Jo-Ann Stores F3Q08 (Qtr End 11/3/07) Earnings Call Transcript

Jo-Ann Stores, Inc. (JAS)

F3Q08 Earnings Call

November 28, 20074:30 pm ET

Executives

Tim Ryan – Director of Investor Relations

Darrell Webb – Chairman of the Board, President, Chief Executive Officer

James Kerr – Chief Financial Officer, Executive Vice President

Travis Smith – Executive Vice President, Merchandising and Marketing

Kenneth Haverkost – Executive Vice President, Store Operations

Analysts

Jeff Stein – KeyBanc Capital Markets

Bill Armstrong - CL King and Associates

Ralph Jean - Wachovia

Karru Martinson - Deutsche Bank

Laura Richardson - BB&T

Cathy Seifert - Travelers Insurance

Brad Leonard - BML Capital Management

Robert Rodriguez - First Pacific Advisors

Jeff Kobylarz - Stone Harbor Investments

Presentation

Operator

Good afternoon, my name is Julie Anne and I will be your conference operator today. At this time I would like to welcome everyone to the Jo-Ann Stores fiscal year 2008 third quarter earnings conference call. (Operator Instructions) I would now like to turn the conference over to Mr. Tim Ryan, Director of Investor Relations. Mr. Ryan, please go ahead.

Tim Ryan

Thank you and welcome everyone to the Jo-Ann Stores fiscal 2008 third quarter conference call. In just a minute, Darrell Webb, our Chairman, President and Chief Executive Officer and Jim Kerr, our Chief Financial Officer will review the third quarter earnings and discuss guidance for the full year fiscal 2008. They will then respond to your question.

After the market closed this afternoon, we issued our third quarter earning release. If you’ve not received it, you may obtain a copy from the Investor Relations section of our website at www.joann.com. This conference is being taped and is available through Wednesday, December 5^th by dialing 1-800-642-1687. The conference ID number to access this call is 22067162.

In addition, this call is being webcast over the Internet and can be accessed through the website mentioned earlier by selecting Investor Relations at the bottom of the website. For those with access, if is also available through StreetEvents.com. A replay will be available shortly after the call. The replay may be accessed at joann.com and at StreetEvents.com.

Before we begin, I would like to remind you that any forward-looking comments 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 included in the press release issued this afternoon and also in our periodic filings with the SEC.

Now, I’ll turn the call over to Darrell.

Darrell Webb

Thanks Tim and good afternoon everyone. Jo-Ann Stores I making solid progress on the strategic progress we outlined earlier this year. Our third quarter results reflect the balanced approach we’re taking. With growth in same-store sales, gross margin expansion, SG&A expense leverage and strong earnings per share improvement. During the third quarter, same-store sales increased 2.4% due to new product assortments, better in stocks, more effective marketing, good execution by our store teams and the ongoing benefit of competitive changes in the fabric business.

In terms of product assortment, customers are responding to the new craft textiles offering, which includes t-shirts, appliqués, iron-ons, fabric paints and other related items. Sales in this category grew at strong double-digit rate during the quarter.

The new XP thread from Coats & Clark was another successful introduction with sales of almost 2 million units in just seven weeks after rolling-out during the quarter.

Our custom framing business, which is offered in 182 large-format stores, is growing at a very strong double-digit rate. Thanks to new product offerings, such as digital photo restoration and custom print on canvas.

In addition to new products, our dramatically improved in-stock on basic items is helping generate incremental sales. So as a result of new product performance and better in-stocks, we enjoyed an increase in average transaction size in both large and small format stores during the quarter.

Marketing was another positive influence on sales performance. We advertised in all 13-weeks of the third quarter this year compared to ten weeks last year. We actually reduced the dollar amount spent on advertising for the quarter. This more efficient and affective adverting produced an increase in traffic in large-format stores where the Sunday inserts are targeted.

We also, continue to capitalize on competitive changes in the market, specifically the closing of Hancock stores and the liquidation of fabric from selected Wal-Mart stores. year-to-date Hancock has closed 134 stores and Wal-mart has liquidated fabric in approximately in 153 stores located within 10 miles of a Jo-Ann store.

The total number of stores from which Wal-mart has removed fabric is now over 340. These competitive changes contributed to our sales growth in the quarter. But it is also, important to note that we also delivered positive same-store sales in our stores that were not impacted by competitive changes.

While I’m pleased with our positive sales momentum, I believe the weakening economy and rising fuel prices did exert some downward pressure on sales during the third quarter. Given these external pressures, I expect consumer spending to be somewhat cautious during the fourth quarter.

Therefore, we’re reducing EPS guidance back to our original range for the year. Still, I believe, Jo-Ann stores will be impacted less than other retailers by tighter consumer spending given the benefits we are seeing from competitive changes in the fabric industry, the performance of the sewing and craft business in past economic downturns, and the favorable demographic of our core customer.

As expected, gross margins increased 60 basis points during the quarter. This improvement was due in large part to the timing of plan-o-gram resets and clearance mark-downs we took in the second quarter this year versus the third and fourth quarters in previous years.

In terms of expense management, our teams focus and discipline resulted in a 150 basis point reduction in SG&A compared to the third quarter of last year due to a number of new initiatives gaining traction. For example, we’ve experienced fewer worker’s comp and general liability insurance claims due in part to operating cleaner stores with less over-stock, which is resulting in fewer accidents.

We’ve also reduced administrative overhead expenses, improved distribution center efficiency and used online reversed auctions to achieve lower costs on a variety of fixtures, supplies and services. These SG&A reductions will be sustainable as we go forward.

Inventory management has been a high priority since I’ve been with the company and we continue to make great strides with the quality of the inventory. Fashion, seasonal and clearance inventory levels are down a combined 15% compare to last year. All inventories of basic merchandise are up 15%.

Two-thirds of the additional basic inventory is already in our stores and is reflected in our record high perpetual system in-stocks. The other one-third of incremental basic inventory is in our distribution centers where service levels are averaging 12% to 15% higher than the same time a year ago.

For the Fall and Halloween programs, we maintained our disciplined approach to buying seasonal merchandise, which again, allowed us to reduce mark-downs and improve sale-through rates. More importantly, the better taste in quality level of our product mix broke Fall and Halloween category sales to an increase of more than double the company trends.

With uncertainty about the economy and consumer confidence this year, the holiday season will be more important than usual. You may recall that last year we bought 23% less holiday merchandise and achieved much better sale-through rates and gross margins than the prior year. We reduced our holiday purchases another 5% this year. I’m comfortable carrying less seasonal merchandise and more basics in this economic environment for a lower risk inventory position.

Turning to store projects, during the third quarter we opened one 3,500 square foot store. We’ve now opened all six of our planned stores for the year. We also completed three remodels during the quarter for a total of 26 store remodels this year. Next fiscal year we expect to open approximately 12 to 15 new stores. All based on the new trade area and price selection criteria that we developed earlier this year. In addition to the new stores, we plan to remodel approximately 30 stores next year.

Finally, I’d like to talk a little about our website. As we announced during the quarter, we purchased the remaining 62% of IdeaForest.com, the parent company of Joann.com for approximately $21 million dollars. Our current priority is to integrate Joann.com into Jo-Ann stores from a operational and brand image perspective. We’ll then focus on a longer term growth strategy. Bills at Joann.com were $31.4 millions dollars last year and have been growing at an annual rate of more than 20%. We continue to expect the transaction to be creed of rich earnings in the first full year.

We did launch a site redesign within 48-hours of the transaction closing on November 5^th. This vastly improved website is more visually compelling, it’s easier to navigate and has features such as a community space to share ideas and a place to review and rate products. Thoroughly, we’re excited about this transaction and the opportunity to integrate the online shopping experience with our brick and mortar stores to help increase sales in both channels.

At this point, I’ll turn the call over the Jim Kerr to provide additional details on the quarter and our outlook for the rest of the year.

Jim Kerr

Thanks Darrell. Net earnings for the third quarter were $8 million dollars or $0.32 per diluted share versus net earnings of $0.1 million or $0.00 per diluted share for the same period last year.

The year-to-date net loss was $12.1 million or $0.50 per share versus a net loss of $27.7 million or a $1.18 per share in the prior year.

Third quarter same-store sales increased 2.4% versus a decrease of 5.4% for the same period last year. The improvement in same-store sales was driven primarily by higher average ticket due to the new product assortments, better in-stocks, more affective marketing and the benefit of competitive dynamics in the fabric business.

Large-format stores accounted for approximately 51% of total third quarter revenues and small-format stores accounted for approximately 49%. Same-store sales for large-format stores increased 2.4% for the third quarter compared to a decrease of 7.6% for the same period last year.

The same-store sales increased for large-format stores was mostly due to higher average ticket. Same-store sales in small-format stores increased 2.4% for the third quarter versus a 3.5% for the same period last year. This increase was also driven primarily by higher average ticket.

Our sewing businesses represented 53% of our third quarter sales volume and increased approximately 3.9% on a same-store sales basis for the quarter. We continued to experience positive same-store sales in the majority of our sewing merchandise categories with the most significant increases in sewing construction, sportswear and home décor fabrics.

Our non-sewing businesses represented 40% of our third quarter sales volume and increased approximately .7% on a same-store basis. The primary drivers of the increase were custom framing, paper crafting, seasonal crafts and jewelry. We experienced negative results in our home accents and summer categories due to planned reduction in inventory investment.

year-to-date, same-store sales increased 3.5% versus a 5.8% decrease last year. year-to-date, same-store sales in large-format stores increased 4.6% versus a decrease of 8.4% last year and same-store sales in small-format stores increased 2.6% versus a decrease of 3.7% last year.

Gross margin for the third quarter increased 60 basis points to 48% primarily due to the timing of plan-o-gram resets and clearance markdowns that we took in the second quarter of this year. Gross margin for the first nine-months decreased 10 basis points to 47.1%. For the third quarter SG&A expense increased slightly to 199.1 million from 198.5 million for the same period last year. As a percent of sales SG&A expense for the third quarter improved 150 basis points to 41.5% due to our continued efforts to control expenses and the leveraged gain from higher sales. On a year-to-date basis, SG&A percent of sales has improved 170 basis points to 44.3%.

For the first nine-months store pre-opening and closing costs were $6.6 million a decrease of $4.5 million versus last year. The decrease was due to the amount of store activity year-over-year. year-to-date, we have opened six stores and closed 22 stores versus the same period last year when we opened 25 stores and closed 48 stores.

Depreciation and amortization for the third quarter was $13.2 million versus $12.6 million last year. Higher depreciation costs are due to depreciation associated with new stores. The $1 million dollar decrease in interest expense for the third quarter was primarily due to lower average debt level.

For the third quarter our debt levels improved from an average of $249 million outstanding in fiscal 2007 to an average of $196 million in fiscal 2008. We ended the quarter at $570.9 million in inventory, a $35.1 million increase versus a year ago due to higher investment in our basic category.

We ended the quarter with $202 million in total borrowing, which was slightly higher than last year when debt was $200.3 million at the end of the third quarter. We currently have approximately $229 million of excess availability under our senior back credit facility.

Year-to-date, capital expenditures were approximately $23 million, net of landlord allowances of approximately $6.5 million. Store-related expenditures including store remodels and new store openings represented the majority of the capital spending.

As we communicated in our earnings press release issued earlier today, we have adjusted our guidance range for fiscal 2008 back to our original range of $0.55 to $0.65 per diluted share. We are confident in our strategic plan were we believe that the current uncertain environment regarding consumer sentiment and spending is likely to continue. But we still expect positive same-store sales, gross margin improvement and positive SG&A leverage for the full year. We now believe the improvements in sales and gross margin rate will be less than what we expected when we adjusted our guidance last quarter.

At this time, Darrell and I would be happy to address any questions you may have.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question is from the line of Jeff Stein – KeyBanc Capital Markets.

Jeff Stein – KeyBanc Capital Markets

Good morning Darrell, just a couple of questions. First of all with regard to the revised outlook, is the revision based on what you’ve seen quarter-to-date or what you expect to see for the rest of the season and then can you talk a little bit about the custom framing business? This seems to be the first time that you’ve called that out as being a strong category for you.

Darrell Webb

Sure Jeff. First of all, we’re not going to speak directly to current sales trend or guidance for the quarter. Let me answer that this way. I think we’ve got a very solid strategy in place not only for the fourth quarter, but for the long term. And, I think we’re executing against that strategy really affectively.

Unfortunately, just as we’re beginning to hit on all cylinders right now, we’re facing this headwind of a weakening economy and this declining of consumer confidence. So as I said in the prepared remarks, I do think we’re positioned to perform better than most retailers in this environment. Just as you saw in the third quarter where our same-store sales were positive when many of the specialty competitors were not. I think that same scenario is likely to play-out over the fourth quarter, so we could expect to see some D leveraging. But, we’re not going to provide specific guidance for the quarter.

Jeff Stein – KeyBanc Capital Markets

Could you talk about the custom framing business? What has changed there because that’s a category that you really haven’t discussed this year.

Darrell Webb

Truly, not a great deal has changed other than we continue to make incremental improvements in what we offer in the stores and how we market the offering. It’s been a very solid business of ours for a number of years and I guess we’ve heard some of the competitors call it out as a strong point and we thought it was time that we took credit for how strong a business it is for us as well.

Jeff Stein – KeyBanc Capital Markets

Had you considered becoming more vertical in that business?

Darrell Webb

We certainly have considered that.

Jeff Stein – KeyBanc Capital Markets

Jim, if you could talk about your estimate for interest expense during the fourth quarter and then also if you could address the list on store remodels this year?

Jim Kerr

I won’t get specifically into the store remodels, but I think we talked on the call before, we’re measuring store remodels and expecting them to improve over the chain average. And, we are seeing an improvement. We’re comfortable with the internal rate of return we’re getting on that and, therefore, we’ve decided to move forward and looking at doing approximately 30 of those next year.

Jeff Stein – KeyBanc Capital Markets

Do you have an estimate for interest expense in Q4?

Jim Kerr

Not specifically. We haven’t been giving that out specifically, so I don’t want to give that out at this time. But, I will tell you from a debt standpoint, we’d expect to end the year in a better debt position than we did last year, so you can get to an average debt that way.

Operator

Our next question is from the line of Bill Armstrong - CL King and Associates.

Bill Armstrong - CL King and Associates

Good afternoon. Did I hear you say then that Q4 same-store sales still would be positive or might that fall into negative territory?

Jim Kerr

We didn’t comment specifically on Q4. What we did was maintain our full year guidance, which will be positive for the full year. We haven’t specifically commented on Q4 and really sticking with what we’ve been doing on a quarterly basis. I won’t comment on that right now.

Darrell Webb

The only thing I would add Bill is that we believe that we’re going to perform better than most, if not all of our peers. Right now, the big question is what the consumer is going to be like over the remainder of this holiday season. How negative will that sentiment be, what will the shopping patterns look like. Regardless of how it plays out, we do think we’re going to perform better than most people in our space and especially retail in general. We just don’t know how positive or negative that’s going to be.

Bill Armstrong - CL King and Associates

Might you get more aggressive in promotions or pricing to chase business, if the consumer continues to slow down?

Darrell Webb

Yea, we’ve done a fair amount of analysis on that question over the time we’ve been here and I think our competitors have probably done the same thing. And, what it tells us is that short-term aggressive promotions general create unprofitable sales. And, they don’t create any sustainable market share gains, so it’s not a great investment.

The thing that we’ll be watching for is, if any one else in the competitive environment is extra long on inventory and have to take some price reductions just to push through some seasonal inventories, then we’ll have to respond accordingly.

Bill Armstrong - CL King and Associates

Segue from that last comment, your inventory per square foot looks like it’s up about 8% year-end. You said it was mostly up in basics. Are you comfortable with your overall inventory position and what areas of basics might the increase have been concentrated in?

Jim Kerr

It is literally in those basic articles that we carry from week-to-week, month-to-month and year-to-year. So, it’s basic crafts. It’s basic fabrics and I am very comfortable with out position there. And, we’ve commented before that we expect to be back down to roughly where we finished last year in merchandised inventory as we get through the holiday season here.

Bill Armstrong - CL King and Associates

Okay, so you don’t feel that your inventory position at this point exposes you to any unplanned markdowns to clear things out?

Jim Kerr

Well, again, we’ll be keeping an eye on the seasonal merchandise to see if any competitors have to react and take deeper markdowns earlier than they would like to and then we’ll have to respond accordingly. But, no, from an overall inventory position as I mentioned in the prepared remarks, I’m very comfortable with where we’re sitting.

Bill Armstrong - CL King and Associates

Did you say in your comments earlier that you reduced your holiday purchases during the quarter by 5% year-to-year?

Jim Kerr

That’s correct.

Bill Armstrong - CL King and Associates

Was that planned all along or perhaps reduced in response to what you’re seeing out there in the stores in terms of customer traffic?

Jim Kerr

No, that decision was made six to eight months ago. We just felt we could ratchet it down the sell-to rate, improve the sell-to rate even further than we did the prior year.

Operator

Your next question is from the line of Ralph Jean - Wachovia.

Ralph King – Wachovia

Thank you. Just with the six new store opening next year, what do you think the typical size will be on those? Will it be the 35,000 or some 25,000?

Jim Kerr

Actually, we had six last year. We’re going to do 12 to 15 we’ve got to do for next year. The average, we will have some 35,000 square foot stores, but we’ll also have some 25,000. There’s going to be a mix. We can look at both formats.

Ralph King – Wachovia

Okay. And, then you mentioned digital photo restoration and custom prints on canvas. Could you think these could develop into pretty strong categories or is it naysay at this point or how do you feel about those?

Jim Kerr

Those are relatively small categories right now, but they’re growing at huge percentages. So, I think the potential is there for them to grow significantly and become real dollar volume categories.

Ralph King – Wachovia

Okay. Thank you.

Operator

Your next question is from the line of Karru Martinson - Deutsche Bank.

Karru Martinson - Deutsche Bank

Good afternoon. In terms of the consumer pressure, are you expecting a trade down in products, the average basket coming down or is it more of a traffic concern for you?

Jim Kerr

It’s really more of a traffic issue. Our average ticket has been looking decent during the third quarter. And, it’s really been, traffic was flattened the third quarter. And, that’s our concern as we look at the fourth quarter.

Karru Martinson - Deutsche Bank

And, in terms of the advertising you mentioned, you were much more affective. You were out each week. How is that being more affective? I’m just curious as to how you’re positioning that?

Jim Kerr

Well, again, speaking to the third quarter, we were able to advertise in all 13 weeks, all 13 Sundays during the quarter. So, we had more consistent exposure, which drove additional traffic into the large-format stores.

The way we were able to do that by spending less money is simply being more efficient with that distribution. So, we eliminated some non-productive zip codes. We eliminated some redundancy in overlapping newspapers that don’t have a high level of readership. We actually took a few pages out of direct mail pieces during the quarter.

Karru Martinson - Deutsche Bank

But the advertising itself was pretty much in line with your traditional focus, correct?

Jim Kerr

With our new approach to marketing and advertising that we rolled-out earlier this year. Yes.

Karru Martinson - Deutsche Bank

And, did you see any type of competitive response from your peers or others who are kind of dabble on the side of the category?

Jim Kerr

The only change we saw in the quarter was that AC Moore ran, I believe the number was seven inserts a year ago and 10 in this quarter. Michaels was the same 10 this year as they did a year ago.

Karru Martinson - Deutsche Bank

We’ve heard quite a bit of talk of in terms of concerns about imported goods. We’ve seen some product recalls. What’s kind of your outlook there and your confidence levels in terms of the goods flowing through your stores?

Darrell Webb

Well, it’s really a multi-pronged approach to that. First of all, anything that is higher risk, meaning products that are oriented towards children, products that have surface paint, we have been doing our own testing, just taking those products off the shelf and testing. We’ve gone back to all of our import vendors and ask them to re-certify that the products they bring into this country meet all of the Consumer Product Safety Commission regulations.

As we go forward into the Spring season, our objective is to test anything that is higher risk before it actually gets onto the store shelves. And, in longer term, we’ve signed an agreement with one of the largest international sourcing agents to act on our behalf and actually do the QA testing on these products when they’re still in the factories oversees.

Karru Martinson - Deutsche Bank

There’s been a lot of talk from your competitors and the overall retail competitor segment, just warm weather kept people coming from the stores. I mean, is that kind of what you see behind the flat traffic or do you feel that this was more just consumers pulling back, them being cautious in terms of their spending?

Jim Kerr

I’ve never allow my people to use weather as an excuse and I’m not going to use it. I think it sure looks and feels like a broader economic belt tightening right now.

Karru Martinson - Deutsche Bank

In terms of the Martha Stewart exclusive, will the anniversary, there’s a broad number of other products that are coming out in that category under that kind of brand. Is there any thought of bringing that into the Jo-Ann’s format?

Darrell Webb

Not at this time.

Operator

Your next question is from the line of Laura Richardson - BB&T.

Laura Richardson - BB&T

Hi everybody.

Darrell Webb

Hi Laura.

Laura Richardson - BB&T

A couple of questions that I’m hoping you can answer in sort of a big picture way. Year-to-date, it’s looking like there’s been more improvement in the SG&A than the gross margin. Should we expect the same thing in the fourth quarter? And, next year, what are the things that you’re working on that will help the margins next year?

Jim Kerr

Okay. I’ll start with the SG&A for the fourth quarter. Shouldn’t expect the same magnitude of leverage improvement in the Q4 as we’ve been seeing on a year-to-date basis, really for two reasons. One, we are beginning to cycle the expense initiatives we started last year and two, if you recall with our 53 week year, that was an extra week of sales, which was about $29 million dollars in sales, which gave us extra leverage and a fixed cost. I wouldn’t expect that same type of improvement in Q4.

Laura Richardson - BB&T

Okay. And, then what are you working on that’s going to help those expenses for next year?

Jim Kerr

Looking at expenses for next year, the main driver will be some information technology enhancements that we’ll be rolling-out the first half of the year. We’re putting in new point-of-sales systems, both hardware and software as well as a labor management system. Those will both contribute to the SG&A savings for us.

Laura Richardson - BB&T

Okay. Is POS going to help you track merchandise better and help on the markdown side too?

Jim Kerr

It will. We think there’s some benefit to be had on gross margin there, yes.

Laura Richardson - BB&T

And, turn the question to the advertising. When you found opportunities in 2007, you basically added weeks of advertising to the calendar. Is there any opportunity in fourth quarter or were you already in the newspaper every week last year? And, then, what about 2008?

Jim Kerr

I really don’t want to share our hand for the rest of the fourth quarter, but we were in certainly all the way through Christmas. Then there were some weeks after Christmas a year ago when we were not.

As we look at 2008, I think it will be refining rather than making dramatic changes like you saw this year with our marketing and advertising. It’ll be more modest changes.

Laura Richardson - BB&T

One more question. The question everyone’s tried to ask you about the fourth quarter comps, to get technically to what you’re saying about a positive comp for the whole year, you’re going to have a wide range of fourth quarter comp. Like I’m getting, well as low as a minus 5 you can still end up with a positive comp for the year. And, I don’t see anything above that, if there’s a positive comp for the year. Do you want to say anything to help us narrow our range a little?

Jim Kerr

I think we want to stick to the precedence we’ve had, which is not commenting on comps in the middle of the quarter. We’ll stick with our full year guidance.

Operator

Your next call is from the line of Cathy Seifert - Travelers Insurance.

Cathy Seifert - Travelers Insurance

Yes, Hi. Not to harp on the inventories, but I’m just trying to understand, the inventories were up about 6%, you were in sales around 3, so I understand what you’re saying about the increase in the basics, but is there something then that this is sort of a one-time thing, and we shouldn’t expect to see these levels more matched sales growth going forward?

Jim Kerr

Part of what you have to understand is that a year ago at this time our in-stocks on basic items was a dismal. We were running low 70% service levels out of our distribution centers, far, far too many out-of-stocks in our stores. So we ramped-up on basics early going into the season to make sure that we didn’t repeat the same mistake this year. And, we do think that will settle down as we sell through a lot of these basics over the next 10 weeks and the quarter back in normal position.

Darrell Webb

When you look at our inventory trends year-over-year, last years is harder to analyze because as we went throughout the year we had reductions in excess inventory in such as yard and fleece, that mitigated some of the seasonal build and not like you’re seeing here in the third quarter. I think it’s a combination of what you’re seeing is our normal season build as well as returning to the level of basics that we think that we should be at for in-stock purposes.

Cathy Seifert - Travelers Insurance

Okay. That’s very helpful. Is there, on a year basis, because I realize there’s some seasonality, but what percent of inventory is typically basics versus not basics?

Jim Kerr

I don’t know, if I’ve done those numbers. You’re right. It varies by time of year. I’m not sure I want to give out a specific, but I’d say over 60% on the basic side.

Cathy Seifert - Travelers Insurance

Okay. That sounds close. And, then with regard to Wal-Mart, I’m not that familiar with them and their liquidation. I’m familiar with Wal-Mart but not with their liquidation of the fabric side of things. The 340 total so far, is that about it for them or is that just scratching the tip? Do you have any sense for that?

Jim Kerr

Well, we believe we do based on information that we acquired through the marketplace. We understand that they are on their way to removing fabric from all but roughly 700 to 750 stores. So, removing fabric from call it 80% of their locations.

Operator

You have a follow-up question from the line of Jeff Stein - KeyBanc Capital Markets.

Jeff Stein - KeyBanc Capital Markets

Darrell, with respect to store expansion next year wondering are you targeting any new market, and can you give us a little help on store closings and then net selling space growth next year?

Darrell Webb

I’m going to have Jim help on the net selling space. I know we have at least one net new market that won’t entail a closing. It may be two.

Jim Kerr

And, in terms of overall activity, we talked about 12 to 15 openings. As you know we typically run a closing for each opening. And, then we’ll have a small number of closing relating to either performance of end of lease life.

So net/net given the size of the stores that we’re opening, we should have a slight increase in selling square footage.

Jeff Stein - KeyBanc Capital Markets

So, we can expect perhaps may be 20 to 30 stores to be closed next year? Somewhere in that range?

Jim Kerr

We’re still reviewing the small-format store base and looking at lease end dates, but that’s not an unreasonable original estimate.

Jeff Stein - KeyBanc Capital Markets

And, the share count, it kicked-up a bit in the third quarter to 25 million average shares. Is that the number we should be using for fourth quarter as well?

Jim Kerr

Yes. For full year, if you use around the 25, that’s about right.

Jeff Stein - KeyBanc Capital Markets

Got it. Thanks.

Operator

Your next question is from the line of Brad Leonard - BML Capital Management.

Brad Leonard - BML Capital Management

Did you guys say that the selling comps were 4.3?

Darrell Webb

No. We had third quarter selling business was up 3.9.

Brad Leonard - BML Capital Management

So, how much of that do you think was a benefit from the competitive closings.

Darrell Webb

We know the competitive closings helped a little more than they did in the second quarter. We actually specified it in our second quarter. It was worth about 120 basis points. The reason we’re not articulating the number for the third quarter is there’s more and more distortion and noise in those numbers as we remodel stores, as competitors open, but we’re still getting a benefit from the competitive factors.

I don’t know that I can breakdown that 3.9 off the top and then tell you what percentage of it.

Jim Kerr

Overall comp, what we did say was, even the stores that weren’t impacted by competitive factors, they were positive.

Brad Leonard - BML Capital Management

Okay. That’s all good. In the remodels, I think on the last call you talked about the remodels, I believe you gave some comment, I’ll have to look at the transcript about being up, I don’t know – double digit or something above what the rest of the chain-wide average did. Are you still seeing that type of remodel? Are you still seeing that type of benefit?

Jim Kerr

Yes, we’re still seeing a nice lift in our first year. And, like I said, it’s in line with what we’re expecting, and therefore, we’re going to continue with those 30 for next year. I can’t remember the specific number we referenced in the call.

Brad Leonard - BML Capital Management

I almost want to say you said it was like 10 percentage points above the chain-wide, and I don’t know if I heard it wrong or if it came out wrong.

Jim Kerr

Yes, we talked to that. Keep in mind that was early on. I think what we talked about was we were getting a very nice bump. May be it was the 10% in the early months. But, we really wanted to see how they performed over the course of the year. It’ll be around that or a little bit less than that to give us the benefit we’re looking for.

Brad Leonard - BML Capital Management

Okay. If I’m looking at, I think year-to-date is probably about 180 – 190 basis point improvement in operation margin give or take? When I look at next year and what you think, and I think you’ve commented a presentation that you thought you’d get back to that, the previous 6% operating margin that Jo-Ann had a few years ago, what I think about the same magnitude of improvement next year, would that be reasonable or not?

Jim Kerr

What we’ve said about getting back to our margins, we do think we can get there, but we haven’t put a timeframe on it. We said we’d talk more about that at yearend.

At this point, I don’t want to start giving too much direction on next year. We’re in the process of putting together our plan right now. We’ll talk more about that at yearend.

Brad Leonard - BML Capital Management

Okay. Would it be unreasonable to think we’re going to get SG&A and gross margin improvement next year?

Jim Kerr

Again, we’re working through the models right now. I won’t make a comment on that right now.

Brad Leonard - BML Capital Management

Okay. Thanks guys.

Operator

Your next question is from the line of Robert Rodriguez - First Pacific Advisors.

Robert Rodriguez - First Pacific Advisors

Good afternoon guys. I was just curious whether you could give us a sense of what the benefit of the plan-o-gram resets in the basic merchandising increase has been a measure of how that change in strategy has shown beyond just the comp store sale for the average ticket.

Darrell Webb

Are you asking about the map reset that was done a year ago Bob?

Robert Rodriguez - First Pacific Advisors

Yes, going through and seeing what – you’ve got time underneath how you’ve restructured the store, so you’ve gone back and other than an average ticket and a comp number can you see within the categories that you reset as well as the increased basics what the marginal rate of improvement is or can you give us a symptom on that?

Darrell Webb

For the first full year that we had the new craft assortments in place, we were seeing very strong nice double-digit increases. Now that we’ve lapped that first full year, they’re not quite as robust, but we have certainly picked-up a lot of market share in crafts relative to our competitors.

Robert Rodriguez - First Pacific Advisors

Okay. In terms of the basic in-stock that you’ve been doing, can you give us a sense of what that lift has been?

Darrell Webb

I don’t know that we can calculate precisely how that helps. What amount of the incremental sells we’re getting comes from that.

Jim Kerr

That’s one of the drivers of average ticket, but we also think that the overall improvement in store conditions and the merchandising presentation is helping average ticket as well.

Darrell Webb

We have seen an increase in basic categories, which is consistent with our increase of basic inventories.

Robert Rodriguez - First Pacific Advisors

I can tell you the stores look better. So, that’s easy to see. Okay then. Thank you anyway. Good luck in the fourth quarter here.

Darrell Webb

Appreciate it.

Robert Rodriguez - First Pacific Advisors

Bye-Bye.

Operator

(Operator Instructions) Your next question is from the line of Jeff Kobylarz - Stone Harbor Investments.

Jeff Kobylarz - Stone Harbor Investments

Hi. Good afternoon. I was curious for you to comment about what your vendors are saying as far as your rate of sales and if they say you are matching the industry sales changing or if you’re out performing?

Darrell Webb

Yes, the majority of our vendors are very enthusiastic about Jo-Ann’s business, certainly on the fabric side, sewing notions, accessories – all those categories are performing very well. As well as on the craft side where some of the other peers in our space have not been growing at the rate we have this year. So, the vendors are quite pleased with us.

Jeff Kobylarz - Stone Harbor Investments

Any general comment about what the outlook is in 08 for new products or themes or renovation.

Darrell Webb

We’re investing a lot of time and energy on our product development team, so a lot more new product coming out of our own design shop. I don’t know if you saw the release on the Debbie Mumm relationship. But, Debbie Mumm is a designer, probably built her name in the quilting are, but is doing a lot of work now in seasonal products as well. And, we rolled-out her product line for the holiday presentation and its been doing extremely well, so we planning to build on that.

Jeff Kobylarz - Stone Harbor Investments

Have you said what your in-stock percentage is, whatever over in the third quarter and what it was, say over a year ago?

Darrell Webb

I mentioned that it was 12 to 15% better in our distribution centers in terms of service level, but we’ve not articulated a store perpetual system in stock level.

Operator

You have a follow-up question from the line of Bill Armstrong - CL King and Associates.

Bill Armstrong - CL King and Associates

Oh, yes, I just noticed that you’re cap x plan for the year is down slightly. Any projects that have been cancelled or slippage into next year. What was that?

Darrell Webb

We did bring the range down slightly. Part of that is at the beginning of the year when we develop our capital plan, one of the big assumptions you’re making about fourth quarter capital is how much you’re going to need to spend on the next years openings and remodels given how early they’ll be in the cycles. So, that’s a little less than we had originally planned, so that’s were most of the saves come in. It’s just a timing issue between this year and next year. So we haven’t cancelled any projects we’d planned on.

Operator

There are no further questions at this time. I would like to turn the call back over to Mr. Darrell Webb for any closing remarks.

Darrell Webb

Okay. Thank you very much. I just want to let everyone know that I’m really pleased with the direction of our company right now. I think we’ve made a lot of progress on our strategic plan and certainly expect to continue driving profitable sales growth as we go forward.

I want to wish everyone a Happy Holiday Season, and thank you for joining us on the call.

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