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AC Moore Arts & Crafts, Inc. (NASDAQ:ACMR)

Q2 2009 Earnings Call

August 13, 2009 10:30 am ET

Executives

Rick A. Lepley – President, Chief Executive Officer & Director

David Stern – Chief Financial Officer & Executive Vice President

Joseph A. Jeffries – Chief Operating Officer & Executive Vice President

David Abelman – Executive Vice President & Chief Marketing and Merchandising Officer

Analysts

Mark Mandel – FTN Equity Capital Markets Corp.

Holly Guthrie – Boenning & Scattergood, Inc.

Joan Storms – Wedbush Morgan Securities

Operator

Good morning, my name is Darrell and I will be your conference operator today. At this time I would like to welcome everyone to the AC Moore second quarter 2009 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question and answer session. (Operator Instructions) Mr. Lepley, you may begin your conference.

Rick A. Lepley

Before we get started today I’d like to review with you our Safe Harbor statement. Today’s discussion may contain forward-looking 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 operation, liquidity, capital resources and statements as to managements’ beliefs, expectations or opinions.

Such forward-looking statements are subject to risks and uncertainties and may be affected by various factors which may cause actual results to differ materially from those in forward-looking statements. Certain of these risks, uncertainties and other factors as and when applicable are discussed in the company’s filings with the Securities & Exchange Commission including its most recent Form 10K, a copy of which may be obtained from the company upon request and without charge.

Now, this morning I’m joined by Dave Stern, our Chief Financial Officer; Joe Jeffries, our Chief Operating Officer; and by David Abelman, our Chief Marketing and Merchandising Officer. Dave will talk to you about our financial performance for the quarter and Joe will talk about our operational performance. Then, David will comment on merchandising and marketing. But, before they do that I’d like to take a few minutes to touch upon some of the highlights of the second quarter.

During the quarter our comp store sales decline was 13.8% not appreciably different than the first quarter and while we are disappointed with the result, it was in line with our expectations as expressed to you during our Q1 call. Some portion of this appears to us to be a continued lower consumer discretionary spending particularly true as it impacts both seasonal and home décor products. Some of this decline is certainly attributable to our reduction in ad spend.

As we explained in our previous call, we believe the ROI on increasing the ad spend to higher levels was not there and we thought that that decision was the right one to make. We believe that it helped our cash position during the quarter. Another part of the comp decline was attributable to our emphasis on closing out some older products related to the major resets that we went through including surfaces, jewelry, home décor and every day floral. Of course, the total sales decline was impacted by the fact that we operated six fewer stores in the second quarter of 2009 than we did in the second quarter of 2008.

We continue to believe that while consumer confidence may be slowly improving, discretionary income spending is still lagging behind general household spending. We believe this is reflected in the fact that while our transaction count has shown steady improvement in the past 60 days, our average basket size is lagging behind last year. While we continue to be confident in our sales plan for the back half of 2009 based on our merchandising, marketing and store operations activities, we do see the possibility of deterioration of our margin rate if the overall market becomes more promotional in nature. That also could cause us to spend more than our current plan in advertising.

We remain hopeful that we’re in the bottom of the trough in terms of declining consumer discretionary spending. We believe that our plans for the second half of 2009 put us in a stronger position to take advantage of increased consumer spending should that occur. We’re operating with leaner inventories, we’ve already reduced expenses and we expect our own efficiencies to improve during this period as well.

Our out of stock condition for basic crafts products continues to show improvement as we continue to increase the number of skews being managed by automated replenishment. Test stores and test skews are still performing above the chain average and we are very pleased with the progress we’re making in this regard. During the second quarter, just as in the first quarter, our merchandising teams and our replenishment team have dedicated a substantial amount of their time to monitoring the new systems and gaining experiencing that will be necessary to complete all merchandising and supply chain system improvements.

The organization continues to do a really fine job of decreasing our warehouse and our background inventories. The average inventory per store declined from $982,000 at the end of Q2 2008 to $892,000 at the end of Q2 2009, an average store reduction of about 9%. I’d like to emphasize that that reduction came out of the warehouse and the store backrooms and not from the basic arts and crafts assortments on our store sales floors.

During the second quarter Glenhill Capital made a $10 million investment in AC Moore. We’re very pleased to have completed this transaction particularly in light of the current environment for investing. Glenhill has a strong track record of investing in good companies. We look at this investment as a vote of confidence in our company and our new store prototype and we are very happy to have them as shareholders.

During the second quarter of 2009 we opened one new store. We began the quarter with 132 stores and ended it with 133 stores. Our current plans now call for two or three more new store openings this year. We expect to end the year with either 135 or 136 stores. We also expect to complete two or three major relocations during this period. During the third quarter, we will complete three remodels. Two are minor in that they involve layout changes and increase to the assortment but, one is a major remodel undertaking that transformed an older layout challenged store to a new [inaudible] prototype. When completed, we will monitor the activity to understand the cost benefit relationship.

No other major remodel activity is scheduled to the first quarter of 2010 so as not to disrupt the normal seasonal traffic increase we experience in Q4. At that time we expect to do several more major remodels to further story the cost benefit impact. All openings and major remodels and all of our relocations are the new Nevada class style store.

As we explained before, we regularly and routinely review store performance and future prospects to identify any underperforming locations and assess closure of those stores that are no longer strategically or economically viable. It is possible that this could lead us to the conclusion to close another store or two if the situation warrants. We’re continuing discussions with some landlords regarding that possibility, particularly in markets where we have little store density. We believe very strongly that despite today’s environment, the fragmented nature of our industry presents an opportunity to grow our business and our store count in the foreseeable future.

It is our intent to expand in 2010 and beyond. The aggressiveness with which we execute that plan is wholly dependent upon the attractiveness of site opportunities and the overall context of our cash position, the real estate environment and the general business conditions at that time. In this regard, the recent $10 million investment by Glenhill Capital could be especially beneficial.

During the second quarter total sales on our website showed a decline due to less frequent purchases of higher dollar craft technology items. While the average order was much smaller than the earlier periods, the total number of orders placed through our website actually increased by nearly 6%. In Q2 we continued to make progress with our systems initiatives. While this continues to cost us some efficiency in the short term, the efficiency gains in the long term, especially next year will make all this work invaluable. As we’ve stated previously, we do expect to see a favorable economic impact and an even better in stock position in 2010.

So far this year we’ve continued to improve our overall supply chain and to reduce our costs. We’re working hard to finish the development of a cross doc IT interface that will allow us the capability to cross doc thereby increasing the number of items that are shipped to our stores through this facility. In turn, we believe this will lead to gradual reductions in our shipping costs to stores throughout 2010.

Joe will speak to both of those initiatives in more detail in a few minutes. Our custom framing operations continue to perform to our expectations, nearly all of our stores are equipped with the visualization technology and stated of the art digital support framing software. Our goals for the balance of 2009 remained unchanged from previous calls. We want to focus on driving profitable top line sales, we want to optimize our distribution network, we want to continue our systems enhancement projects until they’re complete, we want to retain, attract and develop top talent and we need to perpetually improve our store and real estate portfolio.

Finally, with regard to our outlook for the balance of 2009, our views remain fundamentally unchanged from our last two calls when we told you we expected the first half of this year to be difficult. We’ve budgeted our cash flow conservatively around another year of declining comp store sales believing that to be the most prudent approach in the midst of such uncertainty. We still have concern about the macro environment, meaning the level of consumer discretionary spending in the coming months.

We’re also concerned about the overall competitive environment of retail in the very near future and the consumer acceptance of seasonal merchandise which has been weak across all channels of retailing during the fourth quarter of each of the last two years. On the other hand, we continue to be confident about our own preparedness for the second half of 2009. We think our consumer messaging will be more on target, our inventories will be more appropriately balanced with basics and seasonal and our stores with new processes and systems in place will be even better prepared to meet consumer expectations.

If the market for or products improve as we think it will, we believe that we’re well positioned to take advantage of it. Now, I’d like to turn the call over to Dave Stern who will update you on our financial performance during the second quarter.

David Stern

Sales for the quarter were $104.4 million, a decrease of 17.4% compared to sales of $126.4 million during the second quarter of last year. This decrease was primarily due to a decrease in comparable store sales of 13.8% and the operation of six fewer stores. Gross margin for the quarter was 41.6% a 20 basis point increase over the second quarter of last year. Selling, general and administrative expenses for the quarter were $51.2 million, a reduction of $6.5 million compared to last year. This decrease was primarily the result of reductions in payroll, occupancy, impairment and advertising expenses.

Selling, general and administrative expenses were 49.0% of sales compared to 45.6% of sales in the second quarter of last year. This increase was the result of deleveraging of expenses on lower sales. Depreciation and amortization for the quarter was $4.6 million compared with $3.9 million for the same period last year. Store pre-opening and closing costs were $0.3 million which consisted of costs for the one store that opened in the quarter and costs for stores that were previously closed.

In the second quarter of last year pre-opening and closing costs were $1.3 million and consisted of costs related to three stores that opened in the quarter, stores that opened later in 2008 and stores that were closed. Net interest expense was $0.1 million for each of the second quarters in 2009 and 2008.

The loss before tax for the quarter was $8.1 million compared to a loss before tax of $6.7 million for the comparable period last year. In the third quarter of 2008, the company began recording a valuation allowance against the tax benefits generated from its operating losses. As a result we have not had and do not expect to have any significant tax benefit in fiscal 2009. For the second quarter of 2008 the company had a net tax benefit of $2.49 million. The net loss for the second quarter was $8.1 million or $0.38 per share compared to a net loss of $4.3 million or $0.21 per share for the second quarter of 2008. For the second quarter of 2009, capital expenditures were $2.3 million compared to $4.9 million last year.

Moving to the results for the six months ended July 4, 2009 sales were $213.1 million or a decrease of 15.8% compared to the first six months of 2008. This decrease was caused by a 13.6% decrease in comparable store sales and the operation of fewer stores during the six month period. Gross margin for the six months was 42.2% a 10 basis point increase over the comparable period last year.

Selling, general and administrative expenses for the first two quarters of 2009 were $101.0 million, a reduction of $12.2 million compared to last year. This decrease was primarily the result of reductions in payroll, occupancy, impairment and advertising expenses. SG&A expenses were 47.4% of sales compared to 44.8% of sales for the comparable period of last year. This increase was the result of deleveraging of expenses on lower sales.

Depreciation and amortization for the six months was $8.2 million compared to $7.7 million last year. Store pre-opening and closing costs for the first two quarters were $0.07 million which consisted of costs for the store that opened, the store that relocated and for stores previously closed. In the comparable period last year, store pre-opening and closing costs were $2.0 million and consisted of costs for the seven stores that opened in the first six months, stores that opened later in 2008 and closed stores.

Net interest expense for the first six months of 2009 was $0.7 million compared to $0.4 million in the comparable period last year. The loss before income tax for the first six months of 2009 was $12.4 million compared to a loss before tax of $9.1 million for the comparable period last year. As mentioned earlier, in the third quarter of 2008 the company began reporting its valuation allowance against the tax benefits generated from its operating loss. As a result, we have not had and don’t expect a significant tax benefit in fiscal 2009. For the first two quarters of 2008, the company had a tax benefit of $3.1 million.

The net loss for the first six months of 2009 was $12.5 million or $0.60 per share compared to a loss of $6.0 million or $0.30 per share for the comparable period last year. For the first two quarters of 2009, capital expenditures were $5.6 million compared to $8.6 million last year.

Moving to the balance sheet, as of July 4, 2009 inventory was $118.7 million or $17.9 million less than last year. On a per store basis inventory has been reduced by 9% over the year. At the end of the second quarter the cash balance was $56.0 million or an increase of $10.4 million compared to the same period last year. As Rick mentioned there was a $10 million private placement that occurred during the quarter. Cash net of debt at the end of the quarter was $37.0 million or an increase of $11.7 million over the comparable point last year and availability under our line of credit was $34.6 million at the end of the quarter.

Finally, our 10Q for the quarter will be filed today. Now, I’ll turn the call over to Joe.

Joseph A. Jeffries

I’d like to begin my comments by highlighting the recent progress made during the quarter in both supply chain and IT. The supply chain organization continues to meet or exceed targeted performance levels. The allocation and replenishment team have utilized our new ORACLE automatic replenishment system and new score carding tools to improve both store and DC in stock levels.

During the second quarter the distribution center team improved productivity, reduced expenses, meet service level objectives, increased accuracy and reduced OSHA recordable accidents. In addition to our ongoing supply chain initiatives including improving our in stock positions, optimizing inventory levels, increasing merchandise turns and improving distribution efficiencies, we continue to focus on two key projects: automated replenishment and advance shipping notification supported cross dock.

We began implementation of automated replenishment in the fall of 2008 with a group of pilot stores and have successfully rolled out complete categories to the entire chain throughout the first half of 2009. Currently, we have approximately 12,000 skews on automated replenishment in all stores and we will ramp to approximately 28,000 skews by October 2009. Initial results, especially in stock metrics are promising. In stocks in departments on automated replenishments for all stores are running in the 93% to 96% range versus the store ordering method baseline of 86% to 90%. We have seen in stock improvement across every department converted to automated replenishment.

These improvements have been realized while at the same time decreasing our overall inventory position. Because of the cadence of the roll out from pilot to all stores, sales results are inconclusive at this time but we’ve seen no adverse sales impact from the conversion. This project remains on schedule and is planned to be completed in October 2009. Additional categories may be added in 2010.

Our second key project is ASM supported cross docking. We believe this project will greatly reduce vendor and direct-to-store shipments, reduce freight costs and enable us to leverage our current distribution center to handle the vast majority of all products sold in our stores allowing store associates to spend more time serving our customers. This project requires modification to our existing warehouse management system and reconfiguring our distribution center to facilitate a more streamlined flow through design.

The distribution center modifications are complete. We anticipate the system capabilities to be in place in the third quarter and we will begin converting our five test direct-to-store vendors to cross dock at that time. Once the test vendors are successfully brought online we will roll out this new process incrementally to the remaining direct-to-store vendors. A web based tool will be made available to vendors that are not EDI capable allowing them to send ASMs. Full vendor conversion is expected in the first half of 2010.

For the remainder of 2009 we will continue to focus on our ongoing supply chain priorities: maximizing store in stocks; maintaining optimal inventory levels; improving inventory turns; reducing expense; and improving distribution center productivity, accuracy and safety.

Let’s turn our attention to our progress made during the quarter related to other technology priorities. As I mentioned above, AC Moore continues to leverage our recent investments in technology to better our in stock position and to better manage our inventory assets. Both the supply chain team and IT teams have managed this project extremely well. I must also mention that our store teams have received this new thinking and technology with open arms and for that we are very proud of their efforts adopting this new thinking and change to a very old and established process.

We have engaged in a pilot of advance forecasting tool that will provide us by skew and by store the optimal min and max replenishment quantities to maximize profit and satisfy our customers’ needs both on everyday basic items as well as advertised product. This refinement of the auto replenishment model should bring greater opportunities for sales growth and inventory turn in 2010.

Our technology team has also begun to leverage the new ORACLE retail data warehouse to build key performance based online dashboards to provide vital analytical components of the business day to both corporate and field level management in a streamlined fashion. We believe this consolidated information will quickly provide actionable feedback to all areas of the business both in the support center and field improving our operational efficiencies and business performance.

I’d like to close by discussing some operational tactics during the quarter in our store division. A variety of different incentive programs were launched for our store teams as we enter the back half of the year. These programs are unique to our organization focusing on sales, service and profitability. It’s our belief that we must continue to offer such incentive programs to our store teams to ensure they have every opportunity to add to their total compensation package while at the same time assist the company in achieving our strategic objectives.

At the beginning of the quarter we officially launched our store review program that had been in a pilot stage since early Q1. This program provides a comprehensive tool for our field leadership teams to use on a schedule and exception basis when visiting and touring stores. This will enable an enhance the new field structure while ensure the quality of store visits are at a high level and consistent through our chain. The focus of the program begins with service and sales and ends with our store becoming better operators improving our execution at store level.

As I mentioned earlier, we continue to make great strides with our system enhancement. Specifically in stores we have developed new business intelligence tools for our field teams. Beyond the new dashboard reporting tools being generated out of the ORACLE retail data warehouse, significant work has been completed related to a store communications portal. This advanced application will provide a consolidated repository for information and communication designed for our stores to be more informed and prepared on a daily basis. All of this effort supports our desire to do two things: one, continue to improve store and support center overall execution; and two, become a more centrally directed organization.

At this time I’d like to turn the call over to David Abelman.

David Abelman

I’m pleased to be able to share with you our thoughts on our marketing and merchandising performance during Q2. Having joined the AC Moore team in May, I feel very good about the progress we’ve made in just a few short months. While we believe that we’ve strengthened our programs in the back half of 2009 we’ve made significant enhancements to our 2010 plan. We have an enthusiastic and determined team that’s laser focused on driving profitable traffic and sales. I firmly believe we’re on track for solid improvement in 2010.

Let me highlight our Q2 results for merchandising and then we wills share a few of some of our key marketing initiatives. While we’re disappointed with our comp sales decrease of 13.8%, we fully understand the problematic areas and they’ve all been addressed. Over 75% of our comp sales decrease can be attributed to continued weakness in three areas. The first two are paper crafting and readymade frames. The third area, which Rick mentioned earlier, are categories targeting the DIY home enhancement consumer which includes floral, seasonal and home accents.

Let me take a minute to address each of these areas. Our scrapbook and paper crafting category has experienced a significant decline of sales due in part to overall industry down trends in this business. The largest factor is that scrapbooking is a highly promotional category and our reduction in advertising hit this area the hardest. We also elected not to reset this department in 2009 which also contributed to sales loss since we had a major reset on this department last year.

Readymade frames is yet another highly promotional category. We can contribute much of our sales loss to a reduction in advertising space as well. Lastly, our categories focused on the DIY home enhancement consumer which includes floral, seasonal and home accents was the most significant contributor to our comp sales decline. This sales loss was primarily due to market down trends in areas such as seasonal plus our clearancing of off trend products in our mix had a large impact.

While we have successfully sold through much of this merchandise, it had an impact on both sales and margin with the majority of the product discounted at 50% to 75%. We are however optimistic about our 2010 plan in this area. We will launch new everyday items, a greatly improved seasonal program and much better presentation. The product we have sourced has better quality with lower cost which will translate to better top line sales, fewer mark downs and improved margins.

Let’s talk about some businesses that are doing well. We’ve experienced positive comps for the quarter in yarn, kids crafts, cake and candy making and custom framing. We are also experiencing positive sales trend in categories that we reset during the quarter which include ribbon, quilting and our surfaces category which is primarily small wood items. We’ve continued our reset activities in key categories in Q3 and we are pleased with early results.

Concluding my comments on merchandising, the entire team fully understand our priorities and we are focused on continuous improvement in our core categories. We remain confident that the back half of the year particularly Q4 will show improvement. We’re very excited about our product mix, our in store merchandising and traffic driving marketing programs and believe we are ready for this important selling season.

Let’s spend a few minutes on marketing and advertising. We are pleased that traffic in our stores showed steady improvement during the quarter. Our comp transactions declined during Q2, improving over our year-to-date trend. Particularly encouraging is that June comp transactions were flat. Unfortunately the craft consumer tends to be very value conscious and with the current economic situation our average basket is down $0.75.

We worked diligently to improve the productivity of our in service. We’ve completed an extensive review of our circulation to ensure that we have the right coverage levels for every store. This continues to be an ongoing challenge with the continued loss of subscribers by newspapers. As far as advertising content, we continue to make improvements in our [earned] space model. We’re utilizing better decision support systems and instituted new processes to enable our merchants to select a right mix of products to drive profitable traffic and sales.

We’ve also improved our circular design and messaging to ensure that our branch stands out with crafters. As I mentioned earlier, newspaper circulation continues to decline at an alarming rate and circulars are our primary marketing vehicle today. We are developing an integrated advertising and marketing mix based on insight on how our target customer consumes media. We are testing new vehicles and we believe we will be less reliant on newspapers in 2010 and will be better positioned to grow our brand in the years to come.

We also believe that these new vehicles will reach more craft consumers and we will become much more efficient by having more touch points with our most valuable customers in the overall craft community. This is also particularly meaningful in single store markets and markets where we do not currently have adequate store density. Newspaper insertion costs in many of these markets is highly inefficient for us and adversely impacts our G&A.

With more targeted vehicles, our sales are likely to improve and our advertising costs will be lower in these markets with new advertising and marketing options. To assist us with our new plans, we have retained three new agency partners. We also continue to make strides in building our rewards loyalty program which was rolled out to all stores during the second quarter.

Overall, we are pleased with the progress we are making in both merchandising and marketing. I believe the improvements in product sourcing and development, in store merchandising and our overall marketing and advertising programs with resonate with the arts and crafts consumer and we will begin to see improved traffic and sales during the back half of 2009 and throughout 2010.

I will now turn the call back to Rick.

Rick A. Lepley

Operator, I think we can take questions now and I’ll have a few closing comments a little later.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Mark Mandel – FTN Equity Capital Markets Corp.

Mark Mandel – FTN Equity Capital Markets Corp.

I just wanted to drill down a little bit further on the traffic versus ticket. David, I think you said for the month of June that traffic was flat but the basket was down $0.75. First of all, that $0.75 decline was that for the month of June or was that for the full quarter?

David Abelman

That was for the full quarter.

Mark Mandel – FTN Equity Capital Markets Corp.

So if you look at the month of June, were your comps positive for the month of June or at least flat?

David Abelman

Our comps showed improvement over the quarterly trend but they were still down.

Mark Mandel – FTN Equity Capital Markets Corp.

As far as the second half, you made some positive comments again, are you anticipating a return to positive comps either in the third or fourth quarters of this year?

Rick A. Lepley

I think that it’s too much to expect that we could get back to zero I think in that period. We have a better chance of doing that in the fourth quarter than the third quarter I think. We realize that our competitors are flat which is pretty good in this environment but we’re also doing a lot of other things here obviously at this time than just focusing on trying to drive our comps. So, we expect improvement but I don’t think we would want to give any sort of guidance that we would get back to flat.

Mark Mandel – FTN Equity Capital Markets Corp.

With respect to the gross margin and SG&A could you provide some further details? I know the gross margin was up 20 basis points, if you could break that down in any greater detail? And also, if you can quantify the components of the SG&A that you gave on the call I would appreciate it.

David Stern

Although we haven’t released publically and we continue not to release tremendous detail, there was if you recall from last year’s call a decrease in our gross margin related to clearance activity for stores that were to be closed later in the year. So, we got a little bit of a bump related to that and that was partially offset by deleveraging of our warehousing, purchasing and receiving costs over a lower store sales base.

Rick A. Lepley

The sales figure on closing those stores in that quarter last year actually helped us quite a bit. We grew the company in that quarter, in 2008 and that’s another thing that made these comps a little more difficult.

Mark Mandel – FTN Equity Capital Markets Corp.

The SG&A pieces, you don’t want to quantify those?

David Stern

We don’t give that out. As you’ll notice we continue to have SG&A decreases in excess of 10% however, those cost cutting initiatives are spread over a lower store base as it causes as a percentage, the SG&A rate to be slightly higher.

Operator

Your next question comes from Holly Guthrie – Boenning & Scattergood, Inc.

Holly Guthrie – Boenning & Scattergood, Inc.

Going back to one of Joe’s comments, I just wanted to get some clarification and hopefully some additional information. Joe, I think you said that in stocks in certain categories were 93% to 96%. I was wondering if you could give us more color about what programs, I’m assuming it’s part of the automatic replenishment program but if you could give us more color on that number? And then, you gave us a comparative number that was in the mid 80s, can you go through all those numbers again and maybe give us some more color?

Joseph A. Jeffries

All the departments that are on automated replenishment are running in the range of 93% in stock to 96% in stock versus the store ordering method baseline. What that means is prior to going on the automated replenishment we saw in stock positions of 86% to 90% when they were ordered manually.

Holly Guthrie – Boenning & Scattergood, Inc.

How many programs are on auto replenishment?

Joseph A. Jeffries

12,000 plus skews on the program today which is a big number, keeping in mind we started the fall of last year and we anticipate being at 28,000 in change in October of this year. Now, this is every day programs, we will not put seasonal programs on automated replenishment today and I don’t even believe you’ll see us do that in the future. It’s very volatile as you know.

Holly Guthrie – Boenning & Scattergood, Inc.

So what’s the total skew count excluding seasonal, is it around 30,000 skews?

Joseph A. Jeffries

It’s right around 40,000 in change.

Holly Guthrie – Boenning & Scattergood, Inc.

I was hoping to get some clarification on the tax situation, the valuation allowance, some of the assumptions that went in to the valuation allowance and I think you said that you’re not assuming to get any benefit from that for the rest of the year but I was wondering if I could just get more color on that?

David Stern

In the third quarter of 2008, we assessed our tax valuation allowance and as you may recall we recorded a valuation allowance against the tax benefits that we had recorded through that point in time. This is strictly to be in compliance with accounting standards which regulate giving up the history over time and there needs to be overwhelming evidence of the change going forward. With that in mind, we were required to record that valuation allowance for what was a receivable at that time and to record a valuation allowance going forward.

Holly Guthrie – Boenning & Scattergood, Inc.

That was in the third quarter of last year, correct?

David Stern

That’s correct.

Holly Guthrie – Boenning & Scattergood, Inc.

I was wondering if you could talk, you gave the June statistics, I was wondering if you feel comfortable giving the July statistics for the number of transactions and the average transaction value for the comps?

Rick A. Lepley

No, we won’t get in to that kind of detail.

Holly Guthrie – Boenning & Scattergood, Inc.

David, you made comments about floral and seasonal having the most significant impact on comps. There was definitely a dramatic change as you move new product in and it looks like it sounds like you’re flowing it differently with different tags on it. Is this one of the categories that is now on auto replenishment? And if so, how has that been performing in the test stores?

David Abelman

It’s two pieces, no it’s not on auto replenishment and you are seeing some different tags. I believe to improve our margins and have some better advertising capabilities we are labeling our different product lines differently than we have in the past where we’re flowing in new products more regularly to keep the assortment fresh and have really improved the way we merchandise those areas.

Rick A. Lepley

And the quality, the quality is incredible, it’s outstanding. It hasn’t been set for eight years so you can image as a company what we went through to get that turned over.

Holly Guthrie – Boenning & Scattergood, Inc.

Then just a little bit more on scrapbooking if you could. Are you thinking about a reset and if so, when or is it just advertising that you think will drive it in the back half?

David Abelman

We elected not to reset this department in 2009 but we had a considerable amount of what we call line ins line outs to ensure that we keep the section fresh with new product and stay differentiated. We’re going to continue to refresh our mix and work to be a leader in innovation in that category but, at the same time the scrapbook business has been down industry wide and the category is highly promotional whether it’s stickers or papers in the key categories and that is an area with block count or number of items that we promote declined along with a reduction in advertising during the quarter. That’s what we attributed the majority of the losses to. I believe in the back half of the year it will be promoted more frequently as our ad programs is more on line with where we were last year.

Operator

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

Joan Storms – Wedbush Morgan Securities

A couple of questions, on the comp I’m trying to figure out in the first half you had lower advertising which definitely was sort of an intentional negative to the comp, are you saying in the back half you’re going to be picking up your ad spend and that’s what gives you confidence in an increased comp trend?

Rick A. Lepley

Well, think about it relative to last year, in the first half we spent less and in the second half we’re closer to what we spent last year. We did spend less in the first half consciously, I think it was the right decision. It was a decision that I made, the buck stops here, I don’t think we were getting the return that we wanted on it and it just seemed to me that if you spent a dollar and got a dollar back you might have felt good about taking the risk but it was better to spend a dollar when you thought you could get a $1.25 back.

I didn’t feel that was happening, I thought we needed a better message, we had other issues here that we had to deal with and I didn’t see the return. So, we saved the cash and we’ll be back on more of a normal plan for the back half of the year.

Joan Storms – Wedbush Morgan Securities

Then as far as the categories that had been weak that David Abelman had talked about, what changes do you see there, I know you’ve only been there a short time, to help improve those categories in the back half of ’09?

Rick A. Lepley

I’ll let him answer it but he has been here a short time but the good thing is it’s a business he understands pretty well so it doesn’t take him too long to assess it.

David Abelman

As I mentioned in my comments, I think the three areas that contributed 75% of our comp sales loss have all been addressed and while there’s programs that will have a far greater impact in 2010 in terms of product sourcing and refreshing our product mix, some of the promotional activities alone plus some of the product flowing in the fall in terms of fall floral, some of our seasonal product, some of our Christmas and Halloween sets give us optimism that we’re going to have better performance in those areas than we had the first half of the year.

Joan Storms – Wedbush Morgan Securities

Regarding on the SG&A, you’ve had some charges every quarter now for the last four quarters, are we going to start to anniversary some of that and what are you preview for any potential further asset charges going forward?

David Stern

The last asset impairment we had was in Q4 of ’08. Which charges?

Joan Storms – Wedbush Morgan Securities

There’s been line item charges in the SG&A for the last four quarters. I mean you’ve said like it was $0.07 this quarter and I believe last year is when you started recording those and some of those charges were associated with the closed stores.

David Stern

There’s $0.07 that you’re referring to I think on the release is related to second quarter of ’08. We did not have that this quarter.

Operator

There are no more questions at this time Mr. Lepley.

Rick A. Lepley

I’ve got a couple of closing comments here and then we’ll end the call. We’ve said repeatedly that turning the company around would be a three year project and sometimes we’ve said that this is more of a marathon than a sprint. We’d be the first to admit that we’d hope our progress would be more apparent now that we’re in the third year of this. This would be much easier in a high growth atmosphere I think that the industry experienced during the first five years of this decade rather than in the industry decline or stagnation that we’ve experienced in the past two years.

But, the market is what it is and we’ve got to stay focused on what we can affect and what we can change. That’s why we haven’t deviated and why we’ve stayed so focused no our original plan. As we’ve explained previously our analysis indicates that historically we’ve been the high cost provider in the arts and crafts area and while part of that has to do with scale, the part that we can control has more to do with the lack of systems and process so it’s been with good reason that we’ve focused our attention on improving the back end of our business first and that’s why we have spent so much time on systems enhancements, supply chain refinements, centralizing the decision making process and providing or updating practices and process throughout the organization.

We think that we’re closer than ever to having a sound foundation under this business. We expect the results of our efforts to become more evident over the next few quarters. Everyone here at the store support center appreciates the efforts of our store teams all of whom are working hard to improve our operations and our performance. Thanks so much for joining us today and thanks for your continued interest in AC Moore.

Operator

This concludes today’s conference call. You may now disconnect.

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Source: AC Moore Arts & Crafts, Inc. Q2 2009 Earnings Call Transcript
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