Cost Plus Q3 2007 Earnings Call Transcript

Cost Plus, Inc. (CPWM)

Q3 2007 Earnings Call

December 3, 2007 4:30 pm ET

Executives

Barry J. Feld – President & Chief Executive Officer

Jane L. Baughman – Executive Vice President & Chief Financial Officer

Timothy Lester – Vice President, Controller & Principal Accountant

Anne Mirante – Vice President Finance & Treasurer

Analysts

[Lauren Levington] – Cohen & Company

Rex Henderson – Raymond James & Associates

William Armstrong – C. L. King & Associates

Joan Storms – Wedbush Morgan Securities, Inc.

David Martin - Deutsche Securities

Budd Bugatch – Raymond James & Associates

Ralph Jean – Wachovia Securities

Khristine Koerber – JMP Securities

Presentation

Operator

Good day ladies and gentlemen and welcome to the Third Quarter 2007 Cost Plus Earnings Conference Call. My name is Shantela and I will be your coordinator for today’s call. At this time all participants are in a listen only mode. We will be facilitating a question and answer session towards the end of this conference. If at any time during the call you require assistance, please press start followed by zero and an operator will be happy to assist you. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today’s call, Mr. Barry Feld, President & Chief Executive Officer of Cost Plus World Markets. Please proceed sir.

Barry J. Feld

Thank you operator. Good afternoon and thank you for joining us to discuss our third quarter results. With me today for this conference call are Jane Baughman, Executive Vice President and Chief Financial Officer; Tim Lester, Vice President, Controller & Principal Accounting Officer and Anne Mirante, Vice President Finance & Treasurer. Following my opening remarks, Jane will discuss the financial results after which I will make some concluding remarks and then we will open the call to questions.

But, before beginning today’s discussion, I’d like to ask Anne Mirante to read the company’s safe harbor statement. Anne?

Anne Mirante

Certain forward looking statements regarding the company’s third quarter fiscal 2007 actual results and future performance and initiatives will be made during this conference call and will usually be proceeded by words such as believe, anticipate and expect. Any such forward looking statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially [inaudible] expressed or implied by these statements. Examples of such risk factors include, but are not limited to, the following: changes in economic conditions that affect consumer spending, timely introduction and customer acceptance of merchandise offerings, changes in the competitive environment, foreign and domestic labor market fluctuations, interruptions in the flow of merchandise, increases in fuel and transportation costs, currency fluctuations, unseasonal weather, store construction delays, further terrorist acts or our nation’s response thereto, a material unfavorable outcome with respect to litigation claims and assessments and changes in accounting rules and other regulations. A more complete listing of risk factors is included in company documents on file with the Securities and Exchange Commission.

Barry J. Feld

Thank you Anne. Today I will provide a brief review of the quarter including the progress on our turnaround initiatives and the critical task in which the entire organization is intently focused for the fourth quarter and beyond. During our analyst day in September, we shared August results because August was the first month where the company had comparable advertising cadas and promotional activity. August results reflected the early signs of success with our everyday value pricing strategy. At that time we also disclosed there would be some unfavorable advertising and pricing comparisons in the latter months of the quarter which would put pressure on both sales growth and margins. Notwithstanding such unfavorable comparisons, September and October outperformed management’s expectations.

For the quarter, same store sales declined by 4.3% compared to a decrease of 1.3% last year and a decrease of 7.6% last quarter. The decrease was primarily the result of a decline in customer count of 6.6%, partially offset by a 2.5% increase in the average transaction amount per customer. The company did not anniversary several 40% off coupons that drew temporary increases in customer traffic last year. Also, we deferred a significant portion of scheduled advertising until the fourth quarter of this year when a greater percentage of our merchandise would reflect the new everyday value pricing strategy. A higher number of units per transaction drove the increase in average transaction. [Inaudible] our margin, while expected to remain stable in the third quarter, increased approximately 100 basis points validating the company’s efforts to reestablish its everyday value pricing strategy. Our customers are rediscovering the company’s roots of offering unique, high quality and authentic products at affordable prices across many of our higher margin merchandise categories.

Additionally, despite an increasingly challenging economic environment, the company received strong customer response to both the dining and living furniture events and rug caravan that ran during the quarter. The pricing for these events was a combination of everyday value pricing and their conditional promotional pricing activity. Lastly, our Halloween assortment performed very well, achieving a higher and more profitable sell through this year. The net loss for the quarter was $0.63 per share versus a net loss of $0.55 per share last year and was better than our guidance. Jane will provide further detail around this in her remarks. This year, the ever important holiday season has extra meaning for us because it provides another great opportunity to reintroduce ourselves to our seasonal customer base.

As our turnaround initiatives progress, we are continuing to focus on the four core principals of our strategy: One, we are reclaiming opening price points across all of our businesses. Customers entering our stores this holiday season will find great values in our seasonal shop and gift giving suggestions throughout the store for their friends and entire family. Two, we are establishing a continuous flow of newness in all businesses. This allows us to position our stores as a destination worth repeated visits. Every time customers visit they find something new and exciting. Our inventory turn and aged inventory metrics continue to show improvement over last year. Simply put, a continuous product flow is a traffic and loyalty builder. Three, we are increasing the number of key high value high velocity items. This item specific focus is critical to our buying strategy and ties directly into our market strategy. During the fourth quarter our marketing will continue to emphasize the World’s great buy to improve visual signage, key positioning in the stores and specific focus in our advertising, all of which reflect an extraordinary value to our customers. And four, I am pleased with our efforts to enhance the look and feel of our stores to better reflect the unique and authentic quality of the merchandise. We have a major initiative under way at the store associate level designed to drive higher margin incremental sales. To facilitate this we are reducing tasks and lowering base inventory levels of the store to allow more time for customer interaction, selling and speed at checkout.

I have never been more confident that our business is stabilizing and that the turnaround strategy is working. We are now in position to build the momentum needed to return the company to sustainable long term growth and profitability. As our third quarter results show the company reduced it same store sales decline by nearly 50% from the first half of the year while delivering buyer margin improvement on lower average inventory per store. We accomplished all of this with a relatively low investment and advertising.

At the end of the quarter, the company had $104 million outstanding under it’s revolving credit facility versus the same calendar week of last year of $97 million. The company’s seasonal borrowing peaked in mid November at $120 million versus a peak of $97 million last year. The company maintains ample liquidity to accomplish the turnaround under its existing asset based credit facility. The company continues intense focus on inventory management, it’s most significant source and use of cash. Average inventory per store is down approximately 4% versus a year ago. The company began implementing significant improvements in the supply chain last year and expect to continue to reduce skew count non productive inventory both in the distribution centers and stores through the remainder of the year.

As outlined in today’s guidance the company expects the same store sales decline with a -1% to -4% for the fourth quarter but continuing improvement of the negative comp trend. For the past several years the company has encountered difficulty ramping up the business in early November. Sales results to date for November reflect a strong start to the holiday season. This puts the company in its best holiday ramp up position since 2003. By deferring major advertising expenditures till the fourth quarter, we have positioned ourselves to drive traffic while maintaining the merchandising strategy to what we expect to be a highly competitive holiday season.

At the end of the day the success of our turnaround strategy will be to rebuild the company’s loyal customer base through our merchandising and marketing initiatives. We believe that we are making significant progress in that direction. Our new advertising approach has changed the way we present ourselves in weekly newspaper ad and on our website. In addition, we have also rolled out a new radio program in select markets that is fresh, unique and inviting.

I will now turn the call over to Jane to review the third quarter financial highlights after which I will make some concluding remarks before opening up the call for the question and answer portion.

Jane L. Baughman

Thank you Barry. Total revenue for the third quarter was $220.6 million a 2.4% increase over the third quarter of fiscal 2006. Same store sales for the third quarter decreased 4.3% compare to a 1.3% decrease last year. As expected, customer count declined 6.6% as the company came up against heavy coupon activity from last year that was not repeated this year. However, traction with the company’s everyday value pricing strategy and key high velocity item focus translated into higher units per transaction increasing the average transaction to $38.21 or an increase of 2.5% over last year.

Regionally, the California markets continued to improve their negative comp trend in the third quarter from the first half and versus the third quarter a year ago. However, they still slightly lag the chain. Home Décor and home furnishing as a percent of total sales increased to 65% for the third quarter versus 63% last year contributing to the improvement in buyer margins. Consumables decreased from 37% to 35%.

Total revenue for the first three quarters of $643.7 million is flat compared to the first three quarters of last year. Sam store sales decreased 6.7% compared to a 2.9% decrease for the first three quarters of 2006. The mix of home furnishings and consumables to total net sale for the year-to-date was 54% and 36% approximately the same percentage mix as the previous year.

Gross profit rate for the quarter was 28.1% versus 30.3% last year primarily due to higher fixed distribution and occupancy costs on a lower sales base with lower relative inventory. Buyer margin for the quarter was approximately 100 basis points higher than last year as a result of favorable sales mix within home furnishing and between home and consumables and lower markdowns as a result of initial customer acceptance of our everyday value pricing. Year-to-date gross margin of 26.7% is lower than the restated 28.6% experienced in 2006. Again, the primary cause is higher fixed distribution and occupancy cost without the corresponding same store sales growth to absorb the investment which is more than offsetting the improvements in buyer margins.

For the quarter SG&A expense as a percentage of sales was 36.9% compared to 37.1% last year. This reduction occurred despite the leverage use of operating more stores and lower same stores sales. Third quarter SG&A savings came from a couple of areas. First, the company spent considerably less in advertising after deciding to focus advertising in the fourth quarter to drive sales during the critical holiday shopping season. Secondly, the company has maintained tight control of discretionary spending across all areas but, in particularly, in corporate functions. This will continue to be emphasized for the foreseeable future. SG&A for the first three quarters of 36.2% is higher than the 34.7% experienced in 2006 primarily due to higher depreciation and store payroll which was partially offset by the timing of advertising.

In the third quarter pre-opening expenses decreased over last year by approximately $2 million to $700,000. We opened three new stores versus opening 11 stores in the third quarter of 2006. We closed two stores in the third quarter of both 2007 and 2006. Year-to-date, pre-opening expense are [inaudible] lower in the same period in 2006. With a total of 13 stores being opened in 2007 versus 20 in 2006.

Net interest expense was $3.4 million and $2.4 million for the third quarter of 2007 and 2006 respectively. Year-to-date interest expense was $8.2 million versus $5 million in the same period last year. The interest expense is consistent with the higher debt levels that support the sale lease back in both Virginia and Stockton distribution centers and the funding of loss making operations.

Our effective tax rate for the first nine months of 2007 was 40% versus 38.5% last year due to the impact of several discreet events this year. Net loss for the third quarter of fiscal 2007 was $13.9 million or $0.63 per fully diluted share compared to a restated net loss of $12.2 million or $0.55 per diluted share for the third quarter of fiscal 2006. The favorability to the third quarter guidance was a combination of better than anticipated buyer margin, further expense reduction opportunities and lower interest expense as a result of lower borrowings under the credit facility.

Year-to-date, the net loss of $43 million or $1.95 per share compares to $30 million or $1.36 per share in the prior year. Total inventory increased $2.3 million to $328.1 million compared with last year. Average inventory per store decreased approximately 4% as the company continues to emphasize inventory management as a critical area for performance improvement.

Accounts payable was $81.1 million versus $63.2 million last year reflecting the effect of our better terms with our vendors and some timing factors. The company continues to maintain a policy of using the line of credit to pay our vendor partners according to an agreed upon term.

At the end of the third quarter there was $104.4 million outstanding under the revolving line of credit which compares to $90 million at the end of the third quarter 2006. Borrowing for the same calendar week last year were $97 million due to the one week shift resulting from fiscal 2006 being a 53 week year. Subsequent to the end of the third quarter, the company reached its peak borrowing at $120 million for the holiday selling season and has begun to see the borrowings decrease. Long term debt increased compared to last year due to the sales lease back transactions for both the Stockton and Virginia distribution centers. Depreciation charges for the third quarter 2007 were 49.3 million compared to $8.2 million for the same period last year. Capital investments for the third quarter 2007 were $7.2 million.

In this afternoon’s press release we have issued our outlook for the fourth quarter of fiscal 2007. The company expects total fourth quarter revenue in the range of $377 million to $389 million based on a same store decrease of 1-4% and the opening of one net new store compared to four net new stores in the same period last year. The company will again come up against heavy coupon activity during each month of the fourth quarter that will not be repeated this year. Our guidance accommodates the coupon impact on customer count last year with some offsetting improvement expected in the average transaction.

Gross profit rate is expected to increase modestly year-over-year as improved buyer margin rate offsets the leverage effective occupancy cost on lower same stores sales. SG&A expense as a percent of sales will increase versus last year primarily due to additional advertising expense in the quarter versus last year. Depreciation expense is projected to be approximately $9 million. The effective annual tax rate is expected to be approximately 39%.

For the fourth quarter of fiscal 2007, the company is projecting a net profit in the range of $8 million to $11 million or $0.37 - $0.50 per fully diluted share. Weighted shares outstanding are projected to be 22.1 million at the end of the fourth quarter. Annual spending on fiscal 2007 capital projects is estimated to be approximately $30 million. $19 million or 1.9% for growth and maintenance and $11 million for the completion of the stock and distribution expansion versus $67 million last year. Included in last year’s capital expenditures were $30 million for new store growth and maintenance or 2.9% of sales and $37 million for the Stockton DC expansion.

The company’s fourth quarter earnings guidance range approximates to exceed last year’s earnings when normalized for the impact of the impairment charge and the benefit of the 53^rd week last year. I would like to turn the call back over to Barry for his concluding remarks.

Barry J. Feld

Thanks Jane. The entire organization remains highly energized and committed to returning the company to positive comp sales and profitability despite the competitive and macro economic challenges that lay ahead. Management believes that with less than 20% of our sales coming from furniture we are much better positioned to successfully weather the macro economic trends that are placing significant pressure on conventional furniture retailers. I want to ensure you that should the difficult macro economic or competitive environment worsen or we are not continuing to achieve the necessary traction on our turnaround initiative, the company has alternative plans that recognize those realities and will conserve sufficient cash to accomplish our turnaround. As previously, announced we are prepared to add no net new stores in 2008. And, with that I’d like to turn the call over to the operator for the Q&A portion of our call.

Question-and-Answer Session

Operator

(Operator Instructions) And, your first question comes from the line of Lauren Levington of Cohen & Company. Please proceed.

[Lauren Levington] – Cohen & Company

Thanks. Good afternoon.

Barry J. Feld

Good afternoon Lauren.

[Lauren Levington] – Cohen & Company

Barry, I was hoping you could elaborate a little on what you were saying on your positioning relative to holiday and relative to November. I think you said you feel it is the best trend you’ve seen since 2003. In what respect is that in terms of traffic, or promotional activity, or sales trend? Maybe, you could just give us a little better understanding of what you’re referencing. And then, also if you could reconcile your comments about how you’re feeling about the holiday with the Q4 guidance and what you’re saying is the correct apples-to-apples comparison to last year, I thought that would be around $0.53 if we exclude the impairment charge? But maybe you could remind us what the benefit of the extra week is and if on that basis if there is still growth model. Because, from our perspective, it doesn’t look like there is. I just want to get that clarified. Thanks very much.

Barry J. Feld

Sure. Thanks Lauren. The first thing I would address is when we talk about it being the best start, in terms of average transaction and customer count, I’m not going to get, obviously, into specific same store sales performance but, one of the issues the company has had for the last several years is we’ve had a lot of pressure on our holiday seasonal business because, if you recall, we eliminated a lot of the opening price points and a lot of the product categories that we had, you know, decades worth of reputation that we had established as a very strong seasonal shop business. Now that those product categories have been returned, in terms of everything from stocking stuffers to very specific unique gourmet items and beverage items, we are seeing wide acceptance of customers returning in to a number of our markets and purchasing these. If you look at our units per transactions, we’re seeing, you know, material improvement in the sell through in the various products throughout wider categories within the store. So, where we have started off our holiday season historically over the last several years with serious negative same stores sales performance in November, we are seeing trends materially better than that at this early start of the holiday season.

When we look at our Q4 guidance in terms of the comp store performance of -1% to -4%, as you recall, this time last year, we were a wash in high price furniture items that we had to sell through on until we felt that the most effective way to do that was to put out a significant number of 40% off coupons which we did throughout the course of the year, particularly as it related to October to January. Now that our merchandise and strategy is not fully implemented but well along the path to an everyday value pricing, we’re no longer going to be putting out those types of coupons to clear furniture out. And, we believe that every time we anniversary one of those it puts significant pressure on the foot traffic and so while we’re still anniversarying up, and that’s why we always talk Lauren about looking at this turnaround in terms of, you know, getting to Q1 08. Once we’re through all of this promotional cadence with the 40% off, that our new strategy would be more apparent to the outside market and until we get through all these coupons we’re going to continue to see pressure points in terms of transactions and customer traffic.

[Lauren Levington] – Cohen & Company

So, they’re impeded in that gross margin decline, the assumption of merchandise margin improvements given you are eliminating those 40% off coupons?

Barry J. Feld

Yeah and buyer margin improvement impeded in that is buyer margin improvement. When you look at overall merchandise margin, remember that encompasses the fixed cost structure of the DC and the DC expansion that we still have to overcome.

[Lauren Levington] – Cohen & Company

Sure. And, the impact of the extra week in Q4 last year, what was the per share impact that we should be referencing?

Jane L. Baughman

Yeah, let me try and reconcile it for you. Last year we said the charge for the goodwill was approximately 17%. The 53^rd week is somewhere around $0.10-$0.11 and then there is an additional tax impact related to the goodwill so that would get you to approximately the $0.37.

[Lauren Levington] – Cohen & Company

Okay. Then, one last question for you, can you give us any sense of those improved customer counts that you’re seeing? Are you seeing much variability in that trend in some of the more established older markets versus some of the newer markets where the brand is not as well known?

Barry J. Feld

Oh, we’re seeing these trends pretty well across the board and even a negative impact we had been experiencing in California, where seeing materially improvements in the trend, albeit the trend is still negative in California.

[Lauren Levington] – Cohen & Company

Great. Thank you and good luck for holiday.

Barry J. Feld

Great. Thanks Lauren.

Operator

And, your next question comes from the line of Rex Henderson of Raymond James & Associates. Please proceed.

Rex Henderson – Raymond James

Good afternoon. Hello Barry.

Barry J. Feld

How are you?

Rex Henderson – Raymond James

Good.

Barry J. Feld

Good

Rex Henderson – Raymond James

A couple of questions. First of all, I wonder if you could go through and reconcile for me, you said that customers, in the press release you said that traffic and ticket were both up and yet your comps were still down. Reconcile for me how you’re getting there. Is it conversion is lower? Or, what’s going on?

Barry J. Feld

Well, there’s a number of things. I don’t think we talk about the fact that customer traffic is up. We talk about the fact that customer traffic for the quarter was actually impacted and we talk about the fact that it’s less negative. Not that customer traffic is yet up but, it has been on a trend to be less negative. The average transaction growth is coming from more units per transaction per customer and that actually is up. But, in terms of customer traffic, we’re not in positive traffic as a company overall markets yet. What we site is the fact that customer traffic is less negative.

Rex Henderson – Raymond James

Okay. I guess I was a little confused by the language here it says, “Continuing improvement in customer count among other things,” and I thought.

Barry J. Feld

That’s correct. I mean, we are seeing continued improvement. Remember, this time last year customer traffic was significantly negative and in many markets in double digit negatives and we continue to see improvement market by market in that negative trend. But, every time we anniversary up one of these 40% off coupons throughout the course of the year, it puts a lot of pressure on our traffic trends and that is why we felt we’d be struggling with comps throughout the course of the year, Rex.

Rex Henderson – Raymond James

Okay. Finally, how is conversion rate? Do you have any sense of what that is?

Barry J. Feld

Yes. Conversion rate, while we don’t publish the specific metric, it is improved over last year.

Rex Henderson – Raymond James

Okay. Secondly, I was in the store this weekend and I saw a lot of lines being promoted at the front of the store. I just wanted, is your wine set completely ready for the holiday season this year?

Barry J. Feld

Yes, completely ready. As you know, we’ve been refilling our wine department throughout the course of the year. We have made, you know, I think, quite significant improvements in the number of private label wines that we’ve now put into the stores and we feel very good about the wine department and that is well positioned for this year’s holiday business. And, as you can see, you know, one of the things we talked about historically Rex, is really building, doing a tremendous amount of analysis as it relates to market basket penetration for our customer and there’s a lot of adjacencies both where the wine is positioned in the store and adjacencies with glassware and other wine products that are now back in the wine department and that’s also having positive benefit in terms of our units per transaction with our customers.

Rex Henderson – Raymond James

Okay. And, looking at that wine set it looked like you were being quite aggressive on price, particularly in champagne. Is that category going to be a loss leader for you?

Barry J. Feld

No. We don’t sell any beverages below, you know, below some minimal level of acceptable profit margin. So, no loss leaders but, very sharp pricing.

Rex Henderson – Raymond James

Okay. Finally, when Jane was talking about SG&A she said there was a shift in ad expenses from the third quarter into the fourth quarter. Was that included in your prior guidance?

Barry J. Feld

Yes. Well, what we had said was that annually we will spend no more money on advertising this year than last and that still holds true.

Rex Henderson – Raymond James

Okay. But when you provided guidance for the third quarter were you already contemplating holding back on ad spend in the third quarter and moving that into the fourth quarter?

Jane L. Baughman

That’s correct.

Barry J. Feld

Yeah, that’s correct.

Rex Henderson – Raymond James

Alright. Thank you very much.

Barry J. Feld

Thanks Rex.

Operator

And, your next question comes from the line of Bill Armstrong of CL King & Associates. Please proceed.

William Armstrong – C. L. King & Associates

Hi, good afternoon Barry.

Barry J. Feld

Hey Bill, how are you?

William Armstrong – C. L. King & Associates

Good, good. Actually, I just had a power outage here so I got cut off so, I apologize if any of my questions are redundant. In your opening comments, you mentioned a major initiative with your store associates that would, I think, help sales productivity. Can you just elaborate on what that was?

Barry J. Feld

Well, essentially what we’re doing is we’re simplifying the number of tasks that store associates have to do throughout the course of the season. We’ve made some fairly dramatic improvements in terms of supply chain and timing of stores, of trucks as they’re received to the stores and so, we’re giving out store associates more opportunity to interact with customers and to work through the service aspect of getting our customers through the registers.

William Armstrong – C. L. King & Associates

Okay. And, Jane you mentioned in your, when you were discussing guidance and then I sort of got cut off. You were starting to talk about gross margin. I think you’re going in to some heavy couponing in every month from a year ago and could you just quickly run through what the expected impact on gross margin would be for Q4?

Jane L. Baughman

Yes. Well, we talked about that year-over-year there would be modest improvement in gross margin rate, gross profit rate. So, the improvement that we are forecasting in buyer margin is going to offset the deleveraging affects of occupancy for the quarter.

William Armstrong – C. L. King & Associates

Okay. So somewhere to Q3 then?

Jane L. Baughman

Correct.

William Armstrong – C. L. King & Associates

Okay. I think that’s all I had.

Barry J. Feld

Thanks Bill.

William Armstrong – C. L. King & Associates

Thank you.

Operator

As a reminder, if you’d like to ask a question please press star one on your touchtone telephone. And you’re next question comes form the line of Joan Storms of Wedbush Morgan. Please proceed.

Joan Storms – Wedbush Morgan Securities, Inc.

Hi Barry. Hi Jane.

Barry J. Feld

Hi Joan.

Jane L. Baughman

Good afternoon.

Joan Storms – Wedbush Morgan Securities, Inc.

I have a question, you know, in the stores it is noticeable that you’ve made some major presentation, your merchandising presentation changes in a number of departments. And, I was wondering if you care to comment on how far along do you think you are with as far as the way the stores are going to look from a presentation standpoint. And also, as we sort of head into the spring, should we, you know, pretty much have the assortment and the direction you guys want to be going with the spring assortment? And then, I’ll have a follow up.

Barry J. Feld

Joan, we are about 75% there. More areas of the store now have been refilled than not. There are still a couple of departments that I’m not going to really get into specifically that we have, from a merchandise standpoint, very different plans for within the store as we get into the spring of next year we’ll be fully complete in terms of the entire 15,000 plus square footprint. So we’re about 75% along the way. Much further along the way then we were, obviously, this time last year and by the time we get into the spring we’ll be essentially complete. One of the things you’re noticing as you go into the stores is this intense item focus, you know, the number of departments that have been retooled and, for example, we’ve been talking a lot about the bath department where we had tremendous price credibility for years. That’s returned and we’re seeing real progress there. You know, things that we’ve talked about historically, it was mentioned on this call, the wine department. Areas where we have really focused where we had historical creditability; the jewelry and accessory departments, toy department and so on and so forth. But, we’re about 75% along the way. Certainly, far enough along the path to enjoy a solid holiday season and then as we get into spring of next year we’ll be 100% there.

Joan Storms – Wedbush Morgan Securities, Inc.

Okay. When, is it the first quarter that we anniversary your non-repeat of the coupon business?

Barry J. Feld

That’s correct. It’s Q1 of 08 where we’re actually on sort of an even keel. We will have then all the clearing out of the high priced furniture behind us, we’ll have all the couponing and the high/low promotional activity behind us and Q1 in 08 is really our normalized footing

Joan Storms – Wedbush Morgan Securities, Inc.

Okay. And then, if you could comment too on maybe, a little bit more specifically on the lower SG&A. Obviously, we had a shift in the advertising but, what are some of the other initiatives on the cost side that you’re starting to get benefits from?

Barry J. Feld

Well, we have over 40 budgeted positions in corporate that we haven’t filled and don’t plan to fill at this juncture. And, if you will recall, we have, you know, we have a fairly lean corporate environment. You’ve been here we’ve got essentially 350 folks here in corporate running a billion dollar business so it is quite a lean and productive environment.

Joan Storms – Wedbush Morgan Securities, Inc.

Okay. And then, you’ve retooled, just one more quick question. You’ve retooled the Stockton DC and put those buildings together, etcetera, etcetera. What sort of benefits are you seeing as we get into the holiday season? Now, it sounds to me like maybe you were better prepared in getting the goods to the store this year and maybe some comment there.

Barry J. Feld

Well, as you know Stockton DC that’s been a multi year project that has been in place. We have gotten our fixed cost structure in distribution a little bit ahead of ourselves but, it does give us a lot of runway for the future. We have much, much better flow than last year. We’re able to have more conveyable product. But, I think the biggest benefit is now that in California, you know, all of our distribution efforts come out of a single building versus multi buildings in different locations. I don’t think we’ll see the complete profit benefit of that investment, however, until we get into future years where the sales volume grows into the infrastructure that’s gotten a little ahead of itself.

Joan Storms – Wedbush Morgan Securities, Inc.

Okay. And then, lastly, I just want to clarify, are we expecting zero net new stores for next year? Or, you’ll just see how it goes?

Barry J. Feld

Well, we’re positioned to delivery zero net new stores next year. But, so much of this is still predicated on the performance of Q4 as we move through the season.

Joan Storms – Wedbush Morgan Securities, Inc.

Perfect. Thank you.

Barry J. Feld

Thank you Joan.

Operator

And, your next question comes from the line of David Martin of Deutsch Banc. Please proceed.

David Martin - Deutsche Securities

Hi. Good afternoon everyone.

Barry J. Feld

Hi David.

David Martin - Deutsche Securities

Just a couple quick questions and I apologize I had some problems with my phone, if I ask any repeats. On the extra week, could Jane, this is for you, could you quantify how much that’s going to hurt sales and earnings?

Jane L. Baughman

What we did, I broke it out earlier for Lauren, was it is approximately $0.10-$0.11 for the extra week last year.

David Martin - Deutsche Securities

Okay. And, how about on sales? Can you break that out as well?

Jane L. Baughman

Well, if you divide last year’s quarter by 14 weeks you’ll get $28 million. It’s less than that. It’s closer to $20 million.

David Martin - Deutsche Securities

Alright. Fair enough. And then, on inventories, can you give us some color maybe on how 4Q is going to be, how you’re going to be positioned in 4Q kind of relative to sales. Is it going to look a lot like the trends in this quarter?

Barry J. Feld

I think that’s a safe assessment. We’ve got terrific control of our inventory. Our inventory turns, as you know, throughout the course of the year we’ve shown improvement. They’re cleaner than they have been in years. Obviously, we’ve got every important weeks in front of us but, we anticipate similar progress than what we’ve been making the last quarter.

David Martin - Deutsche Securities

Okay. And then, on the inventory fronts, specifically in the home furnishing, kind of on the home furnishing mix, do you have a lot of the inventories for first half of next year already? Or, are they kind of on the water? When you do you actually order a lot of that inventory?

Barry J. Feld

I mean, all of that is bought and on the water.

David Martin - Deutsche Securities

Bought and on the water. Okay. Great. Thanks.

Barry J. Feld

Thanks David.

Operator

And, your next question comes from the line of Budd Bugatch of Raymond James. Please proceed.

Budd Bugatch – Raymond James & Associates

Hi Barry. Hi Jane.

Barry J. Feld

Hey Budd. How are you?

Budd Bugatch – Raymond James & Associates

Fine thank you. Sorry to be a second one to ask questions. A couple just financial questions, Jane if you would. Have you exhausted yet your tax loss carry back? And, if not, will you do that this year?

Jane L. Baughman

Well, we evaluate for our tax position at the end of every quarter and at the end of this quarter we did not need any evaluation losses. But, we will go through that exercise again at the end of the fourth quarter and also look forward into the 12 months of operation for 2008 before we would make any decision around that.

Budd Bugatch – Raymond James & Associates

But, it looks like you’re really coming up against a time when you’ll probably look like an evaluation allowance is required? It looks to me like we’re just about up to precipice.

Jane L. Baughman

Well, we’re not going to speculate on where we’re going to land. So, at this point the customer does not need any evaluation allowance on its book.

Budd Bugatch – Raymond James & Associates

Okay. Where do you see the debt ending at the end of the year? Not the long term but, the revolving line? Where do you see you being?

Jane L. Baughman

We’re not going to comment on that at this juncture.

Barry J. Feld

I think the only thing I would say Budd, is that if you look at how we closed the delta over the course of the year, you know, this time last year we were at $97 million, we’re at $104 million and I would just leave it at that.

Budd Bugatch – Raymond James & Associates

You ended last year’s inventory at about 264, I think? What do you think this year will end? Is it going to be, I think your delta for this quarter was like $3 million higher?

Jane L. Baughman

We still think we’re going to be down slightly on an average per store basis year-over-year.

Budd Bugatch – Raymond James & Associates

But, up overall on balance sheet basis?

Jane L. Baughman

Yes. Mathematically that would happen with more stores.

Budd Bugatch – Raymond James & Associates

Alright. Thank you very much.

Barry J. Feld

Thanks Budd.

Operator

And, your next question comes from the line of Ralph Jean of Wachovia. Please proceed.

Ralph Jean – Wachovia Securities

Thanks. Bud just asked one of my questions. But, looking forward to next year, what do you think the minimum level of same stores sales you need to lever expenses? And, could it be on a negative number, or do you have to have positive comps to lever?

Barry J. Feld

The way we’re positioned now Ralph is that a very, very low positive comp would begin to lever the company in a positive way again. You know, one or two comp.

Ralph Jean – Wachovia Securities

Okay. Thank you.

Operator

And, your next question comes from the line of Khristine Koerber of JMP Securities. Please proceed.

Khristine Koerber – JMP Securities

Hi. Just a question on your comment in the press release regarding future business climate with the changes. Can you just comment further on that, if the environment does weaken and, you know, we’ve talked about going into recession. If that happens, how you would react to that? Thank you.

Barry J. Feld

Well, I’m not going to get into a lot of granularity but, I would address it two ways. Number one, as you know, we’re a company that manages its cost structure very, very tightly. We assess the competitive environment and the external macro economic environment very closely, weekly, monthly. We do a lot of scenario planning here and our commitment is that, you know, to successfully get this company through it’s turnaround with more than ample internal cash to be able to do it. So, we just continue to do a lot of fairly rigorous scenario planning which gives us the confidence that regardless of how bad things get, we’re really in control of our future and that we can execute against our turnaround plan. As I mentioned earlier, for example, this year we had, you know, over 40 what we believe were fairly critical staff additions that we wanted to make but, as we went through the year and accessed the climate we held off on quite a few of those positions. We’ll continue to monitor our business very closely and, you know, as things continue to deteriorate more dramatically externally we’ll have plans that deal with those realities.

Khristine Koerber – JMP Securities

Thank you.

Operator

If you’d like to ask a question, please press star one on your touch tone telephone. If you’re question has been answered, or you wish to remove your question please press star two. And, you’re net question comes from the line of Rex Henderson of Raymond James & Associates. Please proceed.

Rex Henderson – Raymond James & Associates

Thanks. One quick follow up here.

Barry J. Feld

Sure.

Rex Henderson – Raymond James & Associates

Earlier in the comments you said you had peaked out on your use of your credit line at $120 million. At that level, how much availability did you have left under that credit line?

Jane L. Baughman

The credit line is about $200 million with, obviously, some reserves at the bank. But, probably about 60%.

Rex Henderson – Raymond James & Associates

You had used up 60% of your availability?

Jane L. Baughman

We had used about 60% of our availability.

Rex Henderson – Raymond James & Associates

Okay. There are usually some valuation allowances on your inventory in order to calculate what your availability is. Is that the way yours works?

Jane L. Baughman

That’s correct.

Rex Henderson – Raymond James & Associates

Okay. So, you had, at peak you had your whole $200 million line available to you.

Jane L. Baughman

That’s correct.

Barry J. Feld

Yes.

Rex Henderson – Raymond James & Associates

Okay.

Jane L. Baughman

60% includes the reserves that the bank would take against that.

Rex Henderson – Raymond James & Associates

Okay. Thank you very much.

Barry J. Feld

Thanks.

Jane L. Baughman

Just to provide some further color on the borrowing. When we spoke in August we had about an $8 million delta between TY and LY. That grew slightly as we reached our peak borrowing but it’s starting to come back down and it is much more aligned with where it was at that point as we bring down borrowing.

Operator

At this time there are no further questions in queue.

Barry J. Feld

Okay. Well, again, we’d like to thank everyone for joining us to discuss our third quarter results and we’re looking forward to reporting the results of our fourth quarter and full fiscal year when we’re back together again in March. Thank you again everyone for your participation in today’s call.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Good day.

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