adjustment that increased certain state income tax liabilities.

39 WEEKS ENDED OCTOBER 29, 2004 AND OCTOBER 31, 2003

Net Sales .  Increases in net sales resulted primarily from opening additional stores, including 604 net new stores in the preceding twelve month period, and a same-store sales increase of 3.2% for the 2004 period compared to the 2003 period. Same-store sales calculations for a given period include only those stores that were open both at the end of that period and at the beginning of the preceding fiscal year. The increase in same-store sales accounted for $149.7 million of the increase in sales while stores opened since the beginning of 2003 were the primary contributor to the balance of the sales increase of $408.2 million during the current year period. The increase in same-store sales is primarily attributable to an increase in the number of customer transactions.

The Company monitors its sales internally by the four major categories noted in the table above. The Company’s sales increase in the 2004 period compared to the 2003 period was primarily attributable to sales in the highly consumable category, which increased by $438.0 million, or 14.2%.

Gross Profit .  The gross profit rate remained relatively constant in the 2004 period as compared to the 2003 period, declining by five basis points as a result of a number of offsetting factors, including but not limited to: higher average mark-ups on the Company’s beginning inventory in 2004 as compared to 2003, representing the cumulative impact of higher margin purchases over time, resulting in approximately 23 basis points of improvement in the gross profit rate; and higher average mark-ups on the Company’s inventory purchases in 2004 as compared to 2003, resulting in approximately 22 basis points of improvement in the gross profit rate. These factors were offset by the impact of the Company’s increased sales in the highly consumable category in the current year period resulting in a decline in the gross profit rate of approximately 31 basis points; and higher transportation expenses, which are primarily attributable to higher fuel costs, resulting in a decline in the gross profit rate of approximately 17 basis points in the current year period.

In the 2004 period, the Company’s estimated shrink rate included in its gross profit calculation, expressed in retail dollars as a percentage of sales, was 3.11% compared to 3.10% in the 2003 period. There are many factors that affect the Company’s shrink rate in a given reporting period, as more fully discussed below in “Critical Accounting Policies and Estimates”.

Selling, General and Administrative (“SG&A”) Expense .  The increase in SG&A expense as a percentage of sales in the 2004 period as compared with the 2003 period was due to a number of factors, including but not limited to increases in the following expense categories that were in excess of the 11.4 percent increase in sales: store occupancy costs (increased 16.9%) primarily due to rising average monthly rentals associated with the Company’s leased store locations; increased costs for inventory services (increased 107.0%) due to both an increased number of physical inventories and a higher average cost per physical inventory; professional

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fees (increased 177.4%) primarily due to consulting fees associated with the Company’s 2004 store work-flow project; and an increase in purchased services (increased 45.7%) due primarily to fees associated with the increased customer usage of debit cards.

Interest Expense, Net . The decrease in net interest expense in the 2004 period compared to the 2003 period is due primarily to capitalized interest of $2.5 million in the 2004 period related to the Company’s DC construction and expansion projects, compared to none in the 2003 period; a net reduction of interest accruals of approximately $2.0 million related to estimated tax contingencies as discussed below; a reduction in amortization of debt issuance costs of $1.8 million due in part to the amendment of the Company’s revolving credit facility in June 2004; and the May 2003 purchase of promissory notes related to the Company’s DC in South Boston, Virginia, which resulted in reduced interest expense during the current year period of $1.2 million.

Provision for Taxes on Income .  The effective income tax rates for the 2004 and 2003 periods were 34.2% and 36.2%, respectively. In addition to the items discussed above that impacted the current quarter’s provision for income taxes, and as previously disclosed, during the quarter ended July 30, 2004, the Company recorded a net reduction in certain contingent income tax-related liabilities and the related interest accruals due to a change in its probability assessment (as described in SFAS No. 5, “Accounting for Contingencies”) that the likelihood of certain potential income tax-related exposure items would translate into actual future liabilities. These adjustments resulted in favorable impacts of approximately $6.2 million, net of the federal income tax effect, and $2.0 million to pre-tax interest expense, net, in the accompanying condensed consolidated statements of income for the current year period. The effective tax rate in the prior year period was favorably impacted by a $0.8 million adjustment to the Company’s state income tax valuation reserves related to a change in tax laws in the state of Mississippi.

Liquidity and Capital Resources

At October 29, 2004, the Company had total debt (including the current portion of long-term obligations and short-term borrowings) of $335.9 million and $45.8 million of cash and cash equivalents, compared with total debt of $282.0 million and $398.3 million of cash and cash equivalents at January 30, 2004. The most significant factors in the change affecting the Company’s total debt and cash positions during the first 39 weeks of 2004 were increased inventory levels, purchases of property and equipment, and repurchases of the Company’s outstanding common stock, all as further described below.

The Company’s inventory balance represented approximately 55% of its total assets as of October 29, 2004. The Company’s proficiency in managing its inventory balances can have a significant impact on the Company’s cash flows from operations during a given period. In addition, inventory purchases can be somewhat seasonal in nature, such as the purchase of warm-weather or Christmas-related merchandise. Inventory turns increased to 3.9 times for the twelve months ended October 29, 2004 from 3.8 times for the twelve months ended October 31, 2003.

On March 13, 2003, the Board of Directors authorized the Company to repurchase up to 12 million shares of its outstanding common stock. Purchases may be made in the open market or in privately negotiated transactions from time to time subject to market conditions. The

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objective of the share repurchase program is to enhance shareholder value by purchasing shares at a price that produces a return on investment that is greater than the Company's cost of capital. Additionally, share repurchases generally will be undertaken only if such purchases result in an accretive impact on the Company's fully diluted earnings per share calculation. This authorization expires March 13, 2005. During the first 39 weeks of 2004, the Company purchased approximately 10.5 million shares at a total cost of $198.4 million. As of October 29, 2004, approximately 12.0 million shares had been purchased, substantially completing this share repurchase authorization.

On November 30, 2004, the Board of Directors authorized the Company to repurchase up to an additional 10 million shares of its outstanding common stock. Purchases may be made in the open market or in privately negotiated transactions from time to time subject to market conditions. The objective of the share repurchase program is consistent with the March 2003 repurchase program as described above. This authorization expires November 30, 2005.

As described in Note 4 to the condensed consolidated financial statements, the Company is involved in a number of legal actions and claims, some of which could potentially result in material cash settlements.  Adverse developments in these actions could materially and adversely affect the Company’s liquidity. The Company also has certain income tax-related contingencies as more fully described below under “Critical Accounting Policies and Estimates”. Estimates of these contingent liabilities are included in the Company’s condensed consolidated financial statements. However, future negative developments could have a material adverse effect on the Company’s liquidity.

In June 2004, the Company amended its existing revolving credit facility (the “Credit Facility”). Under the terms of the amendment, the Credit Facility has a current maximum commitment of $250 million and expires in June 2009. The amended Credit Facility contains provisions that would allow the maximum commitment to be increased to up to $400 million upon mutual agreement of the Company and its lenders. The Credit Facility, as amended, is unsecured. The Company pays interest on funds borrowed under the Credit Facility at rates that are subject to change based upon the ratio of the Company’s debt to EBITDA (as defined in the Credit Facility).  The Company has two interest rate options, base rate (which is usually equal to prime rate) or LIBOR.  Under the amended terms of the Credit Facility, the facility fees can range from 12.5 to 37.5 basis points; the all-in drawn margin under the LIBOR option can range from LIBOR plus 87.5 to 212.5 basis points and the all-in drawn margin under the base rate option can range from the base rate plus 12.5 to 62.5 basis points. The Credit Facility contains financial covenants, which include limits on certain debt to cash flow ratios, a fixed charge coverage test, and minimum allowable consolidated net worth.  As of October 29, 2004, the Company was in compliance with all of these covenants. As of October 29, 2004, the Company had $64.5 million of outstanding borrowings and $6.5 million of standby letters of credit under the Credit Facility. The standby letters of credit reduce the borrowing capacity under the Credit Facility.

The Company has $200 million (principal amount) of 8 5/8% unsecured notes due June 15, 2010. This indebtedness was incurred to assist in funding the Company’s growth. Interest on the notes is payable semi-annually on June 15 and December 15 of each year.  The note holders may elect to have these notes repaid on June 15, 2005, at 100% of the principal amount plus

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accrued and unpaid interest. Although the holders of the notes have the ability to require the Company to repurchase the notes in June 2005, the Company has classified this debt as long-term due to its intent and ability, in the event it were required to repurchase any portion of the notes, to refinance this indebtedness on a long-term basis, including through borrowings under the Credit Facility. The Company may seek, from time to time, to retire its outstanding notes through cash purchases on the open market, privately negotiated transactions or otherwise. Such repurchases, if any, will depend on prevailing market conditions, the Company’s liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.

Certain terms of the Company’s outstanding debt obligations could have an effect on the Company’s ability to incur additional debt financing. The Credit Facility contains financial covenants as listed above and places certain specified limitations on the incurrence of secured and unsecured debt. The Company’s outstanding notes discussed above place certain specified limitations on the incurrence of secured debt and on the Company’s ability to execute sale-leaseback transactions. The Company has generated over one billion dollars of cash flows from operating activities during the three preceding years, and does not believe that any existing limitations on its ability to incur additional indebtedness will have a material impact on its liquidity.

At October 29, 2004 and January 30, 2004, the Company had commercial letter of credit facilities totaling $218.0 million, of which $65.1 million and $111.7 million, respectively, were outstanding for the funding of imported merchandise purchases.

The Company believes that its existing cash balances, cash flows from operations, available borrowings under the Credit Facility and its anticipated ongoing access to the capital markets, if necessary, will provide sufficient financing to meet the Company’s currently foreseeable liquidity and capital resource needs.

Cash Flows Provided by Operating Activities .  During the 2004 period, cash flows from operating activities declined by $146.1 million as compared to the 2003 period. The most significant component of the change in cash flows from operating activities was an increase in inventory levels in the 2004 period over the 2003 period. Inventory balances at October 29, 2004 in the seasonal, highly consumable and basic clothing categories increased by $155.5 million, $107.7 million and $89.3 million, respectively, as compared to the beginning of the year. These increased inventory levels reflect, among other things, growth in the number of stores, purchases of seasonal merchandise in anticipation of the upcoming Christmas selling season, and the Company’s emphasis on improving its in-stock positions in stores. Cash flows in the current year period increased by $28.5 million over the prior year period related to changes in income taxes payable, primarily due to a large payment of estimated federal income taxes for 2002 that was made in 2003. Cash flows in the 2004 period were positively impacted by an increase in net income of $12.1 million driven by improved operating results (as more fully discussed above under “Results of Operations”). The primary source of cash in 2003 was the Company’s net income, as adjusted for the non-cash depreciation and amortization expense, which together totaled $311.3 million.  In addition, the Company generated $95.3 million in the prior year period as a result of increases in its accounts payable balances.  Significant uses of cash in the prior year include an increase in inventories of $250.2 million and a decline in net cash flows from changes in current income taxes payable of $52.5 million.

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Cash Flows Used in Investing Activities .  The Company’s purchases of property and equipment in the 2004 period totaled $209.5 million, which is net of property and equipment purchases of $4.8 million that have not been processed for payment and are included in accounts payable at October 29, 2004. Significant components of these purchases included the following: $73.2 million for distribution and transportation-related capital expenditures; $53.3 million for new stores; $21.8 million for coolers in new and existing stores, which allow the stores to carry refrigerated products; $16.5 million for certain fixtures in existing stores and $13.9 million for various systems-related capital projects. During the 2004 period, the Company opened 639 new stores. Distribution and transportation expenditures in the 2004 period include costs associated with the expansion of the Ardmore, Oklahoma and South Boston, Virginia DCs as well as costs associated with the construction of the Company’s new DC in Union County, South Carolina. The Company purchased property and equipment totaling $93.0 million in the prior year period which consisted primarily of $45.7 million for new stores, $31.5 million for other store-related projects and $13.6 million for various technology projects. Also during the prior year period the Company purchased two secured promissory notes totaling $49.6 million which represent debt issued by a third party entity from which the Company leases its DC in South Boston, Virginia.

Capital expenditures during 2004 are projected to be approximately $290 million.  The Company anticipates funding its 2004 capital requirements with cash flows from operations and available borrowings under the Credit Facility.

Cash Flows Used in Financing Activities .  During the 2004 period, the Company repurchased approximately 10.5 million shares of its common stock at a total cost of $198.4 million, and paid cash dividends of $39.6 million, or $0.12 per share, on its outstanding common stock. The primary use of cash in the 2003 period was the payment of $35.1 million of cash dividends, or $0.105 per share.

Critical Accounting Policies and Estimates

Merchandise Inventories. Merchandise inventories are stated at the lower of cost or market with cost determined using the retail last-in, first-out (“LIFO”) method.  Under the Company’s retail inventory method (“RIM”), the calculation of gross profit and the resulting valuation of inventories at cost are computed by applying a calculated cost-to-retail inventory ratio to the retail value of sales.  The RIM is an averaging method that has been widely used in the retail industry due to its practicality.  Also, it is recognized that the use of the RIM will result in valuing inventories at the lower of cost or market if markdowns are currently taken as a reduction of the retail value of inventories.

Inherent in the RIM calculation are certain significant management judgments and estimates including, among others, initial markups, markdowns, and shrinkage, which significantly impact the gross profit calculation as well as the ending inventory valuation at cost.  These significant estimates, coupled with the fact that the RIM is an averaging process, can, under certain circumstances, produce distorted cost figures.  Factors that can lead to distortion in the calculation of the inventory balance include:

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applying the RIM to a group of products that is not fairly uniform in terms of its cost and selling price relationship and turnover;

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applying the RIM to transactions over a period of time that include different rates of gross profit, such as those relating to seasonal merchandise;

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inaccurate estimates of inventory shrinkage between the date of the last physical inventory at a store and the financial statement date; and

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inaccurate estimates of LIFO reserves.

To reduce the potential of such distortions in the valuation of inventory, the Company’s RIM currently utilizes 10 departments in which fairly homogenous classes of merchandise inventories having similar gross margins are grouped.  In the future, in order to further refine its RIM calculation, the Company intends to expand the number of departments it utilizes for its gross margin calculation. The impact of this intended change on the Company’s future consolidated financial statements is not currently expected to be material. Other factors that reduce potential distortion include the use of historical experience in estimating the shrink provision (see discussion below) and the utilization of an independent statistician to assist in the LIFO sampling process and index formulation. Also, on an ongoing basis, the Company reviews and evaluates the salability of its inventory and records adjustments, if necessary, to reflect its inventory at the lower of cost or market.

The Company calculates its shrink provision based on actual physical inventory results during the fiscal period and an accrual for estimated shrink occurring subsequent to a physical inventory through the end of the fiscal reporting period. This accrual is calculated as a percentage of sales and is determined by dividing the book-to-physical inventory adjustments recorded during the previous twelve months by the related sales for the same period for each store. To the extent that subsequent physical inventories yield different results than this estimated accrual, the Company’s effective shrink rate for a given reporting period will include the impact of adjusting the estimated results to the actual results. Although the Company performs physical inventories in all of its stores annually, the same stores do not necessarily get counted in the same reporting periods from year to year, which could impact comparability in a given reporting period.

Property and Equipment.  Property and equipment are recorded at cost. The Company groups its assets into relatively homogeneous classes and provides for depreciation on a straight-line basis over the estimated average useful life of each asset class. The valuation and classification of these assets and the assignment of useful depreciable lives involves significant judgments and the use of estimates. Property and equipment are reviewed for impairment periodically and whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable.

Self-Insurance Liability.  The Company retains a significant portion of the risk for its workers’ compensation, employee health insurance, general liability, property loss and automobile coverage. These costs are significant primarily due to the large employee base and number of stores. Provisions are made to this insurance liability on an undiscounted basis based on actual claim data and estimates of incurred but not reported claims developed by an independent actuary utilizing historical claim trends. If future claim trends deviate from recent historical patterns, the Company may be required to record additional expenses or expense reductions which could be material to the Company’s future financial results.

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Contingent Liabilities – Income Taxes . The Company is subject to routine income tax audits which occur periodically in the normal course of business. The Company estimates its contingent income tax liabilities based on its assessment of potential income tax-related exposures and the relative probabilities of those exposures translating into actual future liabilities. The probabilities are estimated based on both historical audit experiences with various state and federal taxing authorities and the Company’s interpretation of current income tax-related trends. If the Company’s income tax contingent liability estimates prove to be inaccurate, the resulting adjustments could be material to the Company’s future financial results.

ITEM 3.