A.C. Moore CEO Discusses Q3 2010 Results - Earnings Call Transcript

Nov. 9.10 | About: A.C. Moore (ACMR)

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

Q3 2010 Earnings Call

November 9, 2010 8:30 AM ET

Executives

David Stern – Executive Vice President, CAO and CFO

Joe Jeffries – Chief Executive Officer

David Abelman – Chief Marketing and Merchandising Officer

Analysts

Mark Mandel – ThinkEquity

Karru Martinson – Deutsche Bank

Bernard Sosnick – Gilford Securities

Doug Kallis – Focus Research

Bill Armstrong – C.L. King & Associates

Michael Corelli – Barry Vogel & Associates

John Zaro – Bourgeon Capital

Operator

Please standby, we are about to begin. Good day, everyone. And welcome to the A.C. Moore Third Quarter 2010 Earnings Conference Call. Today’s conference is being recorded. At this time, I’d like to turn the conference over to Mr. David Stern. Please go ahead.

David Stern

Thank you, April. Good morning. Before we begin, I would like you to remind you that the statements contained in this conference call that are not historical facts constitute forward-looking statements within the meaning of securities laws. These statements are subject to risks and uncertainties which may cause results to differ materially from current expectations expressed or implied by such statements. These risks and uncertainties are described in our filings with the SEC. A.C. Moore undertakes no obligation to update or revise any forward-looking statement in the future.

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

Joe Jeffries

Thanks, Dave. This morning, in addition to Dave Stern, our CFO, I’m joined by David Abelman, our Chief Marketing and Merchandising Officer. Before I begin my comments regarding our performance and the operational activity that took place in the third quarter, I wanted to inform the listeners that I will not remain on the call after my comments as I’m out of town attending a funeral for a very close friend. The question-and-answer portion of today’s call will be conducted by Mr. Stern and Mr. Abelman.

Now, let’s turn our attention to our operating performance for the third quarter. For the third quarter 2010, total sales declined 6% from the same period a year earlier and our same-store sales declined by 7%.

Our gross margin ended at 42.4%, which is a 4 percentage point improvement or $1.5 million year-over-year. This level of improvement was achieved because of the collective effort of our stores and the store support teams. By better managing our markdowns, promotions and inventory control programs, they delivered a marked improvement.

Our inventory level decreased by 12.8% per store, compared to the same time last year ending the quarter at $122.2 million. We are still confident that we will finish the year with less than $115 million of inventory.

This is especially significant because we have been able to invest in additional inventory in select categories and items that are volume generators. Our replenishment system now one-year-old has improved our ability to recognize possible opportunities in basics as well as upcoming promotional or event activities.

We remodeled nine stores during the quarter, converting them to our Nevada class model. We closed one store in the quarter. As of the end of the quarter, 40 of the 135 stores now operating as Nevada class stores. We have one remaining store to close during the fourth quarter and we recently opened one at the end of the third.

During the quarter, we continued to focus on improving our overall execution as it relates to our merchandising plans, store level execution and recovering from the very slow start to the quarter from a sales perspective.

In summary, even with year-over-year improvements in several important metrics, we are still not pleased with the overall results of the quarter. As I stated before, until we achieve sustained profitability, we will not consider our efforts successful.

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

David Stern

Thank you, Joe. I’ll start with a review of the results for the third quarter and year-to-date followed by a review of the cash inventory positions as of October 2, 2010.

Sales for the quarter were $99.7 million, a decrease of 6.0%, compared to sales of $106.1 million during the third quarter of last year. This decline was primarily due to a decrease in comparable store sales of 7.0%, partially offset by the operation of additional stores during the quarter.

The comparable store sales decrease was composed of a 7.1% decrease in transactions, partially offset by a 0.1% increase in the average ticket. At the end of the quarter, there were 135 stores in operation, compared to 133 at the comparable point last year.

Gross margin for the quarter was 42.4% or a 4.0 percentage point increase from the comparable point last year. This increase is primarily the result of improvements in promotional and everyday price management, and inventory, security and control.

Selling, general and administrative expenses for the quarter were $49.6 million, a decrease of $3.6 million or 6.7% compared to last year. Although additional stores were operated during the quarter, this is more than offset by the decreases in advertising and payroll. Selling, general and administrative expenses were 49.8% of sales, compared to 50.1% of sales in the third quarter of last year.

Depreciation and amortization expense is $4.4 million and $3.9 million for the third quarters of 2010 and 2009, respectively.

Store pre-opening and closing costs for the third quarter totaled $0.6 million and were primarily related to costs for stores that were previously closed, one store that opened during the quarter and one store that closed during the quarter.

Fiscal 2009 third quarter expenses of $0.3 million were primarily related to the two stores that opened and the one store that relocated in that quarter.

Net interest expense was $0.2 million for the third quarters of 2010 and 2009. The net loss for the third quarter was $8.1 million or $0.33 per share, compared to a loss of $12.9 million or $0.53 per share for the third quarter of 2009. For the third quarter 2010, capital expenditures were $3.0 million, compared to $2.1 million last year.

Now, I’ll move to results for the three quarters ended October 2, 2010. Sales were $304.9 million, a decrease of 4.5%, compared to sales of $319.2 million in the comparable period last year. The decline was primarily due to a decrease in comparable store sales of 5.9%, partially offset by the operation of additional stores during the period.

Gross margin for the three quarters was 43.1%, a 2.1 percentage point increase from the comparable period last year. This increase is primarily the result of improvement in promotional and everyday price management, and inventory, security and control.

Selling, general and administrative expenses for the nine-month period were $153.8 million, a decrease of $0.4 million or 0.3%, compared to last year. Selling, general and administrative expenses were 50.4% of sales, compared to 48.3% of sales in the first three quarters of last year.

Depreciation and amortization expense was $11.9 million and $12.1 million for the first three quarters of 2010 and 2009, respectively.

Store pre-opening and closing costs for the first nine months of 2010 were $1.6 million. This is primarily related to revisions in the estimate for the net future rent obligations for stores that were closed in prior years plus costs for the two stores that opened and the two stores that closed during this year.

In the first three quarters of 2009, pre-opening and closing expenses were $0.9 million and were primarily related to the operating costs for the stores that closed in prior years, the three stores that opened and the two stores that relocated in 2009.

Net interest expense was $0.7 million for the first three quarters in 2010 and $0.9 million for the comparable period of 2009. Prior year results include a $0.4 million expense related to the termination of an interest rate swap. Tax expense for the nine-month period was $0.5 million for 2010 and $0.1 million for the comparable period in 2009.

The net loss was $25.4 million for the first three quarters of both 2010 and 2009. This resulted in loss per share of $1.04 for the year-to-date in 2010 and $1.16 for the comparable period of 2009. We currently anticipate year-over-year improvements in the fourth quarter and an operating loss for the year less than that incurred in 2009. For the year-to-date ended October 2, 2010, capital expenditures were $8.2 million, compared to $7.7 million last year.

During the latter part of the third quarter, we opened a store in North Myrtle Beach. That was the second store opening for the year and we will not open any during the fourth quarter. Also during 2010, we remodeled 12 stores and relocated three.

As a result of this activity, 30% of our store base is now in the Nevada model. We continue to project capital expenditures of approximately $11 million for the full year. We plan to close one store during the fourth quarter and to end the year with 134 stores in operation.

Now moving to the balance sheet, at the end of the quarter cash was $25.4 million or a decrease of $5.9 million from the comparable point last year. We are projecting to end the year with cash balance in excess of $35 million. Availability under our line of credit was $36.7 million at the end of the quarter.

With two additional stores in operation as of October 2, 2010, inventory was $122.2 million or $15.9 million less than at the comparable point last year. Inventory on a per store basis was down 12.8%, importantly this decrease was achieved while maintaining in-stock rates. We will continue to focus our inventory levels and plan to end the year with inventory below $115 million.

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

David Abelman

Thank you, Dave. I will discuss merchandising and marketing results for Q3 2010 and provide some insight on progress we’ve made in stabilizing growing some of our key businesses. While our overall comp sales declined 7%, we improved our trends in several key businesses and increased our overall gross margin by 4%.

Ready made frames and seasonal floral both experienced comp sales increases during the third quarter. These two departments have been trending negative during the past year. We are encouraged by the potential core growth in these two important areas.

We are still, however, experiencing negative comp sales trends in paper crafting. While our trend has improved in scrapbook and paper craft essentials such as open stock paper and stickers since our reset in Q2. We are still experiencing weak sales in this category, primarily due to lower demand and significantly lower retail selling prices on technology products.

We also had a difficult quarter in fashion crafts due to weakness in the jewelry and beading area. As Dave mentioned earlier, we are pleased with our gross margin rate, which was up 400 basis points over the same period last year. We continue to focus on both regular and promotional prices to improve our gross margin while remaining competitive in the market in which we compete.

Let’s briefly touch upon our advertising and marketing initiatives. Print advertising continues to be our largest marketing expense. Distribution of our inserts continues to be optimized as we refine our circulation strategy. Product offerings, pricing and promotion continue to be enhanced, which has led to improved margin and sales on advertised product.

We continue to test and invest in other vehicles and we have multiple consumer price points -- excuse me, touch points every week. In addition to inserts, our marketing mix also includes focused efforts in vehicles such as social media with our actively engaged Facebook community and our rewards loyalty program which continues to experience growth.

As a regional player, it is critical that we are unique and more nimble than our larger competitors. We will continue to differentiate our product offerings and marketing programs to provide us with a competitive point of difference. While the environment has been challenging, we are encouraged by the progress and enhancements in both marketing and merchandising.

We believe that we are well prepared for the key selling season, where the hard work, planning and teamwork that has taken place during the past year in our company. I think this would be a good time to take some questions.

Operator, we are ready for our first question.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We’ll first hear from Mark Mandel of ThinkEquity.

Mark Mandel – ThinkEquity

Thanks. Good morning, everyone. Just a little bit more color on the sales, if you could, please. Specifically, what was your performance in the Nevada prototypes and secondly, you shed a little light on the trends within the quarter. I was just wondering if you can get a little bit more specific particularly how the quarter ended.

David Abelman

Yeah. I will take the first part of your question, Mark and then David will follow up on the second part of it. Obviously, we are pleased with the layout and presentation that the Nevada store provides for the brand. We assess the model’s financial performance across a broad range of metrics relative to the rest of the chain or our traditional store base.

We are pleased with the results that we have seen and we plan that all new stores, relocations and remodels will be of the Nevada prototype going forward. Consistent with our prior call, we are not giving out specific information, primarily for competitive reasons on the specific ROIs of these stores. However, again, these are deep measured against a number of metrics and given the fact that we are going forward with them, obviously they pass our internal hurdle rates.

David Stern

And Mark, it’s -- the second part of your question, in terms of our sales performance in the quarter, as we mentioned during the last call, we started off Q3 extremely slow. We did have some more productive months and really pleased with a lot of work around balancing our inventory with our seasonal products really being the focus obviously in the latter part of Q3 and Q4 fall sell-through with very good -- in fact, I think we came out cleaner on our fall seasonal than we have in many, many years.

Mark Mandel – ThinkEquity

On the advertising and payroll front, obviously that was responsible for the better showing on the expense line, but are you going -- are you thinking about changing -- shifting gears at all in the fourth quarter, maybe upping that a little bit to drive your topline?

David Stern

So, in terms of Q3 and Q4 in terms of -- and this is David, I will talk advertising. As I mentioned, we continue to work to diversify our mix. Obviously, print does not have nearly the circulation it had just a few short years ago and with other vehicles online and other direct vehicles, we have many more consumer touch points. In Q4, it’s the most promotional time of the year, intense competition. And we will be very, very aggressive in the marketplace. It is not a time to let up on any of the activity we had out there. If anything, it is enhanced.

David Stern

And usually, Mark -- it is David. I can address payroll. As we have gone through, one of the benefits of this model that we are utilizing is more efficient payroll, process and freight handling. However, as we continue to cycle these SG&A decreases, they become more and more difficult to sequentially keep achieving improvements.

This quarter SG&A, it includes all the corporate overhead on a per store basis is down 7.8% relative to the same period last year. But we understand going forward that it will be more and more difficult each quarter to achieve those sort of sequential improvements.

Mark Mandel – ThinkEquity

Right. Well, thanks a lot. Good luck.

David Stern

Thank you.

Operator

Karru Martinson of Deutsche Bank.

Karru Martinson – Deutsche Bank

Good morning. In terms of the gross margin strength, I mean is the view here that this is a sustainable level going forward with the management tool that you have in place?

David Abelman

One area we are very pleased with is throughout the year strategically looking at our promotional everyday pricing as well shrink management. And while we’ve made some nice improvement, we still think there is some opportunity, probably not as significant as the growth we’ve had this year but there is still absolutely opportunity.

Karru Martinson – Deutsche Bank

Okay. And when we look at the top line and some of your peers here, I think Jo-Ann’s had put up positive comps here. What are you guys seeing in terms of the traffic trends and what is it that competitive landscape? What do you feel are the things that you guys can fix here in the near-term to get that comp number turned around?

David Abelman

Yeah. With some categories and we did not go into all the specifics, but we track 14 super departments, which comprises 32 different departments within the super departments. And we have a lot we feel very, very good about many of our key businesses. Transactions continue to be a challenge. The market is incredibly promotional and we find between the promotional pricing, couponing activity, there is an absolute difference in response rates.

And we think with the improvements that we’ve made on seasonal and the way it is resonated with our customer base in Q3 and the early set we have for Christmas moving into Q4, that we are relatively optimistic that our set is right. And it’s going to translate to comp store sales.

Karru Martinson – Deutsche Bank

And just on Christmas, you guys are all set, you did not have any issues getting supply in from Asia and all the stuff we hear about, container ships and shortages and higher prices, I mean, you’re through that period, correct?

David Abelman

Yeah. I think moving into 2011, there is absolutely some price pressures we are hearing in the marketplace. But we received all of our containers for our Q4 sets on time and we are set early.

Karru Martinson – Deutsche Bank

All right. Thank you very much, guys.

David Abelman

Thank you.

Operator

Bernard Sosnick of Gilford Securities.

Bernard Sosnick – Gilford Securities

Good morning. And I want to congratulate you. It is the first decline in the SG&A ratio in a number of years. That is to your credit. With regard to sales, you said that sales had recovered somewhat later in the quarter. Could you give us a feel for how the sales compared and what you are seeing early in the fourth quarter?

David Abelman

Yeah. I mentioned the categories we are pleased with, we’ve made a significant turnaround and invested a lot of time and effort with the team on our ready made frame area and we comped positive in that area for the first time in a long time. And there is areas of our seasonal that were very, very productive. I alluded to success we had in seasonal floral. The core piece of the business still trended down but part of it was planned that way as we balanced our inventory, cleaned up some old merchandise and really prepared for subsequent seasons

Bernard Sosnick – Gilford Securities

I’m sorry to interrupt you. Go ahead.

David Abelman

The other part of your question was moving into Q4. Here, again, the quarter started out a little quieter than we anticipated and a bit bumpy with some successful weeks, some quieter weeks and our best weeks are ahead of us. So we remain optimistic.

Bernard Sosnick – Gilford Securities

Okay. Thank you very much.

David Abelman

Thank you.

Operator

[Doug Kallis] of Focus Research.

Doug Kallis – Focus Research

Now that you have your technology investments behind you, are there any other structural things that you need to do, or is it just a question of better merchandising to get sales going forward?

David Stern

Yeah. Probably as you picked up based on your question, during this conference call, we have talked much less than we have in the past about our supply chain and information technology enhancements. We are very pleased with that as David mentioned earlier. We had products set early this season. Some of our supply chain and IT enhancements have driven.

Our inventory improvements were down significantly on a per store basis while maintaining our in-stock rates, we are very pleased with that. Yeah, the full focus is on jogging top-line sales. If you go through the other parts of our P&L, you’ll see gross margin rate is improved 400 basis points this quarter. SG&A is down significantly, 7.8% on a per store basis. So, we need to be able to leverage that and jog our top-line sales.

Doug Kallis – Focus Research

Well, as you know, someone else had mentioned that Jo-Ann reported recently above a 4% comp gain, which is on top of a 4% comp gain a year ago. Why do you think there is this difference between your sales performance and theirs?

David Abelman

It is tough to comment on. Our business composition is extremely different than theirs, even when you look at the Jo-Ann ETCs in their fabric stores. I believe in their last report somewhere around 50% of their business is in fabric. There is still momentum in that area and we play a very little in that category.

Doug Kallis – Focus Research

Okay. Thank you.

David Stern

Thank you.

Operator

Bill Armstrong, C.L. King & Associates.

Bill Armstrong – C.L. King & Associates

Good morning. Just going back to SG&A for a minute, you mentioned advertising and payroll as the main drivers of the $3.6 million year-over-year decline. Could you maybe flesh out or break out the relative magnitude of each one of those for us?

David Stern

Without getting into specifics, advertising was a larger component of that than the payroll was.

Bill Armstrong – C.L. King & Associates

Okay. And was that mostly early in the quarter where you were -- I know you were dark for a couple of weeks in the summer and I guess in July and August, was that were most of that was?

David Abelman

Yeah. It was. In July and August, we had our more dark weeks than a year ago.

Bill Armstrong – C.L. King & Associates

Got it. And inventory, I know you said your deliveries came in on time. You are down 12%, 13% on a per store basis. Do you feel you have enough inventory going into the holidays now?

David Stern

We do and we assess our inventory positions because we look at it throughout our store base and also in our distribution center and where we have really driven down our inventory, again, due to our -- the enhancements that were previously put in place is in our distribution center.

And so, it’s difficult to dust your hands off and say you are finished. Inventory is completely optimized. We are comfortable with our inventory position as it is now. We are pleased that inventory has drawn down our distribution centers significantly.

Bill Armstrong – C.L. King & Associates

Okay. Any particular categories where you saw a big decline in inventory, or is it pretty much across the board?

David Abelman

I think it’s fairly well balanced across the board. We are definitely lighter in fall than a year ago and led to some nice sell-throughs. So, sometimes in seasonal, you always like to grab the extra sale. But we mitigated our markdown liability, which helped us with our margin improvement.

Bill Armstrong – C.L. King & Associates

Got it. And I had to step off for a bit earlier, so I apologize if you addressed this already. Some of your competitors are seeing some recovery or at least stabilization in the seasonal categories. What are you guys seeing in that area?

David Abelman

We are experiencing stabilization as well. In fact, we actually had growth in our seasonal floral. And part of our results in the core, we are down a bit by design and just bought the inventory tighter and just rationalizing our mix.

Bill Armstrong – C.L. King & Associates

Got it. Okay. That’s all I have. Thanks.

David Abelman

Thank you.

David Stern

Thank you.

Operator

Michael Corelli of Barry Vogel & Associates.

Michael Corelli – Barry Vogel & Associates

Hi. Good morning.

David Abelman

Good morning.

Michael Corelli – Barry Vogel & Associates

Just a couple of questions. First, I know you talked about Jo-Ann on the selling side, but they did report in their quarterly results that they had a 5.2% increase in their non-selling businesses and only 3.3% increase in their selling. So, in those businesses that they overlap with you, they did have a stronger quarter. So, is there a thing that you think they are doing that you are not doing, or products that they have that you don’t have, or what do you think is continuing to be the cause for the spread between you and them?

David Abelman

I think we look at our direct competitors, the larger big-box Jo-Anns and Michaels seriously. We think with our stores it’s important that we differentiate our product mix. Our assortment is different than our two competitors. We obviously within the supplier community understand businesses that are trending up, businesses that are trending down and make the appropriate investments in line-ins, line-outs, reset hot brands and continue to work towards improving our overall performance.

Michael Corelli – Barry Vogel & Associates

Is there a products that they have that you don’t? I mean, because of their size, things that they are offering that have been selling better than you? Are there certain trends that maybe they are recognizing quicker? What are you -- because obviously there is continuing discrepancy?

David Abelman

I really cannot comment on that. There is obviously products we carry they don’t. There is really not a business that we don’t offer products. We even have a fabric assortment in pre-cuts. We don’t cut fabric in store, but we do have needlecraft and quilting product, Polyfil and products in that area.

So, we think with the work we have done in the last really couple of years on resets and really looking at our assortment, that we are pleased with the categories we are in and now it’s really a question of driving performance through advertising, marketing, in-store merchandising, customer service and accelerating the topline.

Michael Corelli – Barry Vogel & Associates

And just a couple of numbers questions for Dave. You said year-end cash of at least $35 million, I am assuming that means continuing to have the $19 million of short-term debt?

David Stern

That’s correct.

Michael Corelli – Barry Vogel & Associates

And any thoughts on CapEx for next year?

David Stern

We haven’t provided forecasts for next year.

Michael Corelli – Barry Vogel & Associates

Okay. Is there any major investments you have besides store activity that you might decide to do, is there any other major investments that you need to make?

David Stern

Well, there will be the ongoing investments in the stores. I’m not sure what other ones are -- IT and the supply-chain enhancements that were investments in past years that we’ve mentioned earlier. We are pleased with the state that they are in.

Michael Corelli – Barry Vogel & Associates

Okay. So there is nothing major that you anticipate at this point?

David Stern

Nothing out of the ordinary investments.

Michael Corelli – Barry Vogel & Associates

And then when you talked about your comment about -- I believe you said that you expect improved results in the fourth quarter versus last year?

David Stern

That is correct.

Michael Corelli – Barry Vogel & Associates

And so last year you had a $0.02 loss overall, I believe, but there was a number of one-time items in there that if you took them out, you would have made a $0.05 profit. So, are we talking about versus the $0.02 loss or the $0.05 profit?

David Stern

Well, in last year there were some one-time items that were a detriment. There were one-time items that were a benefit. But what we referred to was an improvement in operating – [costs] last year.

Michael Corelli – Barry Vogel & Associates

Okay. Thank you.

David Stern

Thank you.

Operator

Next question from John Zaro of Bourgeon Capital.

John Zaro – Bourgeon Capital

Thanks. You guys answered all my questions. Good quarter. Thanks.

David Stern

Thank you.

Operator

(Operator Instructions) We will take a follow-up from Bernard Sosnick of Gilford Securities.

Bernard Sosnick – Gilford Securities

Yeah. Thank you. There was nothing on the tax line in the third quarter and I assume it’s because you have exhausted your tax loss carry forwards. Should there be a profit in the fourth quarter, pretax profit, would there likely be any tax attached to it?

David Stern

No. There would not. Bernie, we have not exhausted our loss carry forwards. We have currently got a -- although we take a valuation allowance against them, a significant loss carry forward and that’s just the fact that there were some very small entries. Typically, if you go back to last year there was $24,000 tax expense for the third quarter. This year it just came out to 0. But that doesn’t indicate or reflect that there are no more loss carry forwards. We have got significant balance remaining.

Bernard Sosnick – Gilford Securities

Okay. Thank you.

David Stern

Thank you.

Operator

(Operator Instructions) And it appears there are no further questions at this time.

David Stern

All right, April. Thank you. I will close by saying that our management team appreciates the efforts of our corporate associates and our store teams, all of whom are working hard and are committed to improving our performance. Our stores are well-prepared for the selling season that is upon us and we look forward to interacting with our guests throughout the very important fourth quarter. Thank you for joining us today and for your continued interest in A.C. Moore.

Operator

That does conclude today’s conference. Thank you all for your participation.

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