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Executives

Barry J. Feld - Chief Executive Officer, President and Director

Anne Mirante - Vice President of Finance and Treasurer

Jane L. Baughman - Chief Financial Officer, Executive Vice President and Corporate Secretary

Analysts

Bradley B. Thomas - KeyBanc Capital Markets Inc., Research Division

N. Richard Nelson - Stephens Inc., Research Division

Thomas J. McConville - Raymond James & Associates, Inc., Research Division

Anthony C. Lebiedzinski - Sidoti & Company, LLC

Unknown Analyst

Eric M. Cohen - BB&T Capital Markets, Research Division

Edward Nishan Antoian - Chartwell Investment Partners

Braden Michael Leonard - BML Capital Management, LLC

Cost Plus (CPWM) Q4 2011 Earnings Call March 22, 2012 4:30 PM ET

Operator

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2011 Cost Plus Earnings Call. My name is Melanie, and I'll be your coordinator today. [Operator Instructions] As a reminder, today's meeting will be recorded. I would now like to turn the call over to Mr. Barry Feld, CEO and President of Cost Plus. Please proceed.

Barry J. Feld

Thank you, operator. Good afternoon, and thank you for joining us to discuss our fourth quarter and fiscal year 2011 results. With me for this conference call are Jane Baughman, Executive Vice President and Chief Financial Officer; Anne Mirante, Vice President of Finance; and Charlie Miltner, Vice President and Controller. Following my opening remarks, Jane will discuss the fourth quarter and full year financial results in detail, after which, I will discuss our fiscal 2012 key growth initiatives. Then we'll open the call to questions.

Before beginning today's discussion, Anne Mirante will read the company's Safe Harbor statement.

Anne Mirante

Certain comments made during this call may contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. These forward-looking statements include statements regarding the company's future financial and operational performance, our goals and our strategies and can be identified by the use of words such as may, will, expect, anticipate, believe and other similar words and phrases. The company's actual results or future financial conditions may differ materially from those expressed in any such forward-looking statements as a result of many factors that may be outside the company's control.

Please refer to the company's current press release and SEC filings, including our annual report on Form 10-K for a complete discussion of the major risks and uncertainties that may affect our business. The forward-looking statements made today are as of the date of this call, and we do not undertake any obligation to update our forward-looking statements.

Barry J. Feld

Thank you, Anne. Fiscal 2011 marked another year of significant progress for Cost Plus World Market. We met or exceeded our sales and earnings guidance in all 4 quarters and have now delivered 8 consecutive quarters of same-store sales increases. The strategic pillars of the brand: home decorating, home entertaining and gift-giving, overlaid with our strong core competency and seasonal merchandise continue to provide our customers with unique, authentic and affordable solutions for all of their shopping needs.

Beginning with fall harvest and then continuing through Thanksgiving, Christmas and New Year's, the excitement and momentum builds in our stores with the constant flow of new and exclusively designed merchandise offered at attractive prices. Our deep international sourcing and trend design capabilities sets our product offering apart from the competition. Merchandise resets executed earlier in the year to showcase our unique gift cards, paper and create-a-gift assortments generated sales significantly ahead of their plans.

Also, within the home division, we experienced strong performance across the textiles, bath, framed art and lighting categories. As always, our consumables assortment drove customers into the store to purchase many unique and hard-to-find European holiday treats including chocolates, Storz and Marzipan, Ginger snacks and much more. From stocking stuffers to ornaments and gifts from around the world, our holiday offering has become a tradition for our loyal customers and a conversion pull for those visiting us for the first time.

Our marketing team continue to drive traffic by effectively layering print, electronic and social media augmented with the special offers for our World Market Explorer loyalty program. In the 2-plus years since its inception, we have over 6 million members enrolled in the loyalty program and our total customer database now has over 8 million customers. Our loyalty members shop more frequently and spend 50% more than nonmembers on each trip. We expect membership to continue to increase at a healthy pace in 2012 as we further optimize the program.

In January, we ran our annual furniture promotion and clearance event that sets the stage for the introduction of new merchandise and positions us to enter the upcoming fiscal year with clean inventories. We are pleased to report that the strong response to the furniture business we experienced in the third quarter continued into the fourth quarter and exceeded our expectations, benefiting our average ticket. Overall, in the fourth quarter, we were able to deliver improved sell-through of seasonal and promotional merchandise at a higher-margin rate than last year.

For the full year, our strong top line growth combined with improving gross margins and SG&A expense leverage resulted in more than a 3x increase in net income from continuing operations versus fiscal 2010. During the last few years, the company has retooled and rebalanced its merchandising mix to support the 4 brand pillars, and merchandise margins still have the ability to expand over time.

EBITDA in fiscal 2011 totaled $51.3 million, a 30% increase over fiscal 2010 and we generated $30 million of free cash flow. Importantly, we ended fiscal 2011 debt-free and are well positioned to resume the growth of the business by investing across multiple channels in fiscal 2012.

I would now like to turn the call over to Jane.

Jane L. Baughman

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

Net sales for the fourth quarter of fiscal 2011 was $364.3 million, a 6.7% increase from the fourth quarter of fiscal 2010. Same-store sales for the quarter increased 7.6%, driven by a 3.4% increase in customer count and the average ticket increased 4.1% to $35.77. Net sales for fiscal 2011 were $963.8 million, a 5.2% increase from fiscal 2010. Same-store sales for fiscal 2011 increased 5.4%, driven by a 4% increase in customer count and the average ticket increased 1.3% to $33.87.

During the fourth quarter, we continued to experience strong performance across the Eastern and Western regions, which resulted in an 8.1% and 7.1% comp increase, respectively. The California market continues to strength and delivered a same-store sales increase of 7.7% in the fourth quarter. The mix between home and consumables as a percentage of net sales was 57% and 43%, respectively, for the fourth quarter of fiscal 2011 versus 56% and 44%, respectively, for the fourth quarter of fiscal 2010.

For the full year, the mix between home and consumables as a percentage of net sales was 61% and 39%, respectively, for fiscal 2011 versus 60% and 40%, respectively, for fiscal 2010. As we mentioned on our last call, the increase in the home sales mix is the result of higher furniture sales as a percentage of total sales year-over-year.

Gross profit as a percentage of net sales for the fourth quarter of fiscal 2011 increased 120 basis points to 34.3% compared to 33.1% for the fourth quarter of last year. The improvement in gross profit for the quarter was primarily due to higher merchandise margins, and to a lesser extent, lower occupancy cost as a percentage of net sales.

Gross profit as a percentage of net sales for fiscal 2011 increased 40 basis points to 32.1% compared to 31.7% last year. The improvement in gross profit for the year was due to lower occupancy cost, partially offset by lower merchandise margins related to the clearance of seasonal outdoor merchandise in the first half of fiscal 2011.

As a percentage of net sales, selling, general and administrative expenses, SG&A, decreased 80 basis point to 22.6% for the fourth quarter of fiscal 2011 from 23.4% for the fourth quarter last year. For fiscal 2011, as a percentage of net sales, SG&A decreased 80 basis points to 28.8% from 29.6% last year. The decrease in SG&A as a percentage of net sales is largely due to increased leverage from higher same-store sales.

Net income from continuing operations for the fourth quarter was $36.8 million or $1.56 per diluted share compared to $28.8 million or $1.24 per diluted share last year. Net income from continuing operations for fiscal 2011 was $17.7 million or $0.76 per diluted share compared to $4.7 million or $0.21 per diluted share for fiscal 2010.

For the fourth quarter of fiscal 2011, the company had non-GAAP earnings before interest, taxes, depreciation and amortization, or EBITDA, from continuing operations of $47.2 million compared to EBITDA of $37.6 million last year. For fiscal 2011, the company had EBITDA from continuing operations of $51.3 million compared to EBITDA of $39.5 million last year. The company continues to maintain a full valuation allowance against its deferred tax assets, which was $75.6 million at the end of fiscal 2011, of which $37.1 million is comprised of net operating loss carryforwards.

As we look forward to the end of fiscal 2012, the company may be in a position to revert some or all of the valuation allowance, which would result in an extraordinary one-time noncash tax benefit. However, because the company expects to generate its profit in the fourth quarter, the analysis will not be performed until that time. Therefore, today's guidance for fiscal 2012 does not contemplate any reversal of the tax valuation allowance.

Net interest expense for the fourth quarter of fiscal 2011 was $3.2 million versus $2.9 million last year. Net interest expense for the full year was $12.8 million versus $11.1 million last year. Included in net interest is interest related to the distribution center lease obligations of $8.5 million and $8.3 million for the full year of fiscal 2011 and 2010, respectively.

The company achieved another milestone and ended fiscal 2011 with no bank debt on its balance sheet. After paying off our revolving asset-based credit facility in its entirety, we ended the fourth quarter with no borrowings and $9.6 million in letters of credit outstanding compared to $25.4 million in borrowings and $10.8 million in letters of credit last year. The company has returned to its normal cadence of paying off the credit line in its entirety each year.

For the year, capital investment for 2011 projects were $9.1 million versus $4.3 million for 2010 projects. Capital spending for fiscal 2012 projects is forecasted to be approximately $18.5 million for the full year.

In this afternoon's press release, we have provided our outlook for the first quarter and full year of fiscal 2012. Our guidance takes into account the current level of volatility in commodity prices, fuel prices and geographic instability. There are few important callouts on the 2012 guidance that I would like to address.

Revenue growth is based on a 5% to 6% same-store sales increase on a 53 to 53 week comparable basis, a 44% increase in e-commerce revenue and the opening of 8 new stores offset by 2 store closures. Additionally, fiscal 2012 is a 53-week year, which we estimate to contribute approximately $16 million in sales.

The improvement in gross profit rate for fiscal 2012 is the result of improvement in merchandise margins, as well as leverage of 6 occupancy expense. The company's merchandise margin rate is sensitive to the overall sales mix of the business. Our unique and diverse assortment has been strategically designed to provide customers with the projects -- products ranging from higher-margin home goods to lower-margin consumables. While some categories drive traffic and unit velocity, others drive volume, resulting in an overall healthy company margin. Our merchants have worked diligently these past few years to restore margins by increasing exclusive designs and elevating the quality of our merchandise while maintaining affordable pricing.

Our customers are responding to this clear and recognizable value. We will continue to pursue opportunities to expand merchandise margin rates, but ultimately, we are focused on the margin dollar to generate profitability and we'll invest in businesses accordingly.

SG&A expense continues to benefit from sales leverage, even as the company reinvests to resume the growth of the business. Advertising expense is expected to be $51 million for the year, up slightly from last year, due to the 53rd week. Depreciation for the full year is planned to be $18 million and net interest expense is planned to be $12 million.

As discussed earlier, our full year guidance does not contemplate the reversal of any of the valuation allowance. The company will be a partial federal taxpayer in fiscal 2012 due to timing limitations on a net operating loss carryforward required under Section 382 of the Internal Revenue Code. It is important to note that these are annual timing limitations and the full value of the NOLs will be recognizable over time.

EBITDA from continuing operations is planned to increase $12 million to $15 million or 23% to 29% over fiscal 2011, resulting in EBITDA in the range of $63 million to $66 million for the full year of fiscal 2012. Diluted weighted average shares outstanding are expected to be $24.7 million for the full year. The company expects to incur $1.2 million in expense for discontinued operations, which relates to ongoing adjustments to the lease exit liabilities for stores closed in prior years.

Lastly, the impact of the 53rd week is estimated to be $0.10 per diluted share from continuing operations for the full year. On a 52-week to 52-week comparison, earnings per share from continuing operations for fiscal 2012 are planned to increase 28% to 34%, and in including the 53rd week, increase 41% to 47%.

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

Barry J. Feld

Thank you, Jane. With the successful fiscal 2011 behind us, I would now like to discuss our key strategic initiatives for fiscal 2012, which keep us on track to achieve our financial targets of 6% EBIT margin, 3% net income margin and 8% EBITDA margin over the next 2 to 3 years.

First, we will continue to drive sales per square foot productivity in our existing stores. In fiscal 2011, we generated $231 sales dollars per square foot, up from $218 in fiscal 2010 and are steadily progressing toward our target of $270 sales dollars per square foot where the company performed for many years. Sales productivity improvements will come from increases in both traffic and ticket and are planned at $243 sales dollars per square foot in fiscal 2012.

Product assortments will continue to evolve, making World Market the destination for exclusively designed, high-quality merchandise while maintaining the integrity of our everyday value pricing. Ongoing improvements in visual merchandising will provide more lifestyle and solution-based merchandising, and store-level customer engagement initiatives have been designed to drive conversion and units per transaction. Refinements to our marketing strategy will continue to increase brand awareness, and when combined with the optimization of our World Market Explorer loyalty program, will continue to drive traffic to our stores.

Second, with only 258 stores in 30 states, we believe significant opportunity exists to expand our existing store base over time to 500 stores nationally. We plan to open 5 to 10 new stores in fiscal 2012, moving towards 15 to 20 new store openings annually.

Our first new store, Mount Prospect, opens in Chicago this week. In the near term, we have identified 100 plus new locations within our existing markets which will allow us to leverage our marketing and distribution cost structure. We believe our 2 state-of-the-art distribution centers, 1 million square feet on each coast, can support the next 100 stores without additional fixed cost. Longer term, we see significant opportunity in new markets.

Third, we have the ability to increase our e-commerce business to $100-plus million during the next 3 to 5 years. In fiscal 2011, e-commerce generated revenue of $26 million, up 54% from the prior year. Our e-commerce model is profitable and is accretive to the bricks-and-mortar business on the operating margin line.

During 2012, investment in our e-commerce business will provide for new platform technology and upgrading search functionality. The redesigning of the website and online assortment will more closely mirror the look and feel of our stores, creating a seamless customer experience across all customer touch points. We plan to begin testing site to store, in-store pickup and shipping to home door in 2012 and expect to rollout chain-wide in 2013.

Lastly, we will continue testing other wholesale and store-within--store concepts. We are currently conducting a pilot in 4 Bed Bath & Beyond locations that showcases our entire consumables assortment, excluding alcohol, in a world market branded shop. We are optimistic about the prospects of this pilot, which will continue in 2012, and both companies are in the process of evaluating the results in next steps.

In closing, we are pleased with the significant progress we have made toward restoring our historical operating metrics. We are entering 2012 with no bank debt on the balance sheet and healthy cash flow to support our key growth initiatives. Given the multiyear growth opportunity in the e-commerce business, combined with our ability to methodically increase the number of bricks-and-mortar locations over time, Cost Plus World Market is strategically advantaged over other large national retailers with more store fleets. Substantial operating leverage in the business model will continue to generate meaningful returns for our loyal shareholder base.

And with that, I would like to turn the call back over to the operator for the Q&A portion of the call.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from the line of Brad Thomas of KeyBanc.

Bradley B. Thomas - KeyBanc Capital Markets Inc., Research Division

I wanted to just ask a little bit about how the first quarter is starting off. Your comp guidance obviously, 6% to 8%, suggested that the trends in the fourth quarter have continued in February and March. Is that fair to assume?

Barry J. Feld

Yes, it is. Obviously, our first quarter is -- the early read on the first quarter is reflected in the guidance that we put out there, and the 6% to 8% comp trend is meaningful and I think reflective of how the momentum of the business is continuing.

Bradley B. Thomas - KeyBanc Capital Markets Inc., Research Division

That's great. And then in terms of the gross margin guidance for the first quarter, you've outlined, I believe, it's about 10 to 20 basis points of improvement off of a similar comp. Can you just help us understand why you wouldn't get gross margin expansion similar to what you did in the fourth quarter off of a similar comp?

Jane L. Baughman

It's really the mix of the business and the unit velocity of what we're selling. There is a lot of seasonal goods that are higher margin that get sold in the fourth quarter as opposed to the first. So there is some volatility, within the modest, I would say, volatility within that gross profit rates across the quarters.

Bradley B. Thomas - KeyBanc Capital Markets Inc., Research Division

Great. And then Jane, I appreciate all the color on the NOLs. Could you just give us an update on what that balance stood at, at the end of the year and what some of the dynamics are to look forward to in terms of how much you may be able to take advantage of this year that might be different than what your current guidance entails?

Jane L. Baughman

Yes. So we talked a bit about the ability to reverse the valuation allowance. It's something that we won't know until we deliver the fourth quarter numbers, so we are not guiding that way. But in my comments, I stated that at the end of fiscal 2011, we had net operating loss carryforward of $37 million. And the restrictions under the Section 382 of the Internal Revenue Code look at an ownership change -- greater than 50% ownership change of your shareholder base. The company did, in 2007, have a greater than 50% shareholder base change. So therefore, the net operating loss carryforwards prior to 2007 is limited, and we can roll that out at about, in round numbers, $5 million a year.

Bradley B. Thomas - KeyBanc Capital Markets Inc., Research Division

Just a great quarter in terms of the average ticket performance and the traffic performance as well. But I mean we're seeing a nice reversal here in the ticket. Could you just talk a little bit more about what it is you think that's driving that improvement?

Barry J. Feld

Well if you recall, I've said over the last several years, we've been rigorously retooling the non-furniture home and the home side of the business because we still are in the furniture business, although the furniture side represents about 20% of our overall sales volume. And I think the ticket is really reflected in all of those efforts on the home side with the newly engineered lamps department, accent pieces, new bedroom initiatives, and the furniture side of the business is more robust as it relates to ticket size. And then in addition, the fact that we're getting very solid traction on our sales per square foot throughout various departments within the store growth, we're also starting to see real benefit from overall units per transaction purchase from our customer base.

Operator

Our next question comes from the line of Rick Nelson with Stephens.

N. Richard Nelson - Stephens Inc., Research Division

I'd like to ask you a follow-up on the first quarter. What is driving the strength in terms of merchandise? And it is in fact that the warm weather we're having across the country is added driver, do you think?

Barry J. Feld

Well, good or bad, we usually really never talk about weather. Obviously, outdoor is a big part of our sales mix. Last year we had to launch our outdoor later in the season because of the late Easter. This year, Easter is more normalized in terms of its timing and therefore, we are getting benefit. We're a bigger Easter shop. Holiday is one of the cornerstones of our strategic pillars. So we are benefiting from the timing of Easter and the fact that we are having nicer weather. So the traction we're getting with our initial launch of our outdoor season is also very promising for us.

N. Richard Nelson - Stephens Inc., Research Division

And the guidance from a margin standpoint would imply better year-over-year. So as the year progresses, I think 50 to 60 basis points for the year, 10 to 20 in the first quarter. What is driving that margin expansion later in the year?

Jane L. Baughman

Well there's margin expansion in all 4 quarters, but the lion's share of it is really coming in the second quarter. As we talked about in our prepared remarks, we did have a difficult outdoor season last year. We filtered all the goods, but we were more promotional than we had planned to be. And this year, we anticipate recovering some of that.

N. Richard Nelson - Stephens Inc., Research Division

Okay. Got you. And the extra week, I know you've called out $0.10 in terms of bottom line impact. What does that mean in terms of running the top line sales?

Jane L. Baughman

It's about $15 million for the 53rd week.

N. Richard Nelson - Stephens Inc., Research Division

$15 million.

Jane L. Baughman

Revenue.

N. Richard Nelson - Stephens Inc., Research Division

And the 8 stores that you're planning for this year, are the leases currently in place?

Jane L. Baughman

Yes. Yes.

N. Richard Nelson - Stephens Inc., Research Division

And the cadence of those openings, how should we think about that?

Barry J. Feld

I think, Rick, what we'll do is we'll reflect those. We don't like to add a lot of granularity. Well we just don't like to add a lot of granularity to where the specific stores are and the timing of those stores till we get closer. But every time we put our guidance out, we'll reflect that. But I would say that you can probably expect opening Mount Prospect, and second and third quarter you'll probably see the bulk of it. Because we try to have everything pretty well opened prior to the holiday season.

N. Richard Nelson - Stephens Inc., Research Division

Okay. Got you. Okay. I look forward to seeing that Chicago area.

Barry J. Feld

Hey, that's right. It's in your neck of the woods. You got to get in there and check it out, Rick. Its grand opening. It's going to be a fabulous weekend. Some good deals.

Operator

Our next question comes from the line of Budd Bugatch with Raymond James.

Thomas J. McConville - Raymond James & Associates, Inc., Research Division

It's TJ McConville filling in again for Budd. We appreciate the kind numbers. The sales outlook for the first quarter, and you sort of alluded to it a little bit, Barry. And I know you don't like to talk about the weather, maybe that's because it's always nice where you live. But is it -- are we expecting this average ticket acceleration to increase in the first quarter? Should we be thinking about the 6 to 8 comp in Q1 as primarily ticket driven, or is there some traffic built in there that gets ahead of the ticket?

Barry J. Feld

Well before I answer that I would say look, your neck of the woods the weather is not too shabby either if I recall. But I will tell you, it's going to be a blend. We continue to intentionally focus on our ability to drive traffic. That's one of the very important strategic imperative in terms of metric drivers that we focus on here intensely because the World Market Explorer program is so robust because of our efforts on the social media side. Our intents, we believe, that not just the improvement in frequency, but the viral ability to attract new customers is going to continue to yield solid positive customer traffic increases. But in addition, we have been mindful of the ticket and the opportunities with ticket. Historically, we really do not model out any improvement in ticket because of where the housing sector was performing and because of the serious negative nature of the consumer economy. But we believe as things really continue to stabilize out there and that in conjunction with the retooling of our home decor efforts, that we'll start to really begin to see the positive outcome reflected in the ticket. And in addition, because sales per square foot productivity metrics are also very important and critical to realizing the long-term operating metrics that I talked about, we have very strong initiatives internally on driving units per transaction. So I would say the combination of the units per transaction, the improved performance of home and furniture and home decor will drive ticket. And so I see it being evenly -- sort of evenly split for the foreseeable future between traffic driving initiatives and average ticket improvement.

Thomas J. McConville - Raymond James & Associates, Inc., Research Division

Okay. That seems reasonable. That's helpful. And on the e-commerce test that we'll see this year, can you give us a little more detail on maybe some of the timing of the different steps, Barry? I mean I assume it's going to go in stages, but can you give us a little bit more color on that?

Barry J. Feld

I think the easiest way to address that is if you go on our e-commerce site today, it's fine, it's good, it's acceptable. It drives $26 million in volume. As I mentioned in my formal comments, it's accretive to the business model. But it's really not representative of where the bricks-and-mortar side of the business and the merchandising side of the business is moving rapidly. We've been adding human resource, sophisticated management infrastructure and now financial infrastructure to really building a world-class e-commerce platform. And what I would just simply say is the easiest way to answer the question is to just go on the website and watch as it evolves. But we plan to have really significant and meaningful changes in place in advance of this holiday season.

Thomas J. McConville - Raymond James & Associates, Inc., Research Division

Okay. Well, we will look forward to that. And then lastly for me, Jane, on the credit line, really happy to see the balance paid down. Can you give us a sense for maybe what the seasonal uses of it? Look like this year should be more normal or might be even lower than usual given the performance of the business and the cash flow that is being generated from that performance.

Jane L. Baughman

Certainly. So as I talked about, we've gone back to a cadence of being able to pay it off in its entirety. Our guidance this year still assumes losses in the first 3 quarters, so we will be into the line earlier than when we get back to our historic operating metrics. But we're running about a $20 million delta below last year, and that's what you should expect to see as we move throughout fiscal 2012 and then, again, paying it off in its entirety at the end of the year.

Barry J. Feld

I think the other thing I would just add for Jane is, as you remember, TJ, we've got a $200 million facility in place in fiscal 2011, correct me if I'm wrong, Jane. But I believe -- I don't even think we cracked $100 million. So I think our peak was $98 million this year, TJ. So I think it's safe to assume that in fiscal 2012, we'll peak at around, as Jane said, $20 million delta. So we'll peak somewhere in the high 70s, call it, $78 million and again, have it paid in full at year’s end.

Operator

Our next question comes from the line of Anthony Lebiedzinski with Sidoti.

Anthony C. Lebiedzinski - Sidoti & Company, LLC

Just wanted to follow up on some previous questions. As far as the current comp trend, is it similar in terms of the breakdown between customer count and average ticket as what you saw in the fourth quarter?

Jane L. Baughman

Yes. I mean it's pretty evenly balanced.

Barry J. Feld

Yes. Anthony, it's just about evenly split.

Anthony C. Lebiedzinski - Sidoti & Company, LLC

Okay. Got it. Okay. And as far as the new stores, are they mostly in existing markets I would assume? Or I just wanted to double check that.

Barry J. Feld

Yes, they're all in existing markets and again, I touched a little bit on this in my formal remarks. But I've been saying I think, Anthony, when we saw you in New York and I pointed out that we have about -- we've identified a little over 100 location opportunities in our existing markets. And until those are really fully built out, as I've said this year, we're getting re-launches with all of our growth. As you know, I'm conservative, particularly in light of the fact that we've just now gotten our business model back in a very healthy, profitable fashion. And so I've been anxious to restart growth, but we're going to start this year with the 5 to 10. As Jane had pointed out earlier, we've got 8 signed leases in place and ready to go, and so we expect to move pretty quickly to a 15 to 20 stores pace, but 100 locations are going to be in existing markets. And then as we start approaching the tail end of that, we'll start moving -- we are anxious at some point in time to restart our efforts and move above the mid-Atlantic. We stopped our store expansion right around Washington D.C., and so we are anxious to get back into the Northeast and New England. But we don't want to be foolish, and so we want to finish building out existing markets where we still have tremendous opportunities.

Anthony C. Lebiedzinski - Sidoti & Company, LLC

Okay. So in fiscal '13, you would open 15 to 20 stores and that's the rate that you would feel very comfortable opening stores, is that right?

Barry J. Feld

What I would say is each quarter that we put our guidance out, we will accurately reflect sort of our go-forward thinking as it relates to the rate of stores. But our objective is to get to a pretty consistent the run rate of 15 to 20 stores a year.

Anthony C. Lebiedzinski - Sidoti & Company, LLC

Okay. And I appreciate the color on the 53rd week. Now are there any other calendar shifts that we should be aware of? I know last year was – you had the issue with the later Easter. Is there anything at all this year, or is it just a more normal calendar?

Jane L. Baughman

No. It's a pretty normalized calendar. Fourth of July, I believe, falls on a Wednesday. So that's kind of...

Barry J. Feld

We take that but...

Jane L. Baughman

We take that, but no. Easter is 2 weeks earlier as we discussed, which really helps the outdoor business in terms of coming into its own. And then there are no calendar shifts in the fourth quarter.

Barry J. Feld

Yes, the calendar shifts actually, Anthony, are really reflected -- are reflected in the thinking around our guidance. But I will say, now that we're back to a more normalized, so that will actually work to our advantage this year where it really did disadvantage us last year.

Operator

Our next question comes from the line of Doug Thomas [ph].

Unknown Analyst

Most of my questions have been answered. I guess I just wondered maybe -- it's obvious to me why you guys are doing so well. You can see it in the stores, and you can see it the customer count, the traffic and so forth. I guess, Barry, would you care to sort of rank the contribution of all of the things that you talked about today in terms of the additive or the accretive performance that we've seen in the last couple of quarters? How much of it comes from the merchandising? How much of it -- is it equally weighted among all those factors that you talked about?

Barry J. Feld

I don't think -- I would probably do all of us into service if I tried to sort of force rank the most accretive because so much of this is an aggregation of a lot of the small parts. But what I would say is this: it's an important question from this standpoint, Doug, from my perspective, and that is that I've said for a long time the most important thing we can do here is get our core business model profitable. And the reason I've said that is because this business model and the foundation, the platform that we put in place is really highly profitable at $270 sales per square foot. So what I would continue to rank as really number one on a forced rank process of returning the company to more normalized operating metrics is just the performance threshold of all the individual departments in the store, aggregating up to overall sales per square foot productivity ultimately of $270 a foot. And so what I would really point to is being able to go from that low of right around $200 -- Jane, was it $203 a foot -- to $218. Last year, it was $230, and this year we're some [ph] $243. So I mean, the closer we get to that $270 number, the more accretive the overall merchandising activities become. Now that being said, some of your kind words as it relates to what you see in the stores is our store operating teams have done really quite an extraordinary job over the years of improving operating metrics in a pretty dramatic fashion. And those operating metrics are everything from conversion rates to average spend per customer to the growth in the average ticket, helping to build the World Market Explorer program. And all these things are important component parts to overall getting the business model back to a very, very profitable baseline. And the one risk that Jane and I and that other members of the management team took is while we were retooling the business, we kept these 2 state-of-the-art distribution centers in place. And why that was so important is we believe that if we could get the productivity of the stores, get that into a rational place, we would have the infrastructure to really drive to a much higher top line performance threshold without incremental investment and fixed cost structures. So today, the entire management team and really the organization is really focused on sales and revenue and profit-generating activities with the fixed cost platform that is sophisticated to support $1 billion-plus company that's already in place. I hope that's helpful, but I don't think I would do any of us a good job if I try to force rank all the activities.

Unknown Analyst

No, and I appreciate that. And this may be an intangible, and I didn't intend to ask it actually or talk about it and it's maybe a rhetorical question. But the sales -- you didn't talk about the salespeople in the stores. And I don't think -- probably I visit more stores than most people, and I guess I have to say that I've noticed a significantly higher amount of enthusiasm on the part of your workforce in the last year, 2 years. And I don't know whether that's something that you've done that has been an active part of your program, or whether you've just gotten lucky or whether people are just feeling better because of traffic or whatever. But it seems to me like there's the reflection of the attitude on the part of the people at the register throughout the stores, too, which is you can definitely notice that.

Barry J. Feld

Well this is retail, so you don't get lucky. I mean this is really all by execution design, and we take great pride in the fact that whether it's in the stores or the DCs or corporately or in buying offices or design. I mean the one thing we take great pride in is that World Market associates, system-wide, are deeply dedicated to the success of this business, and now that they've been able to move after 2 years of nice profit improvement away from a survival mode, I mean people are having fun again and they've got new and improved merchandising. They've got incentive programs that kick in. Remember, all of our bonus programs have been developed so that the company has to be profitable in order to be able to pay out in a lot of these programs. And so I think overall, it's just the morale is dramatically improved because the company is now returned back to a place where it's enjoying tremendous success.

Unknown Analyst

Can you talk about where you are in the Explorer program? You mentioned a number of Explorer members and ticket price. You talked about the statistics and so forth. How many more -- what's the rollout look like, and how many more members are you anticipating you could potentially get over the next year or so?

Barry J. Feld

Jane?

Jane L. Baughman

Yes, I think I would characterize it this way. Early on in the first 12, 24 months of the program, we were very much focused on acquisition and kind of the old 80-20 role: 80% focused on acquisition, 20% focused on retention. We're really now going to evolve that and move more into driving frequency out of the customer base because we do have scale, but we still have some acquisition effort. So I don't know that we have a finite number that we want the program to be x million number members. We're going to continue to grow it and try to maintain the retention of our existing Explorers to be able to benefit the business. So I think that's the best way to answer it.

Barry J. Feld

Although I would like to punctuate just by saying if you really -- really our loyalty program speaks to the value of the brand in that less than 3 years ago, there was no loyalty program. Today, there's over 6 million active members and 8 million customers in our total database. I think those metrics are pretty extraordinary considering 36 months ago, the program didn't even exist.

Unknown Analyst

Yes, I know it's pretty remarkable. And then the only -- I know, Barry, you're not going to want to talk much about the Bed Bath & Beyond thing. But on just a couple of -- I'm curious as to if you could talk about in general what the objectives are going forward with respect to the continuing trial and whether you could talk about the sales -- the comps within the Bed Bath, and I would think they'd have to be as good as what you're seeing within the Cost Plus stores. And then sort of thirdly, you could just say you're not going to answer any of this, I don't know. But the third question is, when you go to rollout stores, whether it's end market or after 5 years or so when you're looking finally to expand into new adjacent or geographic areas, will you look to take into account, let's say the Bed Bath thing continues, would you look to take into account where there's strengths and weaknesses are with respect to conceivably where you might want to be going?

Barry J. Feld

I mean, Doug, your original comment was the right one. I don't comment on Bed Bath because it is a strategic merchandising test. The only thing that I will continue to say publicly is we're very pleased, the objectives that we put in place that I articulated, we're all evaluating as it relates to experimenting with our consumable products and markets where we don't operate stores. And we have great respect for the Bed Bath team, and we're very pleased at how the test continues to progress. And at some point, when there is -- when we're at a juncture where I could provide more granularity, I certainly will. But I've always said to perspective investors and to existing shareholders, if you're investing in Cost Plus World Market stock, you're doing it because you have deep belief in our core brand, our expansion capability and our own bricks-and-mortar model and what we're doing with e-commerce, and then one leg of that expansion is wholesale and store-in-store activities. And so we continue to test. We're not going to scale anything that isn't reasonably accretive. We've worked a long time to put ourselves back on a path for meaningful profit growth. And so there's really not much more at this juncture I can talk about other than we are continuing this test in 2012. We're in discussions on where we go from here, and we really like how things are going and I'm just going to leave it at that.

Operator

Our next question comes from the line of Anthony Chukumba with BB&T.

Eric M. Cohen - BB&T Capital Markets, Research Division

This is Eric Cohen filling in for Anthony this afternoon. First question I have was, we seem to have some recovery in the housing market over the last few months. Just kind of wondering if you guys are seeing any benefit from that?

Barry J. Feld

Well, Eric, in terms of the housing market, I guess if you look on a national basis, I'm not a housing economist, but I would say that when you look at how we've established our business model for it to perform well in markets like Florida, Arizona, California, we try to be agnostic as it relates to the housing market recovery, and we look at any kind of housing market recovery as just something that would be incremental to our growth efforts and our business model. So I think we'll do everybody the service if I try to be -- give a Shiller-like bird's eye view of the housing market. But what I would say is in our markets, we think the overall housing economy and the consumer economy is such that we can really thrive in the existing environment as it stabilizes and hopefully progresses forward a bit today.

Eric M. Cohen - BB&T Capital Markets, Research Division

Great. And the $100 million for e-commerce that you've talked about long term, is that the site-to-store and site-to-home functionality? Is that incremental to $100 million, or is that included in that?

Barry J. Feld

It's included in that business model, the $100 million.

Operator

[Operator Instructions] Our next question comes from the line of Ed Antoian with Chartwell.

Edward Nishan Antoian - Chartwell Investment Partners

Just a couple of things, kind of balance sheet-oriented. Inventory grew just a little bit faster than sales if my math is right, some of that inventory for the new store. And what is inventory for a new store normally?

Jane L. Baughman

So our inventory for a new store costs about $500,000. So there is some inventory in the pipeline for that, but as we talked about, we really cleanup our inventories during January both on the furniture side of the business as well as on the other parts of the business. And then we launch into Easter and other merchandising campaigns in January that go through February until you get into the Easter season.

Barry J. Feld

Well, what I would add to that as well is, I mean, if you look historically over the last several years, we have excellent inventory management capability and very, very clean inventories. But I will say, our inventory growth is also reflected of the guidance that we put forward if you look in the rate of sales growth that we're anticipating in this new fiscal year.

Edward Nishan Antoian - Chartwell Investment Partners

What is the cash flow requirement to open a new store, and what will be CapEx in 2012 versus 2011?

Jane L. Baughman

So CapEx for 2012 is projected to be $18.5 million in total -- and this year, we think just under $10 million, about $9.9 million. To open a new store, in round numbers, is about $1.1 million of which $500,000 is inventory and then the balance is made up between leasehold as well as -- leasehold and fixturing and then grand opening and preopening expense.

Edward Nishan Antoian - Chartwell Investment Partners

All right. And what else do I want to bug you about? Yes, just kind of going back. I know you've answered it twice already, but maybe just one more shot, make sure I gather all the magnitude. When we had the goofy Easter last year, did that end up affecting Q2 or Q1?

Jane L. Baughman

It affected both. The tail end of Q1, we saw a drop in the ticket because of the outdoor business not coming up to speed as quickly as it normally would and then -- but predominately, the second quarter.

Edward Nishan Antoian - Chartwell Investment Partners

Okay. So needless to say, I'll have an easier comparison for furniture.

Jane L. Baughman

For outdoor in Q2, absolutely.

Edward Nishan Antoian - Chartwell Investment Partners

In Q1 and Q2, right?

Barry J. Feld

That's correct. I mean essentially -- I mean last year is past, but because one of the major pillars of our sales volume is the seasonal business and what we articulated last year. I mean we had built it into our business model, but we try to guide people through so they understood that we weren't going to really be able to launch our outdoor season until we clear through Easter. As we all remember, Easter was that ungodly, what, end of April timing. It was like the end of April. So we lost almost a month on our outdoor season. So this year, it's timing being number one; and two, the warm weather favorability, as is also brought up earlier in the call, is going to be -- have positive effect for us this year.

Edward Nishan Antoian - Chartwell Investment Partners

And last one for me on just real estate selection. So in the '70s and '80s, everybody opened into [indiscernible] all the time, but predominately into new construction. You're obviously probably not doing that now. It's probably all in existing, and so these are boxes that frankly didn't survive. How difficult has it been to figure out if you're just in a sense moving into a difficult location because that's what's available, and how have you handled that?

Barry J. Feld

Well there's a -- I have to tell you, there are a lot of very, very good centers that are out there now. A lot of real estate has come into play the last several years, and we're actually -- I mean your point is a very, very good point in terms of there was a lot of new construction particularly in outer belt suburbia. And if you look at our construction today, we consider ourselves much more of an urban and close-in suburban company. Within those environments, there is a lot of opportunity, and I'm not talking about old boxes from Circuit City or Linen. I mean there's a lot of very strong locations, i.e., the Borders of the world. There's just a next generation of very productive retailers, whether it's ULTA or PetSmart or Trader Joe's, that we have excellent co-tenancy with. And there's actually a fair amount of reasonable real estate opportunity within the urban and close-in suburban market, and when we talk about 100-plus stores, that's across the national landscape. So you're talking about a handful of stores in the southeastern state in a Florida or a Georgia. You're talking about incremental stores in the Pacific Northwest and some stores and opportunities right here in our backyard in California or in Texas. So there really is ample real estate. But again, to your point, it's why I am -- I get asked quite a bit why don't we get on the pace to open 30 or 40 stores a year. But we believe 15 to 20 really high-quality, well-thought real estate sites in conjunction with what's going on with multi-channel retailing is a really smart way to proceed in terms of enabling our shareholders to be able to count on us to be accretive in our bottom line activity.

Operator

Our next question comes from the line of Brad Leonard with BML Capital.

Braden Michael Leonard - BML Capital Management, LLC

I don't really have many questions. I think most have been asked and answered. I guess I will ask on the merchandise margin. Based on the guidance, it looks like merchandise margins will probably be flattish for the year. Does it seem about right?

Jane L. Baughman

No. They're planned up -- I think we break that out, 10 to 20 basis points. So modest improvement.

Braden Michael Leonard - BML Capital Management, LLC

Okay. I mean I guess my thought, when I look at the sector, is you and some of your peers have seem to have excellent merchandise margins. You've restored those over the last few years. And I don't kow, I mean, what kind of upside do you think there is long term? Or have we kind of gotten most of that out of there?

Jane L. Baughman

No, there is still opportunity for margin expansion. However, the only thing I will temper it with is as we continue to grow the e-commerce business and it becomes meaningful to the overall contribution of the company, that business model works a little bit differently with the shipping of above the line, but then it's accretive on the operating line. But the company ran historically in the mid-30s. We've talked about our ability...

Barry J. Feld

Gross profit margin.

Jane L. Baughman

Gross profit margin, to get back into that 33%, 34%, but that's probably where we're going to stable out.

Barry J. Feld

I think the only thing I would also add to this, because I always think it's worth pointing out, is that as you know, we've not posted the weather or commodity pressure or these things. But I mean, they're all realities of retailing today. And when we look at our gross profit margin, we put out our guidance, we deeply consider everything from fuel prices to cotton commodity pressures, all these things and that is embedded in our thinking as it relates. So when we talk about 8% EBITDA margin over time, 6% EBIT, 3% net, all of that is contemplated within those numbers. And I think that is important. Plus additionally, we aren't a conventional home decor and furniture retailer. We're as much a grocer. We're as much a consumable company as we are a home company, and I always think that's worth pointing out because that's a lower-margin, high-velocity business, and we look at our overall gross profit margins in connection with the overall business model and feel like we're making good progress. But we don't want to give folks the belief we're going to see 300, 400, 500 basis point improvements, but we believe we'll remain nicely stable with some modest but meaningful improvement along the way as we continue to build and scale the business around the country.

Braden Michael Leonard - BML Capital Management, LLC

Excellent. And one last question here. So it looks like SG&A is going to grow maybe a little quicker this year, maybe almost to the pace of sales growth. Would that be accurate?

Jane L. Baughman

Hang on. It's growing fairly less than sales.

Braden Michael Leonard - BML Capital Management, LLC

Okay. But a little bit faster. I'm guessing you have a little bit -- you're going to have some more SG&A speed. You've probably been under spending for a few years so.

Barry J. Feld

Well it's not just that. We are going to have to take a step function increase, and a bit of our SG&A is reflected in the building of the management team on the e-commerce side of the business, Brad.

Operator

And ladies and gentlemen, we have no further questions at this time. I'd like to turn the call back over to management for any closing remarks. Please proceed.

Barry J. Feld

Okay. Well, again, everyone, thank you for joining us on the call. We deeply appreciate, as we always had, the long-standing support we get from our loyal and valued shareholder community. And we look forward to updating everybody on our next call, Jane, in May.

Jane L. Baughman

May, yes.

Barry J. Feld

Yes. Thanks, again, everyone. We'll talk to you soon. Bye bye.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. That does conclude the presentation. You may disconnect. Have a wonderful day.

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