A.C. Moore Arts and Crafts Q3 2008 Earnings Call Transcript

Nov.10.08 | About: A.C. Moore (ACMR)

A.C. Moore Arts and Crafts (NASDAQ:ACMR)

Q3 2008 Earnings Call

November 10, 2008 8:30 am ET

Executives

Rick Lepley – President and Chief Executive Officer

Mike Zawoysky – Chief Financial Officer

Joe Jeffries – Chief Operating Officer

Craig Davis – Senior Vice President, Merchandising and Marketing

Analysts

Karru Martinson – Deutsche Bank

Bill Armstrong – C.L. King and Associates

Greg McKinley – Dougherty and Company

Laura Richardson – BB&T Capital Markets

Holly Guthrie – Boenning & Scattergood

Joan Storms – Wedbush Morgan Securities

Presentation

Operator

Welcome to the A.C. Moore third quarter 2008 earnings conference call. (Operator Instructions) Mr. Lepley, you begin your conference.

Rick Lepley

Thank you. Before we get started today, I would like to review with you our safe harbor statement. Today's discussion may contain forwardlooking statements as such term is defined in the Securities Exchange Act of 1934 and the regulations there under, including without limitation statements as to the company's financial condition, results of operations, liquidity, capital resources, and statements as to management's beliefs expectations or opinions. Such forwardlooking statements are subject to risks and uncertainties and may be affected by various factors, which may cause factual results to differ materially from those in forwardlooking statements.

Certain of these risks, uncertainties, and other factors as and when applicable are discussed in the company's filings with the Securities and Exchange Commission, including its most recent Form 10K, a copy of which may be obtained from the company upon request and without charge.

This morning, I am joined by Mike Zawoysky, our Chief Financial Officer; Joe Jeffries, our Chief Operating Officer; and by Craig Davis, our Senior Vice President of Marketing and Merchandising. Mike will take you through our financial performance for the quarter; Joe will discuss some of the operational initiatives that we're working on; and Craig will give you a very general outline of our third quarter activities in merchandising and marketing.

Before they do that, I would like to make a few remarks about the third quarter. We were not at all pleased with the total sales decline of 4.9% or with our comp store sales decline of 9.4%. These numbers reflect a direct correlation to our traffic count decline, as our basket size is essentially unchanged yearoveryear. It's obvious that we continue to operate in a very challenging macro environment, one in which any meaningful improvement in the future will have to be directly tied to increases in discretionary spending on the part of American consumers.

For the time being, there's no question that consumers are responding to losses in investment accounts, increasing unemployment rates, declining home values, and increases in food prices by cutting back on what they see as nonessential purchases. That fact seems to be borne out as recently as this morning, as just some time ago I read the Credit Suisse hard line retail report which seems to reach the same conclusion.

We hope to see the typical seasonal surge that the holiday season normally generates, but all the evidence seems to indicate that it won't be at the level that we've seen in past years. If or when you have a chance to analyze our balance sheet for the third quarter, you will see that despite being in a very solid cash position, we felt it was prudent to draw down $10 million against our line of credit to provide additional liquidity until the uncertainty in the credit market subsides. We did that on the morning of September 30, and you may recall that was one day after the Dow had dropped 777 points.

I would hasten to add that despite the very difficult environment in which we're operating, we ended the quarter with $17 million in cash net of debt, which represents approximately $0.84 per diluted share of our common stock.

During our last call, we updated you on our progress toward the store closures that we had announced back on June 9. If you are recall, we said at that time that we would close between 7 and 10 stores in this calendar year and that we would reduce the number of planned store openings for 2008. The first five stores were closed during the third quarter, and the onetime charges resulting from those closings are reflected in our earnings statement for the period.

During this quarter, we will finalize closing four more stores. It still appears to us that the ranges of store openings, closings, and charges to earnings that we enumerated in our announcement of June 9 are accurate.

During the third quarter, we opened one new store; and we also opened one more new store at the very beginning of the fourth quarter.

We ended 2007 with 132 stores in operation; and after our openings and closings are completed in this final quarter, we expect to end 2008 with the same number, 132 stores in operation.

During the fourth quarter, our stores prior to this era of reduced consumer discretionary spending typically performed very well. The severity of the reductions in consumer spending will have an impact on store profitability. We continue to review the performance of each store and the future prospects of each store in an effort to identify locations that are no longer strategically or economically viable, and we will continue to assess the need to impair and/or close such underperforming locations.

Now I will turn the call over to Mike Zawoysky, who will discuss the financials for the quarter.

Mike Zawoysky

Before I discuss our results for the third quarter, I would like to make a few comments regarding the deferred tax valuation allowance that was mentioned in our press release this morning. The company accounts for income taxes in accordance with Statement of Financial Accounting Standards 109, accounting for income taxes. Deferred income taxes reflects the impact of temporary differences between the amounts of assets and liabilities recognized for financial reporting purposes and the amount recognized for income tax purposes measured by applying currently enacted tax rates.

FAS 109 requires that deferred tax assets be reduced by valuation allowances if, based on consideration of all available evidence, it is more likely than not that some portion of a net deferred tax asset will not be realized. As part of our quarterly closing process, we evaluated our deferred income taxes and have concluded that a valuation allowance should be recorded against our net deferred tax asset. The company recorded a valuation allowance of $4.7 million during the third quarter. Considering our net deferred tax valuation allowance and discrete tax items, we do not expect to incur significant income tax expense or benefit in the current fiscal year.

Continuing on to the third quarter results, sales for the quarter were $116.7 million, a decrease of 4.9% over sales of $122.6 million during the second quarter of last year. Same store sales decreased 9.4%. Adjusting for the impact of the liquidation of four stores that we're in the process of closing in the fourth quarter, comparable store sales would have been a decrease of 9.8%

Gross margin for the quarter was 43.2%, an improvement of 20 basis points from 2007. The drivers of the gross margin increase were continuing improvements in vendor pricing, retail price adjustments as a result of ongoing price elasticity studies, and a higher initial markup on imported merchandise.

This increase was partially offset by free cost increases related to fuel prices and the liquidation of inventory for the stores that will be closing in the fourth quarter. Removing the impact of the stores that will be closing in the fourth quarter and the free cost increases, gross margin would have improved by 40 basis points to 43.6%.

SG&A expenses were 45.8% of sales, 270 basis points higher than last year. This increase was primarily due to the deleveraging of occupancy expenses and store payroll against declining same-store sales and was partially offset by advertising reductions.

Store preopening expenses for the one store that opened in August and the one store that opened in early October were $314,000. Last year, preopening costs for the three stores opened during the third quarter and stores opened during the fourth quarter were $962,000. Store closing expenses for the quarter were $1 million.

Net interest expense in the quarter was $158,000 compared to net interest income of $79,000 for the same period in 2007. This decrease is attributable to a lower cash position and lower interest rates throughout the quarter. Income tax expense for the quarter was $3.1 million. This included a tax benefit of $1.6 million on the third quarter pretax loss of $4.4 million, offset by the $4.7 million valuation allowance recorded against the company's net deferred tax asset.

For the quarter, there was a net loss of $7.5 million or $0.37 per share. Third quarter results include $0.23 per share related to the deferred tax valuation allowance and $0.03 per share related to store closing costs. This compares with a net loss of $654,000 or $0.03 per share in 2007.

For the first nine months of 2008, sales were $369.6 million, a decrease of 3.3% compared with 2007 sales of $382.4 million. Same store sales were down 8.7%. Gross margin for the first nine months of 2008 was 42.4%, up 50 basis points over 2007. This improvement is due to merchandise expanded margin on both direct and indirect globally sourced merchandise, vendor cost leveraging, and retail price adjustments as a result of ongoing price elasticity studies. This was partially offset by increases in freight costs related to fuel and the liquidation of the stores, which closed during the third and fourth quarters.

SG&A expenses yeartodate were 45.1% of sales, an increase of 320 basis points over last year. Costs related to the impairment of fixed assets represented 50 basis points. Store payroll represented 70 basis points. The inventory restatement represented 10 basis points. The majority of the remainder of the increase was due to the deleveraging of occupancy costs against store sales.

Preopening costs were $1.5 million for the eight stores which opened and the one store which relocated during the first nine months of 2008 and the one store which opened in early October. Compared with $1.5 million for the five stores opened during the first nine months of 2007 and lease costs for stores opened during the fourth quarter last year.

2008 yeartodate store closing costs were $1.7 million. Net interest expense for the first nine months of 2008 was $529,000 compared with net interest income of $529,000 for 2007. This year includes an interest component from the company increasing a state tax reserve of $336,000, a lower cash position, and lower interest rates.

Yeartodate, we have recorded an income tax expense of $8,000. This includes a tax benefit of $5.2 million on our ninemonth pretax loss offset by the $4.7 million deferred tax valuation allowance and $500,000 primarily related to the settlement of state tax audits from prior years.

For the first three quarters, there was a net loss of $13.6 million or $0.67 per share. The net loss for the first nine months includes $0.23 per share related to the deferred tax valuation allowance, $0.07 per share related to the noncash fixed asset impairment, $0.03 per share related to increasing the state tax reserve, $0.01 per share related to the inventory restatement, and $0.08 per share related to store closing costs. This compares with the net loss of $868,000 or $0.04 per share for the same period last year.

2007 results for the first nine months included costs of $0.03 per share related to a onetime legal settlement.

Inventory at September 30 was $142 million, which represents a 6% decline from the first nine months of last year on a per store basis. Yeartodate, capital expenditures were $12.8 million. Depreciation was $4.1 million for the quarter and $11.8 million for the year. This compares with $3.5 million for the third quarter of 2007 and $10.4 million for the first nine months of last year.

As Rick mentioned, cash net of debt was $17 million versus $20.8 million last year. Our Form 10Q for the quarter will be filed shortly after this call. Now, I will turn the call over to Joe Jeffries.

Joe Jeffries

I would like to begin by providing you an update on the operational improvement projects mentioned on previous calls. As I have discussed, we are very focused on improving our level of execution in our stores and across our support organization.

During the quarter, we implemented several process and service improvement projects that we believe will deliver improved results across the organization as we finish 2008 and embark upon a very important 2009.

I am very proud of the level of effort our store general managers and regional leadership teams have displayed during this very challenging quarter. They completed the implementation of our new store level structure as well as our quality customer care program. Both of these are designed to work in tandem, reducing nonvalue added tasks and greatly improving the focus and abilities of our teams as it relates to guest service.

We made significant improvement this quarter as we transitioned into the fall merchandising sets. Our merchandising and supply chain teams worked in a much more coordinated effort servicing our stores. These efforts, combined with those of our store teams, allowed us to be set five weeks earlier compared to last year.

During the quarter, as we saw a decline in customer traffic, we made an early conscious decision to take a more aggressive pricing stance as it related to fall floral and Halloween merchandising programs. These efforts allowed for the necessary unit turns we needed to insure we had improved level of sellthrough, allowing our stores to transition earlier into the holiday merchandising programs. These coordinated efforts also had a positive impact on our quarter ending inventory levels as mentioned earlier.

This is an indication of how the new category management structure, combined with the new systems and processes installed just two quarters ago, can and is having a positive impact on our overall operations. We expect that this positive impact will continue as the organization becomes more knowledgeable and versed in all aspects of the new systems.

At this time, I want to update you on our recent progress made implementing our new Oracle data merchandising system, retail data warehouse, and MicroStrategy’s data mining tool. We are now live on these systems as planned in early Q4 of this year with no business interruption. During this quarter, we will also test some SKUs on automated replenishment, positioning ourselves to add SKUs, vendors, and departments throughout 2009.

We are now preparing our systems and reporting to align our historical data, moving towards a standardized 445 calendar in January. We will begin an implementation of allocation and forecasting systems toward the end of the first quarter with completion anticipated by the end of the third quarter.

During last quarter's call, I outlined several internal steps we were taking focused on improving our operating margins. I want to touch upon each of those again for you, providing some updates as well.

First, leveraging our open to buy process within the category management structure is critical. This is allowing our merchandising and replenishment teams to make more intelligent buys, having greater visibility of inventory, and working from more realistic sales forecasts. These efforts are paying off as our inventory levels declined this quarter by 6% as mentioned earlier by Mike. This will continue to be a priority as we purchase seasonal goods for 2009. It will also positively impact the purchasing of basic lines at the store and support center levels today and throughout 2009.

We continue to be very prudent as it relates to sales projections and purchases. That, combined with improved season ending markdown practices, will have a positive impact on our future margins.

Second, we continue to look for merchandising margin opportunities such as retail price elasticity, better vendor terms, both domestic and globally sourced, enhance season ending markdown practices with vendor support.

Third, managing costs across the organization is something we are very focused on. We will continue to manage store labor more proportionally to sales and task levels. Additionally, steps are under way to significantly reduce our SG&A dollars in Q4 and throughout 2009.

Fourth, we have focused efforts and programs under way designed to reduce and prevent shrink across the organization. The assembly of a loss prevention team is under way, with internal resources as well as third party. We believe we have significant upside as it relates to our shrink results based on recently implemented processes, system enhancements, and forthcoming audit recovery and prevention programs.

In closing, I can assure you we are not happy at all with our results. However, we do feel that our internal and strategic efforts combined with immediate tactical actions under way are prudent and will provide the positive leverage needed as we weather this economic storm that many retailers are experiencing. At this time, I would like to turn the call over the Craig Davis, who will elaborate further on our merchandising performance, Craig.

Craig Davis

I would like to start my comments today with a few words about sales. The following merchandise categories performed well during the quarter: cake and candy, crossstitch, custom framing, kids' crafts, and children's books. We also saw improving trends in fashion crafts, fine arts supplies, and stitchery.

During the early part of the third quarter, we executed 15 side counter resets, affecting over 400 linear feet. This completed our basic planogram changes for 2008. We are pleased with the progress that has been made during 2008 in our basic planogramming process.

As mentioned earlier, we have improved our execution of seasonal transitions. This is the result of improved planning, adherence to processes and timelines, and the ability to leverage new inventory management tools mentioned earlier.

During the third quarter, these new tools provided visibility to item performance and inventory movement, allowing for the management of sellthrough. We now have perpetual inventory data by item, by location; ladder plans that help manage sellthrough and item pricing in season weekly; and a replenishment team focused on evaluating and distributing nonbasic merchandise.

Now, I would like to update you on our Nevada prototype store. As communicated on previous calls, we have made changes to departmental adjacencies, resulting in improved category dominance and product flow. We relocated several of our seasonal categories to the front of the store, providing for a fresh flow of seasonally appropriate merchandise. We believe this will improve the shopping experience and our ability to connect with the customer.

We have added a new department navigational sign package, designed to improve way finding and connecting with the customer. We have added in key departments new inspirational display program designed to stimulate ideas and possibilities.

We have applied these changes to the stores we opened during the third quarter. We will continue to evaluate the results with an eye towards determining what will be the final model.

We remain focused on the top five merchandising and marketing initiatives we had communicated previously. Continuing to improve our seasonal merchandising transitions, raise the talent of the team through internal training and external acquisition, leverage category management and newly implemented processes, evaluate and improve merchandise assortments and promotional events, and finally refine our sourcing strategy both global and domestic.

In closing, we believe these five focus areas will deliver sustainable sales and margin improvements over time. Now I will turn the call back to Rick.

Rick Lepley

I think this would be a good time to take some questions and I will have a few closing remarks toward the end of the hour. Operator, you can open it up for questions.

QuestionandAnswer Session

Operator

(Operator Instructions) Our first question is from Karru Martinson Deutsche Bank.

Karru Martinson Deutsche Bank

When we look forward here in terms of fuel pricing and freight costs that you saw this past quarter? What's the environment there and your ability to kind of manage those costs down?

Michael Zawoysky

We've already been able to see some improvements in fuel costs. We've taken those into account for future purchases, obviously, we will see some margin improvement. Recently returning also from some sourcing trips in Asia, myself and my team, we believe that we're going to see some slight softening in raw material costs as well. We're encouraged about that.

Rick Lepley

Also we'll have a reduction in the number of runs that we made to Florida for example. That added quite a bit of cost as well.

Karru Martinson Deutsche Bank

In terms of the SG&A savings that you talked about for fourth quarter and into 2009, can you share a sense of the magnitude that we're looking at?

Rick Lepley

Not really in terms of dollars, we are really looking at absolutely everything. We still have a lot of ground to gain. We think there's opportunity to take costs out of almost everything. I will just give you one idea of what we're looking at. This is something that I just happened to note because we were discussing it in a meeting last week. Up until just a month ago, this company paid nearly 300 different phone bills every single month. We now have consolidated that to four.

As we look at every expense we incur, we're trying to figure out the very best way to go about reducing it while, at the same time, not affecting the level of service that we offer.

Michael Zawoysky

You may ask the question, why didn't we consolidate those earlier, but we were obligated to contractual agreements, therefore, we were not able to act upon those.

Karru Martinson Deutsche Bank

In terms of shrink, what percentage are you running at right now? Do we have a sense that this potential savings from that, the equation?

Rick Lepley

We think we can improve it quite a lot. We have never disclosed that publicly, but our procedures and policies that we're tightening up and changing a little bit in terms of the store operations are really focused at exactly that. Now we can do it because for the first time we've really got an understanding of what our inventory level is at each store by SKU. We never knew that before.

All of that is going to make it easier, I believe, to control shrink. Which, in our opinion, never had anything to do with people stealing things. It was just a fact of not knowing what was in every store in order to address it, get it out of the back room, mark it down, sell it, and have it gone and to account for how various products were used sometimes. Because in many cases, we use products in demonstrations or classrooms or whatever. Now we've got really accurate information about how all that is done.

Karru Martinson Deutsche Bank

Lastly, in terms of your categories, you said a couple were doing relatively well, cake, and others. Can we infer here seasonal, home decor, floral, those are all the ones really that are drags or anything additional beyond that?

Craig Davis

Clearly the ones that I called out are the ones that performed well. I would say to you that as we saw traffic declines early in the quarter, we priced appropriately as Joe mentioned in his comments to move through the units. Therefore, obviously, it didn't perform to the levels that we had planned, but we did move through the units in anticipation against the plan.

Karru Martinson Deutsche Bank

On that traffic question, did you see traffic sequentially each week get worse or was it fairly consistent through the quarter?

Rick Lepley

It got a lot worse toward the end of the quarter. There's no question that as we moved deeper into September, that it dropped off considerably.

Operator

Our next question comes from Bill Armstrong – C.L. King and Associates.

Bill Armstrong – C.L. King and Associates

As a followup to that last question regarding trends during the quarter, you say traffic really get worse in September. Has that continued into October?

Rick Lepley

It's difficult to forecast the rest of the year. I would just say generally that we will probably end up, it could be a little bit worse than what our comps are yeartodate. The period that concerns me is the period between Thanksgiving and Christmas. Because if you look at this the way we do, if we achieved the same average daily sales rate in the period between Thanksgiving and Christmas, this is true of every retailer, if every retailer achieves the same average daily sales rate, their sales in that period will be down 15% because there's five less selling days between Thanksgiving and Christmas.

That's the sweet spot for retailers in the fourth quarter. I really haven't seen too many people talk about that. That's the period that I think we all need to be concerned about. It's hard to forecast what's going to happen in that period. Will the daily sales rate be up because there are fewer days? Will it be flat? Will it be down? For sure, there aren't as many days in that period and that's our focus on concern.

Bill Armstrong – C.L. King and Associates

Although being a projectoriented retailer, don't you tend to get a little of that traffic earlier than maybe other retailers where people are buying closer to need?

Rick Lepley

You do for people who are buying projects for the holidays, but you still have an awful lot of home decor that you depend on to move out and your seasonal products in that particular period, as well as a lot of gift buying.

Bill Armstrong – C.L. King and Associates

Moving on to seasonal, the fourth quarter of last year you were overexposed to seasonal and you had a lot of markdowns. Can you talk about your seasonal inventories now going into the holiday season and how you feel about that?

Craig Davis

Just to refresh everyone, what we did last year is because at the time we made the buys for this year, we finally had perpetual inventory. We were able to take into account what we had remaining in stores and what we had in the DC. Last year, during the season, we identified items that we didn't want to carry into this year and we aggressively priced those to move through that inventory. We then adjusted our purchase plan including the carryovers that we knew we had from last year and purchased down significantly for those positions on an average store basis going into this season.

We had on average ownership going into the season in the neighborhood of around 30% less than a year ago when we started the season. So, again, that was all done before anybody could ever anticipate the current macro situation that we're in. As mentioned earlier in the comments today, we're looking at items sellthrough on a weekly basis and by location and doing everything that we can with the tools that we have to optimize sales and margin activity while still insuring that we come clean or cleaner than we have historically.

Bill Armstrong – C.L. King and Associates

You had some carryover from last year, then.

Craig Davis

Yes, we did. That was taken into account and netted down.

Bill Armstrong – C.L. King and Associates

Then moving to the SG&A, you mentioned some significant steps being taken. I think you talked about phone bills. That doesn't sound like much, you reduce the number of phone bills, does that reduce the dollars that you're paying for phone bills? And what other types of SG&A reductions might we be looking at?

Mike Zawoysky

As Joe mentioned earlier, we had some contracts that we had to work through and we're able to go back and negotiate our SG&A expenses. We continue to have a program in place where we're looking at all of our expenses going back. As they expire, we're going back and renegotiating more favorable rates in that regard. Rick had just mentioned, gave you one example, something that we're looking at. We're looking at everything we possibly can do.

Bill Armstrong – C.L. King and Associates

Does this mean more maybe supplies and process versus head count reductions?

Mike Zawoysky

It's a combination of everything, Bill.

Operator

Our next question comes from Greg McKinley – Dougherty and Company.

Greg McKinley – Dougherty and Company

I am wondering if you could maybe give us a little context for thinking about how you're looking at your real estate portfolio today? I know in the past you have talked about some of the challenges of supplying understored markets at great distances from your distribution facilities. Where are you at in terms of closing those markets or doing what you want to from a store standpoint in those markets?

Then, as you think about the real estate base more broadly, how large of a portion of it is, we'll call it close to a tipping point in terms of a decision where you are saying well the four wall contributions from this store or this market could cause it to be considered for closure? I just want to get a sense for how extensive that real estate review could end up being?

Rick Lepley

We don't really know at this point because we haven't even started it if you're talking about the analysis that we each year. As we said at the outset of the call, we had said we'll close between, I think, 7 and 10 stores. We're still in that range for this year. The way it looks it will end up at 9. I think that the key to this, Greg, when you analyze these stores, is do you have stores where your losses exceed your rent and CAM? If you do, what do you do to fix it or can it not be fixed in a short period of time and are you better off then to close it? But generally, you would only close a store if your losses exceeded your rent.

In today's world, it's not so likely that somebody is going to come along and take the building from you nearly as quickly as they may have a couple of years ago. That's all part and parcel of the kind of analysis that you do. And the cost of serving those, we have become more or less like an army that outran its supply chain with stores in Tennessee and Alabama and Florida and no movement of our supply base forward in other words. It just became really expensive, particularly when we were up against such density in store count by our competitors. One store up against 10 or 12, the cost of that is sometimes prohibitive. We are just trying to look at what makes more sense from the viewpoint of building density and thereby getting our costs in line so that everything is not deleveraged.

Greg McKinley – Dougherty and Company

So in relation to those comments on Florida, Alabama, Tennessee, etc., where are we today? How many stores do we still have operating in those markets after these closures?

Rick Lepley

We would still have stores in Florida after this group of closures because it simply doesn't make sense to close some of them, either their loss does not exceed the rent or we see it as coming to at some point in the future of being profitable. I would have to count them to tell you. We can get you that, it's a matter of public record. I don't have it here, but Mike can have it if you call.

Greg McKinley – Dougherty and Company

Are those basically the only markets where you would say we don't have enough, that southeast region, we don't have enough density and it just costs too much to supply the stores? That's where the equation doesn't work unless revenues are materially higher or do you see density issues in other markets that you're in?

Rick Lepley

It's not so much market-by-market as it is a selected location perhaps. It just doesn't work maybe because it's a declining area where the demographics aren't good or something and over the last 10 or 12 years it's changed.

Greg McKinley – Dougherty and Company

And then for 2009, what are your opening plans for 2009? Are you really putting on the brakes and saying, until we get the closures figured out, we're really not going to be opening more?

Rick Lepley

I think almost everybody has changed their outlook on capital spending for 2009 based on the macro environment. Right now, our plans call for opening four. We could open a couple more or couple less, depending on what happens. Any store that we open, we would want to understand that it could quickly be accretive to earnings or we would probably wouldn't do it.

We're more focused on improving the store count of the existing stores in the sense that a lot of these are older locations, no money has been spent on them for a long time. If we had the opportunity to relocate them or somehow improve the shopping experience without going to a full remodel, we would probably tend more to spend a little bit of money that way.

Operator

Our next question comes from Laura Richardson BB&T Capital Markets.

Laura Richardson BB&T Capital Markets

The last question gave me a good segue. In terms of, your balance sheet is pretty decent at this point, is your focus on keeping cash that you have as opposed to building a new distribution center that you have talked about for a while?

Rick Lepley

Absolutely. There's no question about that. That's a decision that we put off last year as you know. At some point in the future, we may indeed expend this one, but it's not something that we're going to do in this environment

Laura Richardson BB&T Capital Markets

How about, consulting, the studies that you've done on things like a distribution center, is that something that you can hold off on until the macro environment gets better?

Rick Lepley

It absolutely is. We even have a number of the permits already approved for what we need to do here. We can just turn that whole project back on whenever it seems the appropriate time to do it.

Laura Richardson BB&T Capital Markets

When you're talking about your SG&A cuts, are consultants and those things you could cut back on? I think you said people are not out of the question and things like the phone bill, have you had any discussions about rents? Leases that are coming up?

Rick Lepley

We're looking at everything. Everybody here is looking at everything. There's nothing that's sacred. Actually, it's been that way for quite some time. As Mike alluded to, in some cases we had contracts that we couldn't get out of. As those contracts are now expiring, we're going in and renegotiating everything and we're doing an awful lot of internet bidding on various projects.

Laura Richardson BB&T Capital Markets

Can you tell me in terms of what's been incurred in 2008 that's an unusual cost? I guess we've got $0.23 now on the tax allowance. How much is the total for closing stores going to be? Is there anything else I need to add to that list of onetime stuff?

Rick Lepley

That one paragraph, Mike, enumerated those various charges.

Laura Richardson BB&T Capital Markets

I guess I am asking what is going to happen in the fourth quarter, too.

Mike Zawoysky

What we've said prior regarding the real estate, that was to your direct question. In the second quarter, we had taken an asset impairment that was $1.8 million of the [$7 to $9] million. And we have store closing costs of $1.8 million to date. We literally have, from the $1.8 million, we literally have up to $5 million that we would potentially be spending in the fourth quarter related to store closing costs on the stores that we will be closing, the four stores that we would be closing.

Laura Richardson BB&T Capital Markets

Is it fair to assume you're going to be close to the high end of that since closing nine stores is close to the high end of what see?

Mike Zawoysky

I think that's a good assumption.

Laura Richardson BB&T Capital Markets

This may sound dumb, but how can it be this close to the end of the year you can still say, not with 100% certainty, it's probably going to be nine stores? Why would you not know?

Rick Lepley

You can close a store anytime you wanted to up until the last day of the year.

Mike Zawoysky

There will be nine stores that will be closing. It would be like a tenth store, whether or not we would have a tenth store or not.

Rick Lepley

Do you understand?

Laura Richards BB&T

Yes. Anything one-time for this year that hopefully doesn't recur next year?

Mike Zawoysky

As I went through, as Rick mentioned, I can go back through those again here rather quickly as to what the onetime costs are associated with. There was the $0.23 that we talked about related to the deferred tax valuation. We had $0.08 on the store closing costs. $0.01 for the inventory restatement that happened during the first quarter of this year. One second. The noncash fixed asset impairment was $0.07. And the state tax reserve was $0.03. So there was $0.23 for the deferred tax valuation, $0.07 for the noncash fixed asset impairment, $0.03 for the state tax reserve, $0.01 for the inventory restatement, and $0.08 for the store closing costs. This is all in the press release also.

Laura Richardson BB&T Capital Markets

That's the yeartodate. I guess I am trying to anticipate what more is going to happen in the fourth quarter? Sounds like there's going to be more on store closing costs but not fixed asset impairment?

Mike Zawoysky

There's nothing else that really we can give any guidance on in that regard.

Laura Richardson BB&T Capital Markets

I will let someone else go and then I might come back with some followups.

Operator

Our next question comes from Holly Guthrie – Boenning and Scattergood.

Holly Guthrie – Boenning and Scattergood

Quick question on sales variance by store, I guess more by region. I know you guys don't want to go to the store level. As the economy continued, or the consumer continued to, challenges became more and more difficult through the quarter. Were there differences, great differences by region?

Rick Lepley

We had begun to see a little difference in Florida, I think, sometime back. But, I don't think so. I think it's pretty general across the board.

Holly Guthrie – Boenning and Scattergood

Then, the customer loyalty program, if you could just give us an update on how many people have signed up. Then also, just looking at it by region. Are you seeing any response rates that are different by region for the customer loyalty program?

Craig Davis

We're not going to share some of the specifics around how big of a registered membership we have at the moment, but I will tell you that we are happy with our results. We're in about 18 stores. We're still analyzing the data, every day, every week, to understand if we're seeing the metrics move in the direction that we anticipated. Thus far, the consumers in those markets have responded well to it. We're happy with it. Our stores have responded well to it as well. So by the end of the year, we will sit back, collectively as a team, evaluate the data, and make a go forward decision.

Holly Guthrie – Boenning and Scattergood

Are the 18 stores, is it regionally diverse?

Craig Davis

It's primarily in the northeast. In one region, primarily, relatively close to our office. We did that on purpose so that we could stay close to it, understand it, and learn more before we take it any further.

Holly Guthrie – Boenning and Scattergood

And a question for Mike, getting back to the deferred tax asset and revaluation. What were, if you can talk about anything substantial, what were the taxable events that originally caused the timing difference? Was it the acquisition of stores? Was it the new DC? I guess the original asset, was it a few taxable events that created it? And then if you could talk a little bit about why there's a valuation difference now, why you won't have those assets?

Mike Zawoysky

As I mentioned, this is part of our closing process. We go back and we evaluate our income taxes. Literally looking back at it, there's a heavy emphasis on the prior periods. We literally collectively had a threeyear cumulative tax loss. That's really what the driver was associated with this. That's why we had taken now in this quarter.

Holly Guthrie – Boenning and Scattergood

It wasn't any, a revaluation on the taxable asset of the new distribution center where the state came back and said, oh, no, you’re not getting that. Okay. Just overall just a corporate, okay.

Mike Zawoysky

Just the valuation, threeyear valuation

Holly Guthrie – Boenning and Scattergood

Then, let me see. Joe had talked about going live on all systems and that you were testing some SKUs for replenishment. Is that across, I mean I am assuming it would be across all the stores for all the SKUs. I guess could you talk a little bit more about the tests? I don't know if you want to give any specificity on the number of SKUs and, if it is all stores and if not?

Joe Jeffries

It is all stores. We selected a number of vendors and a beginning number of SKUs that we want to understand. Originally we had a lower number we wanted to test, but I actually pushed the team to actually take it further and try and understand early in the testing phase if we had in issues. It will be across all stores, the density of SKUs is respectable. It's a mixture of vendors across categories as well, so that we can understand it. We're excited about this. This can take a lot of pressure off of us in the stores from a productivity perspective. At the same time, it can really assist us with leveraging down our purchasing and on-hand inventory dollars at the same time.

Rick Lepley

Operator, I think we can try to take one more question.

Operator

Our next question comes from Joan Storms – Wedbush Morgan Securities.

Joan Storms – Wedbush Morgan Securities

I am trying to get a sense of what your basic sales momentum has been. I mean the comps have been negative for several quarters. You have some intentional programs that you're testing, whether it was the advertising and going dark in certain markets, which had a negative impact on your comps.

Are any of the programs that you're working on right now that you've talked about still having a negative impact on comps? I am trying to get a sense of what the basic momentum was. Last quarter, you were down a major improvement from the negative double digits. Now obviously, the economy is having a negative effect. I guess prior to the significant downturn in the macro environment, were you still comping at like a negative 5 level?

Rick Lepley

I don't want to speculate on it. I would just say that generally the one thing that we have done that sometimes still has an adverse effect on comps is to build density within certain markets. If we put a store between two stores, we see an impact on those two stores and that will probably continue for the year until you get into the comp cycle and then things will get better in all three stores. So, I still think that's the right thing to do rather than stretching ourselves out all over the eastern half of the country.

Generally speaking, the issue is the one that we outlined at the very beginning; it's getting people into malls and restaurants and out spending money again. Because if they're in the mall, they'll come to our store. I don't think it's a thing that we see ourselves as being in alone. I would say that the majority in our opinion of what is happening now, that at least twothirds of it is the market itself and perhaps a third of it, if you want to guess, I will speculate on it, and a third of it might be the changes that we've made and the things that we've done. Something like that.

Joan Storms – Wedbush Morgan Securities

Joe, can you give some examples of sort of, you talked a lot about processes and testing. Can you give some more specific examples about exactly what you're doing, whether it's at the stores or at corporate processes?

Joe Jeffries

In the stores, we have implemented many of new processes that are focused on not just servicing our customers but how we handle our merchandise. And the way we start with loading at the distribution center, how we're distributing it, and how the stores receive the product, process the product, replenish the product, account for shrink when using the product, how our front ends are operated, how we staff our store.

We have a new structure in place beginning with hourly employees up through the general manager. Each one of those departments and employees and management members also have defined roles and responsibilities that didn't exist before. We're really trying to operate the organization at the store level like a bestinclass retailer.

Those processes are relatively new. But they're starting to stick, so we're starting to see early victories and signs that this is going the pay off for us long term. There's lot of improvements out there. Back in the office, the category management structure dictated that we put processes in and procedures and levels of accountability in place for how we, from building ads to purchasing products, to how we actually forecast sales projections on through our purchasing responsibilities as well. A couple of these processes, we've added the system that is I referenced before, that we just went live early in Q4.

Now when you bring even advanced systems in place, most of the merchandising teams have been trained on these systems already. So we expect to see positive leverage from that. It's funny to hear someone talk about that on a call. When a company is of the age that ours is. They just didn't exist at the degree, at the level, that we need to operate in retailing today. I am happy to say they're here now. They are still new. We will continue to learn and refine them when and where appropriate to insure that we have the right processes and procedures for us to be successful long term. But we're very encouraged about all the moves that we have made this year.

Rick Lepley

Operator, I have a couple of comments here and then we'll end the call. You know, we say repeatedly that this is a marathon and not a sprint; and we've been saying that since we understood it was a marathon. I suppose some could argue that it's an uphill marathon being performed at high altitudes, and we may not have understood that until recently. It is a marathon nonetheless.

While our current environment is certainly not helping us, we continue to believe that we're doing the right things and that we're going to be rewarded with an improved operation in the future. Our goals remain unchanged. We want to drive topline sales. We want to optimize the distribution network. We want to continue our systems enhancement projects. We want to retain, attract, and develop top talent. And we need to perpetually improve our store and real estate portfolio. Despite our costs being deleveraged against topline sales, we are evidencing a lot of progress here.

We continue to improve our store in stock position, while lowering our average store inventory by about 6%. We couldn't have done that without building the merchandising analytical team and getting our perpetual inventory platform in place. Our supply chain is better managed, and we're still working on reducing costs as we indicated. Our efforts related to improving our efficiencies through the use of technology are still on target as Joe mentioned.

Our custom framing operations are on target and continue to perform to our expectations. Nearly all of our stores are equipped with visualization technology and state of the art digital support framing software.

We're on the way to standardizing the various Nevada model stores to a final format. And we expect to have the Nevada stores all on the same assortment and setup by the end of the first quarter. Our web business is on target and continues to grow at a steady and quite acceptable rate. Our perpetual inventory system is functioning. The organization is getting more accustomed to using it and relying upon it. Our work toward employing state of the art systems through the application of merchandising suite is going just fine.

We're still on our timelines for installing automated replenishment, and we still expect a major economic impact of that to be quite favorable beginning in 2010. Our loyalty program as we discussed has been rolled out, now being tested in 18 stores, and we're happy with the results.

In closing, let me say that our entire leadership group and all of our associates are doing everything we can to produce the best possible financial results in what may be the most difficult retail environment in the past 50 years. Everyone understands the need to focus on maximizing sales and margin and on cutting costs while improving efficiencies. Everyone understands the need to improve cash flow and husband our cash position.

Overall, we believe the results of our efforts would be much more evident in a stronger market. But the outside influences on our business that we can't control are also compelling us to look at things a little differently. The fact that consumer spending has declined so rapidly means that our plan to blend cost cutting with level comp sales, or perhaps even moderate growth, has to be adjusted to reflect even more dramatic cost reduction in the short term. We're prepared for that, and our budgets for next year will reflect that reality.

Finally, I want to say that we very much appreciate the effort of our associates companywide, but we especially appreciate the endeavors of our store general managers who are working very hard to improve their operations and simultaneously learn new systems and processes in a difficult environment. I am enormously thankful. I am personally impressed. And I am constantly gratified by the efforts being put forth by our field staff and store associates as well as everyone here at the corporate support center. We're staying focused on improving our operations to the best of our ability, and we're moving as quickly as we can toward that end. Thanks so much for joining us today, and thanks for your continued interest in A.C. Moore.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!