UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10 - Q

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

For the Quarterly Period Ended October 30, 2004

Commission File No. 1-6695

JO-ANN STORES, INC.

Registrant’s telephone number, including area code: (330) 656-2600

     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 x No o

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No o

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: Common Shares, without par value, as of December 3, 2004: 22,762,840.

Jo-Ann Stores, Inc.
Form 10-Q Index
For the Quarter Ended October 30, 2004

PART I. FINANCIAL INFORMATION

Jo-Ann Stores, Inc.

See notes to unaudited consolidated financial statements

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Jo-Ann Stores, Inc.

See notes to unaudited consolidated financial statements

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Jo-Ann Stores, Inc.

See notes to unaudited consolidated financial statements

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Notes to Consolidated Financial Statements (Unaudited)
Jo-Ann Stores, Inc.

Note 1 - Basis of Presentation

     Jo-Ann Stores, Inc. (the “Company”), an Ohio corporation, is a fabric and craft retailer operating 858 retail stores in 47 states at October 30, 2004. The 744 traditional stores and 114 superstores feature a variety of competitively priced merchandise used in sewing, crafting and home decorating projects, including fabrics, notions, crafts, frames, scrapbooking material, artificial and dried flowers, home accents, finished seasonal and home décor merchandise.

     The Company’s fiscal year ends on the Saturday closest to January 31. Fiscal years consist of 52 weeks, unless noted otherwise. The fiscal year refers to the year in which the period ends (e.g., fiscal 2005 refers to the year ended January 29, 2005).

     The consolidated interim financial statements include the accounts of the Company and its subsidiaries and have been prepared without audit, pursuant to the rules of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures herein are adequate to make the information not misleading. Certain amounts in the fiscal 2004 year-end and interim financial statements have been reclassified in order to conform to the current year presentation. The financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2004.

     Typical of most retail companies, the Company’s business is highly seasonal with the majority of revenues and operating profits generated in the second half of the fiscal year. Accordingly, earnings or losses for a particular interim period are not indicative of full year results. Due to the seasonal nature of the Company’s business, a comparable balance sheet as of November 1, 2003 has been provided. In the opinion of management, the consolidated financial statements contain all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the financial position and results of operations for the interim periods presented.

Note 2 - Debt Refinancing

     On February 26, 2004, the Company completed the placement of $100 million of 7.5% senior subordinated notes due 2012. The 7.5% senior subordinated notes are fully and unconditionally guaranteed by each of the Company’s wholly-owned subsidiaries. Net proceeds from the offering of $97.4 million were used to repurchase $39.2 million of 10 3/8% senior subordinated notes due 2007 that were tendered as part of the refinancing, as well as the remaining $25.2 million in 10 3/8% senior subordinated notes that remained outstanding on May 1, 2004, the date when their call premium was reduced, and for general corporate purposes. As a result of the repurchase, the Company incurred a $4.2 million charge primarily for the premium paid to repurchase the 10 3/8% senior subordinated notes and to write-off the remaining deferred debt costs.

     On April 16, 2004, the Company amended and extended the expiration date of its senior credit facility originally entered into in April 2001 and led by Fleet Retail Group, Inc. The senior credit facility, as amended, is a $350.0 million revolver that expires April 30, 2009. The prior credit facility provided for a $325.0 million revolver and a $40.0 million term loan, and would have expired on April 30, 2005. The amended credit facility is secured by a first priority perfected security interest in inventory, accounts

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receivable, property and other assets and is fully and unconditionally guaranteed by each of the Company’s wholly-owned subsidiaries. Interest on borrowings under the amended credit facility is calculated at the bank’s base rate or London Interbank Offered Rate (“LIBOR’’) plus 1.25% to 2.00%, depending on the level of excess availability (as defined in the amended credit facility) that is maintained. At October 30, 2004, interest on borrowings under the amended credit facility was calculated at LIBOR plus 1.25%. The credit facility, as amended, contains a sub-limit for letters of credit of $200.0 million.

Note 3 - Earnings Per Share

     Basic earnings per common share are computed by dividing net income by the weighted average number of shares outstanding during the period. Diluted earnings per share include the effect of the assumed exercise of dilutive stock awards under the treasury stock method.

     The following table presents information necessary to calculate basic and diluted earnings per common share for the periods presented (shares in thousands).

     Not included in the computation of diluted earnings per share were certain stock options that would have been anti-dilutive to the earnings per share calculation. For the third quarter of fiscal 2005 and fiscal 2004, 100,733 and 62,450 stock awards, respectively, were excluded. For the fiscal 2005 and 2004 year-to-date periods, 52,755 and 208,356 stock awards, respectively, were excluded.

Note 4 - Store Closing Charges

     The Company is pursuing a growth strategy that is driven by the replacement of its traditional stores with superstores. In addition, the Company continually reviews the productivity of its store base, actively manages its real estate to preserve maximum flexibility in lease terms, and closes locations that do not meet certain financial performance thresholds. Through the first three quarters of the fiscal year, the Company opened 29 new superstores and two traditional stores, and it closed 65 traditional stores.

     The charges to the statement of operations for the year-to-date period ending October 30, 2004 related to store closings and a roll-forward of the store closing reserve balances from January 31, 2004 is summarized in the following table.

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     Store closing costs, as well as the pre-opening costs of new store activity, are reported in the statement of operations in the line item “Store pre-opening and closing costs.”

Note 5 - Fair Value of Derivative Financial Instruments

     The Company is subject to risk resulting from interest rate fluctuations, as interest on the Company’s credit facility is based on variable rates. The Company’s objective in managing its interest rate exposure is to limit the impact of interest rate changes on earnings and cash flows. Interest rate swaps are primarily utilized to achieve this objective, effectively converting a portion of its variable-rate exposures to fixed interest rates. The Company does not enter into financial instruments for trading purposes.

     At October 30, 2004, the Company had a $40.0 million interest rate swap with a fixed LIBOR rate of 6.72% that expires on April 30, 2005. The interest rate swap agreement requires the Company to pay a fixed interest rate while receiving a floating interest rate based on LIBOR. In accordance with Statement of Financial Accounting Standard (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended, the Company has reviewed and designated its interest rate swap agreement as a cash flow hedge and recognizes the fair value of its interest rate swap agreement on the balance sheet. Changes in the fair value of this agreement are recorded in other comprehensive income and reclassified into earnings as the underlying hedged item affects earnings.

     Other comprehensive income includes the effects of derivative transactions accounted for under SFAS No. 133, net of related tax. Comprehensive income consists of the following:

Note 6 - Shareholders’ Equity

     The Company has various stock-based compensation plans that it utilizes as long-term compensation for its Board of Directors, executive officers, senior management and other key employees. The Company issues stock under these various stock-award compensation plans and uses treasury shares to fund the Company’s match under the 401(k) savings plan.

     In fiscal 2005, the Company implemented changes in its long-term compensation for employees, which it believes will help the Company continue to attract and retain the best employees, and better align employee interests with those of its shareholders. Annual grants to employees are now being made in restricted stock awards instead of stock options. The award of restricted stock offers employees the opportunity to earn shares of the Company’s stock over time, rather than options that provide employees the right to purchase stock at a set price. Stock options continue to be awarded to new employees and employees who are promoted into certain management positions.

     Early this year, the Compensation Committee of the Board of Directors approved an annual base award of restricted stock to certain of the Company’s employees that serves as both a retention vehicle and is coupled with performance awards. The base and performance awards vest 50% at the end of three years, with the remaining 50% vesting at the end of the fourth year. The base award consisted of approximately

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187,000 restricted shares. The performance-based award provides the potential to receive up to three-times that amount in additional shares. The number of performance award shares ultimately received, if any, will depend on achieving certain net income performance criteria that are measured at the end of the third year. The expense recognition for the value of restricted shares is based on the vesting period and an estimate regarding certain performance levels over the three-year measurement period.

     During the first three quarters of fiscal 2005, shares outstanding increased by 721,000 as follows:

     As of October 30, 2004, the Company had 2,294,367 stock options outstanding and 358,800 restricted stock awards issued and not yet vested, none of which are included in shares outstanding.

Note 7 - Recent Accounting Pronouncements

     FASB Interpretation No. 46, Consolidation of Variable Interest Entities

     In January 2003, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities.” FIN 46 clarifies the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” for certain entities which do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties or in which equity investors do not have the characteristics of a controlling financial interest (“variable interest entities”). Variable interest entities will be required to be consolidated by their primary beneficiary. The primary beneficiary of a variable interest entity is determined to be the party that absorbs a majority of the entity’s expected losses, receives a majority of its expected returns, or both, as a result of holding variable interests, which are ownership, contractual, or other pecuniary interests in an entity. The Company adopted FIN 46 during its fiscal 2005 first quarter. The adoption of FIN 46 had no impact on the Company’s consolidated financial statements.

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Note 8 - Consolidating Financial Statements (Unaudited)

     The Company’s 7.5% senior subordinated notes and credit facility are fully and unconditionally guaranteed, on a joint and several basis, by the wholly-owned subsidiaries of the Company. The senior subordinated notes are subordinated to the Company’s credit facility. Summarized consolidating financial information of the Company (excluding its subsidiaries) and the guarantor subsidiaries as of October 30, 2004 and January 31, 2004 and for the thirteen and thirty-nine weeks ended October 30, 2004 and November 1, 2003 are as follows:

Consolidating Balance Sheets
October 30, 2004

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Note 8 - Consolidating Financial Statements (Unaudited) – CONTINUED

Consolidating Balance Sheets
January 31, 2004

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Note 8 - Consolidating Financial Statements (Unaudited) – CONTINUED

Consolidating Statements of Operations
Thirteen Weeks Ended October 30, 2004 and November 1, 2003

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Note 8 - Consolidating Financial Statements (Unaudited) – CONTINUED

Consolidating Statements of Operations
Thirty-Nine Weeks Ended October 30, 2004 and November 1, 2003

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Note 8 - Consolidating Financial Statements (Unaudited) – CONTINUED

Consolidating Statements of Cash Flows
Thirty-Nine Weeks Ended October 30, 2004 and November 1, 2003

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

General Overview

     Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the accompanying unaudited consolidated financial statements and notes thereto and the Company’s Form 10-K Annual Report to Shareholders for the fiscal year ended January 31, 2004. The financial information presented for the third quarter and year-to-date of fiscal 2004 has been reclassified for certain amounts to conform to the fiscal 2005 presentation.

     We are the nation’s largest specialty retailer of fabrics and one of the largest specialty retailers of crafts, serving customers in their pursuit of apparel and craft sewing, crafting, home decorating and other creative endeavors. Our retail stores (operating as Jo-Ann Fabrics and Crafts traditional stores and Jo-Ann superstores) feature a variety of competitively priced merchandise used in sewing, crafting and home decorating projects, including fabrics, notions, crafts, frames, scrapbooking material, artificial and dried flowers, home accents, finished seasonal and home décor merchandise.

     Our strategy is to grow by replacing many of our existing traditional stores with superstores over time. We believe that our prototype 35,000 square foot superstore gives us a competitive advantage in the industry. Our superstores provide a unique shopping experience by offering a full creative selection—sewing, crafting, framing, seasonal, floral and home décor accessories—all under one roof. On average we close approximately 1.2 nearby traditional stores for every superstore that we open. In markets where we have opened multiple superstores, we have been able to grow our revenues significantly and, we believe, expand the market size and our share of the market.

     As of October 30, 2004, we operated 858 stores in 47 states (744 traditional stores and 114 superstores). Our traditional stores offer a complete selection of fabric and a convenience assortment of crafts, floral, finished seasonal and home décor merchandise. Our traditional stores average approximately 14,500 square feet and generated net sales per store of approximately $1.5 million in fiscal 2004. Our superstores offer an expanded and more comprehensive product assortment than our traditional stores. Our superstores also offer custom framing and educational programs that our traditional stores do not. Our superstores opened prior to fiscal 2003 average approximately 45,000 square feet and generated net sales per store of approximately $6.0 million in fiscal 2004. Our current superstore prototype averages approximately 35,000 square feet. We opened 29 of these new prototype superstores in the first three quarters of fiscal 2005 and at the end of the third quarter, we had 43 prototype superstores in operation.

Executive Overview

     The third quarter was a challenging quarter compared with the prior year, although through the first three quarters of fiscal 2005, we are slightly ahead of our fiscal 2004 earnings performance. We continue to execute well on our strategic initiatives, opening 18 of our new 35,000 square foot prototype superstores during the third quarter, and improving the profitability of our store base, particularly our superstores. All of our fiscal 2005 planned openings were completed prior to the end of the third quarter.

     Our financial performance for the prior year (fiscal 2004) third quarter benefited from a 60th anniversary promotion in August of 2003 that was not repeated this year, resulting in a difficult sales comparison in fiscal 2005. Our third-quarter financial performance was further impacted by soft sales trends in September and October. We believe the sales trends for the quarter, driven by a reduction in customer traffic, were primarily the result of a reduction in advertising spending during the quarter. Our advertising spending during the third quarter decreased approximately 11% year over year. Highlights of the third quarter are as follows:

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•		Net sales increased 0.2% to $448.3 million. Same-store sales decreased 0.9% versus a 4.2% same-store sales increase for the third quarter last year.
•		Our gross margin rate declined by 30 basis points, to 47.8% of net sales this quarter versus 48.1% for the third quarter last year. Our gross margin rate was negatively impacted by a pre-tax charge of $1.7 million, or 40 basis points, that we recorded in connection with an audit we are currently conducting with the U.S. Customs Service. This charge resulted from a determination that we were deficient in assessing anti-dumping duty on certain candles we imported from China during a five year period from fiscal 2000 to fiscal 2004, due to items being inaccurately classified at the time of import. Excluding this item, our gross margin rate improved 10 basis points for the quarter. Year-to-date, our gross margin rate improved 50 basis points.
•		Our selling, general and administrative expenses (“SG&A”), excluding those expenses separately identified in the statement of operations, increased 70 basis points from 39.6% of sales in the third quarter last year to 40.3% this year. While costs were relatively well-controlled, the lack of sales growth in the quarter did not allow us to leverage expenses effectively. On a dollar basis, SG&A expenses increased approximately 2.0% in the third quarter, with decreases in advertising expense offset by increased freight handling and storage costs in our distribution center network.
•		Store pre-opening and closing costs increased $3.1 million for the third quarter to $5.5 million, reflecting the increased level of real estate activity year over year. As a percentage of sales, store pre-opening and closing costs increased to 1.2% of sales from 0.5% in the prior year third quarter.
•		Third quarter net income was $0.32 per diluted share, versus $0.54 per diluted share last year.

Results of Operations

          The following table sets forth our results of operations through operating profit, expressed as a percentage of net sales. The following discussion should be read in conjunction with our consolidated financial statements and related notes thereto.