AC Moore Arts & Crafts Inc. Q3 2009 Earnings Conference Call

| About: A.C. Moore (ACMR)

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

Q3 2009 Earnings Call

November 6, 2009 10:30 a.m. ET


Rick Lepley - President and CEO

Dave Stern - CFO

Joe Jeffries - COO

David Abelman - Chief Marketing and Merchandizing Officer


Holly Guthrie - Boenning & Scattergood

Bill Armstrong - C.L. King & Associates

Mark Mandel - FTN Equity Capital Markets



Good day and welcome to the ACMR third quarter 2009 earnings conference call. Today's conference is being recorded. At this time for opening remarks and introductions I will turn the conference over to Mr. Rick Lepley please go ahead sir.

Rick Lepley

Thank you operator good morning. Before we get started today I would like to review with you our Safe Harbor statement. Today's discussion may contain forward-looking statements as such term is defined on the Securities and Exchange Act of 1934 and the regulations there under, including without limitation statements as per the companies financial condition, results of operations, 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 companies filings with the securities and exchange commission including its most recent Form 10-K a copy of which may be obtained from the company upon request and without charge.

This morning I am joined by Dave Stern, our Chief Financial Officer; Joe Jeffries our Chief Operating Officer and by David Abelman our Chief Marketing and Merchandizing Officer. Dave will talk to you about our financial performance for the quarter and Joe will talk to you about our operations performance then David will comment on merchandizing and marketing.

Before they do that I would like to take a few minutes to talk about the third quarter. During the quarter our comp store sales decline was 7.7% considerably better than the previous two quarters but obviously still not where we want to be.

While we are disappointed with that decline, the latest CHA Attitude and Usage Study does confirm a drop in the overall consumption of art and crafts products are about 9%. It confirms our thought that less consumer discretionary spending is continuing to adversely affect our business.

But during the quarter, we increased our ad spend over the same quarter a year earlier. We sharpened our prices in our discounts. And while that helped the rest to comp decline and cut into our margins during the period.

Another factor contributing to both our comp decline and our margin decline was our emphasis on aggressively closing out older products including those related to the major resets that we recently went through, including surfaces, home décor, everyday floral, artist drawing pads and jewelry.

Last quarter we told you we saw the possibility of a deterioration of our margin rate if the overall market became more promotional in nature and of course it did, particularly with regard to the seasonal assortment. We aggressively priced much of this year's assortment lower than last year, but then found the need to sharply discount it even further as the environment became more competitive with some retailers introducing their new assortments and a 50% discount.

As I mentioned earlier, our comps declined by 7.7% in the quarter, and the drop in seasonal sales alone accounted for more than 40% of that decline. It had an adverse effect not only on our Q3, sales but also on our Q3 margins. And it continues to show some weakness in the current quarter as well.

A little later David Abelman will talk about the challenge of seasonal sales in more detail. Last call we said we fully anticipated an increase and the competitive environment might cause us to spend more in advertising in the third quarter and we did indeed experience this.

In light of the competitive environment and our focus on improving traffic and sales we stepped up our advertising and promotional pricing and spent about $800,000 more than the year earlier period. Of course the total sales decline, we experienced was also impacted by the fact that we operated too fewer stores in the third quarter of 2009 than we did in the third quarter of 2008.

In observation that we've carried over from the previous quarter is that while consumer confidence may arguably be slowly improving, it appears certain that discretionary income spending is still lagging behind general household spending.

In the third quarter, our transaction count at comp stores declined by only about 2.2%. However, our average ticket dropped by 5.5% in the same quarter a year ago. So, while our improved messaging and aggressive pricing helped our customer count, shoppers focused heavily on purchasing the advertised goods on our close outs thereby impacting the overall size and profitability of the basket.

On our last call we said that we were hopeful that we were in the bottom of the trough in terms of declining consumer discretionary spending. We still think that could be the case. But it is as some economic analysts have said a U shaped bottom is opposed to a V shaped bottom. We continue to think that we are in a stronger position to take advantage of increased consumer spending when it occurs we just don't know when that increase will be meaningful enough for us to fully benefit from it.

Our out of stock condition for basic crafts products has shown dramatic improvement as we have moved more SKUs to automated replenishment. The 2009 rollout for automated replenishment finished about 30 days ahead of our schedule and we now have more than 30,000 SKUs on automated replenishment.

Our average store quarter ending inventories decrease by 1.3% from Q3 of 2008. We did see automated replenishment actually take up the inventories in some departments as we switch from store ordering to system generated orders and we did make purchases all throughout the quarter consistent with the normal expectation of a fourth quarter upswing in our business that we have seen historically.

We still think that increase will occur relative to our earlier quarterly sales average as in 2009 but don't yet know how strong of an uptick to expect particularly from Black Friday to a December 24 when the focus traditionally switches from crafting to gifting.

In Q3, we continue to make progress with a systems initiatives. Now 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. Many folks throughout the IT group, the merchandizing group and the supply chain group have dedicated a substantial amount of their time to understanding implementing and utilizing the new systems and gaining the experience we need to use it going forward.

We are very grateful for the hard work and the dedication of all those associates. Another initiative that we have discussed in the past is developing the systems necessary to support cross stocking. We are continuing to work to finish the development of a cross stock IT interface thereby increasing the number of items that are shipped to our stores through this facility. We believe this will lead to gradual reductions in our shipping cost to stores throughout 2010.

Dave would give you a more detailed update in a few minutes. During the third quarter of 2009 we did not open any new stores, we began the quarter with 133 stores and we ended it with a 133 stores. We will open two more new stores in this the fourth quarter and in fact one of those stores opened last week and one will open next week. We have also just completed the relocation of a store in the fourth quarter. That took place about one week ago.

During the third quarter we completed three remodels two were optimizations that increased assortments in older large format stores and one was our first full remodel that involved transforming an older lay out challenge store to a new Nevada prototype. While we are pleased with the consumer reaction to this remodel, we now need to monitor the activity so that we fully understand the cost benefit relationship.

And Joe will speak of that Nevada remodels in more detail later on. No other major remodel activity is scheduled until the first quarter of 2010 so as not to disrupt the normal seasonal traffic increase, we experience in Q4. I would add that to-date we have a total of 19 Nevada model stores in the comp cycle. 10 of those are the final prototype.

During Q3 this group of 10 stores comp down 1.6%. While our older traditional stores comp down 8.1%. In other words, the final Nevada prototype performs 650 basis points better than the traditional stores in Q3. We have reiterated before that we routinely review store performance and future prospects to identify under performing locations and assess closure of those stores that are no longer strategically or economically viable.

Since such a high percentage of our annual store sales occur in the fourth quarter, those results when available are most influential on our decisions. So, it is possible that such an analysis could lead us to the conclusion to close one or more existing stores and/or it could lead to certain impairment charges, if the situation warrants.

Discussions with landlords regarding the possibility of future rent adjustments or even closures as previously referenced are ongoing. And while we are looking for opportunities to put in new stores and to grow our business and our store count we are also more selective than ever in evaluating such possibilities.

Our custom framing operations continue to perform to our expectations nearly all of our stores are equipped with the visualization technology and state of the art digital support framing software. We've also added the Wizard mat cutting machine to several locations to expand our capabilities for a complete framing solution for customers.

Our goal for the final weeks of 2009 is quite simply to maximize our sales. We continue to have concern about the macro environment meaning the level of consumer discretionary spending in the coming months, the overall competitive environment of retail in the fourth quarter and consumer interest in seasonal merchandise which I think and understand has been weak across all channels of retail during the fourth quarter of the past two years.

Based on our comp sales performance through the first four weeks of this fourth quarter we think our consumer messaging is on target. We think our store inventories are in good shape and we think our store general managers are ready for the traditional increase in consumer traffic we usually see in the fourth quarter. In short, we think we are as prepared as we can be for the holiday shopping season.

Now I would like to turn the call over to Dave Stern who will update you on our financial performance during the third quarter. Dave?

Dave Stern

Thank you Rick. Good morning. I will start with the review of results for the quarter followed by our year-to-date results and finally a review of inventory, cash and debt.

Sales for the quarter were $106.1 million a decrease of 9.1% compared to sales of $116.7 million during the third quarter of last year. This decline was primarily due to a decrease in comparable stores sales of 7.7% and the operation of fewer stores during the quarter.

At the end of the quarter there are 133 stores in operation compared to 135 stores at the comparable point last year. Gross margin for the quarter was 38.4% a 480 basis point decrease from the third quarter of last year. This decrease was primarily driven by increased advertising and promotions, increase transactivity and shift in product mix.

Selling, General and Administrative expenses for the quarter were $53.2 million, a reduction of $0.2 million compared to last year. This decrease is primarily the result of reductions in pay roll partially offset by an increase in advertising expense. Selling, General and Administrative expenses were 50.1% at sales compared to 45.8% of sales in the third quarter of last year. Although SG&A expenses were essentially flat the increase as a percentage of sales was a result of de-leveraging expenses over a lower sales base.

Depreciation and amortization expense for the quarter was $3.9 million compared to $4.2 million for the same period last year. Store pre-opening and closing costs were $0.3 million for the quarter. This consisted of cost for the two stores that will open in the fourth quarter and one store that will relocate the fourth quarter and stores that were previously closed. In the third quarter of last year, pre-opening and closing cost were $1.3 million, this consisted of $0.3 million of cost related to the opening of one store in each of the third and fourth quarters of 2008 and $1.0 million at store closing expense.

Net interest expense was $0.2 million for each of the third quarters of 2009 and 2008. The loss before tax for the quarter was $12.9 million compared to a loss before tax of $4.4 million for the comparable period last year. In the third quarter of 2008, the company began recording evaluation allowance against the tax benefits generated by its operating losses. As a result we have not had and do not expect to have any significant income tax expense or benefit in the current year.

During the third quarter 2008, the company incurred net taxes expense of $3.1 million. Net loss for the third quarter was $12.9 million or $0.53 per share compared to a loss of $7.5 million or $0.37 per share for the third quarter of 2008. For the third quarter of 2009 capital expenditures were $2.1 million compared to $4.3 million last year.

Moving to results for the nine months ended October 3, 2009 sales were $319.2 million or a decrease of 13.7% compared to the first nine months of 2008. This decline was caused by decrease in comparable store sales of 11.7% and the operation of fewer stores during the nine month period. Gross margin for the nine months was 41.0% a 140 basis point decrease from the comparable period last year.

Selling, general and administrative Expenses for the first three quarters of 2009 were $154.2 million, a reduction of $12.4 million. This decrease was primarily a result of reductions in payroll, occupancy and impairment expenses. Selling, general and administrative expenses were 48.3% of sales compared to 45.1% of sales in the comparable period last year. Although SG&A expenses decreased, the increase as a percentage of sales was a result of deleveraging of expenses on a lower sales base.

Depreciation and amortization for the nine months was $12.1 million compared to $11.8 million last year. Store pre-opening and closing cost for the first three quarters was $0.9 million which consisted of cost for the one store that opened and the one store that relocated year-to-date. The two store openings and one relocation schedule in Q4, and stores previously closed.

In a comparable period last year store pre-opening and closing costs were $3.3 million compared not much consisted of cost for the eight stores opened in the first nine months, a store that opened in the fourth and stores that were closed. Net interest expense for the third quarter of 2009 was $0.9 million compared to $0.5 million for the comparable period last year. The net loss for the first nine months of 2009 was $25.4 million or $1.16 per share, a loss of $13.6 million or $0.67 per share for the comparable period of 2008. For the first three quarters of 2009, capital expenditures were $7.7 million compared to $12.9 million last year.

Moving to the balance sheet, as of October 3, 2009 inventories were $138.2 million or $3.9 million less than last year. On a first store basis, inventory was down 1.3%. At the end of the third quarter, cash net of debt was $12.3 million or a decrease of $4.7 million from the comparable point last year. Cash balance was $31.3 million or a decrease of $15.4 million compared to the same period last year and debt was $19 million at the end of the quarter, or a decrease of $10.7 million from the same point last year. Availability under our line of credit was $33.7 million at the end of the quarter.

Now I'll turn the call over to Joe Jeff, Chief Operating Officer. Joe?

Joe Jeffries

Thank you Dave and good morning. I'd like to begin my comments by discussing recent activities and progress made related to our supply chain division during the quarter. During the third quarter of fiscal 2009, in addition to our ongoing supply chain initiatives including improving our in-stock positions, optimizing inventory levels, increasing merchandise returns and improving distribution efficiencies. We continue to focus on two key projects. Automated replenishment and advance shipment notification supported gross stocking.

The auto replenishment rollout for 2009 finished a month ahead of schedule. We have 30,000 plus cues on automated replenishment across all departments with the exception of floral, seasonal and front end check outs. In-stocks have continued to improve from a range of 86% to 90% under the store order method to a range of 93% to 96% on auto replenishment. This is been consistent across businesses and departments. We have seen no adverse impact on sales and hesitate to credit this initiative as the sole reason for the change in trend in some of our basic businesses. The in-stock improvement did come at an increased inventory cost. We estimate that the seasonally adjusted inventory increase on replenishment skews has been in the mid-single digits. We believe that over time, as we work through the pre-existing inventory bubbles, the inventory will stabilize at lower levels.

We will look to maximize sales and optimize inventory levels with the implementation of a dynamics sales forecasting engine that will be implemented in Q1 2010. This forecasting engine with provide recommended order quantities to help us maximize return on inventory investment, specifically this tool will provide order points to give us the optimal placement for inventory investment and in-stock intersect to maximize our profit opportunity. We will add a small group of basic skews to auto replenishment in 2010 that were not on our schedule for 2009. These are everyday fore roll and front end check out items. We will also look for other opportunities to use the auto replenishment system and processes for short life cycle business as a way to more effectively manage inventory at skew and store level.

Our second key project is advanced shipment notification or ASN supported cross stocking. We believe this project will minimize vendor direct to store shipments, reduce freight cost and enable us to leverage our current distribution center to handle the vast majority of all product sold in our stores allowing store associates to spend more time serving our customers. This project requires modifications 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 by the end of this year and we will begin converting our test direct to store vendors to cross stock 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 electronic data interchange or EDI capable, allowing then to send advanced shipment notifications. Full vendor conversion is expected by August of 2010.

Earlier in the call Rick mentioned that we did complete our first full remodel of our traditional store, converting it to our Nevada class prototype. Our intent is to increase the number of Nevada class stores we have, within our portfolio and we plan to do this through remodels and relocations while cautiously opening new stores. We have aggressively worked to value engineer the Nevada class model to an affordable economic level that allows us to remodel eligible stores, which meet very stringent requirements in a five week period at a cost of less than $400,000. Our current plan calls for more than 25% of our chain to be operating as Nevada class stores by the middle of summer 2010. This number will allow us to further examine performance in return on our investment as we consider additional remodels and relocations in 2010 and beyond.

In summary, we are very pleased with the Nevada's performance since we have applied many merchandising and operational enhancements over the past 16 months. We will continue to monitor the remodeled stores performance in hopes of being able to accelerate the transition of our older store portfolio. Now, I'd like to turn the call over to David Abelman.

David Abelman

Thank you, Joe. As Rick mentioned earlier, comp sales and transactions while still down in Q3, showed nice improvement from our trend during the first half of the year. We did experience margin erosions, which I'll touch upon in more detail. And while we're never happy with margin loss, we believe that our actions during the quarter were strategic and necessary. Let's first touch upon sales.

We believe we were successful in gaining market share during the quarter by increasing our promotional intensity in improving our advertising and marketing programs. While our comp sales were down 7.7% for the quarter, our comp sales on amortized products compared to the same period last year, were up 15%. Comp transactions as Rick mentioned earlier, were down 2.2% versus same period last year. Important to note, that our comp transaction trend have shown continuous improvement in each quarter in 2009. Many of our departments delivered the best results of the year. In fact 12 of our departments show comp sales increases during the quarter versus the same period last year. Our best performing categories included yarn, taking candy making supplies, everyday floral and kids activities.

Unfortunately, we continue to experience significant losses in several other departments. While components of our business targeting the DIY home enhancement consumer, which includes everyday floral, home accents and seasonal, have shown improvement, our seasonal business continues to suffer as consumers have cut back on discretionary purchases in this area, along with us competing against an ever increasing retailer universe.

Our seasonal business accounted for 41% of our comp sales lost during the quarter, combined with continued losses in scrapbooking and readymade frames. These three departments were 72% of our comp sales decline. As I mentioned during our last call, reversing the trend in these businesses is our top priority and while we began to see improvement in scrapbooking and frames, plans are in place to improve our performance in each of these categories in 2010.

Let's touch on our decline in margin rate. There were four key factors that adversely affected our margin rate versus our seasonal category which is primarily fall floral and decor. As Rick mentioned, our direct competitors introduced their seasonal merchandise with very aggressive pricing and we promoted our assortment at lower margins to remain competitive and protect our sales as much as possible.

Our margin for seasonal product fell 48% versus the same period a year ago. The next factor impacting margins was our advertising and promotional program. As I mentioned earlier, our ad sales were up 15% in Q3 versus the same period last year. This change of mix of ad sales to regular sales significantly with ad sales as a percentage of our total sales increasing by over 5%. Our ad sales typically deliver margins that are 30% lower than regular price merchandise. While ad sales improved our transactions in sales trend, we did not anticipate such a significant change in mix. A large part of the shift in our mix was additional ad pages with more promotional product along with more advertising vehicles with discounted products during the quarter. While we continue to drive sales and profit with our circulars, we believe we can continue to enhance the productivity and profitability of each transaction. We are developing market basket tools that we will implement in early 2010 which will further assist us in selecting the best mix of products and price points to maximize sales and improve our margins.

The third factor impacting our margin were clearance sales. Clearance sales impacted Q3 margins by a 160 basis points as we focused on sell thorough of aged inventory and items discontinued during resets. We will continue our clearance activity which has been effective of moving this product to our Q4 as well. Crafters demand price assortments and we have delivered in terms of new differentiated assortment with over 25% of our product mix refreshed in 2009. We believe our assortment and presentation in our stores is in fact resonating with our customers and we will have favorable pay back.

The last factor that contributed to lower margin right during the quarter was the shift in our product mix to lower margins for growing business. An example of the category that had comp sales increase but traditionally sold the price points lower than our overall average gross margin would be yarn.

Bottom line, we are not pleased with our margin rate decline during the quarter. We are carefully balancing margin challenges with our focus on growing comp sales and market share and believe we will continue to make meaningful improvements.

We continue to enhance our advertising and marketing during the quarter. We introduced new vehicles tested new concepts and we were much more aggressive with our advertising in terms of page count and item promotion which improved our transaction and sales trend and brought fresh footsteps into our stores. We believe this will benefit us in Q4 and into the new year as we continue to drive to our stores and are able to show our customers new and unique products and a much improved in store experience.

During the last call, I mentioned that we brought on new agency partners in Q2 and we're testing new vehicles and broadening our marketing mix. During the third quarter, we successfully launched our cause marketing program which we called Crafting a Better World, during our 24th anniversary celebration. Our first program which was recently completed benefited the Boys & Girls Clubs of America. They are a fantastic organization and we are pleased to have had the opportunity to work with them and with the support of our customers, we are donating both products and money to support clubs in our local communities.

We also launched our social media initiative during Q3 and are proud of the progress we have made in building our fan base and followers of three leading social media networks Facebook, Twitter and YouTube. Our cause related activities, social marketing strategy and rewards frequent customer program compliment our enhanced current advertising program and local marketing efforts which all work together to assist in differentiating us in the markets we do business.

In closing, great brands listen to their customers and deliver on their expectations. This is core to both our merchandising and marketing organizations. With the tools we now have in place, we understand our customer better than we have in the past and we will continue to invest in building our brand based upon what our customer wants. Our product selection, our marketing and advertising and our in store merchandising and services will continue to evolve based on what we are learning from our customers.

We believe we are doing the right things, and we will continue to work towards building the better company. Our team remains razor focused on building programs that drive sales, traffic and improve our margin. Our top priority is great execution, as we are now in our Q4 peak selling season, and we will continue to plan and build exciting differentiated programs that we will launch in 2010.

Now, I'll turn the call back over to Rick.

Rick Lepley

Okay. Thanks David. Operator, I think we can take questions now.

Question-and-Answer Session


The question-and-answer session will be conducted electronically. (Operator Instructions). If you are utilizing a speaker phone, please make sure that your mute function is turned off to allow your signal to reach our equipment. We will proceed in the order that you signalize and we'll take as many questions as time permits. (Operator Instructions). And we'll pause for just a few moments to assemble our queue. (Operator Instructions). Wait for a few more moments as we assemble our queue. We will take our first question from Holly Guthrie of Boenning & Scattergood

Holly Guthrie - Boenning & Scattergood

I was hoping to get some more, some clarification on the SG&A dollars that were spent in the quarter. The last two quarters you guys saw a significant reduction in the dollar expense and you guys actually produced a flat SG&A number. I know you said advertising was I think it was $800,000 incremental the last year, but what else was in that number and is that what we should be looking for going forward a flattish type SG&A relative to the prior year.

Dave Stern

Sure Holly. This is Dave. We did have reductions in our core operating expenses which were offset by increased advertising that David referred to earlier. And as you know, we don't give a lot of guidance going forward, but we have said previously that we expected the promotional going into Q4 as well.

Holly Guthrie - Boenning & Scattergood

And I am just trying to figure out why there was a change in the third quarter relative to the last two quarters. In the last two quarters you saw significant reduction in and around $4 million in each quarter. As far as the dollar expense goes to the SG&A line and now it's flat in the third quarter. So, I guess what you are saying is that what happened in the third quarter, you are looking at as far as your current expense structure to occur to continue to go going forward we should look for dollar reduction in SG&A?

Dave Stern

Well, without getting into more detail than we've previously given guidance on, we do expect to continue to be promotional as referred to earlier and we do expect to continue to offer top customer service and have [favor] on the stores to support that.

Holly Guthrie - Boenning & Scattergood

And then another expense question, Joe said that you expect by the summer of 2010 to have 25% of your stores in Nevada prototype which is a great model logically doing that, but the cost, if I am looking at it correctly is, is it 25% in the stores at $40k per store is around $10 million. And I am wondering, what part of that is expense? Is all of that expense or some of the capitalized can either go through expense of that in a cost to the P&L?

Dave Stern

The cost of the remodel Joe referred to, I think he said it is less than 400,000 on a per store basis and part of that is capital and very roughly about 75% is capital and remaining would pre opening stuff.

Holly Guthrie - Boenning & Scattergood

And then a question for David Abelman. David, could you just give me a little bit more detail on the mix issue within the quarter the discounted. I think you referred to a couple of mix things that were going on in Q3, discounted products versus full priced products. And then if there were changes in categories may be some categories of lower margins get a little bit better. I couldn't quite understand everything that you're saying as far as how mix totally impacted margin in Q3.

David Abelman

Yeah I think Holly, that mix was a smaller component but a contributing component into our margin decline. I mentioned a category like yarn that is experiencing some very, very nice growth but is traditionally much lower margin than we experience overall. And there is two or three other categories that fall and I've seen both. I think the biggest issue that impacted margins was obviously increasing our promotional activity not only did we add to the dark week and added a circular to it we increased page count and we tested and experimented with other vehicles that had item priced promotion that shifted our mix dramatically. as I mentioned ad sales up 15% at around a 30% lower margin on advertising versus promotional, it affects that margin line real quick.

Holly Guthrie - Boenning & Scattergood

Okay and then on this prepared comments you talked about the average ticket being down 5.5%. How much of that do you guys think came from your out-of-stocks and as you move through the quarter your in stock improved I guess if you could. I am trying to use this as a forecasting tool but I am trying to understand that as you are now in mid-90s within stock. It should come without a (Inaudible). So if you could give me some color, the average basket, could you fill the average basket because there you were out of stock and that's why the average trends was down and the average ticket was down any kind of.

Rick Lepley

We told you that 14% of it was seasonal related to not purchasing seasonal. Then obviously we had a sizeable impact but I don't think that we had an out of stock issue, anything we are probably better now than we have been the last couple of years as we have moved more SKUs on to the AR and in fact that's we indicated in some departments the inventory actually went up as we switch to AR and away from taking it out of the hands of the stores.

David Abelman

Our presentation standards up and down on our isles have improved throughout the course of the year and I can tell you that in Q3 they were probably at a year high as far as in-stock goes on our basic everyday craft assortments and I believe that have no impact on that. In fact, we are very proud of the progress that the office teams have made and more importantly that the store teams have made throughout the year in the quarter.

Holly Guthrie - Boenning & Scattergood

Did you see improvement throughout the quarter or is that statement true or as true at the beginning of the quarter versus the end of the quarter?

Rick Lepley

I think [reading] in, each year we've seen sequential, each quarter we have seen sequential improvement on our in-stock and actually that trend started last year. So, as we move more products, categories on to automated replenishment throughout the course of the year more in-stocks improved. David?

David Abelman

I want to walk through one more thing here as in terms of basket size or average transaction, everyone in our segment (inaudible) brand is; I think it has experienced the decline in average basket. I think the good thing about the craft business is that the [shopper] is still out there, they are spending. But they are not doing nearly as much impulse purchasing as they have done in the past where the economy is. So, I think our improvement in our transaction trend is really a good indicator of health of your business and as discretionary spending improves that basket size is likely to go back up.


Our next question comes from Bill Armstrong, C.L. King & Associates.

Bill Armstrong - C.L. King & Associates

Inventory seems to be pretty lean and good shape going into the quarter. So I am surprised that the impact of clearance marked down on your margins, why was there such a need to do so much clearance.

David Abelman

This is David. I will answer that. We elected this year we thought there were some great opportunities to refresh assortment based on things happening in the marketplace and we elected to really ramp up our recent activity and refreshing our assortment in a lot of our key categories during the year. Obviously when you do resets those products that were not as productive as others that were replaced with new product we have to plan a home for those products and we made a concerted effort as an organization to move through the discontinued product and that impacted margin but we believe that our presentations are better than they've been in a long, long time.

And we believe we are in far better shape moving into 2010 that we don't anticipate nearly the same amount of recent activity or opportunity to replace items we call that a line in line out on a much smaller group of product but we believe that the significant activity we did in 2009 will be much more strategic in 2010 against some very, very stringent guidelines. And against categories we believe we still have nature upside and will provide us the point of difference, the recent activity was the largest contributor to our clearance thing and it impacted in inventories as well when you go through a reset you normally rate your inventory significantly. It should bring in new products and push off the old.

Bill Armstrong - C.L. King & Associates

It sounds like that should moderate in the fourth quarter then?

David Abelman

No we are going to continue closing after the fourth quarter. One of the things that these systems now provide us is better information that we've ever had before and while we still don't have a tool of it actually forecast our inventory for us in the sense. We are much more knowledgeable about what SKUs sell, what the turnover is at each store individually. So as we go forward, if it's possible, we would like to take our skew count down and we are hoping to do that because we are going to have much better information about what's SKUs turn in at what rate. So we are going to continue close outs if we take products out of our parts out of planograms that could continue even into the first quarter as we try and work down the SKU count.

Joe Jeffries

David I will just throw one more thing on the inventories that's a little different in the first three quarters and as in Q4 is Q4 with all the seasonal activity and the gifting activity and the highly promotional nature to business between Black Friday and the Christmas is as Rick mentioned earlier we tend to ramp up our inventories anticipation or very good selling season so the take of inventory we have changes significantly in Q4.

Bill Armstrong - C.L. King & Associates

Speaking seasonal that's been a V category for you and your competitors for a number of years now. What were the same store sales just as the seasonal life categories in Q3? I don't know if you have that broken out or not?

Dave Stern

We had provided that, this is Dave Stern, David did mention that in excess of 40% of our comp store sales decline was related to seasonal.

Bill Armstrong - C.L. King & Associates

Okay so if I take that 40% out of the 7.7 overall comp, is it mathematically correct to then say that the non comp excluding seasonal was down 4.5%?

Dave Stern

Yes. That is doing the math I haven't drawn the map but you just did but yes that would be correct.

Bill Armstrong - C.L. King & Associates

Yes got it. Okay thank you.


We will now move on to our next question in queue coming from Mark Mandel, FTN Equity Capital Markets.

Mark Mandel - FTN Equity Capital Markets

Hi good morning thanks I just wanted to clarify a couple of items, on the expenses where the capital allocation for the Nevada prototype, was that $400,000 per project?

Rick Lepley

It is per project but its south of 400.

Mark Mandel - FTN Equity Capital Markets

Okay what's the economics on a brand new store if you exclude the net inventory investment?

Rick Lepley

We haven't provided that on the new store and I think it was mentioned previously we are much more cautious into new stores going forward. The economics on a remodel which was with a 400,000 related to as was mentioned we have done one complete remodel the traditional store to the new current prototype we have been pleased with those results however its one data point so we want you to get comfortable with that and a few more unroll before we share it. We look at that very stringently we will break it into four phases, the pre-remodels during the remodel, the promotional period after the remodel and then when things are returning to normal after the promotional period. If we assess the post promotional period to the pre-remodel period relative to the rest of the chain and looking at it across metrics for comp store sales, traffic changes, average ticket changes, labor rates and a pretty detailed assessment. As I mentioned, we're pleased with what we've seen but we just need more data points.

Mark Mandel - FTN Equity Capital Markets

Have you looked at your overall capital allocation? You haven't given a budget for 2010, but can you give us any kind of direction or color as to what your CapEx might be and how it might be broken down by remodels, reallocations, new stores, infrastructure spending etcetera?

Dave Stern

Right, this is Dave again. We haven't provided that from 2010. I'll try to share a little bit more color on that in the future. However, what you can draw out of the statements that were made during this call would be that, I think words stringent and cautious were used on new stores going forward, and Joe had referenced, since we're pleased with the remodel and what we are seeing from that, that will skew a little more towards that going forward.

Mark Mandel - FTN Equity Capital Markets

And Rick was alluding to existing stores that are coming under closed scrutiny in terms of their decisions that are going to be made going forward about their continued operation. Is it fair to say that you are becoming a little bit more intense in your, look at the store base to see what stores might not make the cut?

Dave Stern

Sure. I wouldn't say we're becoming intense. It's as we continually review that. At this point in time, we don't have any stores as of for closure. As you are aware in this industry, Q4 is the heaviest quarter of the year. And so, that would be the most indicative of any changes that will need to be made. So I wouldn't say we've become more stringent on that, it's a continuous process of assessing the store base.

Mark Mandel - FTN Equity Capital Markets

And I guess finally I understand all the moving pieces that you have in place right now, but I guess one of the most disturbing things is that some of your competitors are doing quite well and you of course have continued to struggle. If you look at the regional differences in your store base, how are you faring in your strong markets, your core markets, the mid-Atlantic for example, versus some of the other territories where you don't have that competitive presence?

Rick Lepley

Well, we obviously do better where we have more storage density because we can leverage our advertising expenses across more stores. So, I would say in that sense we do better through the mid-Atlantic or the North Eastern than we do in the southeast where we don't have as much store density. It's very difficult to compare us to our competitors in some respects too. In August, they were not selling fabric and as one of our competitors is. And we also did not have a lot of new stores coming into our comp cycle because of the stores we took out in the southeast last year. So, if you've got a national presence of stores, and you are opening 50 or 60 or 70 stores a year, those new stores in year one, two, three, four and five are carrying the comps of your whole company in many cases.

But when you have a smaller base that's regional, you have to rely on sometimes your older stores to help improve your comps which isn't always so easy because those stores particularly in a company like ours, where we historically didn't spend a lot of money remodeling or the nature of the markets changed and perhaps you are not in a location, all those things have to be considered when you are looking at your comps. One of the things that I think encourages us a great deal is Nevada and we're really beginning to feel like if we can start this transition to Nevada's in the first quarter that we've talked about, we can dramatically improve our comp sales in those stores, now time will tell. And it also has to be the type of investment from a CapEx standpoint that's going to give us the right return on our investment, but we feel pretty good about it.

Rick Lepley

Okay, operator I think our time's up. There aren't anymore questions as far as I can see or understand. So, thank you all very much for taking part in the call. Thank you for your interest in AC Moore and have a great holidays.

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