##### Table of Contents



United States  Securities And Exchange Commission
 WASHINGTON, D.C. 20549
 
 Form 10 - Q
 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 For the Quarterly Period Ended August 4, 2007
 Commission File No. 1-6695
 
 JO-ANN STORES, INC.
  Ohio
    
    34-0720629(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. Employer Identification No.)5555 Darrow Road, Hudson, Ohio
(Address of principal executive offices)
    
    44236
(Zip Code)
 (330) 656-2600
 þ o
  o þ o
 o þ




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##### 



Jo-Ann Stores, Inc.
Form 10-Q Index
For the Quarter Ended August 4, 2007
 
  
 Page NumbersPart I. Financial InformationItem 1.
    
    Financial StatementsConsolidated Balance Sheets  August 4, 2007 (Unaudited),
July 29, 2006 (Unaudited) and February 3, 2007
    
    
    1Unaudited Consolidated Statements of Operations for the Thirteen
and Twenty-Six Weeks Ended August 4, 2007 and July 29, 2006
    
    
    2Unaudited Consolidated Statements of Cash Flows for the
Twenty-Six Weeks Ended August 4, 2007 and July 29, 2006
    
    
    3Notes to Unaudited Consolidated Financial Statements
    
    
    4Item 2.
    
    Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    13Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    22Item 4.
    
    Controls and Procedures
    
    
    22Part II. Other InformationItem 1.
    
    Legal Proceedings
    
    
    22Item 1A.
    
    Risk Factors
    
    
    22Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    23Item 3.
    
    Defaults Upon Senior Securities
    
    
    23Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    23Item 5.
    
    Other Information
    
    
    24Item 6.
    
    Exhibits
    
    
    24Signatures
    
    
    
    
    25EX-31.1EX-31.2EX-32.1




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 
 Jo-Ann Stores, Inc.
Consolidated Balance Sheets
 (Unaudited)August 4,
    
    
    July 29,
    
    
    February 3,2007
    
    
    2006
    
    
    2007(Dollars in millions, except share and per share data)AssetsCurrent assets:Cash and cash equivalents
    
    $
    16.7
    
    
    $
    15.3
    
    
    $
    18.4Inventories
    
    
    507.9
    
    
    
    511.3
    
    
    
    453.4Deferred income taxes
    
    
    39.2
    
    
    
    38.0
    
    
    
    41.6Prepaid expenses and other current assets
    
    
    25.0
    
    
    
    24.7
    
    
    
    30.4Total current assets
    
    
    588.8
    
    
    
    589.3
    
    
    
    543.8Property, equipment and leasehold improvements, net
    
    
    307.7
    
    
    
    340.6
    
    
    
    311.8Other assets
    
    
    10.0
    
    
    
    9.6
    
    
    
    10.7Total assets
    
    $
    906.5
    
    
    $
    939.5
    
    
    $
    866.3Liabilities and Shareholders EquityCurrent liabilities:Accounts payable
    
    $
    178.5
    
    
    $
    166.5
    
    
    $
    147.5Accrued expenses
    
    
    70.8
    
    
    
    64.9
    
    
    
    84.4Total current liabilities
    
    
    249.3
    
    
    
    231.4
    
    
    
    231.9Long-term debt
    
    
    159.0
    
    
    
    225.0
    
    
    
    125.3Deferred income taxes
    
    
    14.5
    
    
    
    23.2
    
    
    
    14.2Lease obligations and other long-term liabilities
    
    
    84.0
    
    
    
    84.2
    
    
    
    85.1Shareholders equity:Preferred stock, no par value, 5,000,000 shares authorized, none issued
    
    
    
    
    
    
    
    
    
    
    Common stock, stated value $0.05 per share; 150,000,000 authorized,
issued 27,999,434; 27,179,517 and 27,400,347 shares, respectively
    
    
    1.4
    
    
    
    1.4
    
    
    
    1.4Additional paid-in capital
    
    
    189.7
    
    
    
    169.1
    
    
    
    176.9Retained earnings
    
    
    253.0
    
    
    
    248.8
    
    
    
    274.7444.1
    
    
    
    419.3
    
    
    
    453.0Treasury stock, at cost, 3,581,809; 3,608,288 and 3,542,885 shares, respectively
    
    
    (44.4
    )
    
    
    (43.6
    )
    
    
    (43.2
    )Total shareholders equity
    
    
    399.7
    
    
    
    375.7
    
    
    
    409.8Total liabilities and shareholders equity
    
    $
    906.5
    
    
    $
    939.5
    
    
    $
    866.3
  1




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##### Table of Contents



Jo-Ann Stores, Inc.
Consolidated Statements of Operations
(Unaudited)
 Thirteen Weeks Ended
    
    
    Twenty-Six Weeks EndedAugust 4,
    
    
    July 29,
    
    
    August 4,
    
    
    July 29,2007
    
    
    2006
    
    
    2007
    
    
    2006(Dollars in millions, except share and per share data)Net sales
    
    $
    388.5
    
    
    $
    363.2
    
    
    $
    812.7
    
    
    $
    787.9Cost of sales (exclusive of depreciation and
amortization shown separately below)
    
    
    211.1
    
    
    
    190.9
    
    
    
    434.7
    
    
    
    417.6Gross margin
    
    
    177.4
    
    
    
    172.3
    
    
    
    378.0
    
    
    
    370.3Selling, general and administrative expenses
    
    
    188.1
    
    
    
    186.9
    
    
    
    373.6
    
    
    
    376.6Store pre-opening and closing costs
    
    
    2.7
    
    
    
    2.6
    
    
    
    5.1
    
    
    
    8.1Depreciation and amortization
    
    
    12.8
    
    
    
    12.3
    
    
    
    25.4
    
    
    
    23.9Operating loss
    
    
    (26.2
    )
    
    
    (29.5
    )
    
    
    (26.1
    )
    
    
    (38.3
    )Interest expense, net
    
    
    2.7
    
    
    
    3.9
    
    
    
    5.4
    
    
    
    7.4Loss before income taxes
    
    
    (28.9
    )
    
    
    (33.4
    )
    
    
    (31.5
    )
    
    
    (45.7
    )Income tax benefit
    
    
    (10.5
    )
    
    
    (12.2
    )
    
    
    (11.4
    )
    
    
    (16.9
    )Loss before cumulative effect of accounting change
    
    
    (18.4
    )
    
    
    (21.2
    )
    
    
    (20.1
    )
    
    
    (28.8
    )Cumulative effect of change in accounting principle,
net
of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.0Net loss
    
    $
    (18.4
    )
    
    $
    (21.2
    )
    
    $
    (20.1
    )
    
    $
    (27.8
    )Loss per common share  basic:Loss before cumulative effect of accounting change
    
    $
    (0.76
    )
    
    $
    (0.90
    )
    
    $
    (0.83
    )
    
    $
    (1.23
    )Cumulative effect of change in accounting principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.04Net loss
    
    $
    (0.76
    )
    
    $
    (0.90
    )
    
    $
    (0.83
    )
    
    $
    (1.19
    )Loss per common share  diluted:Loss before cumulative effect of accounting change
    
    $
    (0.76
    )
    
    $
    (0.90
    )
    
    $
    (0.83
    )
    
    $
    (1.23
    )Cumulative effect of change in accounting principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.04Net loss
    
    $
    (0.76
    )
    
    $
    (0.90
    )
    
    $
    (0.83
    )
    
    $
    (1.19
    )Weighted average shares outstanding (in thousands):Basic
    
    
    24,346
    
    
    
    23,469
    
    
    
    24,175
    
    
    
    23,388Diluted
    
    
    24,346
    
    
    
    23,469
    
    
    
    24,175
    
    
    
    23,388
  2




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##### Table of Contents



Jo-Ann Stores, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
 Twenty-Six Weeks EndedAugust 4,
    
    
    July 29,2007
    
    
    2006(Dollars in millions)Net cash flows (used for) provided by operating activities:Net loss
    
    $
    (20.1
    )
    
    $
    (27.8
    )Adjustments to reconcile net loss to net cash
(used for) provided by operating activities:Depreciation and amortization
    
    
    25.4
    
    
    
    23.9Deferred income taxes
    
    
    2.7
    
    
    
    Stock-based compensation expense
    
    
    4.7
    
    
    
    3.3Cumulative effect of change in accounting principle
    
    
    
    
    
    
    (1.0
    )Tax benefit on stock-based compensation plan awards
    
    
    0.2
    
    
    
    Amortization of deferred financing costs
    
    
    0.5
    
    
    
    0.5Loss on disposal of fixed assets
    
    
    0.5
    
    
    
    0.4Changes in operating assets and liabilities:(Increase) decrease in inventories
    
    
    (54.5
    )
    
    
    3.4Decrease in prepaid expenses and other current assets
    
    
    5.4
    
    
    
    10.5Increase in accounts payable
    
    
    31.0
    
    
    
    19.9Decrease in accrued expenses
    
    
    (15.2
    )
    
    
    (29.8
    )(Decrease) increase in lease obligations, net
    
    
    (0.5
    )
    
    
    4.4Decrease in other long-term liabilities
    
    
    (0.6
    )
    
    
    Other, net
    
    
    0.2
    
    
    
    (0.6
    )Net cash (used for) provided by operating activities
    
    
    (20.3
    )
    
    
    7.1Net cash flows used for investing activities:Capital expenditures
    
    
    (21.8
    )
    
    
    (33.2
    )Net cash used for investing activities
    
    
    (21.8
    )
    
    
    (33.2
    )Net cash flows provided by financing activities:Net change in revolving credit facility
    
    
    33.7
    
    
    
    21.3Proceeds from stock-based compensation plans
    
    
    6.6
    
    
    
    1.7Tax benefits in excess of recognized compensation cost for stock-based
awards
    
    
    1.3
    
    
    
    Other, net
    
    
    (1.2
    )
    
    
    0.5Net cash provided by financing activities
    
    
    40.4
    
    
    
    23.5Net decrease in cash and cash equivalents
    
    
    (1.7
    )
    
    
    (2.6
    )Cash and cash equivalents at beginning of period
    
    
    18.4
    
    
    
    17.9Cash and cash equivalents at end of period
    
    $
    16.7
    
    
    $
    15.3Supplemental disclosures of cash flow information:Cash paid during the period for:Interest
    
    $
    4.9
    
    
    $
    7.2Income taxes, net of refunds
    
    
    0.9
    
    
    
    4.4
  3




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##### Table of Contents



Notes to Consolidated Financial Statements (Unaudited)
Jo-Ann Stores, Inc
 Note 1  Basis of Presentation
     Note 2  Loss Per Share
   Thirteen Weeks Ended
    
    Twenty-Six Weeks EndedAugust 4,
    
    July 29,
    
    August 4,
    
    July 29,2007
    
    2006
    
    2007
    
    2006Weighted average shares outstanding:Basic common shares
    
    
    24,346
    
    
    
    23,469
    
    
    
    24,175
    
    
    
    23,388Incremental shares from assumed
exercise of stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Incremental restricted shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Diluted common shares
    
    
    24,346
    
    
    
    23,469
    
    
    
    24,175
    
    
    
    23,388
 4




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##### Table of Contents



Note 3  Shareholders Equity
  CommonNet
    
    
    
    
    
    
    Stock
    
    Additional
    
    
    
    
    
    
    
    
    
    TotalCommon
    
    Treasury
    
    
    Stated
    
    Paid-In
    
    Retained
    
    Treasury
    
    ShareholdersShares
    
    Shares
    
    
    Value
    
    Capital
    
    Earnings
    
    Stock
    
    Equity(Shares in thousands)
    
    
    (Dollars in millions)Balance, February 3, 2007
    
    
    23,857
    
    
    
    3,543
    
    
    
    $
    1.4
    
    
    $
    176.9
    
    
    $
    274.7
    
    
    
    ($43.2
    )
    
    $
    409.8Change in accounting principle
(Note 4)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1.6
    )
    
    
    
    
    
    
    (1.6
    )Adjusted balance at February 3, 2007
    
    
    23,857
    
    
    
    3,543
    
    
    
    $
    1.4
    
    
    $
    176.9
    
    
    $
    273.1
    
    
    
    ($43.2
    )
    
    $
    408.2Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (20.1
    )
    
    
    
    
    
    
    (20.1
    )Exercise of stock options
    
    
    342
    
    
    
    (16
    )
    
    
    
    
    
    
    
    5.4
    
    
    
    
    
    
    
    
    
    
    
    5.4Tax benefits in excess of recognized
compensation cost for stock-based
awards
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.5
    
    
    
    
    
    
    
    
    
    
    
    1.5Stock-based compensation
    
    
    192
    
    
    
    
    
    
    
    
    
    
    
    
    4.7
    
    
    
    
    
    
    
    
    
    
    
    4.7Purchase of common stock
    
    
    (55
    )
    
    
    55
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1.2
    )
    
    
    (1.2
    )Associate stock ownership plan
    
    
    81
    
    
    
    
    
    
    
    
    
    
    
    
    1.2
    
    
    
    
    
    
    
    
    
    
    
    1.2Year-to-date activity
    
    
    560
    
    
    
    39
    
    
    
    
    
    
    
    
    12.8
    
    
    
    (20.1
    )
    
    
    (1.2
    )
    
    
    (8.5
    )Balance, August 4, 2007
    
    
    24,417
    
    
    
    3,582
    
    
    
    $
    1.4
    
    
    $
    189.7
    
    
    $
    253.0
    
    
    
    ($44.4
    )
    
    $
    399.7
  Note 4  Income Taxes
    5




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##### Table of Contents



Note 5  Recent Accounting Pronouncements
 Statement of Financial Accounting Standards No. 157, Fair Value Measurement
  Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities
  Note 6  Segment Reporting
    6




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##### Table of Contents



Large-format
    
    Small-formatStores
    
    Stores
    
    Other
    
    ConsolidatedThirteen Weeks Ended August 4, 2007Net sales
    
    $
    199.1
    
    
    $
    189.4
    
    
    $
    
    
    
    $
    388.5Store pre-opening and closing costs
    
    
    0.8
    
    
    
    1.9
    
    
    
    
    
    
    
    2.7Depreciation and amortization
    
    
    7.6
    
    
    
    2.4
    
    
    
    2.8
    
    
    
    12.8Operating profit (loss)
    
    
    (2.1
    )
    
    
    7.4
    
    
    
    (31.5
    )
    
    
    (26.2
    )Capital expenditures
    
    
    5.3
    
    
    
    5.6
    
    
    
    3.5
    
    
    
    14.4Thirteen Weeks Ended July 29, 2006Net sales
    
    $
    172.5
    
    
    $
    190.7
    
    
    $
    
    
    
    $
    363.2Store pre-opening and closing costs
    
    
    1.0
    
    
    
    1.6
    
    
    
    
    
    
    
    2.6Depreciation and amortization
    
    
    6.9
    
    
    
    2.3
    
    
    
    3.1
    
    
    
    12.3Operating profit (loss)
    
    
    0.7
    
    
    
    8.2
    
    
    
    (38.4
    )
    
    
    (29.5
    )Capital expenditures
    
    
    11.3
    
    
    
    3.5
    
    
    
    4.3
    
    
    
    19.1Twenty-Six Weeks Ended August 4, 2007Net sales
    
    $
    414.3
    
    
    $
    398.4
    
    
    $
    
    
    
    $
    812.7Store pre-opening and closing costs
    
    
    1.7
    
    
    
    3.4
    
    
    
    
    
    
    
    5.1Depreciation and amortization
    
    
    15.1
    
    
    
    4.7
    
    
    
    5.6
    
    
    
    25.4Operating profit (loss)
    
    
    8.3
    
    
    
    29.1
    
    
    
    (63.5
    )
    
    
    (26.1
    )Capital expenditures
    
    
    11.7
    
    
    
    6.1
    
    
    
    4.0
    
    
    
    21.8Property, equipment and leasehold
improvements, net
    
    
    173.4
    
    
    
    38.8
    
    
    
    95.5
    
    
    
    307.7Twenty-Six Weeks Ended July 29, 2006Net sales
    
    $
    368.9
    
    
    $
    419.0
    
    
    $
    
    
    
    $
    787.9Store pre-opening and closing costs
    
    
    3.7
    
    
    
    4.4
    
    
    
    
    
    
    
    8.1Depreciation and amortization
    
    
    13.5
    
    
    
    4.7
    
    
    
    5.7
    
    
    
    23.9Operating profit (loss)
    
    
    8.4
    
    
    
    25.7
    
    
    
    (72.4
    )
    
    
    (38.3
    )Capital expenditures
    
    
    20.5
    
    
    
    4.4
    
    
    
    8.3
    
    
    
    33.2Property, equipment and leasehold
improvements, net
    
    
    198.5
    
    
    
    42.6
    
    
    
    99.5
    
    
    
    340.6
 Note 7  Consolidating Financial Statements (Unaudited)
  7




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##### Table of Contents



Consolidating Balance Sheets  August 4, 2007
 GuarantorParent
    
    Subsidiaries
    
    Eliminations
    
    Consolidated(Dollars in millions)AssetsCurrent assets:Cash and cash equivalents
    
    $
    (9.7
    )
    
    $
    26.4
    
    
    $
    
    
    
    $
    16.7Inventories
    
    
    214.5
    
    
    
    293.4
    
    
    
    
    
    
    
    507.9Deferred income taxes
    
    
    29.4
    
    
    
    9.8
    
    
    
    
    
    
    
    39.2Prepaid expenses and other current assets
    
    
    18.7
    
    
    
    6.3
    
    
    
    
    
    
    
    25.0Total current assets
    
    
    252.9
    
    
    
    335.9
    
    
    
    
    
    
    
    588.8Property, equipment and leasehold improvements, net
    
    
    148.2
    
    
    
    159.5
    
    
    
    
    
    
    
    307.7Other assets
    
    
    8.5
    
    
    
    1.5
    
    
    
    
    
    
    
    10.0Investment in subsidiaries
    
    
    37.1
    
    
    
    
    
    
    
    (37.1
    )
    
    
    Intercompany receivable
    
    
    397.2
    
    
    
    
    
    
    
    (397.2
    )
    
    
    Total assets
    
    $
    843.9
    
    
    $
    496.9
    
    
    $
    (434.3
    )
    
    $
    906.5Liabilities and Shareholders EquityCurrent liabilities:Accounts payable
    
    $
    158.0
    
    
    $
    20.5
    
    
    $
    
    
    
    $
    178.5Accrued expenses
    
    
    75.0
    
    
    
    (4.2
    )
    
    
    
    
    
    
    70.8Total current liabilities
    
    
    233.0
    
    
    
    16.3
    
    
    
    
    
    
    
    249.3Long-term debt
    
    
    159.0
    
    
    
    
    
    
    
    
    
    
    
    159.0Deferred income taxes
    
    
    (1.5
    )
    
    
    16.0
    
    
    
    
    
    
    
    14.5Lease obligations and other long-term liabilities
    
    
    53.7
    
    
    
    30.3
    
    
    
    
    
    
    
    84.0Intercompany payable
    
    
    
    
    
    
    397.2
    
    
    
    (397.2
    )
    
    
    Shareholders equity:Preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Common stock
    
    
    1.4
    
    
    
    
    
    
    
    
    
    
    
    1.4Additional paid-in capital
    
    
    189.7
    
    
    
    
    
    
    
    
    
    
    
    189.7Retained earnings
    
    
    253.0
    
    
    
    37.1
    
    
    
    (37.1
    )
    
    
    253.0444.1
    
    
    
    37.1
    
    
    
    (37.1
    )
    
    
    444.1Treasury stock, at cost
    
    
    (44.4
    )
    
    
    
    
    
    
    
    
    
    
    (44.4
    )Total shareholders equity
    
    
    399.7
    
    
    
    37.1
    
    
    
    (37.1
    )
    
    
    399.7Total liabilities and shareholders equity
    
    $
    843.9
    
    
    $
    496.9
    
    
    $
    (434.3
    )
    
    $
    906.5
 8




---



##### Table of Contents



Note 7  Consolidating Financial Statements (Unaudited)  CONTINUED
 Consolidating Balance Sheets
February 3, 2007
 GuarantorParent
    
    Subsidiaries
    
    Eliminations
    
    Consolidated(Dollars in millions)AssetsCurrent assets:Cash and cash equivalents
    
    $
    (8.8
    )
    
    $
    27.2
    
    
    $
    
    
    
    $
    18.4Inventories
    
    
    200.8
    
    
    
    252.6
    
    
    
    
    
    
    
    453.4Deferred income taxes
    
    
    35.2
    
    
    
    6.4
    
    
    
    
    
    
    
    41.6Prepaid expenses and other current assets
    
    
    20.7
    
    
    
    9.7
    
    
    
    
    
    
    
    30.4Total current assets
    
    
    247.9
    
    
    
    295.9
    
    
    
    
    
    
    
    543.8Property, equipment and leasehold improvements, net
    
    
    149.6
    
    
    
    162.2
    
    
    
    
    
    
    
    311.8Other assets
    
    
    9.2
    
    
    
    1.5
    
    
    
    
    
    
    
    10.7Investment in subsidiaries
    
    
    50.3
    
    
    
    
    
    
    
    (50.3
    )
    
    
    Intercompany receivable
    
    
    358.1
    
    
    
    
    
    
    
    (358.1
    )
    
    
    Total assets
    
    $
    815.1
    
    
    $
    459.6
    
    
    $
    (408.4
    )
    
    $
    866.3Liabilities and Shareholders EquityCurrent liabilities:Accounts payable
    
    $
    144.2
    
    
    $
    3.3
    
    
    $
    
    
    
    $
    147.5Accrued expenses
    
    
    82.8
    
    
    
    1.6
    
    
    
    
    
    
    
    84.4Total current liabilities
    
    
    227.0
    
    
    
    4.9
    
    
    
    
    
    
    
    231.9Long-term debt
    
    
    125.3
    
    
    
    
    
    
    
    
    
    
    
    125.3Deferred income taxes
    
    
    (1.5
    )
    
    
    15.7
    
    
    
    
    
    
    
    14.2Lease obligations and other long-term liabilities
    
    
    54.5
    
    
    
    30.6
    
    
    
    
    
    
    
    85.1Intercompany payable
    
    
    
    
    
    
    358.1
    
    
    
    (358.1
    )
    
    
    Shareholders equity:Preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Common stock
    
    
    1.4
    
    
    
    
    
    
    
    
    
    
    
    1.4Additional paid-in capital
    
    
    176.9
    
    
    
    
    
    
    
    
    
    
    
    176.9Retained earnings
    
    
    274.7
    
    
    
    50.3
    
    
    
    (50.3
    )
    
    
    274.7453.0
    
    
    
    50.3
    
    
    
    (50.3
    )
    
    
    453.0Treasury stock, at cost
    
    
    (43.2
    )
    
    
    
    
    
    
    
    
    
    
    (43.2
    )Total shareholders equity
    
    
    409.8
    
    
    
    50.3
    
    
    
    (50.3
    )
    
    
    409.8Total liabilities and shareholders equity
    
    $
    815.1
    
    
    $
    459.6
    
    
    $
    (408.4
    )
    
    $
    866.3
 9




---



##### Table of Contents



Note 7  Consolidating Financial Statements (Unaudited)  CONTINUED
 Consolidating Statements of Operations
Thirteen Weeks Ended August 4, 2007 and July 29, 2006
 August 4 , 2007GuarantorParent
    
    Subsidiaries
    
    Eliminations
    
    Consolidated(Dollars in millions)Net sales
    
    $
    211.3
    
    
    $
    301.5
    
    
    $
    (124.3
    )
    
    $
    388.5Cost of sales (exclusive of depreciation and
amortization shown separately below)
    
    
    121.5
    
    
    
    213.9
    
    
    
    (124.3
    )
    
    
    211.1Gross margin
    
    
    89.8
    
    
    
    87.6
    
    
    
    
    
    
    
    177.4Selling, general and administrative expenses
    
    
    94.6
    
    
    
    93.5
    
    
    
    
    
    
    
    188.1Store pre-opening and closing costs
    
    
    1.3
    
    
    
    1.4
    
    
    
    
    
    
    
    2.7Depreciation and amortization
    
    
    6.3
    
    
    
    6.5
    
    
    
    
    
    
    
    12.8Operating loss
    
    
    (12.4
    )
    
    
    (13.8
    )
    
    
    
    
    
    
    (26.2
    )Interest expense, net
    
    
    1.3
    
    
    
    1.4
    
    
    
    
    
    
    
    2.7Loss before income taxes
    
    
    (13.7
    )
    
    
    (15.2
    )
    
    
    
    
    
    
    (28.9
    )Income tax benefit
    
    
    (4.2
    )
    
    
    (6.3
    )
    
    
    
    
    
    
    (10.5
    )Loss before equity loss
    
    
    (9.5
    )
    
    
    (8.9
    )
    
    
    
    
    
    
    (18.4
    )Equity loss from subsidiaries
    
    
    (8.9
    )
    
    
    
    
    
    
    8.9
    
    
    
    Net loss
    
    $
    (18.4
    )
    
    $
    (8.9
    )
    
    $
    8.9
    
    
    $
    (18.4
    )
 July 29, 2006GuarantorParent
    
    Subsidiaries
    
    Eliminations
    
    Consolidated(Dollars in millions)Net sales
    
    $
    200.4
    
    
    $
    281.3
    
    
    $
    (118.5
    )
    
    $
    363.2Cost of sales (exclusive of depreciation and
amortization shown separately below)
    
    
    115.4
    
    
    
    194.0
    
    
    
    (118.5
    )
    
    
    190.9Gross margin
    
    
    85.0
    
    
    
    87.3
    
    
    
    
    
    
    
    172.3Selling, general and administrative expenses
    
    
    96.7
    
    
    
    90.2
    
    
    
    
    
    
    
    186.9Store pre-opening and closing costs
    
    
    1.0
    
    
    
    1.6
    
    
    
    
    
    
    
    2.6Depreciation and amortization
    
    
    6.2
    
    
    
    6.1
    
    
    
    
    
    
    
    12.3Operating loss
    
    
    (18.9
    )
    
    
    (10.6
    )
    
    
    
    
    
    
    (29.5
    )Interest expense, net
    
    
    1.7
    
    
    
    2.2
    
    
    
    
    
    
    
    3.9Loss before income taxes
    
    
    (20.6
    )
    
    
    (12.8
    )
    
    
    
    
    
    
    (33.4
    )Income tax benefit
    
    
    (7.5
    )
    
    
    (4.7
    )
    
    
    
    
    
    
    (12.2
    )Loss before equity loss
    
    
    (13.1
    )
    
    
    (8.1
    )
    
    
    
    
    
    
    (21.2
    )Equity loss from subsidiaries
    
    
    (8.1
    )
    
    
    
    
    
    
    8.1
    
    
    
    Net loss
    
    $
    (21.2
    )
    
    $
    (8.1
    )
    
    $
    8.1
    
    
    $
    (21.2
    )
 10




---



##### Table of Contents



Note 7  Consolidating Financial Statements (Unaudited)  CONTINUED
 Consolidating Statements of Operations
Twenty-Six Weeks Ended August 4, 2007 and July 29, 2006
 August 4, 2007GuarantorParent
    
    Subsidiaries
    
    Eliminations
    
    Consolidated(Dollars in millions)Net sales
    
    $
    444.4
    
    
    $
    577.4
    
    
    $
    (209.1
    )
    
    $
    812.7Cost of sales (exclusive of depreciation and
amortization shown separately below)
    
    
    249.8
    
    
    
    394.0
    
    
    
    (209.1
    )
    
    
    434.7Gross margin
    
    
    194.6
    
    
    
    183.4
    
    
    
    
    
    
    
    378.0Selling, general and administrative expenses
    
    
    187.9
    
    
    
    185.7
    
    
    
    
    
    
    
    373.6Store pre-opening and closing costs
    
    
    2.2
    
    
    
    2.9
    
    
    
    
    
    
    
    5.1Depreciation and amortization
    
    
    12.5
    
    
    
    12.9
    
    
    
    
    
    
    
    25.4Operating loss
    
    
    (8.0
    )
    
    
    (18.1
    )
    
    
    
    
    
    
    (26.1
    )Interest expense, net
    
    
    2.5
    
    
    
    2.9
    
    
    
    
    
    
    
    5.4Loss before income taxes
    
    
    (10.5
    )
    
    
    (21.0
    )
    
    
    
    
    
    
    (31.5
    )Income tax benefit
    
    
    (3.7
    )
    
    
    (7.7
    )
    
    
    
    
    
    
    (11.4
    )Loss before equity income
    
    
    (6.8
    )
    
    
    (13.3
    )
    
    
    
    
    
    
    (20.1
    )Equity loss from subsidiaries
    
    
    (13.3
    )
    
    
    
    
    
    
    13.3
    
    
    
    Net loss
    
    $
    (20.1
    )
    
    $
    (13.3
    )
    
    $
    13.3
    
    
    $
    (20.1
    )
 July 29, 2006GuarantorParent
    
    Subsidiaries
    
    Eliminations
    
    Consolidated(Dollars in millions)Net sales
    
    $
    435.6
    
    
    $
    581.5
    
    
    $
    (229.2
    )
    
    $
    787.9Cost of sales (exclusive of depreciation and
amortization shown separately below)
    
    
    250.7
    
    
    
    396.1
    
    
    
    (229.2
    )
    
    
    417.6Gross margin
    
    
    184.9
    
    
    
    185.4
    
    
    
    
    
    
    
    370.3Selling, general and administrative expenses
    
    
    191.4
    
    
    
    185.2
    
    
    
    
    
    
    
    376.6Store pre-opening and closing costs
    
    
    3.6
    
    
    
    4.5
    
    
    
    
    
    
    
    8.1Depreciation and amortization
    
    
    12.2
    
    
    
    11.7
    
    
    
    
    
    
    
    23.9Operating loss
    
    
    (22.3
    )
    
    
    (16.0
    )
    
    
    
    
    
    
    (38.3
    )Interest expense, net
    
    
    3.2
    
    
    
    4.2
    
    
    
    
    
    
    
    7.4Loss before income taxes
    
    
    (25.5
    )
    
    
    (20.2
    )
    
    
    
    
    
    
    (45.7
    )Income tax benefit
    
    
    (9.4
    )
    
    
    (7.5
    )
    
    
    
    
    
    
    (16.9
    )Loss before equity loss &
cumulative effect
    
    
    (16.1
    )
    
    
    (12.7
    )
    
    
    
    
    
    
    (28.8
    )Equity loss from subsidiaries
    
    
    (12.7
    )
    
    
    
    
    
    
    12.7
    
    
    
    Loss before cumulative effect
    
    
    (28.8
    )
    
    
    (12.7
    )
    
    
    12.7
    
    
    
    (28.8
    )Cumulative effect of accounting change, net
of tax
    
    
    1.0
    
    
    
    
    
    
    
    
    
    
    
    1.0Net loss
    
    $
    (27.8
    )
    
    $
    (12.7
    )
    
    $
    12.7
    
    
    $
    (27.8
    )
 11




---



##### Table of Contents



Note 7  Consolidating Financial Statements (Unaudited)  CONTINUED
 Consolidating Statements of Cash Flows
Twenty-Six Weeks Ended August 4, 2007 and July 29, 2006
 August 4, 2007GuarantorParent
    
    Subsidiaries
    
    Eliminations
    
    Consolidated(Dollars in millions)Net cash (used for) provided by operating activities
    
    $
    (32.8
    )
    
    $
    12.5
    
    
    $
    
    
    
    $
    (20.3
    )Net cash flows used for investing activities:Capital expenditures
    
    
    (8.5
    )
    
    
    (13.3
    )
    
    
    
    
    
    
    (21.8
    )Net cash used for investing activities
    
    
    (8.5
    )
    
    
    (13.3
    )
    
    
    
    
    
    
    (21.8
    )Net cash flows provided by financing activities:Net change in revolving credit facility
    
    
    33.7
    
    
    
    
    
    
    
    
    
    
    
    33.7Proceeds from stock-based compensation plans
    
    
    6.6
    
    
    
    
    
    
    
    
    
    
    
    6.6Tax benefits in excess of recognized compensation cost for
stock-based awards
    
    
    1.3
    
    
    
    
    
    
    
    
    
    
    
    1.3Other, net
    
    
    (1.2
    )
    
    
    
    
    
    
    
    
    
    
    (1.2
    )Net cash provided by financing activities
    
    
    40.4
    
    
    
    
    
    
    
    
    
    
    
    40.4Net decrease in cash and cash equivalents
    
    
    (0.9
    )
    
    
    (0.8
    )
    
    
    
    
    
    
    (1.7
    )Cash and cash equivalents at beginning of period
    
    
    (8.8
    )
    
    
    27.2
    
    
    
    
    
    
    
    18.4Cash and cash equivalents at end of period
    
    $
    (9.7
    )
    
    $
    26.4
    
    
    $
    
    
    
    $
    16.7
 July 29, 2006GuarantorParent
    
    Subsidiaries
    
    Eliminations
    
    Consolidated(Dollars in millions)Net cash (used for) provided by operating activities
    
    $
    (19.9
    )
    
    $
    27.0
    
    
    $
    
    
    
    $
    7.1Net cash flows used for investing activities:Capital expenditures
    
    
    (5.9
    )
    
    
    (27.3
    )
    
    
    
    
    
    
    (33.2
    )Net cash used for investing activities
    
    
    (5.9
    )
    
    
    (27.3
    )
    
    
    
    
    
    
    (33.2
    )Net cash flows provided by financing activities:Net change in revolving credit facility
    
    
    21.3
    
    
    
    
    
    
    
    
    
    
    
    21.3Proceeds from stock-based compensation plans
    
    
    1.7
    
    
    
    
    
    
    
    
    
    
    
    1.7Other, net
    
    
    0.5
    
    
    
    
    
    
    
    
    
    
    
    0.5Net cash provided by financing activities
    
    
    23.5
    
    
    
    
    
    
    
    
    
    
    
    23.5Net decrease in cash and cash equivalents
    
    
    (2.3
    )
    
    
    (0.3
    )
    
    
    
    
    
    
    (2.6
    )Cash and cash equivalents at beginning of period
    
    
    15.5
    
    
    
    2.4
    
    
    
    
    
    
    
    17.9Cash and cash equivalents at end of period
    
    $
    13.2
    
    
    $
    2.1
    
    
    $
    
    
    
    $
    15.3
 Note 8  Subsequent Event
  12




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  General Overview
    Executive Overview
    13




---



##### Table of Contents




    
    Net sales increased 7.0% to $388.5 million from $363.2 million last year. Net
sales from stores open one year or more (same-store sales) increased 7.0% versus an 8.4%
same-store sales decrease for the second quarter last year.
    
    Large-format store net sales for the second quarter increased 15.4% to $199.1
million from $172.5 million last year. Same-store sales for large-format stores increased
9.2% for the quarter, versus a same-store sales decrease of 10.5% in the second quarter
last year. Small-format stores net sales for the second quarter of fiscal 2008 were
relatively flat at $189.4 million compared with $190.7 million in the prior year. Our
same-store sales performance for small-format stores increased 4.8% versus a same-store
sales decrease of 6.7% for fiscal 2007.
    
    Our gross margin rate decreased by 170 basis points to 45.7% of net sales
this quarter versus 47.4% for the second quarter last year. The decrease is attributable
to a proactive markdown and clearance pricing strategy for discontinued items.
    
    Our SG&A, excluding those expenses separately identified in the statement of
operations, decreased 310 basis points to 48.4% of net sales from 51.5% of net sales in the
second quarter last year. The improvement in SG&A expenses as a percentage of sales was
due to our continued efforts to control expenses and the benefit of higher sales, offset by
$6 million in incremental advertising expense. Last years second quarter included $4.4
million of compensation expense related to the separation of the former chief executive
officer.
 14




---



##### Table of Contents




    
    Store pre-opening and closing costs increased $0.1 million for the second
quarter of fiscal 2008 to $2.7 million, compared with $2.6 million in the second quarter
last year.
    
    Second quarter net loss was $18.4 million or $0.76 loss per diluted share,
versus net loss of $21.2 million or $0.90 loss per diluted share last year.
 Recent Developments and Business Update
   
    
    Same-store sales improving to positive;
    
    Gross margin rate improvement;
    
    SG&A expenses improving as a percentage of net sales;
    
    Capital spending for the full year of $30 to $35 million; and
    
    Earnings per diluted share in the range of $0.60 to $0.70.
 Results of Operations
  Percentage of Net SalesThirteen
    
    
    Twenty-SixWeeks Ended
    
    
    Weeks EndedAugust 4,
    
    
    July 29,
    
    
    August 4,
    
    
    July 29,2007
    
    
    2006
    
    
    2007
    
    
    2006Net sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Gross margin
    
    
    45.7
    %
    
    
    47.4
    %
    
    
    46.5
    %
    
    
    47.0
    %Selling, general and
administrative expenses
    
    
    48.4
    %
    
    
    51.5
    %
    
    
    46.0
    %
    
    
    47.8
    %Store pre-opening and closing costs
    
    
    0.7
    %
    
    
    0.7
    %
    
    
    0.6
    %
    
    
    1.0
    %Depreciation and amortization
    
    
    3.3
    %
    
    
    3.3
    %
    
    
    3.1
    %
    
    
    3.1
    %Operating loss
    
    
    (6.7
    )%
    
    
    (8.1
    )%
    
    
    (3.2
    )%
    
    
    (4.9
    )%
 Comparison of the Thirteen Weeks Ended August 4, 2007 to July 29, 2006
 Net Sales .
 15




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##### Table of Contents



Gross Margin.
 Selling, general and administrative expenses.
 Store pre-opening and closing costs.
 16




---



##### Table of Contents



Depreciation and amortization.
 Operating profit (loss).
   Interest expense.
 Income taxes.
 Comparison of the Twenty-Six Weeks Ended August 4, 2007 to July 29, 2006
 Net Sales .
   17




---



##### Table of Contents



Gross Margin.
 Selling, general and administrative expenses.
 Store pre-opening and closing costs.
 Depreciation and amortization.
 Operating profit (loss).
  18




---



##### Table of Contents



Interest expense.
 Income taxes.
 Cumulative effect of change in accounting principle. Share-Based Payment,
 Liquidity and Capital Resources
   Dollars in millions
    
    2008
    
    
    2007Net cash (used for) provided by operating activities
    
    $
    (20.3
    )
    
    $
    7.1Net cash used for investing activities
    
    
    (21.8
    )
    
    
    (33.2
    )Net cash provided by financing activities
    
    
    40.4
    
    
    
    23.5Net decrease in cash and cash equivalents
    
    $
    (1.7
    )
    
    $
    (2.6
    )Ending cash and cash equivalents
    
    $
    16.7
    
    
    $
    15.3
 19




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##### Table of Contents



Net cash (used for) provided by operating activities
  Net cash used for investing activities
  Twenty-Six Weeks EndedAugust 4,
    
    
    July 29,Dollars in millions
    
    2007
    
    
    2006Cash
    
    $
    17.7
    
    
    $
    22.3Cash  landlord reimbursed
    
    
    4.1
    
    
    
    10.9Total
    
    $
    21.8
    
    
    $
    33.2
    Net cash provided by financing activities
   20




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##### Table of Contents



Off-Balance Sheet Transactions
  Seasonality and Inflation
   Critical Accounting Policies
  Contractual Obligations
  Cautionary Statement Concerning Forward-Looking Statements
  21




---



##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4. Controls and Procedures
    
 PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  22




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##### Table of Contents



Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 Purchases of Equity Securities by Jo-Ann Stores, Inc.
 Total Number of
    
    Maximum Number ofShares Purchased as
    
    Shares that May YetPart of Publicly
    
    Be Purchased UnderTotal Number
    
    Average Price Paid
    
    Announced Plans or
    
    the Plans orof Shares Purchased
    
    per Share
    
    Programs
    
    ProgramsMay 6  June 2, 2007
    
    
    1,359
    
    
    $
    30.80
    
    
    
    950,130
    
    
    
    1,199,870June 3  July 7, 2007
    
    
    2,104
    
    
    $
    32.86
    
    
    
    952,234
    
    
    
    1,197,766July 8  August 4, 2007
    
    
    9,132
    
    
    $
    24.14
    
    
    
    961,366
    
    
    
    1,188,634Total
    
    
    12,595
    
    
    $
    26.31
    
    
    
    961,366
    
    
    
    1,188,634
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
 a)
    
    An Annual Meeting of Shareholders of the Company was held on June 19,
2007.b)
    
    Ira Gumberg, Patricia Morrison and Darrell Webb were elected to the
Board of Directors for terms that will expire in 2008.c)
    
    The nominees for Directors as listed in the proxy statement were
elected with the following vote:
 Nominee
    
    Votes For
    
    Votes WithheldIra Gumberg
    
    
    20,481,846
    
    
    
    1,468,735Patricia Morrison
    
    
    21,870,449
    
    
    
    80,132Darrell Webb
    
    
    21,656,980
    
    
    
    293,601
 d)
    
    To ratify the selection of Ernst & Young LLP to serve as the Companys
independent registered public accountants for the fiscal year ending February 2, 2008.
 Votes For
    
    Votes Against
    
    Abstentions21,924,887
    
    
    14,806
    
    
    
    10,888
 e)
    
    To approve an amendment to the Companys Amended and Restated Articles of
Incorporation to opt out of the application of the Ohio Control Share Acquisition Law
to acquisitions of the Companys common shares.
 23




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##### Table of Contents



Votes For
    
    Votes Against
    
    Abstentions21,798,903
    
    
    99,141
    
    
    
    52,536
 f)
    
    To approve amendments to the Companys Amended and Restated Code of Regulations
to provide for the phase-in of the annual election of directors.
 Votes For
    
    Votes Against
    
    Abstentions20,188,670
    
    
    1,735,840
    
    
    
    26,070
 g)
    
    To approve amendments to the Companys Amended and Restated Code of Regulations
for the purpose of clarifying that the Company is permitted to issue shares not
evidenced by certificates.
 Votes For
    
    Votes Against
    
    Abstentions21,841,874
    
    
    62,874
    
    
    
    45,832
 
 Item 5. Other Information
  
 Item 6. Exhibits
 Exhibits
 No.
    
    Exhibit Description10.1
    
    
    Split Dollar Insurance Agreement dated August 14, 2007 between the
Company and Darrell Webb (filed as Exhibit 10.1 to the Registrants
Form 8-K filed with the Commission on August 20, 2007 and
incorporated herein by reference)10.2
    
    
    Split Dollar Insurance Agreement dated August 14, 2007 between the
Company and Travis Smith (filed as Exhibit 10.2 to the Registrants
Form 8-K filed with the Commission on August 20, 2007 and
incorporated herein by reference)31.1
    
    
    Section 302 Certification By Chief Executive Officer31.2
    
    
    Section 302 Certification By Chief Financial Officer32.1
    
    
    Section 906 Certification of Principal Executive Officer and
Principal Financial Officer
 24




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##### Table of Contents



SIGNATURES
  JO-ANN STORES, INC.DATE: September 13, 2007
    /s/ Darrell WebbDarrell Webb,President and Chief Executive Officer/s/ James KerrJames Kerr,Executive Vice President and Chief Financial Officer 25