Hills Stores Co/DE – ‘10-K405’ for 2/1/97

As of:  Friday, 4/25/97   ·   For:  2/1/97   ·   Accession #:  786877-97-11   ·   File #:  1-09505

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Annual Report — Reg. S-K – Item 405   —   Form 10-K
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Document/Exhibit                   Description                      Pages   Size 

 1: 10-K405     Annual Report -- Reg. S-K - Item 405                  80    383K 
 2: EX-27       Financial Data Schedule (Pre-XBRL)                     1      5K 

10-K405   —   Annual Report — Reg. S-K – Item 405
Document Table of Contents

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                                                                   UNITED STATES
                                SECURITIES AND EXCHANGE COMMISSION
                                                          Washington, D.C. 20549

                                                                       FORM 10-K

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

For the fiscal year ended February 1, 1997                    

                                                                              or

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

For the transition period from ___________ to ____________    

                                                   Commission file number 1-9505

                                                            HILLS STORES COMPANY
                                                            --------------------
                          (Exact name of registrant as specified in its charter)

                         DELAWARE                                     31-1153510
                   --------                                       ----------
(State or other jurisdiction of                       (I.R.S. Employer
   incorporation or organization)                      Identification No.)

15 DAN ROAD, CANTON, MASSACHUSETTS                         02021      
----------------------------------                         -----      
(Address of principal executive offices)                 (Zip Code)   

Registrant's telephone number, including area code:  (617) 821-1000             
                                                                   -------------
               Securities registered pursuant to Section 12(b) of the Act:

                                                        [Enlarge/Download Table]
     Title of each class             Name of each exchange on which registered                       
     -------------------             -----------------------------------------                       
                                                                                                     
Common Stock, Par Value $0.01 per share          New York Stock Exchange                             
                                                                                Boston Stock Exchange

12 1/2% Senior Notes due 2003, Series B          New York Stock Exchange                             

Series A Convertible Preferred Stock,            New York Stock Exchange                             
Par Value $0.10 per share                                                                            

               Securities registered pursuant to Section 12(g) of the Act:

                                                                [Download Table]

     Title of each class             Name of each exchange on which registered
     -------------------             -----------------------------------------
                                                                              
Series 1993 Warrants to                          Boston Stock Exchange        
Purchase Common Stock                                                         


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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 require-
ments for the past 90 days.                                                     

                                                         Yes      X         No
                                                         ----------- -----------

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405  
or Regulation S-K is not contained herein, and will not be contained, to the    
best of the registrant's knowledge, in definitive proxy or information state-   
ments incorporated by reference in Part III of this Form 10-K or any amendment  
to this Form 10-K.  [ X ]                                                       

The aggregate market value of the voting stock held by nonaffiliates of the     
Registrant as of March 31, 1997 was $42,140,548 with respect to the Common      
Stock and $4,669,200 with respect to the Series A Convertible Preferred Stock,  
which has coextensive voting rights with the Common Stock.                      

 APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
                                PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Indicate by check mark whether the registrant has filed all documents and       
reports required to be filed by Section 12, 13 or 15(d) of the Securities       
Exchange Act of 1934 subsequent to the distribution of securities under a plan  
confirmed by a court.                                                           

                                                         Yes      X         No
                                                         ----------- -----------

The number of shares of Common Stock outstanding as of March 31, 1997 was       
10,280,547.                                                                     

                                             DOCUMENTS INCORPORATED BY REFERENCE

Certain portions of Part III of this report on Form 10-K are incorporated by    
reference from the proxy statement dated May 5, 1997 for the annual meeting of  
stockholders to be held on June 17, 1997.                                       

                                                                 2

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                                                        [Enlarge/Download Table]
                                                            TABLE OF CONTENTS            

                                                                                 PART I  
                                                                                         
ITEM 1.  Business ....................................................   4               
ITEM 2.  Properties ..................................................   7               
ITEM 3.  Legal Proceedings ...........................................   7               
ITEM 4.  Submission of Matters to a Vote of Security Holders .........   8               
         Executive Officers of the Registrant ........................   8               

                                                                                 PART II 

ITEM 5.  Market for the Registrant's Common Equity and Related                           
         Stockholder Matters .........................................  10               
ITEM 6.  Selected Financial Data .....................................  11               
ITEM 7.  Management's Discussion and Analysis of Financial                               
                Condition and Results of Operation ..........................  12        
ITEM 8.  Financial Statements and Supplementary Data .................  17               
ITEM 9.  Changes in and Disagreements with Accountants on                                
         Accounting and Financial Disclosure .........................  17               

                                                                                 PART III

ITEM 10. Directors and Executive Officers of the Registrant ..........  18               
ITEM 11. Executive Compensation ......................................  18               
ITEM 12. Security Ownership of Certain Beneficial Owners and                             
         Management ..................................................  18               
ITEM 13. Certain Relationships and Related Transactions ..............  18               

                                                                                 PART IV 

ITEM 14. Exhibits, Financial Statement Schedules, and Reports                            
         on Form 8-K .................................................  19               


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                                                                          PART I

ITEM 1.    BUSINESS                                                             
--------                                                  

Hills Stores Company (the "Company" or "Hills") operates, through its wholly-   
owned subsidiary Hills Department Store Company ("HDSC"), a chain of discount   
department stores under the trade name of Hills Department Stores.  These       
stores are located primarily in the Great Lakes and Ohio Valley regions of the  
United States.  One new store was opened in 1996.  At fiscal year-end, the      
Company operated 165 stores in twelve states.  Shortly before year-end, Hills   
announced plans to close 10 stores during the first quarter of fiscal 1997,     
reducing the chain to 155 stores.                                               

The Company is a leading regional discount retailer offering a broad range of   
brand name and other first quality general merchandise.  Management's business  
strategy stresses every day low prices, depth and breadth of products in        
selected merchandise categories, remodeled facilities and strict operating      
controls.                                                                       

Hills stores are located in cities and towns of varying sizes, with some of the 
larger cities being Pittsburgh, Buffalo and Cleveland.  The Company concentrates
its stores in selected markets within a geographic region in order to reinforce 
marketing programs, enhance name recognition, achieve market penetration, and   
gain economies of scale in management, advertising and distribution.            

Since 1991, the Company has remodeled all of its stores and is continuing the   
program on an ongoing basis.  The remodeling program is designed to make and    
keep the Company's stores more visually appealing to customers and to take full 
advantage of the most profitable merchandise categories.                        

Store managers report to district managers, who report to regional vice         
presidents.  The district managers and regional vice presidents visit their     
stores on a regular basis to oversee operations.  Store managers and associates 
are empowered to respond directly to the needs of the customers.  The Company   
maintains a stores headquarters office strategically located near Pittsburgh.   

The Company believes that its customer base consists primarily of female        
customers shopping for family needs.  Accordingly, Hills emphasizes merchandise 
in its softlines departments and selected hardlines departments, such as toys   
and seasonal merchandise, which appeal to Hills' targeted female customer.  The 
Company considers the breadth and depth of its merchandise in these departments 
to be an important factor in attracting and retaining customers, and accordingly
emphasizes the availability of a wide selection of sizes, styles and colors of  
items in these departments.                                                     

Hills carries a diverse line of products, all first quality, including a full   
line of clothing for women, men and children, toys, health and beauty aids,     
small household appliances and housewares, home entertainment equipment,        
hardware, stationery and greeting cards, automotive supplies, lawn and garden   
products and jewelry.  Hills licenses its footwear departments to a nationally  
known footwear retailer.  Hills offers a broad range of brand name apparel and  
other products for the family and supplements brand name goods with             
manufacturers' private brands (brands made by major manufacturers but not       
nationally advertised) and Hills' private label program (approximately 5% of    
total purchases).  The Company accepts all major consumer credit cards and      
offers a year-round layaway program.                                            

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Imported goods are purchased by Hills through its importing subsidiary and from 
other sources.  In fiscal year 1996, the subsidiary, C.R.H. International, Inc. 
("CRH"), imported products that accounted for approximately 12% of total        
purchases of the Hills Department Stores chain.                                 

Hills uses a centralized buying organization staffed by merchandise managers,   
buyers and a support staff organized along the Company's product lines.  Most   
of Hills' buying organization is located at its Canton, Massachusetts offices.  
Hills also maintains a fashion buying office in the garment district of New     
York City to purchase and merchandise women's fashion and basic apparel.        

The Company's central distribution facilities are located in Columbus, Ohio.    
These facilities provide central stocking of merchandise and flow-through       
allocation of merchandise for delivery to the stores.  During fiscal year 1996, 
the Company shipped approximately 60% of the dollar value of its merchandise    
receipts through these distribution facilities, which consisted primarily of    
items handled in casepack quantities and imports.  The balance of the Company's 
merchandise receipts, consisting primarily of apparel and less-than casepack    
quantity items, were delivered to stores direct from vendors or through a       
variety of distributor, jobber or in-store service vendors.  In 1997, the       
Company plans to open an interim processing center, primarily focused on        
apparel, to pre-process merchandise, thereby reducing in-store handling costs   
and consolidating and reducing freight costs.  Hills is presently conducting a  
study directed towards opening a second full service distribution facility, not 
later than 1999, which will include breakpack capabilities to enable less-than  
casepack quantity deliveries to stores.  The second distribution center         
initiative may involve an interim facility in 1998.                             

The Company relies extensively on computerized information systems.  Hills      
operates its principal information technology center at its corporate offices   
in Canton, Massachusetts.  All Hills stores, distribution centers and           
administrative locations are tied to the information center's computer by means 
of an on-line data communications network.                                      

Hills' merchandising systems are designed to integrate the key retailing        
functions of seasonal merchandise planning and allocation, purchase order       
management, merchandise distribution, receiving, sales capture, inventory       
control, open-to-buy and replenishment.  Hills maintains electronic data inter- 
change (EDI) connections through third party services to a large number of its  
vendors.  Unit sales data are recorded via the point-of-sale register systems in
each store.  The point-of-sale registers and bar code scanners in all stores    
significantly reduce labor intensive price marking and price changes.  Each     
Hills buyer has on-line access to information via a workstation located in the  
buyer's office.  Sales performance reports are received both daily and weekly   
and assist management in making related merchandising decisions.  The           
merchandising systems allow Hills to distribute specific categories and styles  
of merchandise to each store based upon the sales patterns of the stores.  Store
operations are supported by a number of additional on-line systems including    
electronic correspondence among all locations, payroll and labor scheduling     
systems, price change management and layaway control.                           

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Hills has embarked on a project designed to replace most of its existing        
systems and enhance processes to meet the demands of retailing in the year 2000 
and beyond.  The Company will update its hardware and applications and          
reengineer its business processes in order to take advantage of new technology. 
Hills anticipates substantially completing this project prior to the 1998       
Christmas selling season.                                                       

The discount general merchandise retail business is highly competitive.  The    
Company considers merchandise price, presentation, selection and quality, store 
location, and the expertise of its buying, selling and support management and   
associates to be the most significant competitive factors.  Hills' principal    
competitors are regional and national discount department store chains, some of 
which, such as Wal-Mart, Kmart, and Target, as well as specialty retailers, such
as Toys "R" Us, are larger and have more capital than Hills.  Management        
believes that the Company's store remodeling program and its strength in certain
merchandising lines allow it to defend its competitive position, even with      
Wal-Mart's presence in most of the Company's markets.                           

The "Hills" name is a registered service mark.  The Company considers this mark 
and the associated name recognition to be valuable to its business.  The        
Company has additional trademarks, trade names and service marks, many of which,
such as "American Spirit," are used in connection with the Company's private    
label program.  Although the Company considers these additional marks to be     
valuable in the aggregate, individually, they have varying degrees of importance
to the Company's business.                                                      

As of March 31, 1997, Hills employed approximately 16,200 persons, including    
approximately 9,200 full-time and 7,000 part-time employees.  None of the       
Company's employees are represented by a labor union.  The number of employees  
varies during the year, reaching a peak during the Christmas selling season.    
The Company considers its relations with its employees to be good.              

During the 1996 fiscal year, the Company rebuilt its senior management team with
the addition of a new president and chief executive officer, executive vice     
president-chief financial officer, executive vice president-store and distri-   
bution operations, corporate vice president-human resources, vice president-    
information technology and services, vice president-controller, vice president- 
treasurer, and a regional vice president.  In addition, several other vice      
president positions were filled by internal promotions and reorganizations,     
including a regional vice president, a vice president-merchandise presentation, 
and two merchandise vice presidents.  The Company has also recently hired a new 
vice president-logistics.  As of the date of this Report, the Company has       
vacancies in the positions of executive vice president-chief merchandising      
officer and vice president-marketing.  The Company also strengthened its balance
sheet by refinancing its long-term senior debt, deferring maturities to 2003,   
and obtaining a replacement $300 million revolving credit facility with greater 
financing flexibility.                                                          

Certain statements contained in this document are foward-looking statements that
involve a number of risks and uncertainties.  Among the factors that could cause
actual results to differ materially are the following:  general economic condi- 
tions, consumer demand, consumer preferences and weather patterns in the Great  
Lakes and Ohio Valley regions of the United States; competitive factors,        
including continuing pressure from pricing and promotional activities of major  
competitors; impact of excess retail capacity and the availability of desirable 
store locations on suitable terms, the availability, selection and purchasing of
attractive merchandise on favorable terms; import risks, including potential    
disruptions and duties, tariffs and quotas on imported merchandise; acquisition 
and divestment activities; and other factors that may be described in this      
document.                                                                       
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ITEM 2.    PROPERTIES                                                           
----------                                  

At the end of fiscal 1996, Hills operated 165 stores (164 stores leased and one 
owned) in the states of Pennsylvania, Ohio, New York, West Virginia, Indiana,   
Virginia, Tennessee, Illinois, Kentucky, Maryland, Massachusetts and North      
Carolina.  The stores are located in regional and other enclosed shopping malls,
strip shopping centers and as free standing units.  In early 1997, the Company  
closed 10 stores, located in Kentucky (2), North Carolina (4), Virginia (3) and 
Ohio (1).  The Company leases nearly all of its stores under long-term leases.  
In addition, Hills leases buying and administrative offices, including the      
Company's executive, buying and administrative office in Canton, Massachusetts, 
the stores headquarters in Aliquippa, Pennsylvania, and a buying office in New  
York, New York, and its central distribution facilities in Columbus, Ohio.      

The typical store lease has an initial term of between 20 and 30 years, with    
four to seven renewal periods of five years each, exercisable at the Company's  
option.  Substantially all of the Company's leases provide for a minimum annual 
rent that is constant or adjusts to fixed levels through the lease term,        
including renewal periods.  Most leases provide for additional rent based on a  
percentage of sales to be paid when designated sales levels are achieved.  See  
Note 7 of the Notes to Consolidated Financial Statements for additional         
information about the Company's long-term leases.                               

ITEM 3.    LEGAL PROCEEDINGS                                                    
-----------------                                         

In September 1995, the Company and HDSC filed a suit in the Court of Chancery   
of the State of Delaware against the former members of the Board of Directors   
(the "Former Directors") of the Company.  That action seeks, among other things,
recovery of damages caused by the breach by the Former Directors of their       
fiduciary duties to shareholders arising from the refusal of the Former         
Directors to approve the change in control which took place on July 5, 1995 (the
"1995 Change of Control") following the election of seven replacement directors 
by the shareholders of the Company.  In October 1995, the defendents filed a    
motion to dismiss the suit.  In February 1996, the court granted a motion of the
Former Directors to stay discovery pending the outcome of their motion to       
dismiss.  In March 1997, the court denied the Former Directors' motion to       
dismiss.                                                                        

The Company and HDSC also filed suit against Smith Barney, Inc. in September    
1995 in the New York State Supreme Court for the County of New York, seeking    
damages for losses, as stated in the complaint, caused by the gross negligence  
of this firm in rendering financial advice to the Former Directors of the       
Company in breach of their fiduciary duties.  In April 1996, the court granted  
Smith Barney's motion to dismiss this suit.  In May 1996, the Company filed in  
the Appellate Division a Notice of Appeal of the trial court's dismissal of the 
suit.  The appeal is presently pending.                                         

In August 1995, in the Court of Chancery of the State of Delaware, three share- 
holders of the Company, Gayle Dolowich, Ivan J. Dolowich and Joseph Weiss, filed
a class action lawsuit against the seven new directors of the Company elected at
the 1995 annual meeting, Dickstein Partners Inc. ("Dickstein Partners") and the 
Company.  In November 1995, the plaintiffs amended their complaint to include a 
shareholder's derivative cause of action against the Former Directors for breach

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ITEM 3.    LEGAL PROCEEDINGS (CONTINUED)                                        
-----------------------------                           

of their fiduciary duties to the Company and its shareholders.  In the amended  
complaint, the plaintiffs claim (under Section 225 of the Delaware Corporation  
Code) that in connection with Dickstein Partners' effort to solicit proxies in  
support of the election of its nominees for directors of the Company, Dickstein 
Partners issued a number of false and misleading statements regarding its offer 
to acquire all of the Company's shares it did not already own.  On the Section  
225 claim, the plaintiffs seek an order nullifying the election of directors and
declaring there has been no "change of control" of the Company.  The derivative 
cause of action seeks damages against the Former Directors.  In January 1996,   
in the same Delaware Chancery Court, another shareholder, Peter M. Fusco, filed 
a substantially similar class action and shareholder derivative suit against the
parties named in the Dolowich suit.  The Former Directors filed a motion to     
dismiss the Dolowich and Fusco suits, and that motion was argued in October 1996
and is presently pending.                                                       

The Company is involved in various other suits and claims in the ordinary course
of business.                                                                    

Management does not believe that the disposition of such suits and claims will  
have a material adverse effect upon the continuing operations and financial     
position of the Company.                                                        

ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                   
---------------------------------------------------         

NONE                                                                            

EXECUTIVE OFFICERS OF THE REGISTRANT                                            
------------------------------------                                            
(Furnished pursuant to General Instruction G of Form 10-K)                      

The executive officers of the Company currently are:                            

Gregory K. Raven, 47, was elected President and Chief Executive Officer and a   
Director of Hills on February 7, 1996.  He was executive vice president,        
finance and chief financial officer of Revco D.S., Inc., from September 1988    
until August 1995.  From 1977 until he joined Revco in 1987, Mr. Raven served in
various financial management capacities with The Great Atlantic & Pacific Tea   
Company, Inc.                                                                   

Michael R. Hamilton, 51, joined the Company as Executive Vice President-        
Operations on October 21, 1996.  Prior to joining Hills, Mr. Hamilton had been  
executive vice president of store operations for Venture Stores, Inc.  He joined
Venture in 1973 and at the date of his departure from Venture he served as      
executive vice president of stores, asset protection and leased businesses.     

C. Scott Litten, 47, was elected Executive Vice President and Chief Financial   
Officer on April 23, 1996.  Previously, he served as senior vice president-     
finance of Hechinger Stores Company from May 1994 to September 1995.  He also   
held positions as chief financial officer at The Butler Group, Inc. (January    
1993 to May 1994) and senior vice president-finance of Family Dollar Stores,    
Inc. (August 1989 to December 1991).  He is a certified public accountant.      

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Kim D. Ahlholm, 40, became Vice President-Financial Services in September 1996. 
She had been Vice President-Controller since March 1994, Treasurer from June    
1993 to March 1994, Assistant Controller from July 1990 to June 1993 and        
Director-Audit from April 1989 to June 1990.  She is a certified public         
accountant.                                                                     

John M. Doyle, 37, joined the Company as Vice President-Treasurer on            
September 23, 1996.  He had been vice president and treasurer of Carson Pirie   
Scott & Co. from 1995 to September 1996, and held various financial management  
positions since joining that company in 1991 and at Marshall Field's from 1985  
to 1990.  Mr. Doyle is a certified public accountant.                           

William K. Friend, 50, is and since December 1985 has been Vice President-      
Secretary and Corporate Counsel for Hills.  Prior to joining Hills, Mr. Friend  
held senior management positions with SCOA Industries Inc. and Shoe Corporation 
of America, Hills' predecessor companies.                                       

Reginald B. Garrett, 49, became Corporate Vice President-Human Resources on     
December 1, 1996.  Prior to that date, he had been vice president-human         
resources for Montgomery Ward & Company, Inc., since 1993.  In addition,        
Mr. Garrett held various human resource management positions with Wal-Mart      
Stores, Inc. (1991 to 1993), Zale Corporation, Cook United, Inc., Cole National 
Corporation, and Sherwin-Williams Company.                                      

Wollaston B. Morin, 54, became Vice President-Information, Technology & Services
in February 1997.  He joined Hills on October 23, 1996 as Vice President-       
Information Systems.  He served as vice president of information services for   
Stride Rite Corporation from July 1993 to October 1996 and for Marshalls from   
1989 to June 1993.  Previously, he held other senior management MIS positions   
with Zayre, Allied Stores, and Talbot's.                                        

Brian J. Sheehan, 41, joined the Company as Vice President-Controller on        
September 5, 1996.  Prior to joining Hills, Mr. Sheehan was vice president and  
chief financial officer of Healthcare Direct Inc., since November 1995.  He     
served as assistant corporate controller of Caldor Corporation from 1990 to     
1995.                                                                           

Officers are elected to serve until their successors are elected and qualified. 

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PART II 

ITEM 5.    MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER    
MATTERS                                                   
               -----------------------------------------------------------------

(a)  The principal market on which the Company's Common Stock is traded is the  
New York Stock Exchange.  The following table sets forth the range of high and  
low prices of the Company's Common Stock as reported on the New York Stock      
Exchange during each quarter of fiscal years 1995 and 1996.                     

                                                                [Download Table]
COMMON STOCK PRICES                                                             
-------------------                                                             

     Quarter Ended                 High Price            Low Price              
                                                                                
     February 1, 1997               $ 7.750               $ 2.750               
     November 2, 1996               $ 8.875               $ 6.750               
     August 3, 1996                 $12.875               $ 6.875               
     May 4, 1996                    $13.750               $ 7.875               

     February 3, 1996               $12.000               $ 7.125               
     October 28, 1995               $18.125               $ 8.125               
     July 29, 1995                  $24.875               $18.125               
     April 29, 1995                 $22.750               $18.250               

<FN>                                                                            
(b)  As of March 31, 1997, there were outstanding 10,280,547 shares of Common   
Stock held by 2,234 holders of record, and 933,840 shares of Series A Conver-   
tible Preferred Stock held by 2,047 holders of record.                          

(c)  During the quarter ended February 1, 1997, the Company issued 43,279 shares
of Common Stock (the "Common Shares"), upon the conversion of 43,279 shares of  
Series A Convertible Preferred Stock (the "Series A Preferred Shares").  The    
Series A Preferred Shares were issued pursuant to the exemption from registra-  
tion set forth in Section 1145(a) of the Federal Bankruptcy Code, and the Common
Shares were issued pursuant to the exempton from registration set forth in      
Section 3(a)(9) of the Securities Act of 1933, as amended.                      

(d)  The Company has not paid a cash dividend on its Common Stock in the last   
two fiscal years.  The Loan and Security Agreement dated as of September 30,    
1996, as amended, between HDSC and CRH as the Borrowers, BankAmerica Business   
Credit, Inc. as the Agent, and the Company and its other subsidiaries as the    
Guarantors, prohibits the payment of dividends on the Company's Common Stock.   
HDSC is permitted to make all transfers of funds (in the form of loans, advances
or cash dividends) to the Company necessary for the Company to pay interest on  
the Senior Notes and otherwise conduct its activities as a holding company;     
however, such transfers can not be made for purposes other than in the normal   
course of business.  The Company's Senior Note Indenture also has restrictions  
on the payment of cash dividends.  See Notes 5 and 6 of the Notes to            
Consolidated Financial Statements.                                              


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ƒ WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
                                                        [Enlarge/Download Table]

ITEM 6.    SELECTED FINANCIAL DATA                                                                                                                                                                        
            -----------------------                                                                                                                                                                       

The Company emerged from Chapter 11 proceedings on October 4, 1993.  For financial reporting purposes, the Company adopted fresh-                                                                         
start reporting as of October 2, 1993.  Under fresh-start reporting, a new reporting entity is created and recorded amounts of                                                                            
assets and liabilities are adjusted to reflect their estimated fair values.  Financial data prior to October 2, 1993 has been                                                                             
designated as those of the Predecessor Company.  Black lines have been drawn to separate the Successor Company financial data from                                                                        
the Predecessor Company financial data to signify that they are those of a new reporting entity and have been prepared on a basis                                                                         
not comparable to prior periods.                                                                                                                                                                          

                                                                                                                               Successor Company                         ||        Predecessor Company    
                                                                                                          ------------------------------------------------------------------------------------------------
(in thousands,                          Fiscal           Fiscal         Fiscal       Seventeen    ||   Thirty-Five        Fiscal                                                                          
except per share amounts                 Year             Year           Year       Weeks Ended   ||   Weeks Ended         Year                                                                           
and number of stores)                    1996             1995           1994    January 29, 1994 || October 2, 1993       1992                                                                           
-----------------------------------------------------------------------------------------------------------------------------------                                                                       
                                                                                                  ||                                                                                                      
Net sales                             $1,878,477      $1,900,104      $1,872,021      $772,685    ||   $ 992,848       $1,750,266                                                                         
Gross profit                          $  486,124      $  515,683      $  531,800      $223,034    ||   $ 282,549       $  500,454                                                                         
                                                                                                                               ||                                                                         
Net earnings (loss)                                                                               ||                                                                                                      
  applicable to common                                                                            ||                                                                                                      
  shareholders before                                                                             ||                                                                                                      
  extraordinary items                 $  (30,780)(1)  $  (16,666)(2)  $   40,431(3)   $ 36,235    ||   $  (9,747)      $   24,385                                                                         
                                                                                                                               ||                                                                         
Net earnings (loss)                                                                               ||                                                                                                      
  applicable to                                                                                   ||                                                                                                      
  common shareholders                 $  (35,058)(1)  $  (16,666)(2)  $   40,431(3)   $ 36,235    ||   $ 248,492 (4)   $   47,264                                                                         
                                                                                                                               ||                                                                         
Fully-diluted earnings (loss)                                                                     ||                                                                                                      
  per common share                    $    (3.39)     $    (1.66)     $     2.73      $   2.45    ||   $   11.30 (5)   $     2.15(5)                                                                      
Fully-diluted average shares                                                                      ||                                                                                                      
  outstanding                             10,336          10,029          14,832        14,794    ||      21,982           21,982                                                                         
                                                                                                                               ||                                                                         
FINANCIAL POSITION:                                                                               ||                                                                                                      
Total assets                          $  900,353      $  863,563      $1,009,801      $928,129    ||   $ 987,268       $  945,673                                                                         
Working capital                       $  183,255      $  147,090      $  241,486      $171,440    ||   $ 301,980       $  299,927                                                                         
Liabilities subject to                                                                            ||                                                                                                      
  compromise (6)                      $        -      $        -      $        -      $      -    ||   $ 775,169       $  761,443                                                                         
Long-term obligations                 $  229,100      $  185,169      $  185,169      $160,000    ||   $       -       $        -                                                                         
Long-term obligations                                                                             ||                                                                                                      
  under capital leases                $  120,539      $  118,776      $  124,508      $130,626    ||   $ 122,230       $  133,457                                                                         
Preferred stock                       $   19,942      $   24,636      $   64,144      $100,000    ||   $  33,143       $   31,481                                                                         
Common shareholders'                                                                              ||                                                                                                      
  equity (deficit)                    $  224,784      $  254,663      $  306,741      $230,235    ||   $(186,934)      $ (183,172)                                                                        
Number of stores operated                                                                         ||                                                                                                      
  at period end                              165             164             154           151    ||         151              154                                                                         
<FN>                                                                                                                                                                                                      
(1) Includes a $33.7 million pretax charge ($20.7 million after tax, or $2.00 per fully-diluted share) related to the estimated cost                                                                      
    of impairment of long-lived assets and the closing of ten stores in January 1997.  In addition, the net loss applicable to                                                                            
    common shareholders includes an extraordinary after tax loss of $4.3 million, or $0.41 per fully-diluted share, from early                                                                            
    extinguishments of debt.                                                                                                                                                                              
(2) Includes a $45.5 million pretax charge ($32.5 million after tax, or $3.24 per fully-diluted share) incurred in connection with                                                                        
    the 1995 Change in Control (see Note 19 of Notes to Consolidated Financial Statements).                                                                                                               
(3) Includes the following pretax items:  $9.6 million of income related to a reversal of liabilities established in fresh-start                                                                          
    accounting, $2.2 million paid to holders of the Company's Senior Notes in connection with the Company's self-tender in March                                                                          
    1995, and a $4.5 million pension gain.                                                                                                                                                                
(4) Includes a $258.2 million after tax extraordinary gain on the discharge of prepetition debt.                                                                                                          
(5) Fully-diluted earnings per share for the thirty-five weeks ended October 2, 1993 includes an extraordinary gain per common                                                                            
    share of $11.75 on the discharge of prepetition debt.  Fully-diluted earnings per share for fiscal 1992 includes an                                                                                   
    extraordinary credit per common share of $1.04 attributable to the realization of the benefit of tax loss carryforwards.                                                                              
(6) On February 4, 1991, the Company, its former parent, Hills Department Stores, Inc., and the five principal subsidiaries of                                                                            
    the Company, filed petitions for relief under Chapter 11 of the United States Bankruptcy Code.  As a result, the Company                                                                              
    reclassified certain current liabilities to Liabilities subject to compromise at February 3, 1991.                                                                                                    

THE SELECTED FINANCIAL DATA SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS.                                                                                                     

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ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL                     
-------------------------------------------------         
CONDITION AND RESULTS OF OPERATIONS                       
-----------------------------------                       

RESULTS OF OPERATIONS                                                           

FISCAL YEAR ENDED FEBRUARY 1, 1997 (FISCAL 1996) VERSUS                         
YEAR ENDED FEBRUARY 3, 1996 (FISCAL 1995)                         

Net sales decreased 1.1% compared with fiscal 1995 principally due to fiscal    
1996 having 52 weeks compared with 53 weeks in fiscal 1995.  Comparable store   
sales, on an equivalent 52 week calendar basis, decreased 1.7%.  In particular, 
sales were weak in men's and children's apparel, and the home decor categories  
of the business.                                                                

Cost of sales as a percentage of sales was 74.1% in fiscal 1996 compared with   
72.9% in fiscal 1995.  This margin decrease of 1.2% was due to a higher rate of 
markdowns, particularly in the men's and girl's apparel, toys, and seasonal     
categories.  The decrease was partially offset by an improvement in inventory   
shrinkage results.                                                              

Selling and administrative expenses, including depreciation and other occupancy 
costs, as a percentage of sales was 23.3% in fiscal 1996 compared with 22.5% in 
fiscal 1995.  The 0.8% increase was largely due to the full year impact of      
expenses associated with the mid-year opening of ten new stores in fiscal 1995  
compared with one store that opened in fiscal 1996, combined with the decrease  
in sales.  Expenses per average store decreased by 3.1%.                        

Earnings before interest, taxes, depreciation, amortization, store closing      
expenses, change in control costs, and other non-cash items (EBITDA) was $84.7  
million in fiscal 1996 compared with $119.3 million in fiscal 1995.             

During fiscal 1996, the Company recorded a $33.7 million charge for the         
impairment of long-lived assets and store closings.  See Note 15 of the Notes   
to Consolidated Financial Statements.                                           

Costs related to the 1995 Change in Control were $45.5 million.  See Note 19 of 
the Notes to Consolidated Financial Statements.                                 

Interest expense was $53.6 million in fiscal 1996 compared with $47.7 million   
in fiscal 1995.  The $5.9 million increase was primarily due to the refinancing 
of $160 million, 10.25% Senior Notes with $195 million, 12 1/2% Senior Notes.   
This increase was partially offset by decreased interest related to bank        
borrowings under the Company's working capital facilities due to lower average  
borrowings and lower interest rates.  See Financial Condition, Liquidity and    
Capital Resources.  Average direct borrowings under the revolving credit        
facilities were $58.0 million for fiscal 1996 at an average interest rate of    
8.4%, with peak borrowings of $142.8 million.  In fiscal 1995, average          
borrowings approximated $62.6 million at an average interest rate of 9.4%, with 
peak borrowings at $188.0 million.                                              

In fiscal 1996, the Company recorded a tax benefit of $14.0 million on a loss   
before income taxes and extraordinary items of $44.8 million, an effective tax  
rate of 31.3%.  Of the total tax benefit, $13.0 million related to impairment   
and store closing charges.  The remaining $1.0 million tax benefit related to   
the $11.1 million pretax loss before those charges, a 9.0% effective tax rate,  
resulted from non-deductible goodwill amortization and certain expenses only    
partially deductible for state income tax purposes.                             

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RESULTS OF OPERATIONS (CONTINUED)                                               

FISCAL YEAR ENDED FEBRUARY 1, 1997 (FISCAL 1996) VERSUS                         
YEAR ENDED FEBRUARY 3, 1996 (FISCAL 1995) (CONTINUED)             

In connection with the Senior Notes refinancing mentioned above and the         
refinancing of the Company's working capital facility, the Company recognized   
an extraordinary after-tax loss of $4.3 million.  See Notes 5 and 6 of the Notes
to Consolidated Financial Statements.                                           

FISCAL YEAR ENDED FEBRUARY 3, 1996 (FISCAL 1995) VERSUS                         
FISCAL YEAR ENDED JANUARY 28, 1995 (FISCAL 1994)                          

Net sales increased 1.5% compared with fiscal 1994.  The improvement was        
attributable to opening ten new stores and fiscal 1995 having 53 weeks compared 
to 52 weeks in fiscal 1994.  The extra week represented an increase in sales of 
$17.6 million.  Sales increases in hardlines categories, particularly in areas  
associated with the home, all occasion and electronics, were partially offset   
by a decrease in apparel sales.  Comparable store sales, excluding the          
fifty-third week, decreased 3.9%.                                               

Cost of sales as a percentage of sales was 72.9% in fiscal 1995 compared with   
71.6% in fiscal 1994.  This margin decrease of 1.3% was due to a higher rate of 
markdowns, particularly in the apparel categories, a shift in the mix of        
business to lower margin hardlines categories, and a decrease in the purchase   
markup percentage in the hardlines areas.                                       

Selling and administrative expenses, including depreciation and other occupancy 
costs, as a percentage of sales was 22.5% in fiscal 1995 and 21.9% in fiscal    
1994.  Savings in payroll and payroll related expenses as a percentage of sales 
were offset by increased advertising costs in the Company's new markets and     
higher operating costs associated with opening ten new stores.  Fiscal 1994     
expenses included the following unusual items: a $4.5 million gain from the     
elimination of pension obligations and a credit due to a reversal of liabilities
established in "fresh-start" reporting totalling $9.6 million.  These credits   
were partially offset by $2.2 million paid to the holders of the Company's      
Senior Notes in connection with the Company's repurchase of $75 million of      
common stock.  Selling and administrative expenses excluding these unusual      
items, as a percentage of sales, was 22.6% in fiscal 1994.                      

EBITDA was $119.3 million in fiscal 1995 compared with $138.1 million in fiscal 
1994.  The $138.1 million represents first-in, first-out (FIFO) earnings before 
interest, taxes, depreciation, amortization and the unusual items noted above.  

Costs related to the 1995 Change in Control were $45.5 million.  See Note       
19 of the Notes to Consolidated Financial Statements.                           

Interest expense was $47.7 million in fiscal 1995 compared with $35.9 million   
in fiscal 1994.  The $11.8 million increase was primarily due to interest on    
borrowings under the revolving credit facility (mainly caused by cash outflows  
during fiscal 1995 for the repurchase of common stock for $75 million and for   
$45.5 million of costs related to the change in control, and by the store       
expansion program) and additional amortization of deferred financing costs      
related to securing a new revolving credit facility.  Average direct borrowings 
under the revolving credit facility were $62.6 million for fiscal 1995 at an    
average interest rate of 9.4%, with peak borrowings of $188.0 million.  In      
fiscal 1994, average borrowings approximated $88,000 at an average interest     
rate of 9.25%, with peak borrowings at $8.0 million.                            

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RESULTS OF OPERATIONS (CONTINUED)                                               

FISCAL YEAR ENDED FEBRUARY 3, 1996 (FISCAL 1995) VERSUS                         
FISCAL YEAR ENDED JANUARY 28, 1995 (FISCAL 1994) (CONTINUED)              

In fiscal 1995, the Company recorded a tax expense of $3.2 million on a loss    
before income taxes of $13.5 million.  A tax benefit of $13.8 million, an       
effective tax rate of 30.4%, was attributable to the $45.5 million of costs     
related to change in control due to certain nondeductible costs.  A tax expense 
of $17.0 million, an effective tax rate of 53.2%, was attributable to all other 
pretax income of $32.0 million as a result of nondeductible goodwill            
amortization.                                                                   

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES                            

Certain statements contained in this document (in particular, the discussion of 
liquidity) are forward-looking statements that involve a number of risks and    
uncertainties.  Among the factors that could cause actual results to differ     
materially are the following: general economic conditions, consumer demand,     
consumer preferences and weather patterns in the Great Lakes and Ohio Valley    
regions of the United States; competitive factors, including continuing         
pressure from pricing and promotional activities of major competitors; impact   
of excess retail capacity and the availability of desirable store locations on  
suitable terms; the availability, selection and purchasing of attractive        
merchandise on favorable terms; import risks, including potential disruptions   
and duties, tariffs and quotas on imported merchandise; acquisition and         
divestment activities; and other factors that may be described in this document.

Effective September 30, 1996, the Company, through its wholly-owned subsidiary  
Hills Department Store Company ("HDSC"), and C.R.H. International, Inc., a      
wholly-owned subsidiary of HDSC, obtained a new $300 million secured revolving  
credit facility (the "Facility"), replacing an existing facility.  The Facility 
was amended in March 1997.  See Note 5 of the Notes to Consolidated Financial   
Statements.                                                                     

In April 1996, the Company issued $195 million of unsecured 12 1/2% Senior Notes
(the "New Senior Notes") due 2003. The Company subsequently redeemed or called  
for redemption all of its $160 million of outstanding 10.25% Senior Notes due   
2003. See Note 6 of the Notes to Consolidated Financial Statements.             

The Company has significant commitments which require cash outflows for         
operating and capital lease payments and financing obligations.  These          
commitments are expected to approximate $63.3 million for fiscal 1997.          

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FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)                

                                                        [Enlarge/Download Table]
A summary of cash flow information and financial position is presented                             
below (in thousands):                                                                              

                                                                                  Fiscal    Fiscal 
                                                                                   1996      1995  
-------------------------------------------------------------------------------                    
                                                                                                   
Cash and cash equivalents                                                                          
  at begining of period                           $ 22,898         $197,474                        
Net cash provided by (used for)                                                                    
  operating activities                              47,519        (  20,587)                       
Capital expenditures                             (  32,858)       (  56,714)                       
Refinancing of Senior Notes                         25,151                -                        
Capital lease and sale/leaseback financing          10,092        (   6,121)                       
Cash distributions pursuant to the                                                                 
  Plan of Reorganization                         (   2,682)       (   5,297)                       
Shares repurchased per self-tender offer                 -        (  75,000)                       
Deferred finance costs and other                                                                   
  financing activities                           (   3,957)       (  10,857)                       
                                                                                 --------  --------
Cash and cash equivalents                                                                          
  at end of period                                $ 66,163         $ 22,898                        
                                                                                 ========  ========

Working capital at end of period                  $183,255         $147,090                        
                                                                                 ========  ========

Net cash provided by operating activities for fiscal 1996 increased by $68.1    
million compared with fiscal 1995.  This increase in cash provided by operating 
activities was primarily due to $45.5 million of costs in fiscal 1995 related   
to the 1995 Change in Control.                                                  

Capital expenditures were $32.9 million for fiscal 1996 compared with $56.7     
million for fiscal 1995, a $23.8 million decrease.  This decrease was due to    
the completion of the Company's chainwide store remodeling in fiscal 1995.  In  
addition, the prior year's use of cash reflected the impact of opening ten new  
stores.  During fiscal 1997, capital expenditures are expected to approximate   
$30 million.  The Company expects to open no new stores during fiscal 1997.     
Fiscal 1997 investing activities are expected to include approximately          
$20 million of deferred, intangible costs for software procurement, development 
and installation costs.                                                         

Net cash provided by financing activities was $28.6 million for fiscal 1996     
compared with a $97.3 million use of cash in the same period a year ago, a      
$125.9 million increase.  The increase was primarily due to $25.2 million in    
net proceeds received from the issuance of long-term debt in excess of the debt 
refinanced, $16.6 million received from fixture and equipment financings, and   
the prior year payment of $75.0 million related to the Company's self-tender    
offer.                                                                          

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FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)                

As a result of the Company's long-term financing activities during fiscal 1996  
and the improvements in the Facility (see Note 5 of the Notes to Consolidated   
Financial Statements), the Company has improved its liquidity compared with the 
prior year.  Excess credit availability under the Facility at February 1, 1997  
was approximately $149.2 million compared with approximately $145.7 million at  
February 3, 1996.                                                               

The Company believes that its credit arrangements, together with cash from      
operations, will enable the Company to maintain the liquidity necessary to      
finance its continuing operations, including its planned capital expenditures   
and software procurement, and installation costs for fiscal 1997.               

The terms of the Company's revolving credit facility and the New Senior Notes   
limit the ability of the subsidiaries to pay dividends.  Any or all of the      
restrictions, limitations or contingencies under the Facility and the Senior    
Note Indenture, as well as the Company's leverage, could adversely affect the   
Company's ability to obtain additional financing in the future, to make         
capital expenditures, to effect store expansions, to make acquisitions, to      
take advantage of business opportunities that may arise, and to withstand       
adverse general economic and retail industry conditions and increased           
competitive pressures.  Retail suppliers and their factors monitor carefully    
the financial performance of retail companies such as the Company, and may      
reduce credit availability quickly upon learning of actual or perceived         
deterioration in the financial condition or results of operations of a retail   
company.                                                                        

OTHER MATTERS                                                                   

SEASONALITY                                                                     

The Company's business is highly seasonal due to increased consumer buying for  
back-to-school needs and Christmas.  The second half of each year provides the  
major portion of the Company's annual sales and operating earnings with         
operating earnings particularly concentrated in the Christmas selling season.   

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ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                           
-------------------------------------------                 

See accompanying page F-1 through F-27.                                         

                                                                [Download Table]
Information called for by this item can be found at the pages listed in the
following index.                                                           

                                         INDEX TO FINANCIAL STATEMENTS     

Hills Stores Company and Subsidiaries                                  Page
                                                                           
Reports of Independent Auditors ......................................  F-1
Consolidated Balance Sheets ..........................................  F-3
Consolidated Statements of Operations ................................  F-4
Consolidated Statements of Cash Flows ................................  F-5
Consolidated Statements of Common Shareholders' Equity ...............  F-6
Notes to Consolidated Financial Statements ...........................  F-7

ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING          
 -----------------------------------------------------------
AND FINANCIAL DISCLOSURE                                  
------------------------                                  

On November 14, 1995, the Company engaged Deloitte & Touche LLP ("Deloitte &    
Touche") as its independent auditors, following the resignation of Coopers &    
Lybrand L.L.P. ("Coopers & Lybrand") as independent auditors for the Company    
on November 8, 1995.                                                            

None of the reports of Coopers & Lybrand on the financial statements of the     
Company for either of the two fiscal years preceding such resignation contained 
an adverse opinion or a disclaimer of opinion, or was qualified or modified as  
to uncertainty, audit scope or accounting principles.  During the Company's two 
most recent fiscal years and the subsequent interim period preceding the resig- 
nation of Coopers & Lybrand, there were no disagreement(s) with Coopers &       
Lybrand on any matter of accounting principles or practices, financial statement
disclosure or auditing scope or procedures, which disagreement(s), if not re-   
solved to the satisfaction of Coopers & Lybrand would have caused it to make    
reference to the subject matter of the disagreement(s) in connection with its   
report.  None of the reportable events listed in Item 304(a)(1)(v) of           
Regulation S-K occurred with respect to the Company during the Registrant's     
two most recent fiscal years and the subsequent interim period preceding the    
resignation of Coopers & Lybrand.                                               

The Company has agreed to hold Coopers & Lybrand harmless against legal costs   
and expenses incurred in a successful defense of a legal action or proceeding   
related to the inclusion of its report in the Company's Registration Statement  
on Form S-4 relating to the exchange of New Senior Notes, whereby Coopers &     
Lybrand is not found culpable nor pays any part of the plaintiff's damages,     
legal costs and expenses as a result of a judgment or a settlement of a claim   
against it.  The Company has deposited a total of $500,000 in escrow to fund    
payments under this indemnification arrangement.  In addition, the Company and  
the affiliates of Dickstien Partners Inc. who own shares of the Company's Common

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Stock have released Coopers & Lybrand from any and all claims, demands and      
liabilities whatsoever on account of professional services that Coopers &       
Lybrand performed, as independent auditors, for either or both of the Company   
and HDSC through November 8, 1995.  The Company has further agreed to reimburse 
Coopers & Lybrand for its professional time and expenses, including reasonable  
attorney's fees, incurred in responding to subpoena or other legal process to   
produce its documents relating to the Company in a legal action or proceeding in
which Coopers & Lybrand is not a party.                                         

During the Company's two most recent fiscal years and the subsequent interim    
period preceding the engagement of Deloitte & Touche, neither the Company nor   
anyone on its behalf consulted Deloitte & Touche regarding the application of   
accounting principles to a specific completed or contemplated transaction, or   
the type of audit opinion that might be rendered on the Company's financial     
statements, and no written or oral advice concerning same was provided to the   
Company that was an important factor considered by the Company in reaching a    
decision as to any accounting, auditing or financial reporting issue.           

                                                                        PART III

ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                   
--------------------------------------------------        

Incorporated by reference from the item entitled "Information About Nominees"   
in the proxy statement dated May 5, 1997 for the annual meeting of stockholders 
to be held June 17, 1997, except for information regarding executive officers   
of the Company, which information is furnished in a separate item captioned     
"Executive Officers of the Registrant" in Part I of this report.                

ITEM 11.   EXECUTIVE COMPENSATION                                               
----------------------                                    

Incorporated by reference from the item entitled "Executive Compensation" in    
the proxy statement dated May 5, 1997 for the annual meeting of stockholders    
to be held June 17, 1997.                                                       

ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT       
    --------------------------------------------------------------

Incorporated by reference from the item entitled "Beneficial Ownership" in the  
proxy statement dated May 5, 1997 for the annual meeting of stockholders to be  
held June 17, 1997.                                                             

ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                       
----------------------------------------------            

Incorporated by reference from the items entitled "Information About Nominees," 
"Executive Compensation," "Employment Contracts," and "Compensation of          
Directors" in the proxy statement dated May 5, 1997 for the annual meeting of   
stockholders to be held June 17, 1997.                                          

                                                                              18

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PART IV 

ITEM 14.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K     
      ----------------------------------------------------------------

                                                                [Download Table]
(a)    Documents filed as part of this report:                               
                                                                             
1.   Financial statements                                                    

         Reports of Independent Auditors                                  F-1
         Consolidated Balance Sheets                                      F-3
         Consolidated Statements of Operations                            F-4
         Consolidated Statements of Cash Flows                            F-5
         Consolidated Statements of Common Shareholders' Equity           F-6
         Notes to Consolidated Financial Statements                       F-7

2.   Financial statement schedules                                           

         I    Reports of Independent Auditors                             S-1
         II   Valuation and Qualifying Accounts                           S-3

Schedules other than these listed above are omitted because they are not        
required, not applicable, or the information is otherwise included in the       
financial statements.                                                           

3.   Certain of the exhibits listed hereunder have previously been filed with   
the Commission as exhibits to certain registration statements and periodic      
reports set forth in the footnotes following this exhibit list and are hereby   
incorporated by reference pursuant to Rule 411 promulgated under the Securities 
Act and Rule 24 of the Commission's Rules of Practice. The location of each     
document, so incorporated by reference, is indicated by footnote (the number in 
parentheses).                                                                   

3.1(1)    Amended and Restated Certificate of Incorporation of the Company, as  
amended.                                                    

3.2(2)    Amended and Restated By-Laws of the Company.                          

4.1(3)    Certificate of the Voting Powers, Preferences and other designated    
 attributes of the Series A Convertible Preferred Stock of the
Company.                                      

4.2(4)    Form of Series 1993 Stock Right.                                      

4.3(3)    Indenture dated as of October 1, 1993 relating to the 10.25% Senior   
    Notes due 2003 of the Company (the "Old Senior Note Indenture").

4.4(5)    First Supplemental Indenture dated as of January 1, 1995 to the Old   
Senior Note Indenture.                                      

4.5(5)    Second Supplemental Indenture dated as of August 1, 1995 to the Old   
Senior Note Indenture.                                      

4.6(6)    Third Supplemental Indenture dated as of January 15, 1996 to the Old  
Senior Note Indenture.                                      

4.7(7)    Series 1993 Warrant Agreement dated October 4, 1993 between the       
Company and Chemical Bank, as Warrant Agent.                

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4.8(8)     Rights Agreement dated as of August 16, 1994 (the "Rights Agreement) 
           between the Company and Chemical Bank, as Rights Agent.

4.9(8)     Form of Certificate of the Voting Powers, Preferences and other      
          designated attributes of Series B Participating Cumulative Preferred
        Stock of the Company (which is attached as Exhibit A to the Rights
 Agreement incorporated by reference as Exhibit 4.8 hereto).

4.10(8)    Form of Right Certificate (which is attached as Exhibit B to the     
        Rights Agreement incorporated by reference as Exhibit 4.8 hereto).

4.11(9)    Amendment dated as of October 18, 1995 to the Rights Agreement.      

4.12(10)   Indenture dated as of April 19, 1996 relating to the 12 1/2% Senior  
Notes due 2003, Series B, of the Company.                 

10.1(11)   Loan and Security Agreement dated as of September 30, 1996 among the 
      Financial Institutions named therein as the Lenders, BankAmerica
        Business Credit, Inc. as the Agent, Hills Department Store Company
         and C.R.H. International, Inc. as the Borrowers, and the other Loan
Parties named therein.                                    

10.2(12)   First Amendment to the Loan and Security Agreement dated as of       
February 28, 1997.                                        

10.3(13) * Employment Agreement made as of February 7, 1996 with Gregory K.     
Raven.                                                    

10.4     * Consulting Agreement made as of February 8, 1997 with Chaim Y.       
Edelstein.                                  

10.5(5)  * Employment Agreement made as of July 6, 1995 with William K. Friend. 

10.6(14) * Employment Agreement made as of November 19, 1996 with Michael R.    
Hamilton.                                                 

10.7     * Separation Agreement dated February 7, 1996 between the Company and  
E. Jackson Smailes.                                       

10.8     * Confidential Separation Agreement, Voluntary Release and Notice      
               dated March 6, 1997 between the Company and James E. Feldt.

10.9(4)  * 1993 Incentive and Nonqualified Stock Option Plan, as amended.       

10.10(13)* 1996 Directors Stock Option Plan.                                    

11.1       Computation of earnings per share.                                   

16(15)     Letter re: change in certifying accountant.                          

21         Subsidiaries.                                                        

23.1       Consent of Deloitte & Touche LLP.                                    

23.2       Consent of Coopers & Lybrand L.L.P.                                  

24         Powers of Attorney of directors and officers of the Company.         

                                                                              20

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27         Financial Data Schedule.                                             
__________________________                                                      
*  Executive Compensation Plans and Arrangements.                               

1.        Incorporated by reference from the Annual Report on Form 10-K of the  
Company for the fiscal year ended January 28, 1995.         

2.        Incorporated by reference from the Report on Form 8-K of the Company  
dated January 18, 1996.                                     

3.        Incorporated by reference from the Form 8-A of the Company filed on   
October 5, 1993.                                            

4.        Incorporated by reference from the Annual Report on Form 10-K of the  
Company for the fiscal year ended January 29, 1994.         

5.        Incorporated by reference from the Report on Form 10-Q of the Company 
for the quarter ended July 29, 1995.                        

6.        Incorporated by reference from the Report on Form 8-K of the Company  
dated January 15, 1996.                                     

7.        Incorporated by reference from the Report on Form 8-K of the Company  
dated October 4, 1993.                                      

8.        Incorporated by reference from the Report on Form 8-K of the Company  
dated August 16, 1994.                                      

9.        Incorporated by reference from the Report on Form 10-Q of the Company 
for the quarter ended October 28, 1995.                     

10.       Incorporated by reference from the Report on Form 10-Q of the Company 
for the quarter ended May 4, 1996.                          

11.       Incorporated by reference from the Report on Form 8-K of the Company  
dated October 1, 1996.                                      

12.       Incorporated by reference from the Report on Form 8-K of the Company  
dated February 28, 1997.                                    

13.       Incorporated by reference from the Annual Report on Form 10-K of the  
Company for the fiscal year ended February 3, 1996.         

14.       Incorporated by reference from the Report on Form 10-Q of the Company 
for the quarter ended November 2, 1996.                     

15.       Incorporated by reference from the Report on Form 8-K of the Company  
dated November 8, 1995.                                     

                                                                              21

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(b)    Reports on Form 8-K:                                                     

1.   A report on Form 8-K dated November 21, 1996 was filed by the Company      
concerning the third quarter financial press release issued on that date.       

2.   A report on Form 8-K dated January 13, 1997 was filed by the Company       
concerning planned store closings.                                              

3.   A report on Form 8-K dated February 28, 1997 was filed by the Company      
concerning the First Amendment to the Loan and Security Agreement.              

4.   A report on Form 8-K dated March 12, 1997 was filed by the Company con-    
cerning the fourth quarter and year-end press release issued on that date.      

                                                                              22

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SIGNATURE   

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange  
Act of 1934, the registrant has duly caused this report to be signed on its     
behalf by the undersigned, thereunto duly authorized, in the Town of Canton,    
Commonwealth of Massachusetts, on April 21, 1997.                               

                                                            HILLS STORES COMPANY

                                                        By: /s/William K. Friend
                                                         -----------------------
                                                               William K. Friend
                                                      Vice President - Secretary

                                                        [Enlarge/Download Table]
Pursuant to the requirements of the Securities Exchange Act of 1934, this report               
has been signed below by the following persons on behalf of the registrant and                 
in the capacities and on the dates indicated.                                                  
                                                                                               
        *              Chairman of the Board of the                                            
------------------     Company and Hills Department                                            
Chaim Y. Edelstein     Store Company                             April 21, 1997                

        *              Director, President and Chief                                           
------------------     Executive Officer of the Company                                        
Gregory K. Raven       and Hills Department Store Company                                      
                                       (Principal Executive Officer)             April 21, 1997

        *              Director of the Company and                                             
------------------     Hills Department Store Company            April 21, 1997                
Mark B. Dickstein                                                                              

        *              Director of the Company and                                             
------------------     Hills Department Store Company            April 21, 1997                
Stanton J. Bluestone                                                                           

        *              Director of the Company and                                             
------------------     Hills Department Store Company            April 21, 1997                
Samuel L. Katz                                                                                 

        *              Director of the Company and                                             
------------------     Hills Department Store Company            April 21, 1997                
John W. Burden                                                                                 

        *              Director of the Company and                                             
------------------     Hills Department Store Company            April 21, 1997                
Alan S. Cooper                                                                                 

                                       Executive Vice President-Chief                          
        *              Financial Officer of the Company                                        
------------------     and Hills Department Store Company                                      
C. Scott Litten        (Principal Financial Officer)             April 21, 1997                

        *              Vice President-Controller of the                                        
------------------     Company and Hills Department Store                                      
Brian J. Sheehan       Company (Principal Accounting Officer)    April 21, 1997                

*By: /s/ William K. Friend                                                                     
     ---------------------                                                                     
     William K. Friend                                                                         
     Attorney-In-Fact                                                                          

                                                                              23

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INDEPENDENT AUDITORS' REPORT                                                    

To the Board of Directors and Stockholders of                                   
Hills Stores Company and Subsidiaries:                                          

We have audited the accompanying consolidated balance sheets of Hills Stores    
Company and Subsidiaries as of February 1, 1997 and February 3, 1996 and the    
related consolidated statements of operations, common shareholders' equity,     
and cash flows for the years then ended (the "1996 and 1995 consolidated        
financial statements").  These financial statements are the responsibility of   
the Company's management.  Our responsibility is to express an opinion on these 
financial statements based on our audits.                                       

We conducted our audits in accordance with generally accepted auditing          
standards.  Those standards require that we plan and perform the audit to       
obtain reasonable assurance about whether the financial statements are free of  
material misstatement.  An audit includes examining, on a test basis, evidence  
supporting the amounts and disclosures in the financial statements.  An audit   
also includes assessing the accounting principles used and significant          
estimates made by management, as well as evaluating the overall financial       
statement presentation.  We believe that our audits provides a reasonable basis 
for our opinion.                                                                

In our opinion, the 1996 and 1995 consolidated financial statements present     
fairly, in all material respects, the financial position of the Company as of   
February 1, 1997 and February 3, 1996 and the results of its operations and its 
cash flows for the years then ended in conformity with generally accepted       
accounting principles.                                                          

DELOITTE & TOUCHE LLP                                                           

Boston, Massachusetts                                                           
March 11, 1997                                                                  

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                                                  REPORT OF INDEPENDENT AUDITORS

To the Shareholders and Board of Directors                                      
of Hills Stores Company and Subsidiaries:                                       

We have audited the accompanying consolidated statement of operations, cash     
flows and common shareholders' equity of Hills Stores Company and Subsidiaries  
for the year ended January 28, 1995.  These financial statements are the        
responsibility of the Company's management.  Our responsibility is to express   
an opinion on these financial statements based on our audit.                    

We conducted our audit in accordance with generally accepted auditing           
standards.  Those standards require that we plan and perform the audit to       
obtain reasonable assurance about whether the financial statements are free of  
material misstatement.  An audit includes examining, on a test basis, evidence  
supporting the amounts and disclosures in the financial statements.  An audit   
also includes assessing the accounting principles used and significant          
estimates made by management, as well as evaluating the overall financial       
statement presentation.  We believe that our audit provides a reasonable basis  
for our opinion.                                                                

In our opinion, the financial statements referred to above present fairly, in   
all material respects, the consolidated results of operations and cash flows    
of Hills Stores Company and Subsidiaries for the year ended January 28, 1995 in 
conformity with generally accepted accounting principles.                       

                                                        Coopers & Lybrand L.L.P.

Boston, Massachusetts                                                           
March 10, 1995                                                                  

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HILLS STORES COMPANY AND SUBSIDIARIES                                                                                 
____________________________________________________________________________________________                          
CONSOLIDATED BALANCE SHEETS                                                                                           

                                                                                              February 1,  February 3,
(dollars in thousands)                                          1997             1996                                 
--------------------------------------------------------------------------------------------                          
                                                                                                                      
ASSETS                                                                                                                
Current assets:                                                                                                       
 Cash and cash equivalents                                   $ 66,163         $ 22,898                                
 Accounts receivable, less allowance                                                                                  
  for doubtful accounts of approximately                                                                              
  $4,500 and $3,500                                            24,346           25,187                                
 Inventories                                                  341,477          331,697                                
 Deferred tax asset, net (Note 16)                             46,491           34,011                                
 Other current assets                                           5,115            5,352                                
                                                                                              --------     --------   
   Total current assets                                       483,592          419,145                                

Property and equipment, net (Note 2)                          173,701          190,893                                
Property under capital leases, net (Note 7)                   112,201          113,785                                
Beneficial lease rights, net (Note 1)                           6,848            8,247                                
Deferred tax asset, net (Note 16)                               8,085            8,233                                
Reorganization value in excess of amounts allocable                                                                   
 to identifiable assets, net (Notes 1 and 3)                   97,508          107,514                                
Other assets, net (Note 1)                                     18,418           15,746                                
                                                                                              --------     --------   
                                                                                              $900,353     $863,563   
                                                                                              ========     ========   

LIABILITIES AND SHAREHOLDERS' EQUITY                                                                                  
Current liabilities:                                                                                                  
 Current portion of long-term debt (Note 7)                  $  7,255         $  5,732                                
 Accounts payable, trade                                      111,064           87,471                                
 Other accounts payable and accrued expenses (Note 4)         182,018          178,852                                
                                                                                              --------     --------   
   Total current liabilities                                  300,337          272,055                                

Senior notes (Note 6)                                         195,000          160,000                                
Obligations under capital leases (Note 7)                     120,539          118,776                                
Financing obligations - sale/leaseback (Note 7)                34,100           25,169                                
Other liabilities                                               5,651            8,264                                

Commitments and contingencies (Note 18)                             -                -                                

Preferred stock, at mandatory redemption value (Note 9)        19,942           24,636                                

Common shareholders' equity (Notes 10 and 11):                                                                        
 Common stock, 50,000,000 shares of $0.01 par value                                                                   
   authorized, 10,337,761 and 9,982,842 shares issued and                                                             
   outstanding                                                    103              100                                
 Additional paid-in capital                                   215,537          209,563                                
 Retained earnings                                              9,942           45,000                                
 Unearned compensation (Note 11)                            (     798)               -                                
                                                                                              --------     --------   
   Total common shareholders' equity                          224,784          254,663                                
                                                                                              --------     --------   
                                                                                              $900,353     $863,563   
                                                                                              ========     ========   

See Notes to Consolidated Financial Statements                                  

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HILLS STORES COMPANY AND SUBSIDIARIES                                                                                                                     
________________________________________________________________________________________                                                                  
CONSOLIDATED STATEMENTS OF OPERATIONS                                                                                                                     

                                                                                           Fiscal Year   Fiscal Year      Fiscal Year                     
                                                                                              Ended         Ended            Ended                        
                                                                                           February 1,   February 3,      January 28,                     
(in thousands, except per                     1997            1996             1995                                                                       
share amounts)                             (52 Weeks)      (53 Weeks)       (52 Weeks)                                                                    
----------------------------------------------------------------------------------------                                                                  

                                                                                                                                                          
Net sales                                  $1,878,477      $1,900,104       $1,872,021                                                                    
Cost of sales                               1,392,353       1,384,421        1,340,221                                                                    
Selling and administrative expenses                                                                                                                       
  (Notes 6 and 8)                             437,593         428,212          410,661                                                                    
Amortization of reorganization                                                                                                                            
  value in excess of amounts                                                                                                                              
  allocable to identifiable assets              6,050           7,755            8,986                                                                    
Impairment of long-lived assets and                                                                                                                       
  store closings (Note 15)                     33,706               -                -                                                                    
Costs related to change                                                                                                                                   
  in control (Note 19)                              -          45,529                -                                                                    
                                                                                           ----------    ----------       ----------                      
Operating earnings                              8,775          34,187          112,153                                                                    

Interest expense, net (Note 1)                 53,555          47,666           35,869                                                                    
                                                                                           ----------    ----------       ----------                      
                                                                                          (    44,780)  (    13,479)          76,284                      
Income tax benefit                                                                                                                                        
  (provision) (Note 16)                        14,000     (     3,187)     (    35,853)                                                                   
                                                                                           ----------    ----------       ----------                      
                                                                                          (    30,780)  (    16,666)          40,431                      
Extraordinary loss on early                                                                                                                               
  extinguishment of debt, net                   4,278               -                -                                                                    
                                                                                           ----------    ----------       ----------                      
Net earnings (loss)                       ($   35,058)    ($   16,666)      $   40,431                                                                    
                                                                                           ==========    ==========       ==========                      
Primary earnings (loss) per                                                                                                                               
  common share (Note 17):                                                                                                                                 
    Earnings (loss) before                                                                                                                                
      extraordinary loss                  ($     3.00)    ($     1.70)      $     2.87                                                                    
    Extraordinary loss                    (      0.42)              -                -                                                                    
                                                                                           ----------    ----------       ----------                      
    Net earnings (loss)                   ($     3.42)    ($     1.70)      $     2.87                                                                    
                                                                                           ==========    ==========       ==========                      

Fully-diluted earnings (loss)                                                                                                                             
  per common share (Note 17):                                                                                                                             
    Earnings (loss) before                                                                                                                                
      extraordinary loss                  ($     2.98)    ($     1.66)      $     2.73                                                                    
    Extraordinary loss                    (      0.41)              -                -                                                                    
                                                                                           ----------    ----------       ----------                      
    Net earnings (loss)                   ($     3.39)    ($     1.66)      $     2.73                                                                    
                                                                                                                    ==========      ==========  ==========

See Notes to Consolidated Financial Statements                                  

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HILLS STORES COMPANY AND SUBSIDIARIES                                                                                                     
________________________________________________________________________________________                                                  
CONSOLIDATED STATEMENTS OF CASH FLOWS                                                                                                     

                                                                                          Fiscal Year  Fiscal Year   Fiscal Year          
                                                                                                          Ended         Ended       Ended 
                                                                                          February 1,  February 3,  January 28,           
                                                                                                           1997          1996       1995  
(in thousands)                                 (52 Weeks)     (53 Weeks)    (52 Weeks)                                                    
----------------------------------------------------------------------------------------                                                  
                                                                                                                                          
CASH FLOWS FROM OPERATING ACTIVITIES:                                                                                                     

Net earnings (loss)                            ($ 35,058)    ($ 16,666)      $ 40,431                                                     
Adjustments to reconcile net earnings                                                                                                     
 (loss) to net cash provided by (used for)                                                                                                
 operating activities:                                                                                                                    
  Depreciation and amortization                   35,130        31,784         26,801                                                     
  Amortization of deferred financing costs         5,942         4,847          4,649                                                     
  Extraordinary loss on extinguishment of debt     4,278             -              -                                                     
  Amortization of reorganization value in                                                                                                 
    excess of amounts allocable to                                                                                                        
    identifiable assets                            6,050         7,755          8,986                                                     
  Gain on termination of pension plan                  -             -      (   4,479)                                                    
  Loss on disposal of fixed assets                   998            54              -                                                     
  Impairment of long-lived assets                                                                                                         
    and store closings                            28,958             -              -                                                     
  Decrease in deferred tax assets                                                                                                         
   recognized through a reduction in                                                                                                      
   reorganization value in excess of                                                                                                      
   amounts allocable to identifiable assets        2,592         9,496         22,977                                                     
  Deferred income taxes                        (  12,332)    (  11,260)     (  30,984)                                                    
  Decrease (increase) in accounts receivable                                                                                              
   and other current assets                        1,078     (   2,325)     (     199)                                                    
  Decrease (increase) in inventories           (  15,080)    (  17,846)        12,614                                                     
  Increase (decrease) in accounts payable                                                                                                 
   and other accrued expenses                     25,293     (  24,464)        39,959                                                     
  Other, net                                   (     330)    (   1,962)           772                                                     
                                                                                                         --------     --------    --------
   Net cash provided by (used for)                                                                                                        
    operating activities                          47,519     (  20,587)       121,527                                                     

CASH FLOWS FROM INVESTING ACTIVITIES:                                                                                                     

Capital expenditures                           (  32,858)    (  56,714)     (  38,458)                                                    

CASH FLOWS FROM FINANCING ACTIVITIES:                                                                                                     

Proceeds from issuance of                                                                                                                 
   12 1/2% Senior Notes                          195,000             -              -                                                     
Fees incurred with the issuance of                                                                                                        
   12 1/2% Senior Notes                        (   8,100)            -              -                                                     
Redemption of 10.25% Senior Notes              ( 160,000)            -              -                                                     
Payment of premium on debt redemption          (   1,749)            -              -                                                     
Principal payments under capital                                                                                                          
   lease obligations                           (   6,467)    (   6,121)     (   5,529)                                                    
Proceeds from sale/leaseback financing            16,559             -         25,169                                                     
Cash distributions pursuant to the Plan                                                                                                   
   of Reorganization                           (   2,682)    (   5,297)     (  14,419)                                                    
Shares repurchased per self-tender offer               -     (  75,000)             -                                                     
Deferred finance costs and                                                                                                                
   other financing activities                  (   3,957)    (  10,857)     (   1,373)                                                    
                                                                                                         --------     --------    --------
   Net cash provided by (used for)                                                                                                        
    financing activities                          28,604     (  97,275)         3,848                                                     
                                                                                                         --------     --------    --------
Net increase (decrease) in cash and                                                                                                       
 cash equivalents                                 43,265     ( 174,576)        86,917                                                     

Cash and cash equivalents:                                                                                                                
 Beginning of period                              22,898       197,474        110,557                                                     
                                                                                                         --------     --------    --------
 End of period                                  $ 66,163      $ 22,898       $197,474                                                     
                                                                                                         ========     ========    ========

See Notes to Consolidated Financial Statements                                  

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ƒ WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
                                                        [Enlarge/Download Table]
HILLS STORES COMPANY AND SUBSIDIARIES                                                                                                                                             
__________________________________________________________________________________________________________________                                                                
CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY                                                                                                                            

                                                                                                    Common Stock     Additional                                  Common           
                                                                                                        ------------------    Paid-in    Retained       Unearned     Shareholders'
(dollars in thousands)                    Shares    Amount    Capital    Earnings     Compensation      Equity                                                                    
------------------------------------------------------------------------------------------------------------------                                                                
                                                                                                                                                                                  
Balance at January 29, 1994              9,000,000   $ 90    $193,910     $36,235        $    -        $230,235                                                                   

Conversion of Preferred Stock            1,792,805     18      35,838           -             -          35,856                                                                   
Exercise of stock options                   11,979      -         219           -             -             219                                                                   
Net earnings                                     -      -           -      40,431             -          40,431                                                                   
                                                                                                --------------------------------------------------------------------------        

Balance at January 28, 1995             10,804,784    108     229,967      76,666             -         306,741                                                                   

Retirement of Common Stock (Note 20)   ( 3,000,000) (  30)  (  59,970)   ( 15,000)            -       (  75,000)                                                                  
Conversion of Preferred Stock            1,975,400     20      39,488           -             -          39,508                                                                   
Exercise of stock options                                                                                                                                                         
  and warrants                               4,387      -          80           -             -              80                                                                   
Exchange for Stock Rights (Note 12)        198,271      2   (       2)          -             -               -                                                                   
Net loss                                         -      -           -    ( 16,666)            -       (  16,666)                                                                  
                                                                                                --------------------------------------------------------------------------        
Balance at February 3, 1996              9,982,842    100     209,563      45,000             -         254,663                                                                   

Conversion of Preferred Stock              234,674      2       4,692           -             -           4,694                                                                   
Restricted stock grants                    120,000      1       1,202           -        (1,203)              -                                                                   
Amortization of restricted                                                                                                                                                        
  stock grants                                   -      -           -           -           405             405                                                                   
Other                                          245      -           7           -             -               7                                                                   
Issued stock options (Note 11)                   -      -          73           -             -              73                                                                   
Net loss                                         -      -           -    ( 35,058)            -       (  35,058)                                                                  
                                                                                                --------------------------------------------------------------------------        
Balance at February 1, 1997             10,337,761   $103    $215,537     $ 9,942       ($  798)       $224,784                                                                   

                                                                                                ==========================================================================        


See Notes to Consolidated Financial Statements                                  

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HILLS STORES COMPANY AND SUBSIDIARIES                                           
_______________________________________________________________________________ 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                      

1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES                                  
------------------------------------------                              

BASIS OF REPORTING                                                              

During fiscal 1996, the Company operated, through its wholly-owned subsidiary   
Hills Department Store Company ("HDSC"), a chain of 165 discount department     
stores located primarily in the Great Lakes and Ohio Valley regions of the      
United States.  The consolidated financial statements include the accounts of   
the Company and its wholly-owned subsidiaries.  All significant intercompany    
transactions and balances have been eliminated.  Certain prior year amounts     
were reclassified to conform to the current year presentation. The Company's    
fiscal year ends on the Saturday closest to January 31.  Fiscal 1995 was a      
fifty-three week year, fiscal years 1996 and 1994 were fifty-two week years.    

CASH AND CASH EQUIVALENTS                                                       

Cash and cash equivalents consist of cash and highly liquid investments with    
maturities of three months or less from the date of purchase and whose cost     
approximates market value due to the short maturity of the investments.         
Interest income of $1.3 million, $1.8 million and $2.8 million was included     
in Interest expense, net for fiscal 1996, 1995 and 1994, respectively.          

INVENTORIES                                                                     

Inventories are valued using the retail method on the lower of last-in,         
first-out (LIFO) cost or market basis.  LIFO cost at February 1, 1997 and       
February 3, 1996 exceeded the cost of inventory on a first-in, first-out        
basis; accordingly, there has been no LIFO charge.                              

DEPRECIATION AND AMORTIZATION                                                   

Depreciation and amortization are provided on a straight-line basis over the    
estimated useful lives of the related assets, which is 27 1/2 years for         
buildings and range from five to eight years for fixtures and equipment.        
Amortization of leasehold improvements is provided on a straight-line basis     
over the shorter of the lease term, considering renewal options that are likely 
to be exercised, or the estimated useful life of the related asset.  Leasehold  
improvements are amortized principally over a 15 year period.                   

DEFERRED FINANCING COSTS                                                        

Net deferred financing costs of $11.4 million at February 1, 1997 and $11.1     
million at February 3, 1996 were included in other assets and are being         
amortized on a straight-line basis over the estimated term of the related debt. 
Accumulated amortization of deferred financing costs was $1.7 million at        
February 1, 1997 and $2.8 million at February 3, 1996.                          

INTANGIBLE ASSETS                                                               

Beneficial lease rights are amortized using the straight-line method over the   
terms of the related leases. Accumulated amortization of  beneficial lease      
rights was $2.5 million at February 1, 1997 and $1.9 million at February 3,     
1996.                                                                           

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HILLS STORES COMPANY AND SUBSIDIARIES                                           
_______________________________________________________________________________ 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)                          

1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)                      
------------------------------------------------------                  

INTANGIBLE ASSETS (CONTINUED)                                                   

Reorganization value in excess of amounts allocable to identifiable assets      
("Reorganization Value") is being amortized over twenty  years on a straight-   
line basis.  Accumulated amortization was $26.2 million at February 1, 1997     
and $20.1 million at February 3, 1996 (See Notes 3 and 16).                     

PREOPENING COSTS                                                                

Preopening costs consist of direct costs of opening a store and are charged to  
operations within the fiscal year that a new store opens.                       

INTEREST CAPITALIZATION                                                         

The Company capitalizes interest incurred in connection with the construction of
new stores and other major assets produced for the Company's own use.  In fiscal
1995, the Company capitalized $452,000 of such interest.  No interest was       
capitalized during fiscal 1996 and 1994.                                        

USE OF MANAGEMENT'S ESTIMATES                                                   

The preparation of financial statements in conformity with generally accepted   
accounting principles requires management to make estimates and assumptions     
that affect the reported amounts of assets and liabilities and disclosure of    
contingent assets and liabilities at the date of the financial statements and   
the reported amounts of revenues and expenses during the reporting period.      
Actual results could differ from those estimates.                               

Significant estimates used in preparation of the consolidated financial         
statements include income tax liabilities (including those associated with the  
Company's emergence from bankruptcy), self-insurance reserves for worker's      
compensation and general liabilities, and the estimated useful life of          
intangible assets.                                                              

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HILLS STORES COMPANY AND SUBSIDIARIES                                           
_______________________________________________________________________________ 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)                          

2.  PROPERTY AND EQUIPMENT                                                      
----------------------                                                  

                                                        [Enlarge/Download Table]
The components of property and equipment are listed below (in thousands):                                 

                                                                                  February 1,  February 3,
                                                                                     1997          1996   
                                                                                 ------------  -----------
                                                                                                          
  Fixtures and equipment                             $152,731         $156,658                            
  Leasehold improvements                               56,802           50,899                            
  Buildings                                            16,192           17,292                            
  Land                                                  3,430            3,430                            
  Improvements in progress                              3,633            2,919                            
                                                                                   --------      -------- 
                                                                                    232,788       231,198 
  Accumulated depreciation and amortization         (  59,087)       (  40,305)                           
                                                                                   --------      -------- 
                                                                                   $173,701      $190,893 
                                                                                   ========      ======== 

3.  REORGANIZATION VALUE IN EXCESS OF AMOUNTS ALLOCABLE TO IDENTIFIABLE ASSETS  
  --------------------------------------------------------------------------

                                                        [Enlarge/Download Table]
The activity for Reorganization Value is presented below (in thousands):                                  

                                                                                  February 1,  February 3,
                                                                                     1997          1996   
                                                                                 ------------  -----------
                                                                                                          
  Balance at beginning of period                     $107,514         $144,765                            
    Amortization                                    (   6,050)       (   7,755)                           
    Tax benefit applied to reduce                                                                         
      Reorganization Value                          (   2,592)       (   9,496)                           
    Impairment of long-lived assets and                                                                   
      store closings                                (   1,364)               -                            
    Reversal of liabilities established                                                                   
      in fresh-start                                        -        (  20,000)                           
                                                                                   --------      -------- 
  Balance at end of period                           $ 97,508         $107,514                            
                                                                                   ========      ======== 

In the fourth quarter of fiscal 1995, the Company determined that $20.0 million 
of liabilities established in fresh-start accounting for the purpose of         
relocating certain operations and facilities were no longer required, and,      
accordingly, these liabilities were reduced with a corresponding reduction in   
Reorganization Value.                                                           

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HILLS STORES COMPANY AND SUBSIDIARIES                                           
_______________________________________________________________________________ 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)                          

4.  OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES                                 
-------------------------------------------                             

                                                        [Enlarge/Download Table]
Significant components of other accounts payable and accrued expenses are                               
presented below (in thousands):                                                                         

                                                                               February 1,   February 3,
                                                                                  1997          1996    
                                                                              -----------   ----------- 
                                                                                                        
 Accrued payroll and related costs                  $ 17,327        $ 15,289                            
 Self-insurance accruals                              30,884          28,083                            
 Store closing accruals                               11,532               -                            
 Accrued Chapter 11 and related                                                                         
  reorganization costs                                 9,784          11,316                            
 Accrued distribution payable pursuant                                                                  
  to the Plan of Reorganization                        2,939           7,672                            
 Other                                               109,552         116,492                            
                                                                               --------       --------  
                                                                               $182,018       $178,852  
                                                                               ========       ========  

5.  REVOLVING CREDIT FACILITY                                                   
-------------------------                                               

Effective September 30, 1996, the Company, through its wholly-owned subsidiary  
Hills Department Store Company ("HDSC"), and C.R.H. International, Inc., a      
wholly-owned subsidiary of HDSC (collectively referred to as the "Borrowers"),  
obtained a new $300 million secured revolving credit facility (the "Facility"). 
This Facility replaced an existing facility.  Within the Facility, $200 million 
is available to secure letters of credit.  Borrowings under the Facility are    
limited by a borrowing base, as defined, and bear interest, at the option of    
the Borrowers, at either of (1) the Bank of America's "reference rate" plus a   
margin ranging from 0% to .75% or (2) LIBOR plus a margin ranging from 1.5% to  
2.5% (2.25% at February 1, 1997), determined quarterly by the Company's excess  
cash flow.  The Borrowers must pay commitment fees at an annual rate of 3/8% on 
the average daily unused portion of the commitment.  The Borrowers must also pay
letter of credit fees on the average undrawn amount at an annual rate ranging   
from 1.5% to 2.25%, determined quarterly by the Company's excess cash flow.  The
Facility is secured by a pledge of all of the capital stock of the Borrowers and
their subsidiaries (the "Subsidiaries") and a security interest in tangible and 
intangible assets of the Company, the Borrowers and the Subsidiaries, other than
certain fixtures and equipment and real estate.  The Facility is guaranteed by  
the Company and the Subsidiaries.  During March 1997, the Agreement was amended 
to extend the maturity date from September 30, 1999 to January 31, 2000 and to  
modify certain financial covenants.                                             

As amended in March 1997, the financial covenants under the Loan and Security   
Agreement (the "Agreement") require that the Company maintain levels of net     
worth and cash flow in excess of certain defined or computed amounts.  The      
Agreement also contains, among other restrictions, provisions limiting to       
varying degrees: business combinations, the issuance of certain kinds of        
additional debt and the repurchase and prepayment of debt.  Under the Agreement,
HDSC is permitted to make all transfers of funds to the parent company as       
necessary for the parent company to service its senior note interest obligations
and to otherwise conduct its activities as a holding company; however, such     
transfer can not be made for purposes other than in the normal course of        

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HILLS STORES COMPANY AND SUBSIDIARIES                                           
_______________________________________________________________________________ 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)                          

5.  REVOLVING CREDIT FACILITY (CONTINUED)                                       
-------------------------------------                                   

business.  The Agreement prohibits the payment of dividends on the Company's    
Common Stock.  Net assets of HDSC and its subsidiaries at February 1, 1997      
totaled $437 million.  In addition, the Facility requires the outstanding       
principal balance of loans to be zero for at least thirty consecutive days      
during the period from December 1 of each year to March 31 of the next year.    

In connection with this transaction, the Company recognized an extraordinary    
after-tax loss for early extinguishment of debt of $2.3 million ($3.8 million   
pretax) from the write-off of deferred financing costs related to the prior     
credit facility.  Front-end fees in connection with the Facility were $2.9      
million and will be amortized over the life of the Facility.                    

At February 1, 1997, the Company was in compliance with all covenants and       
restrictions, had maintained a Clean-Up Period of at least thirty consecutive   
days, had no direct borrowings under the Facility, and had outstanding letters  
of credit totalling $36.8 million.                                              

6.  SENIOR NOTES                                                                
------------                                                            

On April 19, 1996 the Company issued $195 million of unsecured 12 1/2% Senior   
Notes (the "New Senior Notes") due 2003.  The New Senior Notes are noncallable, 
unconditionally guaranteed by all the subsidiaries of the Company, with interest
payable semiannually.  The subsidiary guarantees are subordinated to bank debt. 
The New Senior Notes contain covenants regarding limitations on debt incurrence 
and the issuance of preferred stock.  Separate financial statements of the      
Company's subsidiary guarantors have not been provided because (1) the          
subsidiary guarantors constitute all of the Company's direct and indirect       
subsidiaries, (2) they have fully and unconditionally guaranteed the New Senior 
Notes on a joint and several basis, (3) their aggregate assets, liabilities,    
earnings and equity are substantially equivalent to those of the Company on a   
consolidated basis, and (4) separate financial statements are not deemed to be  
material to investors.  Additionally, both the terms of the Company's revolving 
credit facility and the New Senior Notes limit the ability of the subsidiaries  
to pay dividends (see Note 5).                                                  

In connection with the sale of the New Senior Notes, the Company offered to     
redeem all of its outstanding 10.25% Senior Notes due 2003 (the "Old Senior     
Notes") at a redemption price equal to 101% of principal, plus accrued interest.
Pursuant to this offer, the Company subsequently redeemed approximately $155    
million of its approximately $157.5 million of outstanding Old Senior Notes.    
The Company later called for redemption the approximately $2.5 million of       
remaining outstanding Old Senior Notes at the indenture specified price of 104% 
of principal plus accrued interest.  In addition, the Company deposited, in     
trust, funds sufficient to redeem, upon issuance, approximately $2.5 million of 
Old Senior Notes yet to be issued under the terms of the Company's 1993 Plan    
of Reorganization (the "POR").  As a result of these transactions, the Company  
recognized an extraordinary after-tax loss for early extinguishment of debt of  
$2.0 million ($3.5 million pretax).  The extraordinary loss included the        
redemption premiums and the write-off of the related deferred financing costs.  

The estimated fair value of the New Senior Notes was $143.8 million at          

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HILLS STORES COMPANY AND SUBSIDIARIES                                           
_______________________________________________________________________________ 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)                          

6.  SENIOR NOTES (CONTINUED)                                                    
-----------------------                                                 

February 1, 1997.  The estimated fair value of the Old Senior Notes was $152.8  
million at February 3, 1996.  These values were based on quoted market prices   
in effect at those dates.                                                       

In the fourth quarter of fiscal 1994, the Company determined that due to        
changing market conditions $9.6 million of liabilities included in "Other       
accounts payable and accrued expenses" related to a potential refinancing of    
the Senior Notes were no longer required, and in accordance with AICPA Practice 
Bulletin 11: "Accounting for Preconfirmation Contingencies in Fresh-Start       
Reporting," these liabilities were reversed and included in selling and         
administrative expenses.                                                        

7.  LEASE COMMITMENTS                                                           
-----------------                                                       

The Company's operations are conducted predominantly in leased properties which 
consist principally of retail outlets.  Leases are generally for periods between
twenty to thirty years plus renewal options and generally include fixed rentals 
and rentals based on sales in excess of predetermined levels.                   

                                                        [Enlarge/Download Table]
The composition of property under capital leases, net of accumulated                                             
amortization, is shown below (in thousands):                                                                     

                                                                              February 1,     February 3,        
                                                                                         1997            1996    
                                                                                      -----------     -----------
                                                                                                                 
Retail outlets                                     $138,094        $131,408                                      
Other                                                   982           6,476                                      
                                                                                       --------        --------  
                                                                                        139,076         137,884  
Accumulated amortization                          (  26,875)      (  24,099)                                     
                                                                                       --------        --------  
Property under capital leases, net                 $112,201        $113,785                                      
                                                                                       ========        ========  
                                                        [Enlarge/Download Table]
Consolidated rental expense under operating leases and rental expense based on                                                
sales in excess of predetermined levels under capital leases are presented                                                    
below (in thousands):                                                                                                         

                                                                                   Fiscal Year    Fiscal Year     Fiscal Year 
                                                                                      Ended           Ended          Ended    
                                                                                    February 1,    February 3,     January 28,
                                                                                       1997           1996           1995     
                                                                          ---------------------------------------------       
                                                                                                                              
  Capital leases:                                                                                                             
   Rental based on sales            $   801        $ 1,251         $ 1,577                                                    
  Operating leases:                                                                                                           
   Minimum facility rentals          29,125         26,133          23,519                                                    
   Equipment and other rentals       14,647         17,706          17,757                                                    
   Rental based on sales              1,511          1,244           1,404                                                    
                                                                                    -------        -------         -------    
  Consolidated rental expense       $46,084        $46,334         $44,257                                                    
                                                                                    =======        =======         =======    

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HILLS STORES COMPANY AND SUBSIDIARIES                                           
_______________________________________________________________________________ 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)                          

7.  LEASE COMMITMENTS (CONTINUED)                                               
----------------------------                                            

During 1996 and 1994, the Company obtained $16.6 million and $25.2 million,     
respectively, of financing for certain of its real property and equipment       
through sale/leaseback arrangements.  The related property for those            
transactions which were accounted for as financings, under which the property   
remains on the Company's books and continues to be depreciated, is included in  
Property and equipment and has a net book value of $64.8 million at February 1, 
1997.  The leases, which have terms from 42 months to ten years, include options
to purchase some or all of the assets either at the end of the initial lease    
term or renewal periods at an amount not greater than the then current fair     
market value of the properties.                                                 

                                                        [Enlarge/Download Table]
Minimum future lease commitments under noncancelable leases in effect at                                                                         
February 1, 1997 are listed below (in thousands):                                                                                                

                                                                                   Capital     Financing     Operating                           
  Fiscal years:                      Leases    Obligations      Leases    Total                                                                  
                                                                                  ---------------------------------------------                  
                                                                                                                                                 
     1997                          $ 19,916     $ 6,692      $ 36,729   $ 63,337                                                                 
     1998                            19,488       8,369        31,347     59,204                                                                 
     1999                            19,085       7,699        29,279     56,063                                                                 
     2000                            17,398       7,789        27,593     52,780                                                                 
     2001                            16,942       6,257        24,743     47,942                                                                 
     Thereafter                     168,380      22,068       133,332    323,780                                                                 
                                                                                  ---------------------------------------------                  
  Minimum rental commitments        261,209      58,874      $283,023   $603,106                                                                 
                                                                                                                              ===================
  Less amount representing                                                                                                                       
   interest                         134,434      23,755                                                                                          
                                                                                  --------     -------                                           
  Present value of net minimum                                                                                                                   
   lease payments                   126,775      35,119                                                                                          
  Current portion                 (   6,236)   (  1,019)                                                                                         
                                                                                  --------     -------                                           
                                                                                  $120,539     $34,100                                           
                                                                                  ========     =======                                           

8.  EMPLOYEE BENEFITS                                                           
-----------------                                                       

PENSION PLANS                                                                   

The Company's Board of Directors authorized the termination, effective April 30,
1994, of the Company's pension plan.  In connection with the termination of the 
pension plan, a participant's vested benefits were calculated based on all      
credited service, pension earnings, and contributions up to April 30, 1994.     

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HILLS STORES COMPANY AND SUBSIDIARIES                                           
_______________________________________________________________________________ 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)                          

8.  EMPLOYEE BENEFITS (CONTINUED)                                               
-----------------------------                                           

PENSION PLANS (CONTINUED)                                                       

There was no asset reversion to the Company as plan assets in excess of benefit 
obligations, as adjusted for the termination of the plan, were allocated to     
participants.  The settlement of the vested benefit obligation by the purchase  
of nonparticipating annuity contracts for, or the optional lump sum rollover to 
the 401(k) plan account for, each covered employee was completed in fiscal 1995.
In the first quarter of fiscal 1994, the Company recorded a $4.5 million gain,  
which was included in selling and administrative expenses, related to the       
curtailment and settlement of the pension plan and the elimination of the       
related pension obligation.                                                     

Net pension expense included in the results of operations was $830,000 for      
fiscal 1994.  The discount rate used in determining the actuarial present value 
of projected benefit obligations was 7.0% and the expected long-term rate of    
return on plan assets used in determining net pension expense was 8.0%.         

In fiscal 1994, the Company adopted an expanded defined contribution 401(k)     
savings plan (the "401(k)") for employees meeting certain employment conditions.
In addition to permitting employee contributions, the 401(k) plan provides for  
company matching contributions.  Company matching contributions were $3.6       
million in fiscal 1996, $3.9 million in fiscal 1995 and $3.0 million in fiscal  
1994.                                                                           

OTHER                                                                           

The Company accounts for postretirement benefits (such as health care) in       
accordance with Statement of Financial Accounting Standards No. 106: "Employers'
Accounting for Postretirement Benefits Other Than Pensions" ("FAS 106").  This  
statement requires accrual of postretirement benefits during the years an       
employee provides services.  Under FAS 106, the Company recognized expenses of  
$0.2 million in fiscal 1996, $0.2 million in fiscal 1995 and $0.4 million in    
fiscal 1994.  The Company funds benefit costs principally on a pay-as-you-go    
basis.  The status of the plan is as follows (in thousands):                    

                                                                [Download Table]

                                                       February 1,  February 3,
                                                           1997         1996   
                                                       -----------  -----------
                                                                               
Accumulated postretirement                                                     
 benefit obligation ("APBO") for:                                              
   Active employees                  $ 2,212  $ 1,904                          
   Retirees                              303      573                          
                                                         -------       ------- 
                                                           2,515         2,477 
Plan assets at fair value                  -        -                          
                                                         -------       ------- 
Unfunded APBO                          2,515    2,477                          

Unrecognized gain                      1,329    1,294                          
                                                         -------       ------- 
Accrued postretirement benefit cost  $ 3,844  $ 3,771                          
                                                         =======       ======= 

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HILLS STORES COMPANY AND SUBSIDIARIES                                           
_______________________________________________________________________________ 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)                          

8.  EMPLOYEE BENEFITS (CONTINUED)                                               
-----------------------------                                           

OTHER (CONTINUED)                                                               

The assumed health care cost trend rate used in measuring the APBO was 11% in   
fiscal 1996 (9% for Medicare eligible retirees); grading down to 5% (5% for     
Medicare eligible retirees) by fiscal 2002 and remaining at that level          
thereafter.  A one percentage point increase in the assumed health care cost    
trend rate would increase the APBO at the end of fiscal 1996 by $387,000 (or    
by 15%) and the service and interest cost by $38,000 (or by 11%).  The assumed  
discount rate used in determining the APBO was 7% for both years.               

9.  HILLS STORES SERIES A CONVERTIBLE PREFERRED STOCK                           
-------------------------------------------------                       

The Company is authorized to issue 15,000,000 shares of preferred stock, par    
value of $0.10 per share.  Pursuant to the POR a total of 5,000,000 of such     
shares are authorized to be issued as payment and cancellation of prepetition   
liabilities and interests and designated as Hills Stores Series A Convertible   
Preferred Stock (the "Preferred Stock").  As of February 1, 1997, a total of    
51,092 shares of the 5,000,000 shares of the Preferred Stock remain to be       
issued pending resolution of prepetition claims and interests.                  

The Preferred Stock is convertible by the holders, at any time, into Hills      
Stores Common Stock ("Common Stock") at a rate of one share of Common Stock     
for each share of the Preferred Stock, subject to antidilution adjustments.     
During fiscal 1996, 234,674 shares of the Preferred Stock were converted to     
Common Stock on a share for share basis. As of February 1, 1997 and February 3, 
1996, 941,344 and 1,171,779 shares, respectively, were outstanding.             

Each holder of the Preferred Stock has one vote per share in the same class as  
the holders of Common Stock.  The holders of the Preferred Stock are entitled   
to dividends when and if declared by the Board of Directors; however, dividend  
payments are restricted under the terms of the Facility and the New Senior      
Notes.  The Company does not expect to pay dividends in the foreseeable future. 

The Company may redeem, at its option prior to October 4, 2008, all or part of  
the outstanding shares of the Preferred Stock at $20 per share; and in any case 
shall redeem all outstanding shares of the Preferred Stock on October 4, 2008   
at $20 per share.  Upon dissolution or liquidation of the Company, the holders  
of the Preferred Stock will be entitled to receive $20 per share out of the     
assets of the Company available for distribution to shareholders, in preference 
to the holders of Common Stock and any other class or series of capital stock of
the Company that is junior to the Preferred Stock.                              

10.  HILLS STORES COMMON STOCK                                                  
-------------------------                                             

Pursuant to the POR, a total of 9,000,000 shares of Common Stock are authorized 
to be issued as payment for prepetition liabilities and cancellation of old     
preferred stock interests.  As of February 1, 1997, a total of 59,341 shares of 
the 9,000,000 shares of Common Stock remain to be issued pending resolution of  
prepetition claims and interests.  Each holder of Common Stock has one vote per 

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HILLS STORES COMPANY AND SUBSIDIARIES                                           
_______________________________________________________________________________ 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)                          

10.  HILLS STORES COMMON STOCK (CONTINUED)                                      
-------------------------------------                                 

share  and is entitled to dividends when and if declared by the Board of        
Directors; however, dividend payments are restricted under the terms of the     
Facility and the New Senior Notes.  The Company does not expect to pay dividends
in the foreseeable future.                                                      

11.  STOCK COMPENSATION PLANS                                                   
------------------------                                              

In October 1995, the Financial Accounting Standards Board issued Statement of   
Financial Accounting Standards No. 123, "Accounting for Stock-Based             
Compensation" ("FAS 123").  FAS 123 encourages, but does not require, the       
recognition of compensation expense for the fair value of stock options and     
other equity instruments issued to employees.  This statement gives entities a  
choice of recognizing related compensation expense by adopting the new fair     
value method or to continue to measure compensation using the intrinsic value   
approach under Accounting Principles Board Opinion No. 25 ("APB 25"), the       
former standard.  If the fair value provisions of FAS 123 are not adopted,      
companies are required to disclose the proforma amounts of net earnings and     
earnings per share that would have been reported had these provisions been      
adopted.  The Company has choosen to continue to recognize compensation expense 
under APB 25.  Accordingly, no compensation cost has been recognized for its    
fixed stock option plans, other than approximately $73,000 for options granted  
in connection with consulting services during fiscal 1996.                      

The Company has stock-based compensation plans, which are described below.      

1993 STOCK OPTION PLAN                                                          

In October 1993, the Company established an incentive and nonqualified stock    
option plan (the "Option Plan") providing for the grant of nonqualified stock   
options or incentive stock options.  The options are granted at prices greater  
than or equivalent to the market price of the Common Stock on the date of each  
grant.  The options are generally subject to a five year vesting schedule, with 
initial vesting beginning one year from the date of the grant, and expire ten   
years from the date of the grant.  A total of 1,303,763 shares of Common Stock  
are reserved for grants of options under the Option Plan.  During fiscal 1996   
and 1995 eligible participants were allowed, for a limited time, to exchange    
existing options for new options with an exercise price of $10.125 and $12.00,  
respectively.  On March 11, 1997, eligible participants were allowed to         
exchange existing options for a reduced number of new options with an exercise  
price of the greater of $5.00 or the closing share price on the date of         
acceptance.  The repriced options are subject to additional vesting restrictions
which prohibit exercise of any vested option for one year and 50% of the vested 
options for two years from the date of the new grant.                           

1996 DIRECTORS STOCK OPTION PLAN                                                

During fiscal 1996, the Company received shareholder approval of a stock option 
plan for non-employee members of the Board of Directors.  The plan provided for 
an initial grant of 4,000 options to each non-employee member of the Board of   
Directors with subsequent annual automatic grants of 2,000 options.  All        

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HILLS STORES COMPANY AND SUBSIDIARIES                                           
_______________________________________________________________________________ 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)                          

11.  STOCK COMPENSATION PLANS (CONTINUED)                                       
------------------------------------                                  

options are granted at prices greater than or equivalent to the market price    
of the Common Stock on the date of each grant.  The options are subject to a    
three year vesting schedule with vesting beginning from the date of the grant.  
A total of 100,000 shares of Common Stock are reserved for grants under the     
plan.  On March 11, 1997, participants were allowed to exchange existing options
for a reduced number of new options with an exercise price of the greater of    
$5.00 or the closing share price on the date of acceptance.  The repriced       
options are subject to additional vesting restrictions which prohibit exercise  
of any vested option for one year and 50% of the vested options for two years   
from the date of the new grant.                                                 

RESTRICTED STOCK AGREEMENTS                                                     

In fiscal 1996, the Company entered into restricted stock agreements with the   
Chairman of the Board and the President and Chief Executive Officer. Pursuant   
to the agreements, the Company issued 120,000 shares of Common Stock subject to 
certain restrictions.  Unearned compensation was charged for the market value   
of the restricted shares, shown as a reduction of common shareholders' equity   
in the accompanying consolidated balance sheet, and is being amortized ratably  
over the restricted period.  The weighted-average fair value of shares granted  
during fiscal 1996 was $10.02.  During fiscal 1996, approximately $405,000      
was charged to expense.                                                         

PROFORMA INFORMATION                                                            

Had compensation cost for the Company's two fixed stock option plans been       
determined based on the fair value at the grant dates for awards under those    
plans consistent with the method of FAS 123, the Company's net loss and loss    
per share would have been reduced to the proforma amounts indicated below:      

                                                        [Enlarge/Download Table]

                                                                                                 1996       1995    
                                                                                                ---------  ---------
                                                                                                                    
Net loss                      As reported  ($35,058)  ($16,666)                                                     
                                                                 Proforma  ($36,349)  ($18,244)                     

Primary loss per share        As reported  ($  3.42)  ($  1.70)                                                     
                                                                 Proforma  ($  3.55)  ($  1.86)                     

Fully-diluted loss per share  As reported  ($  3.39)  ($  1.66)                                                     
                                                                 Proforma  ($  3.52)  ($  1.82)                     


The effects of applying FAS 123 in this proforma disclosure are not indicative  
of future amounts.  The proforma disclosure does not include awards prior to    
1995 and additional awards are anticipated in future years.                     

The fair value of each option grant is estimated on the date of grant using the 
Black-Scholes option-pricing model with the following weighted-average          
assumptions used for grants in fiscal 1996 and 1995: dividend yield of zero;    
expected volatility of 50%, risk-free interest rate of 5.83% and 5.77%,         
respectively; and expected lives of five years.                                 

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HILLS STORES COMPANY AND SUBSIDIARIES                                           
_______________________________________________________________________________ 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)                          

11.  STOCK COMPENSATION PLANS (CONTINUED)                                       
------------------------------------                                  

ƒ WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.

                                                        [Enlarge/Download Table]

A summary of the status of the Company's fixed stock option plans as of February 1, 1997, February 3, 1996                                                                    
and January 28, 1995 and changes during the years ending on those dates is presented below:                                                                                   

                                                                                                                         1996                         1995                1994
                                                                                       -------------------------    -------------------------   ------------------------      
                                                                               Weighted-                    Weighted-                   Weighted-                             
                                                                                       Average                      Average                     Average                       
Fixed Options                           Shares    Exercise Price     Shares    Exercise Price    Shares   Exercise Price                                                      
                                                                                                                                                                              
Outstanding at beginning of year        416,797     $ 12.36        1,014,021     $ 18.48        876,500      $ 18.25                                                          
Granted                                 678,751       11.08          203,000       12.75        191,000        19.50                                                          
Exchanged November 4, 1995                    -           -       (  337,200)      18.26              -            -                                                          
Issued in exchange on November 4, 1995        -           -          224,797       12.00              -            -                                                          
Exchanged on March 8, 1996            ( 330,000)      12.00                -           -              -            -                                                          
Issued in exchange on March 8, 1996     330,000       10.12                -           -              -            -                                                          
Exercised                                     -           -       (    4,300)      18.25     (   11,979)       18.25                                                          
Forfeited                             ( 223,968)      12.42       (  683,521)      18.49     (   41,500)       18.25                                                          
                                                                                       --------                    ---------                  ---------                       
Outstanding at end of year              871,580 *     10.64 *        416,797       12.36      1,014,021        18.48                                                          
                                                                                        ========                    =========                  =========                      

Options exercisable at year-end         141,961 *                    231,894                    153,321                                                                       
Weighted-average fair value of                                                                                                                                                
  options granted during the year        $ 5.60                       $ 6.40                                                                                                  
<FN>                                                                                                                                                                          
*  As a result of the March 11, 1997 repricing, options anticipated to be outstanding and exercisable                                                                         
are 637,400 (weighted-average exercise price of $6.69) and 51,659, respectively.                                                                                              

                                                        [Enlarge/Download Table]

The following table summarizes information about fixed stock options outstanding at February 1, 1997:                                                              

                                                                                                      Options Outstanding                       Options Exercisable
                                                   ------------------------------------------------------     --------------------------------                     
                                                        Number       Weighted-Average                              Number                                          
    Range of         Outstanding         Remaining         Weighted-Average     Exercisable     Weighted-Average                                                   
  Exercise Prices     at 2/1/97      Contractual Life       Exercise Price       at 2/1/97       Exercise Price                                                    
                                                                                                                                                                   
           $ 3          10,000          9.97 years              $ 3.00                  -                -                                                         
    $ 7 to $ 8          89,500          9.71 years              $ 7.26                  -                -                                                         
    $10 to $13         766,080          8.63 years              $11.07            137,461           $12.00                                                         
    $18 to $19           6,000          6.76 years              $18.25              4,500           $18.25                                                         
                                     -------                                                    -------                                                            
                                       871,580                                                    141,961                                                          
                                       =======                                                    =======                                                          

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HILLS STORES COMPANY AND SUBSIDIARIES                                           
_______________________________________________________________________________ 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)                          

11.  STOCK COMPENSATION PLANS (CONTINUED)                                       
------------------------------------                                  

ASSOCIATE STOCK PURCHASE PLAN                                                   

Under the Associate Stock Purchase Plan, the Company is authorized to issue up  
to 500,000 shares of common stock to its full-time employees. Under the terms   
of the Plan, associates can choose each year to have up to ten percent of their 
annual base earnings, up to $25,000, withheld to purchase the Company's common  
stock.  The purchase price of the stock is 85 percent of the lower of its market
price at the commencement date or at the termination date of each offering      
period.  As of February 1, 1997, no offerings had as of yet been made.          

12.  SERIES 1993 STOCK RIGHTS                                                   
------------------------                                              

Pursuant to the POR, Series 1993 Stock Rights (the "Stock Rights") were issued  
under Stock Right Agreements.  Each Stock Right entitles the holder to acquire, 
at $0.01 per share, shares of Common Stock, subject to antidilution adjustments,
as determined pursuant to a formula which is based on the Company's proforma    
utilization of certain tax benefits as defined in the Stock Right Agreements.   
Shares under the Stock Right Agreements are not available for issuance until    
vested.  During 1995, the Company repurchased 693,949 of its 700,000 outstanding
stock rights in exchange for 198,271 shares of newly issued common stock.  The  
aggregate par value of the newly issued common stock was reclassified from      
Additional paid-in capital to Common Stock.  As of February 1, 1997 and         
February 3, 1996, 6,051 rights were outstanding.                                

13.  SERIES 1993 WARRANTS                                                       
--------------------                                                  

Pursuant to the POR, Series 1993 Warrants (the "Warrants") were issued.  Each   
Warrant entitles the holder to purchase, subject to antidilution adjustments,   
one share of Common Stock at $30 per share.  Initially, 432,990 shares of       
Common Stock were reserved for issuance upon exercise of the Warrants.  The     
Warrants are callable by the Company at $.01 per Warrant at any time after      
October 4, 1998 if the average closing price of Common Stock, subject to        
antidilution adjustments, for a period of thirty consecutive trading days is    
equal to or greater than $35 per share.  The Warrants expire on October 4, 2000.
During fiscal 1995, 87 warrants were exercised.  None were exercised during     
fiscal 1996 and 1994.  As of February 1, 1997 and February 3, 1996, 432,903     
warrants were outstanding.                                                      

14.  RIGHTS AGREEMENT                                                           
----------------                                                      

Pursuant to a Rights Agreement adopted on August 16, 1994, the Company declared 
a distribution of one purchase right (the "Right") for each share of Common     
Stock and Preferred Stock then outstanding.  Each Right would initially entitle 
the holder to purchase, subject to adjustment, one one-thousandth share of the  
Company's Series B Participating Cumulative Preferred Stock, consisting of      
55,000 shares authorized, $.10 par value per share, at an exercise price of $75 
per one one-thousandth share.  Each share of Common Stock and Preferred Stock   
issued after August 16, 1994 will also have one Right attached.  The Rights     
expire August 16, 2004 and, under certain conditions, may be redeemed by the    

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HILLS STORES COMPANY AND SUBSIDIARIES                                           
_______________________________________________________________________________ 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)                          

14.  RIGHTS AGREEMENT (CONTINUED)                                               
----------------------------                                          

Company at a price of $.01 per Right.  The Rights have no voting or dividend    
privileges and are not currently separable from the capital stock.  The Rights  
would become exercisable if certain events occurred relating to a person or     
group (the "Acquiring Person") acquiring or attempting to acquire 20% or more   
of the outstanding shares of capital stock other than through a qualifying      
tender offer.  Upon the occurrence of such an event, each Right (except the     
Rights beneficially owned by the Acquiring Person, which become null and void)  
entitles its holder to purchase for $75 the economic equivalent of Common       
Stock, or in certain circumstances, securities of the Acquiring Person, or its  
affiliate, worth twice as much.  After there is an Acquiring Person, the Rights 
may be exchanged, at the election of the Company, for consideration per Right   
consisting of one-half of the securities that would otherwise be issuable at    
that time.                                                                      

15.  IMPAIRMENT OF LONG-LIVED ASSETS AND STORE CLOSINGS                         
--------------------------------------------------                    

Effective February 4, 1996, the Company adopted Statement of Financial          
Accounting Standards No. 121: "Accounting for the Impairment of Long-Lived      
Assets and for Long-Lived Assets to be Disposed Of" ("FAS 121").  FAS 121       
requires that the carrying value of long-lived tangible and certain intangible  
assets be evaluated periodically in relation to the operating performance and   
estimated future cash flows of the underlying assets.  In accordance with       
FAS 121, the Company recognized pre-tax charges of $23.6 million ($11.7 million 
in the first quarter of fiscal 1996 and $11.9 million in the fourth quarter of  
fiscal 1996, in connection with the store closings and impairments) to reduce   
the carrying value of certain of its long-lived tangible and intangible assets  
to their estimated fair market value.  The impaired assets include property and 
equipment, beneficial lease rights and Reorganization Value related to          
underperforming stores.  The fair value was based on estimated future cash      
flows to be generated by these stores, discounted at a rate commensurate with   
the risks involved.                                                             

In January 1997, the Company announced plans to close ten stores during the     
first quarter of 1997 as part of its initiatives to improve profitability.  In  
connection with these closures, the Company recorded in fiscal 1996 a pretax    
charge of $10.1 million to cover costs for disposal of inventories ($5.3        
million), lease terminations, net ($3.2 million), and other related costs       
($1.6 million).                                                                 

During fiscal 1996, approximately $9.5 million was incurred and charged against 
the accrual for store closings, consisting primarily of costs related to        
disposal of inventories and store assets.  The majority of the February 1, 1997 
liability totalling $11.5 million is expected to be paid during fiscal 1997,    
with certain amounts relating to lease terminations extending through fiscal    
1998.                                                                           

These ten stores generated 4.6%, 3.9% and 2.2% of the total net sales of the    
Company during fiscal 1996, 1995 and 1994, respectively.  In addition, these    
stores had operating losses, excluding corporate overhead allocations, of $4.3  
million and $1.7 million for fiscal 1996 and fiscal 1995, respectively, and an  
operating profit of $1.8 million for fiscal 1994.                               

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HILLS STORES COMPANY AND SUBSIDIARIES                                           
_______________________________________________________________________________ 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)                          

16.  INCOME TAXES                                                               
------------                                                          

The Company accounts for income taxes in accordance with Statement of Financial 
Accounting Standards No. 109: "Accounting for Income Taxes" ("FAS 109").  Under 
FAS 109, deferred taxes are computed on the difference between the bases of     
assets and liabilities for tax reporting purposes and their corresponding bases 
for financial reporting purposes.  Deferred tax assets, net of appropriate      
valuation reserves, may be recorded.                                            

                                                        [Enlarge/Download Table]

Temporary differences and carryforwards which give rise to significant deferred                                              
tax assets and liabilities are as follows (in thousands):                                                                    

                                                                                    February 1, 1997      February 3, 1996   
                                                                                 Deferred     Deferred  Deferred     Deferred
                                                                                    Tax         Tax        Tax         Tax   
                                                                                   Asset     Liability    Asset     Liability
                                                                                 --------    ---------  --------    ---------
                                                                                                                             
Net operating loss and                                                                                                       
 tax credit carryforwards         $ 58,307   $      -      $ 65,461     $     -                                              
Capital lease obligations           49,959          -        51,584           -                                              
Assets under capital leases              -     45,544             -      47,141                                              
Accrued expenses                    37,102          -        33,281           -                                              
Beneficial lease rights             17,161          -        18,423           -                                              
Property and equipment                   -     15,359             -      19,942                                              
Inventories                         11,922          -         5,635           -                                              
Financing obligation-sale/                                                                                                   
 leaseback                          11,717          -        10,428           -                                              
Other                               10,629          -        13,273           -                                              
                                                                                 --------   --------    --------     ------- 
Total deferred taxes               196,797     60,903       198,085      67,083                                              
Valuation allowance              (  81,318)         -     (  88,758)          -                                              
                                                                                 --------   --------    --------     ------- 
Net deferred taxes                $115,479   $ 60,903      $109,327     $67,083                                              
                                                                                 ========   ========    ========     ======= 

The consummation of the POR resulted in a change in ownership for federal       
income tax purposes.  As a result, the Company's ability to utilize its net     
operating loss and tax credit carryforwards is subject to an annual limitation  
of $16.8 million.  This limitation may be reduced if additional changes in      
ownership are deemed to occur subsequent to October 4, 1993.  For the year ended
February 1, 1997, the Company utilized net operating loss carryforwards to      
offset $4.0 million in federal taxable income.  Total deferred tax assets as of 
February 1, 1997, include $81.3 million of deferred tax assets which arose      
before the Company's emergence from bankruptcy and which have been fully        
reserved.  For financial reporting purposes, any benefit derived from the       
reduction of the valuation allowance related to deferred tax assets in existence
at October 4, 1993 will not be credited to the tax provision, but instead will  
ultimately reduce Reorganization Value.                                         

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HILLS STORES COMPANY AND SUBSIDIARIES                                           
_______________________________________________________________________________ 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)                          

16.  INCOME TAXES (CONTINUED)                                                   
------------------------                                              

                                                        [Enlarge/Download Table]
Federal income tax carryforwards at February 1, 1997 consisted of $125.1                                          
million of net operating losses, $10.3 million of general business credits and                                    
$0.5 million of alternative minimum tax credits.  Except for the alternative                                      
minimum tax credits which do not expire, the carryforwards expire as follows                                      
(in thousands):                                                                                                   

                                                                                Net Operating             Tax     
                                                                                   Losses               Credits   
                                                                                ----------------------------------
                                                                                                                  
  Fiscal years:                                                                                                   
  2000                                   $      -             $   413                                             
  2001                                          -                 797                                             
  2002                                          -                 664                                             
  2003                                          -               1,369                                             
  2004                                          -               2,196                                             
  2005                                          -               1,547                                             
  2006                                     57,263                 949                                             
  2007                                     56,848                 797                                             
  2008                                     10,954                 944                                             
  2009                                          -                 174                                             
  2010                                          -                 492                                             
                                                                                ----------------------------------
                                                                                 $125,065             $10,342     
                                                                                ==================================
                                                        [Enlarge/Download Table]
The provision for income taxes consists of the following components                                                                     
(in thousands):                                                                                                                         

                                                                                                                       Fiscal Year Ended
                                                                                 February 1,      February 3,       January 28,         
                                                                                    1997             1996              1995             
                                                                                ----------------------------------------------          
                                                                                                                                        
Current provision:                                                                                                                      
  Federal                         ($   689)         $   227           $19,524                                                           
  State and local                    1,419               23             9,973                                                           
                                                                                  -------          -------           -------            
                                                                                      730              250            29,497            
Deferred provision:                                                                                                                     
  Federal                         (  9,159)        (  9,986)         ( 23,393)                                                          
  State and local                 (  3,173)        (  1,274)         (  7,591)                                                          
                                                                                  -------          -------           -------            
                                                                                 ( 12,332)        ( 11,260)         ( 30,984)           
Amount to be applied to                                                                                                                 
 reorganization value             (  2,398)          14,197            37,340                                                           
                                                                                  -------          -------           -------            
Income tax provision (benefit)    ($14,000)         $ 3,187           $35,853                                                           
                                                                                  =======          =======           =======            

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HILLS STORES COMPANY AND SUBSIDIARIES                                           
_______________________________________________________________________________ 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)                          

16.  INCOME TAXES (CONTINUED)                                                   
------------------------                                              

The income tax provision in each of the periods presented reflects an effective 
tax rate that differs from the statutory federal income tax rate for those      
periods.  For net earnings (loss) from operations before extraordinary items,   
the table below reconciles the federal statutory rate to the effective tax      
rate.                                                                           

                                                        [Enlarge/Download Table]

                                                                                              Fiscal Year Ended
                                                           February 1,   February 3,   January 28,             
                                                                      1997          1996          1995         
                                                        -------------------------------------------            
                                                                                                               
Statutory tax rate             (35.0%)  (35.0%)  35.0%                                                         
State and local income taxes,                                                                                  
 net of federal tax benefit    ( 2.7 )    3.7     6.4                                                          
Goodwill                         5.8     20.1     4.1                                                          
Targeted jobs credit                                                                                           
 and other, net                  0.6      0.7     1.5                                                          
Change in control costs            -     34.2       -                                                          
                                                                            -----         -----         -----  
Effective tax rate             (31.3%)   23.7%   47.0%                                                         
                                                                            =====         =====         =====  

On December 27, 1994, the Company reached a final settlement with the Internal  
Revenue Service (the "IRS") for the periods ended January 1988 through January  
1990.  The final settlement resulted in no tax deficiencies being assessed.     
The IRS is nearing completion of its audit of fiscal 1991, 1992 and 1993.  The  
Company has filed a Protest to certain adjustments proposed by the IRS.  The    
Company does not believe the final adjustments resulting from this examination  
would have a material adverse effect on the Company's financial condition.      

17.  EARNINGS PER SHARE                                                         
------------------                                                    

Primary earnings per share was computed based on the weighted average number of 
common and common equivalent shares assumed to be outstanding during each       
period.  Such shares amounted to 10,252,022, 9,809,675 and 14,105,498 for fiscal
1996, fiscal 1995 and fiscal 1994, respectively.  If primary earnings per share 
were calculated as if all conversions of preferred stock which occurred during  
the period took place at the beginning of such period, the net loss per share   
would have been $3.39 and $1.66 for fiscal 1996 and 1995, respectively.         

Fully-diluted earnings per share for each period also assumes, any Preferred    
Stock conversions in the period were converted at the beginning of such period  
and, if the effect is dilutive, the exercise of the Stock Rights.  Such shares  
amounted to 10,336,497, 10,029,442 and 14,831,568 for fiscal 1996, fiscal 1995  
and fiscal 1994, respectively.  Exercise of the Warrants is not assumed as      
their exercise would be antidilutive.  The weighted average number of shares    
reflects all shares of common and preferred stock intended to be issued in      
accordance with the POR.                                                        

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HILLS STORES COMPANY AND SUBSIDIARIES                                           
_______________________________________________________________________________ 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)                          

17.  EARNINGS PER SHARE (CONTINUED)                                             
------------------------------                                        

In February 1997, the Financial Accounting Standards Board issued Statement of  
Financial Accounting Standards No. 128, "Earnings per Share" ("FAS 128").       
FAS 128 is effective for financial statements, for both interim and annual      
periods, ending after December 15, 1997.  The Company has not determined the    
impact FAS 128 may have on its earnings per share calculations.                 

18.  COMMITMENTS AND CONTINGENCIES                                              
-----------------------------                                         

In September 1995, the Company and HDSC filed a suit in the Court of Chancery   
of the State of Delaware against the former members of the Board of Directors   
(the "Former Directors") of the Company.  That action seeks, among other things,
recovery of damages caused by the breach by the Former Directors of their       
fiduciary duties to shareholders arising from the refusal of the Former         
Directors to approve the change in control which took place on July 5, 1995 (the
"1995 Change of Control") following the election of seven replacement directors 
by the shareholders of the Company.  In October 1995, the defendants filed a    
motion to dismiss the suit.  In February 1996, the court granted a motion of the
Former Directors to stay discovery pending the outcome of their motion to       
dismiss.  In March 1997, the court denied the Former Directors' motion to       
dismiss.                                                                        

The Company and HDSC also filed suit against Smith Barney, Inc. in September    
1995 in the New York State Supreme Court for the County of New York, seeking    
damages for losses, as stated in the complaint, caused by the gross negligence  
of this firm in rendering financial advice to the Former Directors of the       
Company in breach of their fiduciary duties.  In April 1996, the court granted  
Smith Barney's motion to dismiss this suit.  In May 1996, the Company filed in  
the Appellate Division a Notice of Appeal of the trial court's dismissal of the 
suit.  The appeal is presently pending.                                         

In August 1995, in the Court of Chancery of the State of Delaware, three        
shareholders of the Company, Gayle Dolowich, Ivan J. Dolowich and Joseph Weiss, 
filed a class action lawsuit against the seven new directors of the Company     
elected at the 1995 annual meeting, Dickstein Partners Inc. ("Dickstein         
Partners") and the Company.  In November 1995, the plaintiffs amended their     
complaint to include a shareholder's derivative cause of action against the     
Former Directors for breach of their fiduciary duties to the Company and its    
shareholders.  In the amended complaint, the plaintiffs claim (under Section    
225 of the Delaware Corporation Code) that in connection with Dickstein Partners
effort to solicit proxies in support of the election of its nominees for        
directors of the Company, Dickstein Partners issued a number of false and       
misleading statements regarding its offer to acquire all of the Company's shares
it did not already own.  On the Section 225 claim, the plaintiffs seek an order 
nullifying the election of directors and declaring there has been "no change of 
control" of the Company.  The derivative cause of action seeks damages against  
the Former Directors.  In January 1996, in the same Delaware Chancery Court,    
another shareholder, Peter M. Fusco, filed a substantially similar class action 
and shareholder derivative suit against the parties named in the Dolowich suit. 
The Former Directors filed a motion to dismiss the Dolowich and Fusco suits, and
that motion was argued in October 1996 and is presently pending.                

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HILLS STORES COMPANY AND SUBSIDIARIES                                           
_______________________________________________________________________________ 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)                          

18.  COMMITMENTS AND CONTINGENCIES (CONTINUED)                                  
-----------------------------------------                             

The Company is involved in various other suits and claims in the ordinary course
of business.                                                                    

Management does not believe that the disposition of such suits and claims will  
have a material adverse effect upon the continuing operations and financial     
position of the Company.                                                        

19.  CHANGE IN CONTROL                                                          
-----------------                                                     

On July 5, 1995, following a proxy contest in connection with the annual        
meeting of shareholders held on June 23, 1995, nominees of Dickstein Partners   
were certified as being elected to the Board of Directors.  The Company         
reimbursed Dickstein Partners for, or directly paid, approximately $1.9 million 
in third-party fees and expenses incurred or committed to by Dickstein Partners 
in connection with the proxy contest and the related acquisition proposal of    
Dickstein Partners.  This amount included $1.0 million paid by the Company to   
the financial advisor of Dickstein Partners, in respect of the advisor's        
proposal to refinance the indebtedness of the Company accelerated as a result of
the election of the Dickstein Partners nominees.  These costs are included in   
the Consolidated Statements of Operations in Costs related to change in control.

In connection with the change in control, the Company recognized $45.5 million  
in expense, including $31.0 million related to severance and retirement         
payments, including certain taxes attributable thereto, to six senior           
executives, a consultant to the Company and approximately twenty associates of  
the Company, $6.0 million paid to holders of the Senior Notes, and legal and    
other miscellaneous change in control costs.                                    

20.  SELF-TENDER FOR COMMON STOCK                                               
----------------------------                                          

In August 1994, Dickstein Partners, L.P., et al. ("Dickstein") commenced a      
consent solicitation to replace four members of the then current Board of       
Directors with Dickstein nominees.  In response to the Dickstein consent        
solicitation, the Company's Board of Directors announced a program to enhance   
shareholder value, including the approval of a self-tender to purchase up to    
3,000,000 common shares at $25 per share in cash.  Effective February 21, 1995, 
the Company accepted for payment 3,000,000 shares of Common Stock which were    
validly tendered pursuant to the Company's offer, and for which payment of      
$75,000,000 was made in March 1995.  The excess of the purchase price over the  
original issue price of the Common Stock, or $15,000,000, was charged to        
retained earnings.  In connection with the offer, 561,863 shares of Preferred   
Stock were converted to Common Stock.                                           

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HILLS STORES COMPANY AND SUBSIDIARIES                                           
_______________________________________________________________________________ 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)                          

21.  STATEMENTS OF CASH FLOWS                                                   
------------------------                                              

                                                        [Enlarge/Download Table]
Supplemental disclosures of cash flow information are presented in the table                                                     
below:                                                                                                                           
<capiton>                                                                                                                        
                                                                                  Fiscal Year    Fiscal Year     Fiscal Year     
                                                                                             Ended         Ended            Ended
                                                                                  February 1,    February 3,     January 28,     
(in thousands)                           1997           1996            1995                                                     
                                                                                 ------------------------------------------      
                                                                                                                                 
NONCASH INVESTING AND                                                                                                            
 FINANCING ACTIVITIES:                                                                                                           

 Preferred stock conversions                                                                                                     
  to common stock                       $ 4,694        $39,508          $35,856                                                  
 Capital lease obligations, net           3,735              -                -                                                  

CASH PAID (RECEIVED):                                                                                                            

 Interest                                50,122         38,655           34,731                                                  
 Income taxes                          (  8,956)        17,877            8,562                                                  


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HILLS STORES COMPANY AND SUBSIDIARIES                                           
_______________________________________________________________________________ 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)                          

22.  QUARTERLY FINANCIAL INFORMATION (UNAUDITED)                                
-------------------------------------------                           

                                                        [Enlarge/Download Table]

(in thousands,                         First      Second      Third      Fourth                                                     
except per share amounts)             Quarter     Quarter    Quarter     Quarter                                                    
                                                                               -----------------------------------------------------
FISCAL 1996                                                                                                                         
-----------                                                                                                                         
                                                                                                                                    
Net sales                            $370,248    $388,600    $460,983    $658,646                                                   
                                                                                  ========     ========     ========     ========   
Gross profit                         $ 99,263    $ 97,691    $120,831    $168,339                                                   
                                                                                  ========     ========     ========     ========   
Loss before extraordinary loss      ($ 14,738)  ($ 10,321)  ($  2,804)  ($  2,917)(1)                                               
                                                                                  ========     ========     ========     ========   
Net loss                            ($ 14,738)  ($ 12,367)  ($  5,036)  ($  2,917)(1)                                               
                                                                                  ========     ========     ========     ========   
Primary loss per common share:                                                                                                      
 Loss before extraordinary loss     ($   1.45)  ($   1.01)  ($   0.27)  ($   0.28)                                                  
 Extraordinary loss                         -   (    0.20)  (    0.22)          -                                                   
                                                                                  --------     --------     --------     --------   
 Net loss                           ($   1.45)  ($   1.21)  ($   0.49)  ($   0.28)                                                  
                                                                                  ========     ========     ========     ========   
Fully-diluted loss per common share:                                                                                                
 Loss before extraordinary loss     ($   1.45)  ($   1.01)  ($   0.27)  ($   0.28)                                                  
 Extraordinary loss                         -   (    0.20)  (    0.22)          -                                                   
                                                                                  --------     --------     --------     --------   
 Net loss                           ($   1.45)  ($   1.21)  ($   0.49)  ($   0.28)                                                  
                                                                                  ========     ========     ========     ========   

                                                        [Enlarge/Download Table]


FISCAL 1995                                                                                                                
-----------                                                                                                                
                                                                                                                           
Net sales                            $362,862     $389,424     $448,033     $699,785                                       
                                                                                     ========  ========  ========  ========
Gross profit                         $101,310     $100,741     $124,694     $188,938                                       
                                                                                     ========  ========  ========  ========
Net earnings (loss)                 ($  4,337)   ($ 45,170)    $ 22,441(2)  $ 10,400 (2)(3)                                
                                                                                     ========  ========  ========  ========
Primary earnings (loss) per                                                                                                
 share                              ($   0.45)   ($   4.66)    $   2.01(2)  $   0.93 (2)                                   
                                                                                     ========  ========  ========  ========
Fully-diluted earnings (loss) per                                                                                          
 share                              ($   0.42)   ($   4.64)    $   1.98     $   0.93                                       
                                                                                     ========  ========  ========  ========
<FN>                                                                                                                       
(1)  Loss before extraordinary loss and net loss in the fourth quarter of fiscal 1996                                      
included $22.8 million of additional income tax expense resulting from a change in                                         
the estimated annual effective tax rate.                                                                                   

(2)  The Company reclassified $7.2 million before taxes, of change in control costs from                                   
its previously announced fiscal 1995 fourth quarter results to the third quarter.  The                                     
effect of the change is to decrease third quarter net earnings by $3.0 million, or $0.27                                   
per share on a primary basis, and to increase fourth quarter net earnings by $3.0 million,                                 
or $0.27 per share on a primary basis, from the amounts previously reported.                                               

(3)  Net earnings in the fourth quarter of fiscal 1995 included $11.0 million of additional                                
income tax expense resulting from a change in the estimated annual effective tax rate.                                     

                                                                            F-27

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INDEPENDENT AUDITORS' REPORT ON SCHEDULES                                       

To the Board of Directors and Stockholders of                                   
Hills Stores Company and Subsidiaries:                                          

We have audited the accompanying consolidated financial statements of Hills     
Stores Company and Subsidiaries as of February 1, 1997 and February 3, 1996 and 
for the years then ended, and have issued our report thereon dated March 11,    
1997; such consolidated financial statements and report are included elsewhere  
in this Form 10-K.                                                              

Our audits also included the consolidated financial statement schedule of Hills 
Stores Company and Subsidiaries for the years ended February 1, 1997 and        
February 3, 1996, listed in Item 14(a)(2).  This financial statement schedule   
is the responsibility of the Company's management.  Our responsibility is to    
express an opinion based on our audits.  In our opinion, such consolidated      
financial statement schedule, when considered in relation to the basic          
consolidated financial statements taken as a whole, presents fairly in all      
material respects the information set forth therein.                            

DELOITTE & TOUCHE LLP                                                           

Boston, Massachusetts                                                           
March 11, 1997                                                                  

                                                                             S-1

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                                                 INDEPENDENT ACCOUNTANTS' REPORT

To the Shareholders and Board of Directors                                      
of Hills Stores Company and Subsidiaries:                                   

Our report on the consolidated financial statements of Hills Stores Company and 
Subsidiaries is included on page F-2 of this Form 10-K.  In connection with our 
audit of such financial statements, we have also audited the related financial  
statement schedule listed in the index on page 19 of this Form 10-K.            

In our opinion, the financial statement schedule referred to above, when        
considered in relation to the basic financial statements taken as a whole,      
presents fairly, in all material respects, the information required to be       
included therein.                                                               

                                                        Coopers & Lybrand L.L.P.

Boston, Massachusetts                                                           
March 10, 1995                                                                  

                                                                             S-2

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HILLS STORES COMPANY AND SUBSIDIARIES                                           
_______________________________________________________________________________ 

                                                        [Enlarge/Download Table]
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS                                                                                                 

For the Fiscal Years Ended February 1, 1997, February 3, 1996 and January 28,                                                                   
1995.                                                                                                                                           

                                                                                                                          Additions             
                                                                                      Balance at    Charged to  Deductions            Balance at
                                                                                      Beginning      Cost and      from                 End of  
(in thousands)                        of Period      Expense        Reserves      Other        Period                                           
-------------------------------------------------------------------------------------------------------                                         
                                                                                                                                                
FISCAL YEAR ENDED FEBRUARY 1, 1997:                                                                                                             

Allowance for doubtful accounts       $3,459        $1,697         ($  655)      $    -        $4,501                                           
                                                                                      ======        ======       ======       ======    ======  

FISCAL YEAR ENDED FEBRUARY 3, 1996:                                                                                                             

Allowance for doubtful accounts       $4,228        $1,010         ($1,779)      $    -        $3,459                                           
                                                                                      ======        ======       ======       ======    ======  

FISCAL YEAR ENDED JANUARY 28, 1995:                                                                                                             

Allowance for doubtful accounts       $5,497        $  866         ($2,135)      $    -        $4,228                                           
                                                                                      ======        ======       ======       ======    ======  


                                                                             S-3

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EXHIBIT INDEX     

                                                                [Download Table]

                              Pursuant to Item 601 of Regulation S-K               



Exhibit                 Title                                                      
-------                 -----                                                      
                                                                                   
10.4     Consulting Agreement made as of February 8, 1997 with Chaim Y.            
                         Edelstein                                                 

10.7     Separation Agreement dated February 7, 1996 between the Company           
                         and E. Jackson Smailes                                    

10.8     Confidential Separation Agreement, Voluntary Release and Notice           
                         dated March 6, 1997 between the Company and James E. Feldt

11.1     Computation of earnings per share                                         

21       Subsidiaries                                                              

23.1     Consent of Deloitte & Touche LLP                                          

23.2     Consent of Coopers & Lybrand L.L.P.                                       

24       Powers of Attorney of directors and officers of                           
                         the Company                                               

27       Financial Data Schedule                                                   


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                                                                    EXHIBIT 10.4

CONSULTING AGREEMENT made as of February 8, 1997, by and between Hills
Department Store Company, a Delaware corporation having its principal office at 
15 Dan Road, Canton, Massachusetts ("Principal Office"), and Hills Stores       
Company (the "Company"), a Delaware corporation having its principal office at  
the Principal Office, and Chaim Y. Edelstein the ("Consultant"), with an office 
address of 1040 Park Avenue-12E, New York, New York 10028.                      

   WHEREAS, Consultant is presently working for the Company as a consultant;
and                                                                             

     WHEREAS, the Company desires to secure the continued services of Consultant
and Consultant is willing to continue to provide such services.                 

   NOW, THEREFORE, in consideration of the premises and the mutual covenants
hereinafter contained, the Company and Consultant agree as follows:             

  SECTION 1.  ENGAGEMENT.  The Company hereby agrees to continue to engage
Consultant and Consultant hereby accepts such engagement.  The Consultant agrees
to commit a substantial portion of his professional time to providing consulting
services to the Company hereunder.                                              

    SECTION 2.  TERM.  The engagement of Consultant by the Company as provided
in Section 1 shall continue to February 7, 1998.                                

SECTION 3.  FEES AND EXPENSES.                                        

        (a) FEES.  Consultant shall receive the consulting fee, specified in
Schedule A.  Consultant will be paid in equal monthly installments on the 1st   
day following each calendar month in which consultant's services are provided to
the Company.                                                                    

          (b) BONUS.  Consultant shall receive, as a supplemental fee, the bonus
specified in Schedule A, upon the terms and conditions specified in Schedule A. 
Such bonus shall be paid to Consultant within sixty (60) days after the end of  
the Company's 1997 fiscal year.                                                 

 (c) EXPENSES.  The Company shall reimburse Consultant for all
reasonable and documented out-of-pocket expenses incurred by Consultant in      
connection with the business of the Company and in performance of Consultant's  
duties under this Agreement.                                                    

   SECTION 4.  TERMINATION BY THE COMPANY.  The Company shall have the right
to terminate Consultant's engagement at any time for "Cause."  For purposes of  
this Agreement, "Cause" shall mean (a) termination by action of a majority of   
the members of the Hills Stores Company's Board of Directors, because of:       

                                               1

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     (i) The Consultant's willful or intentional failure or refusal to
       perform or observe any of the Consultant's material duties,
            responsibilities or obligations set forth in, or as contemplated
             under, this Agreement, if such breach is not cured within 30 days
  after notice thereof to the Consultant by the Company;

        (ii) Any willful or intentional act or failure to act involving fraud,
               theft, embezzlement, dishonesty or moral turpitude (collectively,
             "Fraud") affecting the Company or any supplier or employee of the
Company; or                                         

      (iii) Conviction of (or a plea of nolo contendere to) an offense which
              is a felony in the jurisdiction involved or which is a misdemeanor
  in the jurisdiction involved but which involves Fraud.

The Company shall have the right to terminate Consultant's engagement 
hereunder at anytime without "cause."  If a termination without "cause" occurs: 

          (i) The Consultant shall be entitled to continuation of his consulting
fee payments through the end of the term, as set forth in Section 7(b).         

       (ii) Notwithstanding the termination of the Consulting Agreement, all
stock options and restricted stock grants issued to Consultant pursuant to the  
February 8, 1996 Consulting Agreement, which have not been otherwise terminated,
shall remain in effect and all vesting and exercise rights of Consultant shall  
continue as scheduled, without accelerated vesting.                             

    SECTION 5.  TERMINATION BY DEATH.  In the event Consultant dies during the
Term, Consultant's engagement shall terminate.                                  

SECTION 6.  TERMINATION BY DISABILITY.  In the event that Consultant  
suffers a disability which prevents Consultant from substantially performing    
Consultant's duties under this Agreement for a period of a least ninety (90)    
consecutive or nonconsecutive calendar days within any three hundred sixty-five 
(365) calendar day period, the Company shall have the right, after such ninety  
(90) calendar day period has elapsed, to terminate Consultant's engagement      
hereunder.                                                                      

     SECTION 7.  TERMINATION BY CONSULTANT.  Notwithstanding any other provision
of this Agreement, Consultant may terminate Consultant's engagement following a 
Change in Control, by written notice served upon the Company within thirty (30) 
calendar days after Consultant has knowledge of an event constituting "Good     
Reason."                                                                        

          (a) For purposes of this Agreement, the term "Change in Control" shall
mean any one of the following events:               

          (i)  any "person" as such term is used in Sections 3(a)(9) and
                        13(d) of the Securities Exchange Act of 1934, other than
                          Dickstein Partners Inc. and its Affiliates becomes a
                         "beneficial owner," as such term is used in Rule 13-d-3
                       promogulated under such Act, of 30% or more of the voting
                   stock of Hills Stores Company or the majority of the Board of

                                                                       2

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                        Directors of Hills Stores Company consist of individuals
                    other than Incumbent Directors, which term means the members
                   of the Board on the date of this Agreement; provided that any
                        person becoming a director subsequent to such date whose
                          election or nomination for election was supported by a
                      majority of the directors who then comprised the Incumbent
                      Directors shall be considered to be an Incumbent Director;

               (ii) the Company adopts any plan of liquidation providing for the
                   distribution of all or substantially all of the assets of the
      Company on a consolidated basis;

           (iii)  Hills Stores Company merges or combines with another company
                    and, immediately after the merger or combination, the stock-
                     holders of the Company immediately prior to the combination
                     hold, directly or indirectly, (1) in the event Hills Stores
                         Company is the surviving corporation 50% or less of the
                        voting stock of the combined company or (2) in the event
                    Hills Stores Company is not the surviving corporation 50% or
                    less of the voting stock or other ownership interests of the
                     entity or entities, if any, that succeed to the business of
Hills Stores Company; or  

                   (iv) the Company sells all or substantially all of its assets
         determined on a consolidated basis.

      For purposes of this Agreement, the term "Good Reason" shall mean:

           any failure by the Company to timely pay the amounts or provide
               the benefits prescribed by this Agreement, other than an isolated
             failure not occurring in bad faith and which is remedied promptly
        after receipt of written notice thereof given by Consultant.

        (b) In the event of (i) termination of this Agreement by the Company
         other than for Cause or (ii) termination of this Agreement by
             Consultant for Good Reason after a Change in Control, the Company
              shall continue to pay Consultant, the amounts described in Section
        3 and in the manner set forth in Section 3 of this Agreement
             throughout the term of the Agreement.  In the event the Company's
             performance bonus goals are met or exceeded for the year in which
              such a termination occurs, Consultant shall be entitled to receive
            a performance bonus which is prorated to reflect that portion of
            the year prior to the termination date, consulting services were
provided to the Company.                            

SECTION 8.  ACCELERATION AND EXPIRATION OF OPTIONS.                   

(a) Any options to purchase the Common Stock of the Company 
              ("Options") granted by the Company to Consultant that have not yet
            become exercisable shall become exercisable upon the earliest to
              occur of(i) the termination of Consultant's engagement as a result
        of Consultant's death or disability; (ii) the termination by
                Consultant with Good Reason; after a Change in Control. Notwith-
              standing the foregoing, all Options, whether currently exercisable
        or not, shall expire and cease to be exercisable as follows:

                                                                 3

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             (i)  if the Company terminates Consultant's engagement for Cause,
                        immediately upon the effective date of such termination;

        (ii)  if Consultant dies while engaged by the Company, six (6)
                   calendar months after Consultant's death; and

      (iii)  if Consultant's engagement is terminated as a result of
                    disability, six (6) calendar months after the effective date
of such termination.      

                (b) Notwithstanding the termination of this Consulting Agreement
        (provided Consultant's stock options, as shown on Schedule A
                hereto, have not been otherwise terminated pursuant to the terms
           of this Consulting Agreement or the terms of the 1993 Incentive
        and Nonqualified Stock Option Plan) as long as Consultant is
          available, willing and able to provide the Consulting services
      contemplated by this Agreement, the stock options shown on
          Schedule A shall remain in effect and all vesting and exercise
    rights of Consultant with respect to these options shall
continue.                                           

SECTION 9.  ACCELERATED VESTING OF RESTRICTED STOCK.  Consultant has  
received restricted stock grants from the Company which are subject to periodic 
vesting.  In the event Consultant's engagement with the Company is terminated   
(a) as a result of Consultant's death or disability or (b) by Consultant with   
good reason after a Change in Control, then all restricted stock held by        
Consultant, not otherwise vested, shall become fully vested, subject to the     
terms of the restricted stock agreement between the Company and Consultant.     

SECTION 10.  NO MITIGATION; NO OFFSET.  Consultant shall be under no  
obligation to mitigate damages or the amount of any payment provided for under  
this Agreement by seeking another engagement or otherwise and there shall be no 
offset against amounts due Consultant under this Agreement on account of any    
remuneration attributable to any subsequent engagement that Consultant may      
obtain.                                                                         

SECTION 11.  COVENANTS OF CONSULTANT.                                 

(a) Consultant recognizes that the knowledge of, information
             concerning and relationship with customers, suppliers and agents,
         and the knowledge of the Company's business methods, systems,
          plans and policies which Consultant will establish, receive or
          obtain as a consultant to the Company, are valuable and unique
        assets of the business of the Company.  Consultant will not,
            during or within two (2) years after the Term, disclose any such
              knowledge or information pertaining to the Company, its customers,
             suppliers, agents, policies or other aspects of the business, for
             any reason or purpose, whatsoever except pursuant to Consultant's
         duties hereunder or as otherwise authorized by the Company in
                   writing. The foregoing restriction shall not apply, following
             termination of Consultant's engagement hereunder, to knowledge or
                 information which (i) is in or enters the public domain without

                                                                 4

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violation of this Agreement or other obligations of 
                 confidentiality by Consultant or his agents or representatives,
      (ii) Consultant can demonstrate was in his possession on a
               nonconfidential basis prior to the commencement of his engagement
              with the Company, or (iii) Consultant can demonstrate was received
             or obtained by him on a non-confidential basis from a third party
       who did not acquire it wrongfully or under an obligation of
                confidentiality, subsequent to the termination of his engagement
hereunder.                                          

         (b) All memoranda, notes, records or other documents made or compiled
       by Consultant or made available to Consultant while engaged
                     concerning customers, suppliers, agents or personnel of the
          Company, or the Company's business methods, systems, plans and
            policies, shall be the Company's property and shall be delivered
              to the Company on termination of Consultant's engagement or at any
other time on request.                

      (c) During the term of the Consultant's engagement and for two (2)
               years thereafter, Consultant shall not, except pursuant to and in
       furtherance of his duties hereunder, directly or indirectly
               solicit or initiate contact with any employee of the Company with
        a view to inducing or encouraging such employee to leave the
                 employ of the Company for the purpose of being hired by
            Consultant, an employer affiliated with him or any competitor of
the Company.                                        

       (d) Consultant acknowledges that the provisions of this section are
                  reasonable and necessary for the protection of the Company and
              that the Company will be irrevocably damaged is such covenants are
                 not specifically enforced. Accordingly, Consultant agrees that,
       in addition to any other relief to which the Company may be
                 entitled in the form of actual or punitive damages, the Company
         shall be entitled to seek and obtain injunctive relief from a
                 court of competent jurisdiction for the purposes of restraining
              Consultant from any actual or threatened breach of such covenants.

       (e) In the event that, following the termination of this Agreement,
               Consultant is entitled to receive any further payments other than
             for compensation or other amounts accrued prior to termination or
         expiration of this Agreement, such payments shall nonetheless
           cease and the Company shall no longer be obligated to make such
             payments if there is a material breach of any of the covenants in
          this section and Consultant shall forthwith upon demand of the
           Company repay any such amounts paid to Consultant subsequent to
the date such breach occurred.                      

   SECTION 12.  ENTIRE AGREEMENT.  This Agreement contains the entire under-
standing of the parties with respect to the subject matter thereof, and, super- 
sedes and replaces in its entirety any and all prior agreements and arrangements
of the parties with respect to the subject matter hereof.                       

SECTION 13.  GOVERNING LAW.  This Agreement and all matters and issues
collateral thereto shall be governed by the laws of The Commonwealth of         
Massachusetts applicable to contracts performed entirely therein.               

                                                                 5

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    SECTION 14.  SEVERABILITY.  If any of this Agreement, as applied to either
party or to any circumstance, shall be adjudged by a court to be void and       
unenforceable, the same shall in no way affect any other provision of this      
Agreement or the validity or enforceability thereof.                            

    SECTION 15.  NOTICES.  All notices or other communications hereunder shall
be given in writing and shall be deemed given if served personally or mailed by 
registered or certified mail, return receipt requested, to the parties at their 
respective addresses indicated below, or at such other address or addresses as  
they may hereafter designate in writing                                         

To the Company c/o: Hills Stores Company                    
                                 15 Dan Road
                                  Canton, MA  02021-9128
                                           ATTN:  Vice President-Secretary
                                                             & Corporate Counsel

To the Consultant:  At the address noted on Exhibit A.      

   IN WITNESS WHEREOF, the parties have executed this Agreement on
February 8, 1997.                                                               

                                                       /s/ Chaim Edelstein
                                                  ------------------------------
                                                 Chaim Edelstein

                                                  HILLS DEPARTMENT STORE COMPANY
                                                      HILLS STORES COMPANY

                                      BY: /s/ Gregory K. Raven
                                                  ------------------------------
                                           President

                                                                 6

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                                                                February 8, 1997

                                                SCHEDULE A
                                                TO
                                CONSULTING AGREEMENT
                                                 BETWEEN
                                HILLS DEPARTMENT STORE COMPANY
                                                 AND
                                                CONSULTANT

NAME:                         Chaim Y. Edelstein                                

ADDRESS:                      1040 Park Avenue - 12E                            
                               New York, NY  10028

TITLE OF POSITION:            Consultant                                        

TERM OF ENGAGEMENT:           February 8, 1997 through                          
                            February 7, 1998

ANNUAL CONSULTING FEE:        $400,000 - payable in equal monthly               
                                   installments of $33,333

                 BONUS

                                   If the Consultant provides or is available to
                                      provide consulting services to the Company
                                     throughout the term of this Agreement, then
                                   Consultant shall be entitled to a performance
                                 bonus in accordance with the schedule set forth
                                            herein below, provided the Company's
                                    performance goals for the year are achieved.

                                         The Company's performance goals and the
                                   bonus to be paid to Consultant upon attaining
                                           these goals will be determined by the
                                      HR/Compensation Committee at the same time
                                           as the bonus goals are determined for
                               Company executives.

OPTIONS:                      An option to purchase 30,000 shares of Hills      
                                         Stores Company Common Stock was granted
                                     on February 7, 1996. The purchase price was
                    $10.125.

RESTRICTED STOCK:             20,000 shares of restricted stock were granted    
                                    to Consultant pursuant to a Restricted Stock
                                      Agreement between Hills Stores Company and
                                              Consultant dated February 8, 1996.

                                                                 7

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                                                                    EXHIBIT 10.7

                              HILLS STORES COMPANY
                              HILLS DEPARTMENT STORE COMPANY
                                             15 Dan Road
                              Canton, Massachusetts  02021

                                                                February 7, 1996

Mr. E. Jackson Smailes                                                          
387 Far Reach Road                                                              
Westwood, Massachusetts  02090                                                  

Dear Jack:                                                                      

     This letter sets forth our agreement with respect to your resignation

as President and Chief Executive Officer of Hills Stores Company and, its       

subsidiary, Hills Department Store Company (collectively, the "Companies").     

Capitalized terms used and not defined herein shall have the meanings given such

terms in the Employment Agreement, dated as of July 6, 1995, among the Companies

and you (the "Employment Agreement").                                           

               1. RESIGNATION. By your execution and delivery hereof, you hereby

resign, effective immediately, from all positions with the Companies and any    

subsidiaries thereof, including, without limitation, as (i) a director of each  

of the Companies and (ii) President and Chief Executive Officer of each of the  

Companies.  The Companies hereby acknowledge their appreciation for the four    

years of outstanding service and executive leadership you have provided on their

behalf.                                                                         

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Mr. E. Jackson Smailes                                                          
February 7, 1996                                                                
Page -2-                                                                        

2.  SEVERANCE.                                  

               (a) The Companies hereby agree to pay you on February 15, 1996 as

severance a lump sum payment of $1,150,000.                                     

                (b) The Companies will reimburse you for your heretofore unreim-

bursed travel and other business expenses reasonably incurred by you prior to   

the date hereof in the performance of your duties on behalf of the Companies    

upon submission of the required supporting documentation.                       

              (c) The Company's obligation to pay the Change of Control Bonus is

hereby terminated.                                                              

                   (d) The Companies shall, except as otherwise provided in this

letter agreement, cause to be provided to you all benefits and perquisites, or  

their equivalent, to which you are entitled under Section 5(c) and 5(e) of the  

Former Agreement until the earlier of December 31, 1996 and your commencement of

full-time ongoing employment as a senior executive ("Other Employment").        

Effective the date hereof, you shall no longer be entitled, except as may be    

required by law or the terms of any benefit plan, to any of the benefits or     

perquisites set forth in Sections 5(c) and 5(e) of the Employment Agreement.    

                   (e) The Companies will pay the fee, not to exceed $15,000 per

year,to provide you with outplacement services by the firm of your choosing     

until the earlier of (i) January 31, 1998 and (ii) the date on which you accept 

employment with another employer.                                               

              (f) The Companies agree promptly to (i) buy back the lease for the

automobile currently leased by the Companies for you, (ii) purchase such auto-  

mobile from the leasing company, and (iii) transfer ownership of such automobile

to you.  From and after the date of transfer of ownership, the Companies will no

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Mr. E. Jackson Smailes                                                          
February 7, 1996                                                                
Page -3-                                                                        

longer be required to pay for insurance, gasoline or maintenance with respect to

such automobile or otherwise provide you with any benefits or allowances under  

the car policy of the Companies for senior executives.                          

        (g)  To the extent permitted by law and applicable federal tax

restrictions, (x) until the earlier of October 1, 1997 and your commencement of 

Other Employment, the Companies agree to continue, your health, disability and  

life insurance programs at the levels they exist as of the date hereof and in   

accordance with their current benefits practices, and you agree to continue to  

make monthly contributions at the levels generally in effect for executive      

participants as if you had continued to be actively employed by the Companies,  

and (y) thereafter, you will be entitled to participate in the Companies'       

executive retirement insurance program as it is otherwise available to executive

retirees, provided that such participation is at no cost to the Companies or    

that you reimburse the Companies for any costs incurred by them in respect of   

such participation.                                                             

                (h) You understand and agree that, except as expressly set forth

in this letter agreement, you will receive no payments, compensation, benefits, 

perquisites, remuneration or bonuses, including severance, to which you other-  

wise might be entitled pursuant to the Employment Agreement or any other under- 

standing or agreement with the Companies or any of their subsidiaries.          

                 (i) The Companies may withhold or cause to be withheld from any

amounts payable under this letter agreement such amounts as shall be required to

be withheld pursuant to any applicable law or regulation.                       

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Mr. E. Jackson Smailes                                                          
February 7, 1996                                                                
Page -4-                                                                        

      3.  OPTIONS.  You hereby surrender for cancellation, without consider-

ation, options to purchase 122,000 shares of common stock of the Company that   

were granted to you pursuant to the Company's 1993 Incentive and Nonqualified   

Stock Option Plan.  Such options (and any option grant agreements related       

thereto) are hereby terminated.                                                 

4.  CONTINUING OBLIGATIONS.                                     

       (a)  The provisions of Sections 12, 13 and 16 of the Employment

Agreement shall continue in full force and effect.                              

       (b)  Except as expressly provided in this letter agreement, the

obligations of each of the parties under the Employment Agreement are hereby    

terminated.                                                                     

    5.  TAX COOPERATION.  You agree to file your 1995 Federal, state and

local income tax returns (and any amendments thereof) consistently with the Form

W-2 issued to you by the Companies for 1995.  You agree to cooperate with the   

Companies in connection with any dispute between the Companies (or the Companies

on your behalf) and any taxing authority relating to the amount of 1995 compen- 

sation and the tax treatment thereof (including the amount of any taxes,        

interest, penalties or excise tax payble thereon).  You also agree that you     

will, at the reasonable request of the Companies, file any reasonable tax refund

claim for amounts that the Companies paid (or subsequently pay) to you or on    

your behalf under Section 11 of the Former Agreement, and to pay to the         

Companies the amount of any refund actually recovered to the extent of any prior

payments under Section 11 of the Former Agreement made by the Companies to you  

or on your behalf.  Any filings or cooperation by you pursuant to the second and

third sentences of this paragraph 5 will be at the sole cost and expense of the 

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Mr. E. Jackson Smailes                                                          
February 7, 1996                                                                
Page -5-                                                                        

Companies and will not result in any cost or expense to you or any reduction in 

the payments made by the Companies to you, other than such payments made        

pursuant to Section 11 of the Former Agreement.                                 

       6.  DISPARAGING STATEMENTS.  Each of the parties agrees not to take any

action or make any remarks or statements which he or it knows or reasonably     

should know will have the effect of damaging the reputation of the other, or in 

the case of any action, remark or statement by you, of damaging the reputation  

of any of the officers or directors of the Companies.                           

7.  RELEASE BY SMAILES.                                         

           (a)  You hereby represent that you do not have any claim, action or

proceeding pending against Hills.  For purposes of this paragraph 7 and para-   

graph 9(a), the term "Hills" refers to the Companies, each of their respective  

subsidiaries, divisions and affiliates, and each of their respective officers,  

directors, agents, employees and assigns.                                       

              (b) Except as necessary to enforce the terms of this letter agree-

ment, and in exchange for and in consideration of the payments, promises,       

covenants and agreements set forth in this letter agreement, you hereby release 

Hills from any and all manner of claims, demands, causes of action, obligations,

damages or liabilities whatsoever of every kind and nature, at law or in equity,

known or unknown, and whether or not discoverable, which you have or may have   

for any period prior to and including the date of the execution of this letter  

agreement, including, but not limited to, any claim of wrongful discharge,      

breach of an express or implied contract, breach of any covenant of good faith  

and fair dealing, any tort and any claims of discrimination under the Age       

Discrimination In Employment Act of 1967 or any other federal, state or local   

law or regulation, and any claim for attorneys' fees or costs.                  

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Mr. E. Jackson Smailes                                                          
February 7, 1996                                                                
Page -6-                                                                        

            (c)  You promise never to file or participate in a lawsuit, arbitra-

tion or other legal proceeding asserting any claims that are released pursuant  

to this paragraph 7, unless you are compelled to testify or otherwise partici-  

pate in any lawsuit, arbitration or other legal proceeding by subpeona or any   

other legal process, but only to the extent of such compulsion.  If you breach  

your promise and file or participate in a legal proceeding based on claims you  

have released, you agree to pay for all costs incurred by Hills, including      

reasonable attorneys' fees, in defending against your claim, and you shall be   

required to repay to Hills (and shall forfeit any right to receive) any monies  

and benefits paid or payable to you pursuant to this letter agreement.  In      

addition, Hill shall be entitled to any other relief available to it at law or  

in equity.                                                                      

      (d)  In executing this letter agreement, the Companies are not

admitting any liability or wrongdoing, and the considerations exchanged herein  

do not constitute an admission by Hills of any liability, error, contract viola-

tion, or violation of any federal, state or local law or regulation.            

8.  RELEASE BY THE COMPANIES.                                   

              (a) Except as necessary to enforce the terms of this letter agree-

ment, and in exchange for and in consideration of the promises, covenants and   

agreements set forth in this letter agreement, the Companies hereby release you 

from any and all manner of claims, demands, causes of action, obligations,      

damages or liabilities whatsoever of every kind and nature, at law or in equity,

known or unknown, and whether or not discoverable (all of the foregoing being   

hereafter referred to as "Claims"), which the Companies have or may have for any

period prior to and including the date of the execution of this letter agree-   

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Mr. E. Jackson Smailes                                                          
February 7, 1996                                                                
Page -7-                                                                        

ment arising out of or related to your having been an officer or director of the

Companies; provided that the foregoing release shall not apply to any illegal   

acts undertaken by you in any capacity with the Companies.                      

    (b)  The Companies promise never to file or participate in a

lawsuit, arbitration or other legal proceeding against you, asserting any       

claims that are released pursuant to this paragraph 8, unless the Companies are 

compelled to testify or otherwise participate in any lawsuit, arbitration or    

other legal proceeding by subpeona or any other legal process, but only to the  

extent of such compulsion.  If the Companies breach their promise and file or   

participate in a legal proceeding against you based on claims they have         

released, they agree to pay for all costs incurred by you, including reasonable 

attorneys' fees, in defending against their claim.  In addition, you shall be   

entitled to any other relief available to you at law or in equity.              

          (c)  In executing this letter agreement, you are not admitting any

liability or wrongdoing, and the considerations exchanged herein do not con-    

stitute an admission by you of any liability, error, contract violation, or     

violation of any federal, state or local law or regulation.                     

9.  MISCELLANEOUS.                                              

         (a)  This letter agreement shall be binding upon and inure to the

benefit of the parties hereto and their respective legal representatives,       

executors, heirs, administrators, successors and assigns and, for purposes of   

paragraph 7, Hills.                                                             

       (b)  The unenforceability or invalidity of any provision or

provisions of this letter agreement shall not render any other provision or     

provisions hereof unenforceable or invalid.                                     

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Mr. E. Jackson Smailes                                                          
February 7, 1996                                                                
Page -8-                                                                        

           (c)  This letter agreement constitutes the entire agreement between

the parties hereto with respect to the subject matter hereof and fully super-   

sedes any and all prior agreements or understandings between us with respect to 

such subject matter, except for the November 27, 1995 letter to you from the    

Companies and the release of the Companies in your favor, dated July 1995.  This

letter agreement may not be altered, modified or changed, and no provision      

hereof may be waived, except pursuant to a written instrument signed by the     

parties hereto.                                                                 

        (d)  This letter agreement and all matters and issues collateral

thereto shall be governed by the laws of the Commonwealth of Massachusetts      

applicable to contracts performed entirely therein.                             

            (e)  All notices or other communications hereunder shall be given in

writing and shall be deemed given if served personally or mailed by registered  

or certified mail, return receipt requested, to the parties at their respective 

addresses above indicated, or at such other address or addresses as the parties 

may hereafter designate in writing.                                             

           (f)  You have been afforded an opportunity to take at least twenty-

one (21) days to consider this letter agreement and have been advised to consult

with the attorneys of your choice prior to executing this letter agreement.  The

parties understand and acknowledge that you will have a period of seven (7)     

calendar days following your execution hereof in which to revoke your consent to

this letter agreement.  If you so revoke your consent, this letter agreement    

shall be null and void and of no force or effect.                               

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Mr. E. Jackson Smailes                                                          
February 7, 1996                                                                
Page -9-                                                                        

     If the foregoing letter correctly sets forth our agreement and under-

standing with respect to the subject matter hereof, please so indicate by       

executing and returning to the Companies the enclosed duplicate copy of this    

letter, whereupon it shall constitute our legally binding agreement.            

                                                               Very truly yours,

                                                            HILLS STORES COMPANY
                                                  HILLS DEPARTMENT STORE COMPANY

                                                          By: /s/ Mark Dickstein
                                                      --------------------------
                                                                        Chairman

ACCEPTED AND AGREED                                                             
AS OF FEBRUARY 7, 1996                                                          

/s/ E. Jackson Smailes                                                          
-------------------------                                                       
E. Jackson Smailes                                                          

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                                                                    EXHIBIT 10.8

CONFIDENTIAL SEPARATION AGREEMENT, VOLUNTARY RELEASE & NOTICE                   
-------------------------------------------------------------                   

      For and in consideration of the separation payments and other good and
sufficient consideration described herein below, subject to legally required    
withholdings, to be paid to James E. Feldt ("Executive"), which payments        
Executive agrees are good and sufficient consideration for this Agreement and   
Release, and subject to Hills' (as defined below) obligations under this        
Agreement, Executive and Executive's executors, administrators, heirs, repre-   
sentatives and assigns, hereby voluntarily release and discharge Hills Stores   
Company and its related companies including its parents and subsidiaries, and   
their officers, agents, employees, trustees, successors and assigns (collec-    
tively the "Company", or "Hills") from and against any and all losses, damages, 
claims and liability, including specifically, any damages, claims or liability  
due to or arising out of any breach of contract, wrongful termination, employ-  
ment discrimination, violation of Title VII of the Civil Rights Act of 1964, as 
amended, The Employee Retirement Income Security Act, the Massachusetts Equal   
Rights Act, the Age Discrimination in Employment Act (ADEA), and/or any other   
similar state or federal laws or regulations, relating to Executive's employ-   
ment, the termination of Executive's employment and/or Executive's rights and   
benefits pursuant to his March 25, 1996 Employment Agreement ("Employment       
Agreement") (Exhibit 1).  Executive will not file such claims, and Executive    
agrees to save and hold Hills harmless from and against any liability, loss,    
cost, damage and expense arising out of Executive's failure to comply with the  
terms of this Agreement.  Notwithstanding, the foregoing shall not release or   
discharge Hills from, and expressly excluded from this release are, the         
following:  (i) any obligations to Executive under this Agreement; (ii) any of  
Executive's rights of indemnification or contribution arising from any third    
party claim, charge, lawsuit or complaint against Executive on account of his   
employment by the Company or performance of his duties for the Company as set   
forth in Article VII, Section 5 of the Company's Amended And Restated By-Laws   
or as otherwise provided by law (Exhibit 2); (iii) any claim relative to any    
Company stock, stock option or 401K/pension plans pursuant to the terms of      
those plans.                                                                    

   For and in consideration of the covenants herein and other good and
sufficient consideration described herein below, which Hills agrees are good    
and sufficient consideration for this Agreement and Release, and subject to     
Executive's obligations under this Agreement, Hills hereby voluntarily releases 
and discharges Executive and his executors, administrators, heirs, represen-    
tatives, successors and assigns from and against any and all losses, damages,   
claims and liability, including arising out of or relating to Executive's       
employment, the termination of Executive's employment and/or Executive's obliga-
tions and promises pursuant to his March 25, 1996 Employment Agreement          
(Exhibit 1).  Hills will not file such claims, and Hills agrees to save and hold
Executive harmless from and against any liability, loss, cost, damage and       
expense arising out of Hills' failure to comply with the terms of this Agree-   
ment.  Notwithstanding, the foregoing shall not release or discharge Executive  
from, and expressly excluded from this release are, the following:  (i) any     
obligations to Hills under this Agreement; (ii) any of Hills' rights of indem-  
nification or contribution arising from any third party claim, charge, lawsuit  
or complaint against Hills on account of Executive's employment by the Company; 
(iii) any claim relative to any Company stock, stock option or 401K/pension     
plans pursuant to the terms of those plans.                                     

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SEPARATION PAYMENTS AND BENEFITS:                               
---------------------------------                               

     1.   Executive is terminated from the Company "without cause" as pro-
vided in the Employment Agreement, effective April 13, 1997 (the "Effective     
Date"), notice having been given by the Company on January 13, 1997.  Hills     
shall pay Executive the payments and benefits as described herein below:        

     A.   During the ninety (90) day notice period (January 13 - April 13,
          1997) Executive will be paid by Hills as an employee pursuant to
      his Employment Agreement, including all rights and benefits.

    B.   Separation pay in semi-monthly installments for 102 weeks, from
          April 14, 1997 to March 25, 1999 ("Separation Pay Time Period"),
           at the current Base Compensation rate ($355,000 annually) without
bonus, based on the following conditions:             

             (i)   Separation pay shall be paid in full only if Executive has no
                      direct compensation earned by and paid to Executive during
                      the Separation Pay Time Period. The term "direct compensa-
                        tion earned" or "direct compensation earnings" means any
                          income earned from any employment source regardless of
                      whether employment is full-time or part-time, temporary or
                        permanent, work with an organization or self-employment.
                       "Earnings" includes: the value of any services in lieu of
                    income; any income that is earned but not paid in the normal
                     course during the Separation Pay Time Period and any income
                     that may be deferred under a deferred income plan or agree-
                       ment; and any unemployment compensation received. "Direct
                   Compensation earned" does NOT include any amounts received as
                      a result of investment, passive income, dividends, capital
                        appreciation, interest or other similar unearned income.

           (ii)  If Executive is entitled to or receives direct compensation
                     earnings during or for the Separation Pay Time Period, then
                      such earnings will be deducted from the separation pay. In
                        effect, Hills will thus "make up the difference" between
                         Executive's earnings and what Executive would have been
                     receiving in full separation pay through the Separation Pay
Time Period.              

            (iii) Each payment made to or on behalf of the Executive hereunder
                       shall be deemed earned by the Executive contemporaneously
                          with such payment on account of the termination of the
                      employment of the Executive, and shall not be deemed to be
                    earned by the Executive on account of the Executive's length
of service.               

      C.   Executive's 1997 vacation time shall accrue through the Effective
             Date and any accrued, but unused vacation pay through the Effective
Date shall be paid no later than April 14, 1997.      

   D.   The Company shall pay Executive all benefits under retirement/
            401(k) plans accrued through the Effective Date in accordance with
the applicable Company plan or policies (Exhibit 2).  

                                                                 2

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      E.   During the Separation Pay Time Period, the Company shall continue
             Executive's participation at the Company's expense in the insurance
           benefit plans (health, life, disability and other similar plans -
         copies attached as Exhibit 3) in which Executive is entitled to
            participate as of January 13, 1997, subject to Executive's contri-
           bution of his share of such expenses as of January 13, 1997 or as
     may be calculated under the Company's plans or policies for
comparably situated executives or officers.           

   F.   Up to the Effective Date, the Company shall pay all reasonable
           expenses for Executive's automobile (1995 Cadillac STS) including
    insurance, gas, maintenance and repairs.  On or before the
            Effective Date, Executive shall pay the Company $4,750 as the full
          and final amount for Executive's automobile.  The Company waives
           all claims for any further reimbursement for any amounts advanced
         or paid to or on behalf of Executive for the purchase of Execu-
      tive's automobile.  The Company agrees and acknowledges that
          Executive will retain the auotmobile without any further obliga-
tion, offset or payment to the Company.               

G.   Upon execution of this Agreement, the Company shall advance
            $20,000 to Executive as reimbursement for Executive's outplacement
service expenses.                                     

        2.   The Company agrees that Executive's stock options shall continue to
accrue and vest through March 25, 1999 under the 1993 Incentive And Non-Quali-  
fied Stock Option Plan and that the time for Executive to exercise such options 
expires on March 25, 1999.                                                      

REPRESENTATIONS:                                                
----------------                                                

   3.   Executive represents that he understands the various claims he
might have asserted under the common law of Massachusetts, the Age Discrimin-   
ation in Employment Act, Title VII of the Civil Rights Act of 1964, Chapter 151B
of the Massachusetts General Laws, the Americans with Disabilities Act and other
such similar laws; that he has read the Agreement carefully and understands all 
of its provisions; that he understands that he has the right to and is advised  
to consult an attorney concerning this Agreement and in particular the waiver of
any rights he might have under these laws; that to the extent, if any, that he  
desired, he availed himself of this right; that he has had sufficient time to   
consider whether to sign the Agreement and he enters this Agreement and waives  
any claims knowingly and willingly.  Executive further agrees to never bring a  
proceeding to challenge the validity of the Agreement.  Notwithstanding, the    
foregoing shall not release or discharge the Company from its obligations under 
this Agreement.                                                                 

   4.   Hills and Executive agree that the terms of this Agreement are
strictly confidential and shall be not disclosed to any other person, except    
that they may disclose this Agreement to their respective immediate families,   
directors, members, attorneys and tax and other professional advisors, or as    
otherwise compelled by federal, state or local law including SEC and IRS        
regulations.                                                                    

                                                                 3

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       5.   Executive agrees that he will not disparage or defame the Company,
its officers, directors and/or employees in any way.  The Company agrees that it
and its representatives, agents, employees, officers and directors will not     
disparage or defame Executive in any way.                                       

    6.   Executive hereby waives any and all rights to future employment
with Hills.  Executive agrees not to divulge, appropriate or use any proprietary
information of the Company (including, without limitation, financial and/or     
merchandising information) regardless of the form in which said information     
might exist.  Executive agrees not to remove from the Company's premises (and   
to return to the Company if already removed), any proprietary materials of the  
Company of whatever form or description whatsoever.                             

       7.   Executive agrees to notify the Company's Human Resource Department
promptly, in writing, if and when he receives direct compensation earnings.     
Executive's failure to provide such notification within 30 days of receipt shall
constitute a breach of this Agreement, and Hills' payment obligations for       
severance pay under this Agreement shall therefore be null and void, and any    
overpayment by Hills to Executive shall be immediately due and owing to Hills.  

      8.   Notwithstanding anything to the contrary contained herein, Execu-
tive acknowledges and agrees to comply with the covenants contained in Paragraph
5 of Executive's March 25, 1996 Employment Agreement with Hills.                

ADMINISTRATIVE PROVISIONS:                                      
--------------------------                                      

       9.   All disputes between Executive and Hills concerning this Agreement
(except its validity, which shall be presumed), shall be submitted to binding   
arbitration as the sole remedy for such disputes.  The arbitration will be con- 
ducted in Boston, Massachusetts before a single arbitrator jointly chosen by the
parties, under the rules of the American Arbitration Association (with the cost 
of the arbitration to be shared equally).                                       

     10.  This Agreement shall become effective seven (7) days after it is
signed.  Executive may revoke this Agreement within seven (7) days after it is  
signed, and it shall not become effective or enforceable until this seven (7)   
day revocation period has expired.                                              

     11.  This Agreement will be governed by and interpreted in accordance
with the substantive laws of the Commonwealth of Massachusetts and may be signed
on one or more copies, each of which when so signed will be deemed to be an     
original, and all of which together will be one and the same document.          

     12.  If any portion of this Agreement is found to be invalid, then it
shall not affect the remaining provisions.  This Agreement includes the entire  
understanding of the parties and can only be modified by a writing signed by    
both parties.  This Agreement is not an admission of any liability or wrongdoing
by any party.                                                                   

       13.  All notices, requests, consents and other communications hereunder
shall be in writing, shall be addressed to the receiving party's address set    
forth below or to such other address as a party may designate by notice here-   
under, and shall be either (i) delivered by hand, (ii) made by telex, telecopy  
or facsimile transmission, (iii) sent by overnight courier, or (iv) sent by     
registered or certified mail, return receipt requested, postage prepaid as      
follows:                                                                        
                                                                 4

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if sent to Executive, to,                                       

James E. Feldt                                                  
85 Skyline Drive                                                
Westwood, MA 02093                                              

with a copy to:                                                 

Henry A. Sullivan, Esq.                                         
Mintz, Levin, Cohn, Ferris,                                     
Glovsky and Popeo, P.C.                       
One Financial Center                                            
Boston, MA  02111                                               

and if sent to Hills, to,                                       

Vice President and Corporate Counsel                            
Hills Stores Company                                            
15 Dan Road                                                     
Canton, MA 02021                                                

All notices, requests, consents and other communications shall be effective     
upon receipt.                                                                   

    EXECUTIVE HAS BEEN GIVEN AMPLE OPPORTUNITY TO REVIEW THIS AGREEMENT,
HAS READ AND UNDERSTOOD IT, HAS BEEN REPRESENTED BY COUNSEL AND ENTERS INTO IT  
KNOWINGLY AND VOLUNTARILY.                                                      

EXECUTIVE:                                                                      

/s/ James E. Feldt                      Date:  2/24/97                          
------------------------------                ------------------------------    

HILLS:                                                                          

/s/ Reginald B. Garrett                 Date:  3/6/97                           
------------------------------                ------------------------------    
Reginald B. Garrett                                                             
Vice President-Human Resources                                                  

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ƒ WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
                                                        [Enlarge/Download Table]
                                                                                                                               EXHIBIT 11.1                                              

                                                                                                             HILLS STORES COMPANY AND SUBSIDIARIES                                       
                                                                                                         STATEMENT RE COMPUTATION OF PER SHARE EARNINGS                                  


                                                                                                 Thirteen      Fiscal Year       Fourteen       Fiscal Year      Thirteen     Fiscal Year
                                                                                       Weeks Ended        Ended        Weeks Ended         Ended        Weeks Ended      Ended           
                                                                                       February 1,     February 1,      February 3,     February 3,     January 28,    January 28,       
                                                                                                  1997            1997             1996             1996           1995           1995   
-----------------------------------------------------------------------------------------------------------------------------------                                                      
<s                                                                                                                                                                                       
PRIMARY                                                                                                                                                                                  

Weighted average number of                                                                                                                                                               
  common shares assumed to be                                                                                                                                                            
  outstanding during the period        10,306,070       10,252,022       9,962,450        9,809,675     10,797,637     10,794,013                                                        
Assumed conversion of preferred                                                                                                                                                          
  stock                                         -                -       1,252,389                -      3,207,195      3,207,195                                                        
Assumed exercise of stock options               -                -               -                -        105,733        104,290                                                        
Assumed exercise of stock rights                -                -           6,514                -              -              -                                                        

                                                                                       ----------       ----------      ----------        ---------     ----------     ----------        
                                                                                       10,306,070       10,252,022      11,221,353        9,809,675     14,110,565     14,105,498        
                                                                                       ==========       ==========      ==========        =========     ==========     ==========        

                                                                                                                                                                                         
FULLY-DILUTED                                                                                                                                                                            

Weighted average number of                                                                                                                                                               
  common shares assumed to be                                                                                                                                                            
  outstanding during the period        10,337,761       10,336,497       9,983,044       10,029,442     10,797,637     10,794,013                                                        
Assumed conversion of preferred                                                                                                                                                          
  stock                                         -                -       1,231,795                -      3,207,195      3,207,195                                                        
Assumed exercise of stock options               -                -               -                -        132,446        130,360                                                        
Assumed exercise of stock rights                -                -           6,514                -        700,000        700,000                                                        

                                                                                       ----------       ----------      ----------       ----------     ----------     ----------        
                                                                                       10,337,761       10,336,497      11,221,353       10,029,442     14,837,278     14,831,568        
                                                                                       ==========       ==========      ==========       ==========     ==========     ==========        


                                                                               1

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                                                              EXHIBIT 21

                                                                [Download Table]

                                     SUBSIDIARIES OF HILLS STORES COMPANY   


NAME OF SUBSIDIARY                                    STATE OF INCORPORATION
------------------                                    ----------------------
                                                                            
Hills Department Store Company                             Delaware         

HDS Transport, Inc. (1)                                    Ohio             

C.R.H. International, Inc. (1)                             Ohio             

Canton Advertising, Inc. (2)                               Massachusetts    

Corporate Vision Inc. (1)                                  Massachusetts    

Hills Distributing Company (1)                             Delaware         

<FN>                                                                        
(1)  Wholly-owned subsidiary of Hills Department Store Company              
(2)  Wholly-owned subsidiary of C.R.H. International, Inc.                  

                                                                               1

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                                                              EXHIBIT 23.1

INDEPENDENT AUDITOR'S CONSENT                                                   

We consent to the incorporation by reference in Registration Statement Nos.     
33-56321 and 333-4627 on Forms S-8 and S-3, respectively, of Hills Stores       
Company and to Registration Statement No. 333-5003 of Hills Stores Company,     
Hills Department Store Company, Canton Advertising, Inc., Corporate Vision,     
Inc., C.R.H. International, Inc., HDS Transport, Inc. and Hills Distributing    
Company on Form S-4 of our report dated March 11, 1997 appearing in this        
Annual Report on Form 10-K of Hills Stores Company.                             

DELLOITTE & TOUCHE LLP                                                          

Boston, Massachusetts                                                           
April 22, 1997                                                                  

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                                                                    EXHIBIT 23.2

                            INDEPENDENT ACCOUNTANTS' CONSENT

We consent to the incorporation by reference in Registration Statement          
Nos. 33-56321 and 333-4627 on Forms S-8 and S-3, respectively, of the Hills     
Stores Company and Subsidiaries to Registration Statement No. 333-5003 of Hills 
Stores Company, Hills Department Store Company, Canton Advertising, Inc.,       
Corporate Vision, Inc., C.R.H. International, Inc., HDS Transport, Inc. and     
Hills Distributing Company on Form S-4 (File No. 333-05003) of our report dated 
March 10, 1995 on our audit of the Consolidated Financial Statements and        
Financial Statement Schedule of Hills Stores Company and Subsidiaries as of     
January 28, 1995 and for the year then ended, which report is included in this  
Annual Report on Form 10-K.  We also consent to the reference to our Firm under 
the caption "Experts."                                                          

                                                        Coopers & Lybrand L.L.P.

Boston, Massachusetts                                                           
April 23, 1997                                                                  

                                                                   2

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                                                                      EXHIBIT 24
                            HILLS STORES COMPANY
                                           FORM 10-K
                           POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS that each of the directors and officers of Hills 
Stores Company whose signature appears below constitutes and appoints Gregory   
K. Raven, C. Scott Litten and William K. Friend, and each of them, his/her true 
and lawful attorneys-in-fact and agents with full power of substitution, for    
him/her and in his/her name, place and stead, in any and all capacities,        
granting unto said attorneys-in-fact and agents, and each of them, full power   
and authority to do and perform each and every act and thing requisite and      
necessary to be done in connection with the preparation, delivery and filing    
of an Annual Report on Form 10-K of Hills Stores Company for the fiscal year    
ended February 1, 1997 with the Securities and Exchange Commission and any      
appropriate state or governmental agencies, as fully to all intents and purposes
as such person might or could do in person, hereby ratifying and confirming all 
that said attorneys-in-fact and agents or any of them, or their or his substi-  
tutes, may lawfully do or cause to be done by virtue hereof.                    

                                                        [Enlarge/Download Table]

    SIGNATURE                       TITLE                           DATE                       
                                                                                               
/s/ Chaim Y. Edelstein    Chairman of the Board of                                             
-----------------------   the Company and Hills                                                
Chaim Y. Edelstein        Department Store Company               March 11, 1997                

/s/ Gregory K. Raven      Director, President and Chief                                        
-----------------------   Executive Officer of the Company                                     
Gregory K. Raven          and Hills Department Store Company                                   
                                          (Principal Executive Officer)          March 11, 1997

/s/ Mark B. Dickstein     Director of the Company and Hills                                    
-----------------------   Department Store Company               March 11, 1997                
Mark B. Dickstein                                                                              

/s/ Stanton J. Bluestone  Director of the Company and Hills                                    
-----------------------   Department Store Company               March 11, 1997                
Stanton J. Bluestone                                                                           

/s/ Samuel L. Katz        Director of the Company and Hills                                    
-----------------------   Department Store Company               March 11, 1997                
Samuel L. Katz                                                                                 

/s/ John W. Burden        Director of the Company and Hills                                    
-----------------------   Department Store Company               March 11, 1997                
John W. Burden                                                                                 

/s/ Alan S. Cooper        Director of the Company and Hills                                    
-----------------------   Department Store Company               March 11, 1997                
Alan S. Cooper                                                                                 

/s/ C. Scott Litten       Executive Vice President-Chief                                       
-----------------------   Financial Officer of the Company                                     
C. Scott Litten           and Hills Department Store Company                                   
                                          (Principal Financial Officer)          March 11, 1997

/s/ Brian J. Sheehan      Vice President-Controller                                            
-----------------------   of the Company and Hills                                             
Brian J. Sheehan          Department Store Company                                             
                                          (Principal Accounting Officer)         March 11, 1997

Dates Referenced Herein   and   Documents Incorporated by Reference

				Referenced-On Page
This ‘10-K405’ Filing		Date		First		Last			Other Filings
		10/4/08		38
		8/16/04		42
		10/4/00		42
		1/31/00		33
		9/30/99		33
		3/25/99		72		73
		10/4/98		42
		2/7/98		55		61
		1/31/98		63					10-K405
		12/15/97		47
		10/1/97		64
		6/17/97		2		18			10-Q,  DEF 14A
		5/5/97		2		18
Filed on:		4/25/97
		4/23/97		79
		4/22/97		78
		4/21/97		23
		4/14/97		72
		4/13/97		72
		3/31/97		2		10
		3/12/97		22					SC 13D/A
		3/11/97		24		80			8-K
		3/6/97		20		54
		2/28/97		20		22			8-K
		2/8/97		20		61
For Period End:		2/1/97		1		80
		1/13/97		22		73			8-K
		12/31/96		63
		12/1/96		9
		11/21/96		22					8-K
		11/19/96		20
		11/2/96		10		21			10-Q
		10/23/96		9
		10/21/96		8
		10/1/96		21					8-K
		9/30/96		10		33
		9/23/96		9
		9/5/96		9
		8/3/96		10					10-Q
		5/4/96		10		21			10-Q
		4/23/96		8
		4/19/96		20		34
		3/25/96		71		74
		3/8/96		41
		2/15/96		63					SC 13D/A,  SC 13G
		2/8/96		56		61			SC 13G/A
		2/7/96		8		70
		2/4/96		43
		2/3/96		10		53			10-K
		1/18/96		21					8-K
		1/15/96		19		21			8-K,  8-K/A
		11/27/95		69
		11/14/95		17
		11/8/95		17		21			8-K
		11/4/95		41
		10/28/95		10		21			10-Q,  10-Q/A
		10/18/95		20					8-K
		8/1/95		19
		7/29/95		10		21			10-Q
		7/6/95		20		62
		7/5/95		7		48			8-K
		6/23/95		48
		4/29/95		10					10-Q
		3/10/95		25		79			SC 13D/A
		2/21/95		48
		1/28/95		13		79			10-K/A,  10-K405
		1/1/95		19
		12/27/94		46
		8/16/94		20		42
		4/30/94		36
		1/29/94		11		21
		10/5/93		21
		10/4/93		11		44
		10/2/93		11
		10/1/93		19
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