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Cost Plus Inc. (NASDAQ:CPWM)

Q1 2009 Earnings Call

May 21, 2009; 4:30 pm ET

Executives

Barry Feld - President and Chief Executive Officer

Jane Baughman - Executive Vice President & Chief Financial Officer

Charley Miltner - Corporate Controller

Analysts

Budd Bugatch - Raymond James

Operator

Thank you everyone for joining us for our first quarter 2009 Cost Plus earnings conference call. My name is Erica and I’ll be your coordinator for today. At this time, all participants are in a listen-only mode. We will facilitate a question-and-answer session towards the end of this conference. (Operator Instructions)

I’ll now like to turn the presentation over to your host Mr. Barry Feld, CEO of Cost Plus Market.

Barry Feld

Thank you, operator. Good afternoon and thank you for joining us to discuss our first quarter 2009 results. With me today for the conference call are Jane Baughman, Executive Vice President and Chief Financial Officer; and Charley Miltner, Corporate Controller

Following my opening remarks, Jane will discuss the financial results in more detail, after which I will make some concluding remarks, and then we will open up the call to questions. Before beginning today’s discussion, Charley will read the company’s Safe Harbor statement.

Charley Miltner

Certain forward-looking statements regarding the company’s future performance and initiatives will be made during this conference call and will usually be preceded by words such as belief, anticipate, project or expect. Any such forward-looking statements such as, but not limited to future liquidity position and financial guidance are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed or implied by these statements.

Examples of such risk factors include, but are not limited to the following: Changes in the economic conditions that affect consumer spending, timely introduction and customer acceptance of merchandise offerings, continued deterioration in the competitive environment, foreign and domestic labor market fluctuations, interruptions in the flow of merchandise, complications or delay in the store closing processes, increases in fuel and transportation costs, currency fluctuations, unseasonable weather, terrorist acts or our nation’s response thereto, a material unfavorable outcome with respect to litigation and changes in accounting rules and other regulations.

A more complete listing of risk factors is included in the company documents on file with the Securities and Exchange Commission.

Barry Feld

Thank you, Charley. We have consistently communicated our expectations at fiscal 2009 will be a challenging year with further pull back in consumer spending. This belief was the basis for the actions taken in January, to rationalize operational expense and to close certain under performing stores.

While we were able to reduce our EBIT loss from continuing operations, excluding the eight store closures, our first quarter results reflect the anticipated impact for prolonged stress in the economy, with further pressure on the average ticket per customer related to our furniture business and a modest softening in customer traffic.

Financial plan we executed in January, fully accommodates these negative trends while still providing ample liquidity to meet planned expenses, inventory purchases and maintenance capital spending this year. The company out performed its internal plan in the first quarter of 2009 on both revenue generation and cost reductions, moving as closure to our goal of achieving positive EBITDA form continuing operations in fiscal 2009.

The company was able to successfully sell through its Easter seasonal merchandise with no residual inventory remaining. Our merchant and marketing teams are maintaining a constant flow of fresh brand right products and delivering more costs effective market specific advertising.

Merchandise margins had began to stabilize and we anticipate further improvement in INU as we move throughout the year. Promotional activity levels are consistent with last year. Significant point of differentiation between Cost Plus World Market and our competition is our gourmet food and wine business, which continues to perform well particularly with many of the private-label products that are designed to drive, repeat visits, improve margin increased customer loyalty.

During this unprecedented times, management remains intensely focused on the elements of the business that we can control, our unique and value priced merchandise assortments, solution oriented marketing message, positive in-store shopping experience, expense management and liquidity. Our core business metrics are stabilizing and we achieve financial results inline with our guidance.

I would now like to turn the call over to Jane, after which I’ll make some concluding remarks.

Jane Baughman

Thank you, Barry. As a reminder, the income statement included in this afternoon’s press release clearly breaks out the results from continuing and discontinued operation, both for the current year and prior year periods. The company’s balance sheet presentation remains unchanged.

Total net sales for the first quarter of fiscal 2009 were $184.3 million and 8.7% decrease from the first quarter of fiscal 2008. Same store sales for the first quarter decreased 8.9%, compared to a 0.6% increase last year. Customer account decreased to 1.1% and the average transaction decreased to $32 and 74%, or 8% below last year primarily as a result of lower furniture sales.

The eastern region continues to outperform the western region, which has been impacted by weakness in the California and Arizona markets. The mix between home and consumable as a percentage of total net sales were 62% and 38% respectively for the first quarter of 2009 versus 63% and 37% respectively for the first quarter of 2008. Furniture accounts for the 100 basis point decrease in home sales mix as consumers are still hesitant to spend money on larger ticket items.

Gross profit rate for the quarter was 26% versus 27.7% last year, a 170 basis point decline. The gross profit rate was lower due to fixed occupancy expense on lower same store sales. Cost of sales as a percentage of sales was essentially flat compared to last year and included the impact of inventory liquidations for the eight store closures, which were approximately 30 basis points.

Selling, general and administrative expenses for the first quarter of 2009 were $64.5 million, versus $72.2 million last year reflecting the benefit of the cost cutting measures taken last year to rationalize the company’s SG&A expense structure. Additionally, the company recorded $5.7 million charge versus store shutdown cost and severance related to eight store closures.

Continuing operations, depreciation expense in the first quarter of fiscal 2009 was $7.9 million compared to $8.4 million for the same period last year. Capital investments in the first quarter related to 2009 projects were $300,000 versus $2.7 million for the same period last year. The company did not open any new stores in the first quarter of 2009 and had no pre-opening expense, compared to eight new stores opened in the first quarter of 2008 and pre-opening expense of $1.9 million.

The first quarter loss before interest and taxes from continuing operations or EBIT loss of $22.3 million was better than our guidance range of a $23 million to $25 million EBIT loss and compares to a loss of $18.2 million last year. Excluding the $5.7 million in store shutdown cost, the EBIT loss for the quarter was $16.6 million, which was better than last year despite lower sales.

Net interest expense was $2.8 million in the first quarter of fiscal 2009, compared to $3 million throughout the first quarter of fiscal 2008. The small decrease in interest expense is due to a lower interest rate on relatively flat borrowings. Our effective tax rate in the first quarter of 2009 of 0.8% is a reflection of several discrete tax events in the ongoing effects of maintaining a full valuation allowance on the deferred tax assets.

18 of the 26 stores were in medium markets that the company exited and our classified as discontinued operations. The $16.2 million net loss from discontinued operations contained all the expected cost on completing the 18 store closures including severance and estimated lease settlement and some residual costs from the 13 store closures in 2008.

The company’s net loss for the first quarter of fiscal 2009, including discontinuing operations was $41.6 million or $1.88 for fully diluted share compared to a net loss of $32 million or $1.45 for fully diluted share in the first quarter of fiscal 2008. In the first quarter of fiscal 2009, we completed the process of closing 26 stores that began in the fourth of last year. The 12 week liquidation event generated $19.1 million in cash received from the sale of inventories, at 42% above the aggregate book value and was comparable to the liquidation event held last year despite a tougher retail climate.

Additionally, the company had executed approximately 11 of the 26 lease termination, which is the ahead of plan. At the end of the quarter, inventory declined 27.9% from the first quarter of fiscal 2008. The company had $58.9 million in borrowings and $11.2 in Letters of Credit outstanding under its $200 million asset based credit facility.

Cash received from the liquidation event and ongoing optimization efforts offset the operating loss for the first quarter and lease termination expense, resulting in flat borrowing year-over-year at the end of first quarter. Our forecasted peak borrowing requirement will be well within credit line capacity.

Accounts payable was $48.3 million versus $57.8 million last year. The company continues to maintain a policy of using the Line of Credit to pay our vendor partners according to agreed-upon terms, which are typically 60 days. With the exception of certain state regulated merchandise categories our day’s payable is 41 this year, which compares to 43 last year.

In this afternoon’s press release, we have provided our outlook for the second quarter of fiscal 2009. Our guidance anticipate continuing softness in the furniture business, which includes seasonal outdoor furniture in the second quarter, and that consumers sentiment and spending patterns will remain constant to the first quarter.

The company expects total second quarter revenue in the range of a $176 million to $186 million, based on a same store sales performance in the range of negative 9.5% to negative 14.5%. We will open no new stores and close one store in the second quarter of fiscal 2009, compared to opening seven new stores and closing three stores in the same period last year.

For the second quarter of 2009, the company is projecting a loss from continuing operations before interest and taxes or EBIT losses in the range of $14 million to $21 million, versus a comparable EBIT loss of $21 million last year.

Depreciation expense from continuing operations is projected to be $7.5 million and interest expense is projected to be $2.9 million for the second quarter. The company will continue its practice of maintaining a full valuation allowance against its deferred tax assets. Diluted shares outstanding are expected to remain unchanged.

I will now turn the call back over to Barry, for his concluding remarks.

Barry Feld

Thanks Jane. We remain confident that the changes to our operational structure, merchandise assortment, marketing programs and in store experience have provided necessary staying power to persevere during the economic downturn and achieve positive EBITDA from continuing operations for 2009.

Lastly, I want to reiterate that we have sufficient liquidity to complete the turnaround. We have three years remaining our $200 million asset based credit facility and our bank group remains very support of the company. The banks are secured by the underlying assets of the company, which in our cases primarily inventory.

The inventory liquidation events for the 26 stores closed in the first quarter of 2009 provided another clear and timely witness test for the banks to determine the value of our assets in today’s tough retail environment.

With that, I would like to turn the call over to the operator for the q-and-a portion of this call.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Budd Bugatch - Raymond James

Budd Bugatch - Raymond James

Just a couple of things; one, as you go through the portfolio of stores, you’ve gone through a significant evaluation. You closed 26 last quarter or so. Any more, any new thoughts on that as you look at this and that you can disclose at this time?

Barry Feld

Yes, we don’t anticipate any additional closures this year, with exception of one location where we have lease opportunity to make it change. We’ve called out of the markets the stores that have had the greatest level of difficulty in the turnaround markets like Detroit, Michigan for example. So, we don’t anticipate with the exception, just the one store mentioned, closing any additional stores this year.

However that said we are closely monitoring, evaluating every market that we operate in and once we get to the holiday season we’ll do the same expenses analysis that we do every year as we move to the year and see if we are essentially happy with the basis of stores that we’re currently operating or we need to call that number even further.

At this time we don’t anticipate any additional closures, and ultimately we would like to get back into the business of opening stores in markets we don’t operate, but until we have net income our plan is not to do that.

Budd Bugatch - Raymond James

Also you get high marks from us on your inventory control, at least in the financial side in terms of reducing inventories on an absolute and total, year-over-year and per store basis. Can you give us a little color as to what you’ve done there? Is that simply because of discounting and the fewer stores and how does the inventory look in the stores versus the DCs? How much was residing in each of those --?

Jane Baughman

I’ll answer that one Budd. It’s a combination of most of the elements that you mentioned. As you recall, in the fourth quarter of last year we did take a meaningful write down to inventory and we were able to sell through that merchandize in the fourth quarter and into the first quarter. So that impacted the overall inventory levels in the store. With regards to aging; the inventories are very clean, our aging is better than it was a year ago.

For the most part, we are continuing to take excess inventory out of weeks of supply in our distribution center facilities. The merchants are now on a disciplined program of monitoring and editing SKU count in-season as we move through the year, which is a practice that we weren’t as skilled at in the past and so, the combination of all those events will allow us to profitably sell through the inventory that we are carrying at the lower levels and not risk sales.

Barry Feld

I would add one thing Jane, but as you know, we’ve done a lot of work over the last several years in supply chain and a lot of money was put into this stock and distribution center that we build, which has state of art conveyable capabilities and all these efforts has have actually yielded higher inventory turns and have enabled us to really streamline weeks of supply on hand, both in the DCs and in the stores. So, all of these efforts in the challenging times, particularly as it relates to furniture have had yields for us.

Budd Bugatch - Raymond James

Two other areas of questioning; one, gross margin, can you give us some color as for the various elements in terms of merchandise margin and what the occupancy was, you culled out I think one of the impacts to gross margin?

Jane Baughman

Yes, we don’t typically breakout occupancy expense, it’s combined in our financial statement presentation. Clearly, we de-leveraged on the fixed portion of that in gross profit. With regards to merchandise with margin and the components, which includes buyer margin as well as what we call as UCAP, our distribution expense and our freight out to the stores and shrink, that was essentially flat when you included the 30 basis points related to this liquidation event.

So, backing that out we were better, we continued to see improvements within the supply chain side for our distribution center. We’ve gone from two shifts to one. We continue to increase the productivity there as well as take some variable and fixed costs out of that side of the business.

The buyer margin for the first quarter was still below last year modestly, but we are working on IMU and proving that as we go throughout the year.

Budd Bugatch - Raymond James

Okay and as you have sold throughout all of that discontinued inventory, we won’t have any of that repeated next quarter?

Jane Baughman

Are you talking about what I alluded to earlier in the fourth quarter of last year?

Budd Bugatch - Raymond James

The 30 basis point impact, yes

Jane Baughman

No, the liquidation inventory that’s gone, that’s correct the liquidation events were completed at the end of the March.

Budd Bugatch - Raymond James

Okay. My last area question is just as to talk a little bit about ticket and traffic?

Jane Baughman

Sure. Well as you saw in our press release our customer traffic decline slightly in the first quarter. The pressure is really coming from the furniture side of the business. In terms of mix, at the company level it was 100 basis points lower than it was last year in terms of penetration, so we are absolutely feeling that.

With regards to our guidance for the second quarter, we have the ongoing furniture, dining and living businesses, but then we add an additional furniture element with outdoor furniture in the second quarter, which is why you see a wider range in the guidance. We believe that we are very competitively priced and have very compelling merchandise, but that is differed from the first quarter.

Barry Feld

I would add to that, Budd. You have such a strong history in the furniture business. So I think you can appreciate these comments, but essentially as you know 18% to 20 % of our volumes still comes from furniture and that has been quite a challenging part of business. I believe it will remain so, it is the primary driver in truncating our average ticket per customer and as we roll over furniture related events from last year, it put some additional pressure on our traffic.

So, that’s one that we have to continue to work through to be able to crack the code on.

Budd Bugatch - Raymond James

One another thing, on your tickets, what percentage of the tickets has both the consumables and non-consumables?

Barry Feld

I don’t know the answer for that. We really don’t measure. We measure market basket content, but we don’t really disclose how that market basket breaks out on a per customer basis?

Budd Bugatch - Raymond James

What I was trying to get to is, what was the compound on the consumable side and what was the compound in non-consumable side kind of where the smaller ticket. We’ve seen with the some other major retailers that the comp is essentially the flat, for tickets under $50 and for larger tickets have been significantly lower and I wondered whether or not you had that same metric.

Barry Feld

Yes, our metric would be similar to that. In terms of the comps on the furniture would be meaningfully worse than the comps in the non-furniture business.

Operator

(Operator Instructions) We have no questions in queue. I would now like to turn it over back to Mr. Barry Feld for closing remarks.

Barry Feld

Thank you everyone for participating in the call and we’ll look forward to updating you as we complete our second quarter of fiscal 2009. Thank you very much.

Operator

Thank you for your participation in today’s conference. You may now disconnect and have a wonderful day.

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