Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

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

Q1 2010 Earnings Call Transcript

May 6, 2010 08:30 a.m. ET

Executives

David Stern - EVP and CFO

Joe Jeffries - Acting CEO

David Abelman - EVP and Chief Marketing and Merchandizing Officer

Analysts

Michael Corelli - Barry Vogel & Associates

Bill Armstrong - C.L. King & Associates

Joan Storms - Wedbush

Operator

Good day and welcome to the A.C. Moore first quarter 2010 earnings conference call. At this time, I would like to turn the conference over to Mr. David Stern.

David Stern

Before we begin, I would like to remind you that any forward-looking statements made during this call are subject to certain risks and uncertainties, which may cause results to differ materially from our current expectations. The risks and uncertainties that are most likely to cause our results to differ materially from our current expectations are referred to in the press release issued this morning as well as in our periodic filings with the SEC.

Now I'll turn the call over to Joe Jeffries, Acting CEO.

Joe Jeffries

Thanks, Dave. This morning, in addition to Dave Stern, I am joined by David Abelman, our Chief Marketing and Merchandizing Officer. I'll begin by commenting on our performance and discuss some operational initiatives in the first quarter. Dave Stern will take you through our financial performance for the quarter. And then David Abelman will touch upon some of our activities in merchandizing and marketing.

For the first quarter 2010, total sales declined 3% from the same period a year earlier and our same-stores sales declined by 4.7%. Our gross margin ended at 43.2%, which is a 30 basis points improvement year-over-year.

I do want to note that we were more promotional during the quarter compared to last year. We were forced to be more aggressive with our seasonal markdowns because of the February weather impact to traffic and sales.

Our inventory level increased by $9.1 million, ending the quarter at $122 million. We continue to optimize our inventory level, and we feel confident that we will finish the year at a per-store level equal to a 6.5% decline, ending the year at $115 million. This performance is not acceptable; however, it is in line with our expectations and guidance we provided during our last call.

During the quarter, we saw our level of execution improve throughout our organization. This type of execution is a requirement going forward as we are focused on our strategic plan and returning the company to being a merchandise-driven and customer-focused on a daily basis. Our strategic plan is designed to grow the business profitably going forward, as most of the IT foundation is now in place and our operational improvements at store level are firmly rooted.

At this time, I'd like to discuss some of our accomplishments made during the quarter. In the first quarter, we opened one new store and relocated two. We remodeled two stores during the quarter, converting them to our Nevada class model, and we are on track to convert 30% of the change to this model prior to the Q4 selling season.

In the first quarter, we made good progress with our cross-stocking project, and we are on schedule to have more than 80% of our store-directed vendors converted by late summer. An additional 4,000 SKUs were added to automated replenishment, primarily in everyday floral and short lifecycle seasonal items, driving our in-stock position up across all departments.

Also in the first quarter, preparations again in several merchandizing sets, transitioning out older products, making room for new merchandise, focusing on those departments that have been the majority of our sales loss.

As I mentioned at the start of the call, we are completely focused on our level of execution as it pertains to driving top-line profitable revenue through a renewed merchandizing focus and commitment across the entire organization.

Most of our system initiatives are completed and in place. We have a better understanding of the needs and desires of our customers. Our goal is simply to execute better and to truly become a merchandise-driven organization focused on driving traffic, increasing average ticket and expanding market.

Now I'd like to turn the call over to Dave Stern who will update you further on our financial performance.

David Stern

Thanks, Joe. I'll start with a review of results for the quarter, followed by a review of the cash and inventory positions as of April 3, 2010. Sales for the quarter were $105.4 million, a decrease of 3.0% compared to sales of $108.6 million during the first quarter of last year. This decline is primarily due to a decrease in comparable store sales of 4.7%, partially offset by the operation of additional stores during the quarter.

The comparable sales decrease was composed of a 5.7% decrease in transactions, partially offset by 1.0% increase in the average ticket. As a regional operator, our sales and transaction count were significantly impacted by the storms this winter. Excluding their impact, we estimate comparable store sales would have been a decrease of 3.4%.

At the end of the quarter, there were 136 stores in operation compared to 132 for the comparable point last year. Gross margin for the quarter was 33.2%, a 30 basis point increase from first quarter of last year. Merchandise margins remained essentially flat despite a more promotional environment.

Selling, general and administrative expenses for the quarter were $52.7 million, an increase of $2.8 million or 5.7% compared to last year. This increase was primarily the result of the operation of four additional stores, expenses related to the retirement of the former CEO and increased advertising spend. Selling, general and administrative expenses were 50.0% of sales compared to 45.9% of sales in the first quarter of last year.

Depreciation and amortization expense was $3.7 million for the first quarter of both 2010 and 2009. Net interest expense was $0.2 million for the first quarter of 2010 and $0.6 million for the comparable period of 2009. Prior-year results included $0.4 million of expense related to the termination of an interest rate swap. The net loss for the quarter was $7.6 million or $0.31 per share compared to a loss of $4.3 million of $0.21 per share for the first quarter of 2009.

Although we are not pleased with the results, the first quarter was in line with the projections expressed on the prior call. Also, we are affirming the assumptions provided during that call. Specifically, we anticipate year-over-year improvements in the back half of the year and the loss for the year to be less than that incurred in 2009.

For the first quarter of 2010, capital expenditures were $2.4 million compared to $3.3 million last year. Consistent with the prior call, we are projecting capital expenditures for the full year of approximately $10 million and we continue to plan 12 remodels, three relocations and one new store opening for the year. During the first quarter completion of two remodels, two relocations and one new store opening, this equates to an additional 10 remodels and one relocation for the remainder of the year. Also, we are assessing the opportunity to strategically close a couple of stores.

Moving to the balance sheet, at the end of the quarter, cash was $31.9 million or a decrease of $21.4 million from the comparable point last year. Consistent with the prior call, we are projecting the year-end cash balance in excess of $35 million. Availability under our line of credit was $36.7 million at the end of the quarter.

As of April 3, 2010, inventory is $122.0 million or $9.1 million more than at the comparable point last year. This increase is driven by the increased store count and an increase in inventory per store of 4.9%. We will continue to focus on inventory levels and plan to end the year with approximately $115 million in inventory or a decrease per store of approximately 6.5% from the end of 2009.

Now I'll turn the call over to David Abelman, Chief Marketing and Merchandizing Officer.

David Abelman

Thank you, Dave. I'm going to provide you with a brief overview of our merchandizing and marketing initiatives during Q1 2010 and provide some insight on progress we've made in stabilizing and growing some of our key businesses.

While our overall comp sales continued to trend negative, we are experiencing improvements, especially in light of the historic winter storms that impacted our stores in February. This had implications not only on sales, but margins, particularly on our seasonal business.

Several of our destination categories experienced growth, and we continued to make progress in improving our merchandise margin. As Dave mentioned earlier, our merchandise margin rate was flat over the same period last year in spite of increased promotional and clearance activity along with the weather impact on seasonal, which impacted our gross margin by 150 basis points.

We continue to focus closely on both our regular and promotional pricing to improve our merchandise margin while remaining very competitive in the markets that we compete.

Let's touch a bit on sales. Several destination departments have positive comps in Q1, while some of our other categories continued an improved performance over prior quarters. Consistent with last quarter, our three weakest departments were responsible for our entire comp sales loss in Q1, with losses exceeding our overall comp dollar shortfall.

The three departments are seasonal, paper crafting and readymade frames. Our largest loss occurred in paper crafting, with over 50% of our comp dollar loss. Later in Q2, we will be relaunching this department and we anticipate meaningful sales improvement in this area.

Our seasonal business experienced another difficult quarter, but showed improvement over trend in both sales and margin even with the heavier clearance activity, as I mentioned earlier, due to the February storms.

Last, our readymade frame department, while comping negative, showed improvement over the prior quarter trend, and niche department will be relaunched as well in Q2 after extensive analysis and product design efforts. While it has taken many months of hard work in testing, we're confident that the right plans are now in place for these three important departments.

Before moving on to my marketing comments, I'd like to emphasize our commitment to merchandizing and being a product-driven organization. We continued to strengthen our merchandizing team during Q1. Our team is now fully trained in utilizing the systems and tools we have invested in over the last two years, and we are in fact realizing the benefits.

We're focused on improving our sales performance and gaining market share and we believe we are making steady progress. We have also made significant strides in utilizing these new systems and strengthening our team to improve our merchandise margin.

Let's touch upon our advertising and marketing initiatives. We continue to be aggressive with our print advertising in terms of vehicles and page count. We're also fully aware of declining newspaper circulation and continue to optimize our distribution based upon the most productive use of our marketing dollars.

While newspaper inserts are still important, we have made great progress in diversifying our marketing mix during the last year, and we are more balanced now than ever before. Our marketing mix now includes differentiated and fully integrated vehicles, such as social media, our rewards loyalty program and our acmoore.com website.

We have more customer touch points, and we are reaching customers and craft consumers in larger numbers and with better content. We will continue to explore new vehicles to retain and expand our customer base. We also will remain focused on continuing to improve the productivity of our marketing spend in 2010 and beyond.

In closing, we understand our customer better than ever. We're listening daily and responding to their needs. As a regional player, it's critical that we're unique and more nimble than our larger competitors. It's our commitment to continue to keep our product mix differentiated and refresh in the arts and crafts store of choice in the markets we compete.

Now I'll turn the call back to Joe.

Joe Jefferies

I think this will be a good time to take some questions. Operator, we can take the first question.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from Michael Corelli with Barry Vogel & Associates.

Michael Corelli - Barry Vogel & Associates

I know you talked in the quarter that the weather obviously had a negative impact on the comp. Although still negative would have been somewhat better. Obviously, we have had much better weather recently. Have you seen a little bit of improvement in sales trends recently?

David Stern

Sure, Michael, this is Dave Stern. As David mentioned, there were three departments that caused our comparable store sales to decline, specifically paper crafting and readymade frames that we reset later in the quarter. As a result, we are continuing to clear the existing inventory in those departments during most of Q2.

This is an example of the rigor that we now have in place to ensure that we keep our inventories clean as the new product is set, and we don't carry any inventory balance in the future quarters. Having said that, it's in line with our expectations for the quarter and has now caused us to modify our forecast regarding the income, inventory levels or projected cash at the end of the year.

Michael Corelli - Barry Vogel & Associates

So the clearance of those items, obviously that would hurt margins, I would think. But would it help sales, I guess, in the short term?

David Stern

No, David had mentioned three of the departments which have impacted our comp store sales, and this is two of the three. And again, that's continuing for the majority of Q2.

Operator

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

Bill Armstrong - C.L. King & Associates

This morning in Jo-Ann Stores' press release, they actually called out that seasonal is generating positive comps, which I think was the first time in several years. Are you seeing any stabilization or signs of improvement in the seasonal categories?

David Abelman

We have done a great deal of work during the last year to improve our seasonal offerings and improve the margin. And as I mentioned, we're making steady progress and we believe seasonal is a very important business moving forward. And yes, the consumer is responding to freshness in that area.

Bill Armstrong - CL King & Associates

So it sounds like you also then are seeing some light at the end of the tunnel as far as the seasonal category. Is that fair to say?

David Abelman

I think that's fair to say.

Bill Armstrong - CL King & Associates

There is a comment in your prepared remarks that I think I missed a little bit. There was a 150 basis point impact on the gross margin. Was that from the snowstorms or was there something else?

David Abelman

It was a combination of the clearance activity that we experienced in some of these businesses that we're refreshing. The weather had an impact on seasonal where we want to end each season clean and move through the product we have. So we are much more aggressive. And we were more promotional in Q1 of 2010 than 2009.

Bill Armstrong - CL King & Associates

And then just a couple of housekeeping items. What was the dollar amount of the severance charge, and was that in SG&A?

David Stern

It is in SG&A and it's, as stated in the release, about $0.03 a share.

Bill Armstrong - CL King & Associates

Do you have a dollar amount?

David Stern

It's about $750,000.

Bill Armstrong - CL King & Associates

And the new store opens, was that at the end of the quarter? When did that store open exactly?

Joe Jeffries

Right in the middle of the quarter, Bill.

Operator

(Operator Instructions) And our next one comes from Joan Storms with Wedbush.

Joan Storms - Wedbush

I wanted to ask a couple of questions. I wonder if you could comment, as you did in the last quarter, just generally about the performance of the completely finished Nevada prototype stores versus the rest of the chain on a same-store sales basis.

David Stern

Sure, Joan. As I mentioned previously, comps for the quarter were down 4.7%. If we were to adjust for the snow impact, then it'd be down by approximately 3.4%. Segregating the decrease, traditional stores were down by 5.7%. Our Nevada stores as a group comped up 1.5%. There is a 720 basis point spread between the two.

Joan Storms - Wedbush

Perfect. Can we just go through the Nevada prototype, like how many in total there are, how many are in the complete form that you want them and how many are still in transition to the complete form by the end of the second quarter or whatever your goal is?

David Stern

Sure. Joan, we ended the year with 24. We ended Q1 with 29. We've got 18 that are optimized and 11 that are not optimized. Again, those are earlier iterations of the prototype.

Joan Storms - Wedbush

What does it take on the 11 to be optimized? Does that involve CapEx as well?

Joe Jeffries

Yes, it will involve a little bit of CapEx. Each one of the 11 are slightly different in size and structure. So there will be fixture adds. Obviously, the new sign package, Joan, which I think you saw, will be installed in all of those and some adjacency changes. And if space is permitting, we'll be able to expand some categories like we've done in our optimized models.

Joan Storms - Wedbush

And then there is an additional 12 conversions to be done, or is that part of that number?

Joe Jeffries

When we end the year, we would have converted 12 this fiscal year.

Joan Storms - Wedbush

And that's beyond 24 from the yearend? So you'll have 36?

Joe Jeffries

That's correct.

David Stern

Plus, Joan, we have two relocations, which are also going in that format, the one new store which we're going to format as well.

Joan Storms - Wedbush

And then, David Abelman, I didn't think I heard it, but what were your better performing categories, and what were those categories?

David Abelman

Sure. Our better categories where we continue to build momentum would be our celebrations area, which includes what we call occasions and includes party and wedding. It includes the caking candy category or ribbon. Our kids craft area continues to perform well with activities. And our everyday floral has really picked up momentum as well. So my comment about seasonal everyday floral is actually a component of seasonal, and we're very pleased with the progress in that area.

Joan Storms - Wedbush

Okay. And then just turning to more of the infrastructure for a moment, you've completed the ARs at the end of Q4 and you commented that sometimes once that's implemented you feel a little bit of a bubble in the inventory. So how is that working for you and what can we see as far as a positive impact on the gross margin from that going forward?

Joe Jefferies

Well, the systems are working fine. We're happy with our in-stock positions, up and down or side count that's across our departments. We're really encouraged in Q1 with the addition of our everyday floral stem, which is a large program as you know. We've already seen an uptick in unit movement and things in that particular category. And then we tested the water with some seasonal programs in Q1, short lifecycles seasonal items, and the results have been good there as well.

So we're happy with the performance of this system. We have made some adjustments with our merchant teams on some of our basic items for seasonal builds, moving forward, going into upcoming seasons, and we feel confident that we're going to see unit movement. And certainly we anticipate a positive margin impact because of these systems.

Joan Storms - Wedbush

Okay. And then just turning back to merchandising a little bit, on the reset, David, that you're talking about, and we know that seasonal paper crafting and the readymade frames, how is that going so far? You must be on track and that will be completed I guess so by the end of June?

David Abelman

Each category has its new launches. So we had it cleared effectively. Obviously, a category like paper crafting, that's a highly SKU-intensive. We need to balance our margin plan to clear products. So we've totally swept the old product as the new product comes in, and we're right on plan for that. So new product is ready to be staged as well as our marketing is supported.

Same thing with our readymade frames; a lot of direct imports, longer lead times, but a lot of testing and validation to ensure we have it right. And seasonal is not so much a reset area as looking at our merchandise mix, looking at our margins, keeping it fresh and differentiate it and presenting it in a better fashion. And it's all on plan.

Joan Storms - Wedbush

Excellent. And then can you comment on Easter at all, how that did and was that up to your expectations?

Joe Jefferies

With the storms, Easter was a challenge. While seasonal continues to show improvement and bettered in our '09 trends, Easter was not as productive as we anticipated with the month of February being extremely difficult.

Operator

Our next question comes from (Judy Krandel with Alpine).

Unidentified Analyst

I can appreciate all the hard work you're doing and everything that's going into this, but I have to say that is the most embarrassing and irresponsible press release I've read. And to be honest, I feel that way every quarter. It would really be beneficial if you could outline more initiatives and things going on in your quarterly press release, because anyone new to your story who would read that would probably rip it up and throw it away and say there is nothing here. I think you owe it to your investors to give a little more detail and talk a little bit more and not sound so downright depressing. I think I read about 300 press releases a quarter, and I think I never seen a worse one.

Joe Jefferies

Okay. Well, we appreciate your comments, and we'll take it under advisement, Judy.

Operator

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

Bill Armstrong - C.L. King & Associates

So the merchandise margin was flat year-over-year despite of markdowns and clearance. Where did you see some upside then?

David Abelman

As I mentioned in my comments, we continue to work diligently, and we've tools in place to look at our regular-priced merchandise and how we manage promotion. I believe that top better earned space model during our last call, meaning that as we develop our advertising, we have a tight alignment between our marketing and merchandising to look at market basket and look at items that drive equal mentality and drive a profitable basket.

And I think a lot of discipline and rigor was put around promotion management, and having the right everyday shelf price has really strengthened our margins, which allowed us to get more promotional and which allowed us to do some heavy clearancing of the items we reset. So it's really across the board improvement on how we manage our business.

Bill Armstrong - C.L. King & Associates

Are you seeing lower product costs as part of that?

David Abelman

There were more price concessions than we anticipated as we went into the new year, so we're pleased with a lot of our suppliers now that work with us. So we're not seeing a lot of pressure on costs.

Operator

And we have a follow-up call from Michael Corelli with Barry Vogel & Associates.

Michael Corelli - Barry Vogel & Associates

Just a quick question. When you gave that Nevada prototype comp up 1.5%, would that be the latest and greatest version or would that be all of them, and how many were in that comp base?

David Stern

Sure. That is all of the Nevada's and there are 22 in the companies out of the total of 29 Nevada's.

Operator

Next you'll hear from Joan Storms with Wedbush.

Joan Storms - Wedbush

I don't know if you can do this or not, but obviously there is a lot of moving parts. Can you give us any guidance on what we might see full company return to positive comps?

David Stern

No, Joan, we have not provided that yet.

Joan Storms - Wedbush

And then also on the cross-stocking and getting the vendors on board to be capable of that, what kind of benefits do you expect and what would be the timing for that?

David Stern

We expect a significant benefit obviously related to shipping cost. Right now, all of those vendors are shipping direct to each one of our stores. So when we pull them into our cross-stocking through our distribution center, there's a obvious major reduction in shipping cost. So that's one thing.

We also see labor efficiencies at store level that we'll be able to redirect a lot of these tasks that we're performing now, dealing with these inbound carriers to more customer-facing activity. So we should see some positive results from that.

And at the same time, combined with our cross-stocking project, we are optimizing a couple of other things internally here in our distribution center, allowing us to pick more (inaudible) versus case packs. And that'll have a positive impact on our inventory levels moving forward as well.

Operator

(Operator instructions) We are seeing you have no further questions at this time.

David Stern

Okay, thank you, operator. I'll close and we appreciate everybody's comments and questions. Our management team here at the store support center appreciates all the efforts of our corporate associates and our store teams. All of them are working extremely hard and are committed to improving our performance on a daily basis going forward.

I'd like to thank you on behalf of my team here today and thank you for your continued interest in A.C. Moore. Have a great day.

Operator

Again, that does conclude today's conference. Thank you for joining.

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

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

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

Source: A.C. Moore Arts & Crafts, Inc. Q1 2010 Earnings Call Transcript
This Transcript
All Transcripts