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Executives

Darrell Webb - Chairman, President and Chief Executive Officer

Jim Kerr - Chief Financial Officer

Tim Ryan – Investor Relations

Analysts

Shaun Smolarz – Sidoti and Company

Ralph Jean - Wachovia

Kerry Martinson - Deutsche Bank

Joan Storms - Wedbush Morgan

Laura Richardson - BB&T

Brad Leonard - BML Capital Management

Jeff Stein

Bill Armstrong - C. L. King & Associates

Doug Pardon – Brigade Capital

Jo-Ann Stores Inc. (JAS) F4Q08 Earnings Call March 12, 2008 4:30 PM ET

Operator

Good afternoon. My name is Christie 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 fourth quarter earnings conference call. (Operator Instructions) Mr. Ryan, you may begin your call.

Tim Ryan

Thank you and welcome everyone to the Jo-Ann Stores fiscal 2008 fourth quarter and full year 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 fourth quarter and full year results and discuss our guidance for the full year fiscal 2009. They will then respond to your questions.

After the market closed this afternoon, we issued our fourth quarter and full year earnings release. If you have not received it, you may obtain a copy from the Investor Relations section of our website at www.joann.com. This conference call is being taped and is available through Wednesday, March 19, by dialing 1-800-642-1687. The conference ID number to access this call is 360-331-26. 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 it is also available through streetevent.com. A replay will also 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 will turn the call over to Darrell.

Darrell Webb

Thanks Tim. Good afternoon everyone.

A year ago, I outlined a new strategic growth plan for Jo-Ann Stores that described our intent to improve the customer shopping experience in our stores, enhance our marketing and merchandizing offers and refine our store development program. These broad themes were supported by dozens of initiatives and enabled by investments in our people, systems and supply chain along with tight control of expenses and inventory. I indicated that this plan will allow Jo-Ann to deliver balanced and consistent financial improvements over the long-term.

I'm pleased to report that by executing this strategy our team delivered solid results for fiscal year 2008. We achieved same store sales growth, retail store gross margin expansion, SG&A expense leverage and earnings per share improvement for the year. This balanced and consistent improvement was reflected in our fourth quarter results as well.

Fourth quarter same store sales increased 3.3%. This was our fourth consecutive quarter of positive same store sales. The growth in sales was driven by our fabric and sewing business and also by improved basic in-stocks. Craft sales were also up slightly compared to the fourth quarter of last year. Those increases were partially offset by a decrease in Christmas seasonal categories.

Overall gross margin was flat for the quarter due to the consolidation of the Joann.com business which carries a lower margin than our retail stores. Excluding the effect of Joann.com gross margin expanded 50 basis points in the fourth quarter. The improvement was due to reduced clearance and promotional markdowns and benefits from global sourcing initiatives. Our decision to reduce purchases of seasonal merchandize was also prudent and helped avoid a serious impact on gross margins.

In terms of SG&A expense management, we continue to make progress in reducing operating cost in a number of areas. The largest savings in the fourth quarter came from store level expenses and distribution centers. Although we’ve captured substantial savings over the past year we expect to continue identifying new opportunities for expense reductions going forward.

As planned there were no store openings or remodels completed in the fourth quarter. Our six new stores and 26 remodels for fiscal year 2008 were all completed by the end of the third quarter. In fiscal year 2009 we expect to open 12 to 15 new stores averaging just under 30,000 square feet and we plan to remodel 25 to 30 stores averaging just under 20,000 square feet. As we continue to improve overall business results and drive more consistent performance from new stores we will accelerate new store openings in future years.

Looking ahead, the economic environment has created some uncertainty for fiscal year 2009, but we will continue to execute our strategic plan and continue to take advantage of competitive withdrawals from the fabric business. We also expect to be insulated from a downturn to a certain extent by the strong demographics of our shoppers and the steady performance of the sewing and craft industry in previous recessions. Nonetheless we have planned the year conservatively from a financial perspective.

A few examples of key priorities we will be working on in fiscal year 2009 include rolling out our new point-of-sale and store systems package as well as new human resource and workforce management applications. We will also continue integrating the Joann.com Internet business to achieve better synergy with our retail stores and we will continue to focus on updating stores by remerchandising dozens of small-format stores over and above those we have scheduled for remodels.

At this point, I will turn the call over to Jim Kerr.

James Kerr

Thanks Darrell. First, I will go through the quarter and full year financial results. Then I will wrap up with some comments on our outlook for fiscal 2009.

Net earnings for the fourth quarter were $27.5 million or $1.10 per share versus net earnings of $25.8 million or $1.05 per share for the same period last year. For the full year, net earnings were $15.4 million or $0.62 per share versus a net loss of $1.9 million or $0.08 per share in the prior year.

Total net sales for the fourth quarter declined 2.5% compared to the prior year. Note however that the fourth quarter of fiscal 2007 included an extra week which added $28.8 million in sales to last year’s results. On a comparable 13 week basis, fourth quarter same stores sales increased 3.3% versus a decrease of 6% for the same period last year. The improvement in same store sales was primarily driven by higher average ticket due to new product assortments, better in-stocks or effective marketing in the benefit of competitive withdrawals from the sewing business.

Large-format stores accounted for a 50% of total fourth quarter sales and small format stores accounted for 48%. Internet sales through joann.com accounted for the remaining 2% of sales. Same-store sales for large format stores increased 2.4% for the quarter compared to a decrease of 7.2% for the same period last year. The same-store sales increase for large format stores was due to higher average ticket. Same-store sales in small format stores increased 4.2% for the fourth quarter versus a decrease of 5.1% for the same period last year. This increase was also driven primarily by higher average ticket. We have seen an ongoing benefit from competitive factors in the sewing business in our small format stores.

Our sewing business represented 47% of our fourth quarter sales volume and increased approximately 10% on the same-store sales basis from the quarter. We continue to experience positive same-store sales in the majority of our fabric and selling notions merchandise categories. Our non-sewing business represented 53% on our fourth quarter sales volume and decreased approximately 3% on a same-store sales basis, impacted by lower sales of Christmas shop and seasonal fall. We did however experience positive sales results in our craft and party categories.

For the full fiscal year on a comparable 52 week basis same store sales increase 3.5% versus a 5.9% decrease last year. Full year of same store sales in large-format stores increased 3.9% versus a decrease of 8% last year and same-store sales in small-format stores increased 3% versus a decrease of 4.1% last year.

Overall our gross margins for the fourth quarter and full year were consistent with the prior year. While our retail gross margins improved due to reduced clearance markdowns and improved promotional effectiveness this was essentially offset by the addition of sales from joann.com which had a lower gross margin rate than our stores. As, a percentage of net sales SG&A expense for the fourth quarter improved by approximately a 140 basis points to 34.5% due to our continued efforts to control expenses. The additional sales from joan.com which has a lower expense structure than the retail stores contributed to the improved leverage. For the full year SG&A expense leverage improved by approximately 150 basis points to 41.2%.

Our store pre-opening and closing cost were $8.4 million for the full year down $2.7 million versus the prior year due to a lower amount of store activity. During fiscal 2008 we opened six stores and closed 33 stores compared to last year when we opened 26 stores and closed 63 stores. Depreciation and amortization expense for the fourth quarter increased to $13.2 million from $12.7 million last year due to the depreciation associated with additional new stores. Depreciation for the year was $51.8 million or $2.6 million higher than last year, also from higher depreciation costs associated with new stores. For fiscal 2009 we expect full year depreciation and amortization expense of approximately $54 million.

Interest expense for the fourth quarter decreased by approximately $100,000 primarily due to lower average debt levels. For the fourth quarter our average debt levels improved from a $147 million outstanding in fiscal 2007 to an average of a $142 million in fiscal 2008. We ended the quarter at $472.2 million in inventory, an $18.8 million increase versus a year ago due to higher investment in our basic categories and the timing of spring merchandise received somewhat offset by a decrease in fashion in clearance merchandise levels. We ended the year with a $100 million in total borrowings versus a $125.3 million at the end of last year. We currently have approximately $238 million of excess availability under our senior bank credit facility.

Capital expenditures for the year were approximately $29 million net of landlord allowances of approximately $9 million. Store related expenditures including store remodels and new store openings represented the majority of the capital spending. For fiscal 2009 we expect capital expenditures of approximately $50 to $55 million net of landlord allowances of approximately a $11 million. The increase in capital expenditures for fiscal 2009 is due to additional spending on store activity and investments in IT projects.

As we communicated in our earnings release issued earlier today we issued our fiscal 2009 guidance range for earnings of $0.70 to $0.85 per diluted share. This reflects our expectation for same-store sales growth of 1% to 3%, improvement in our gross margin rate and an improvement in SG&A expense as a percent of net sales.

Over the long term we will continue to execute under strategic initiatives to deliver sustainable sales and earnings growth. We expect same-store sales to increase in the range of 2% to 4% per year on average with improvements in both gross margin and SG&A as a percent of net sales. As we continue to open new stores we expect net square footage to increase by a low single digit percentage on an annual basis. We also plan to continue our current remodel program of approximately 25 to 30 stores annually. At this time Darrell and I would be happy to address any questions you may have.

Question-and-Answer Session

Operator

Your first question comes from Shaun Smolarz from Sidoti and Company.

Shaun Smolarz – Sidoti and Company

Hi, good afternoon everyone.

Darrell Webb

Hi

Shaun Smolarz – Sidoti and Company

Hi, my first question is how does the operating margin of the internet business compare with the retail stores?

Darrell Webb

The bottom line operating margin will help us out slightly. I mentioned in the prepared remarks that the gross margin is lower and the SG&A is actually better but incrementally there is a lot of fixed cost that we don’t need to incur because we can leverage the infrastructure we have here, so we expected to help our operating margin.

Shaun Smolarz – Sidoti and Company

That’s the internet business is accretive to the operating margin.

Darrell Webb

Yes, as we said when we made the acquisition we expected it to be accretive in fiscal 2009 and as we have the year planned we still expect that.

Shaun Smolarz – Sidoti and Company

And on the gross margin line do you think that the internet business eventually can have gross margins that is equal to the retail stores?

Jim Kerr

We think we can improve the gross margin and we generate today on the internet business but based on the structure of that industry where you also have the shipping costs, I don’t anticipate that we will ever have internet business match the retail store gross margins.

Shaun Smolarz – Sidoti and Company

And could you elaborate on the spread between the gross margin levels?

Darrell Webb

We’re probably not going to get into the detail of that on an ongoing basis. At this point no, we are not going to talk about it.

Shaun Smolarz – Sidoti and Company

Okay and can you elaborate on how craft retailers have performed well in the past recessionary periods.

Darrell Webb

Actually Richardson has generated some reports on that performance and as I recall 2001 and 1991 were the last two years of recession that she references and actually in those two years retailers in the craft and sewing business had better same-store sales increase than the prior and the following years. So, clearly I am not suggesting that we are going to expect some big benefits from our recession, but I do think this industry as a segment of retail is a little bit insulated from the overall down turn compared to other retailers.

Shaun Smolarz – Sidoti and Company

And for the year end just ended did you have the operating cash flow and the total CapEx numbers?

Jim Kerr

CapEx was $29 million. I don’t have the operating cash flow in front of me.

Shaun Smolarz – Sidoti and Company

Okay and any guidance you can provide on interest expense for the current year?

Jim Kerr

Yeah, I mean we expect to see an improvement in interest expense. Keeping mind though will have outstanding a $100 million note for the year, those where up 7.5%. We have amortization of our original facility cost, we have fees related to unused portion of our line and we will have borrowings when we hit our peak inventory levels. So we expect some level of improvement on interest expense that I wouldn’t call significant.

Shaun Smolarz – Sidoti and Company

Then my last question for now is it seems fairly optimistic about the current year despite the tougher retail and economic environments. Is this level of confidence equal in both the first and second half of the year?

Jim Kerr

It’s roughly comparable between those two halves yes.

Shaun Smolarz – Sidoti and Company

Alright, thank you very much.

Jim Kerr

Thanks Shaun.

Operator

Your next question comes from Ralph Jean from Wachovia.

Ralph Jean - Wachovia

Great thanks, couple of questions. One; are there any other categories that are emerging and showing some strength that could lead to some kind of a tail win for the sector or we still kind of looking for that.

Darrell Webb

Not enough for those categories right now Ralph. The one that does continue to do well for us is the craft textiles. I think it’s a combination of people wanting to express a little creativity on their closing as well as may be some influence from the green movement that the people trying to retain, reuse, recycle their payroll.

Ralph Jean – Wachovia

And then you talked about selling being up 10% seems to a sales basis, was that geographically isolated to certain region was it pretty much across the chain?

Darrell Webb

We had a great selling business across the chain but you have heard us talk about in the past some of the Wal-Mart stores that remove fabric. Certainly the 173 stores that we had within 10 miles of a Wal-Mart to remove fabric did have better performance than the overall chain.

Ralph Jean – Wachovia

And then lastly just Hancock putting up a pretty disappointing same store sales number for their December quarter, yours was on a slightly different quarter. You said your non-selling same store sales were down about 3.3%. I mean that’s a big difference between what Hancock reported. Will you, would you say you are more promotional or they chosen not to participating in promotions or how would you characterize the environment in the dispirit results.

Darrell Webb

I wouldn’t say we were more promotional I believe they made a commitment to increase their buy into the seasonal business where we were going the other direction. So we are a bit more conservative on our seasonal purchases which worked out well for us given that was the weakest segment in the fourth quarter.

Ralph Jean – Wachovia

Okay, thank you.

Darrell Webb

Thank you.

Operator

Your next question comes from [Kerry Martinson] from Deutsche Bank.

Kerry Martinson - Deutsche Bank

Those are the guidance here for the upcoming year. I mean what’s kind of baked into that in terms of your outlook for the consumer and the economy.

Darrell Webb

We tried to take a relatively conservative approach one that we thought we could realistically achieve not counting on the economy getting significantly better.

Kerry Martinson - Deutsche Bank

Okay, and in terms of the competitive outlook in your expectations here the competition kind of remains the same or intensifies?

Darrell Webb

We think that competition remains basically the same on the craft business. We do anticipate that the Wal-Mart stores will continue to withdraw from the fabric business and roughly the same number of stores that they pulled out of last year. So, we will get that tail win.

Kerry Martinson - Deutsche Bank

And if I understood you correctly that the non-selling categories were down 3% overall on a comp basis for the quarter, but we saw slight positives in the core craft categories and core party categories correct?

Darrell Webb

That’s correct.

Kerry Martinson - Deutsche Bank

So, other than seasonal is there anything that kind of really stuck out as being software during this period.

Darrell Webb

Floral which -- the seasonal component of floral as well as the regular holidays seasonal categories were both soft.

Kerry Martinson - Deutsche Bank

Okay and in terms of the higher average ticket than for large format stores. I guess which trend of reason that we are seeing declines in traffic correct?

Jim Kerr

It’s for the full year traffic in the large format stores was actually up slightly. Part of that is attributive to the increased marketing efforts being in the newspaper all 52 weeks of the year but during the fourth quarter I’d say traffic is basically flat.

Kerry Martinson - Deutsche Bank

And in terms of the -- just in terms of the short-term outlook -- I know a lot of retailers have talked how the consumer confidence has been off. February in particular was a difficult month with weather shutting down some stores and the consumer pulling back. I mean is that something that you guys have seen as well?

Jim Kerr

As a rule we don’t comment on our comps or same store sales during a quarter but given kind of the economic conditions we will make an exception here and say that our comps do remain positives and we expect them to throughout the year.

Kerry Martinson - Deutsche Bank

Thank you very much guys.

Jim Kerr

You bet.

Operator

Your next question comes from Joan Storms from Wedbush Morgan.

Joan Storms - Wedbush Morgan

Hi, good afternoon, good quarter. A couple of questions here. On the remodels, you talked about, I guess remodeling a certain number but that you are going to accelerate some other remerchandising activities in the smaller-format stores. Could you expand on that a little bit?

Darrell Webb

Sure. In the second half of this past year, we surveyed all of our small-format stores to get a better sense of how space is being utilized and what we’ve learned from that process is that based on the reduction in seasonal inventory purchases and in clearance merchandize we had some underutilized footage in the stores. So by going out to those stores and resetting planograms we should be able to add in some cases 20, 40, even 60 feet of additional craft assortment into the small-format stores.

Joan Storms - Wedbush Morgan

And as far as new merchandizing initiatives for this year, is there anything like straight from significantly enhancing or reducing any categories in particular or adding new categories?

Darrell Webb

Nothing dramatic that we are prepared to talk about right, no.

Joan Storms - Wedbush Morgan

Okay, and what about marketing. Do you plan to have sort of a same number of inserts as we -- at least in the first half, first quarter and second quarter?

Darrell Webb

We plan to spend roughly the same amount on marketing this year, about 3.5% of sales. We will certainly do some refinements of the new marketing that we put in place last year but I'm not going to speak specifically to how many inserts we are doing.

Joan Storms - Wedbush Morgan

Okay. And then on the mix now and I’ve heard your comments when you talked about sort of some of the drivers for gross margin and SG&A and you had talked about new POS store systems workforce. Could you either repeat that or give us a little bit more detail?

Darrell Webb

Sure. So we are rolling out an entire suite of new applications for our stores beginning with the software that we used at the front end and in most of our stores there are also new hardware, new equipment, scanners and registers, also new receiving systems, new backend systems for inventory management, sales audits, human resource and workforce management which is the labor scheduling tool. So that entire suite of applications is currently being piloted in two stores and we will finish rolling that out to the rest of the chain, we call it by the middle of August.

Joan Storms - Wedbush Morgan

Okay. And that will be a double -- help both gross margin and SG&A?

Darrell Webb

Yes, it will.

Joan Storms - Wedbush Morgan

Okay, thank you.

Darrell Webb

You bet.

Operator

Your next question comes from Laura Richardson from BB&T.

Laura Richardson - BB&T

A couple of questions on guidance, Jim or Darrell, did you say what the tax rate should be next year and I think Jim you gave G&A but I missed that.

Jim Kerr

Tax rate I would use a similar rate to this year and we did give depreciation and amortization, we said it would be approximately $54 million.

Laura Richardson - BB&T

Okay, thanks. And then I want to ask a couple of questions about the Wal-Mart fabric withdrawal. I mean you guys know the stores, where you are getting the sales benefit from that. Wouldn’t the traffic be improving in those stores as much as the ticket as you are getting someone who would’ve gone to a Wal-Mart or a Hancock?

Darrell Webb

Our traffic trend in the small-format stores is a bit better than the large-format stores. So yes, I think that’s the answer. Those Wal-Mart withdrawals are sending more shoppers to those small-format stores.

Laura Richardson - BB&T

Okay. And did the piece of that accelerate at all as the year went on because it seemed like in the fourth quarter I heard more about the fabric benefit than I did earlier in the year.

Darrell Webb

No, if anything it decelerated because they were not remodeling as many stores in the fourth quarter.

Laura Richardson - BB&T

Okay. And did you say Darrell, you think that they are going to do roughly the same number in ’09?

Darrell Webb

Yes, that’s based on the field intelligence that we have coming back in from our district managers and people that are out there talking to folks in the field but yeah, that’s our expectation right now.

Laura Richardson - BB&T

So the same degree of overlap with you as far as you know?

Darrell Webb

That’s hard to say. We don’t have any specifics on that.

Laura Richardson - BB&T

Okay. And then just -- when you are getting the fabric benefit in these stores and maybe this is what the new software is going to help you with, I assume you have to [weef] up the labor or to service those customers for fabric.

Darrell Webb

Yes, it depends on the store and what the current level of sales volume and staffing levels are. So we are certainly watching that very closely.

Laura Richardson - BB&T

Okay. And then just the last question or two is Darrell, I thought I heard you addressing something that could end up being the long-term growth rate. You were talking about the 2% to 4% comp and low-single-digit square footage growth and was that how you were just envisioning 2009?

Darrell Webb

No. Jim covered that in his prepared remarks.

Laura Richardson - BB&T

Yeah.

Darrell Webb

We have been asked to provide something beyond one year look forward --

Laura Richardson - BB&T

Right, right.

Darrell Webb

We are committing to do so with this call. Unfortunately with the economic environment being what it is, it causes to be a little conservative with that direction but yes, 2% to 4% positive comps and continuing improvement in both gross margin and reduction in SG&A.

Laura Richardson - BB&T

Okay. And then the square footage I guess is the key thing we have been waiting for, for a while as you tested the store format and as you decide what you want to roll out with and when, any hints you can give us on that?

Darrell Webb

Yeah, Jim referenced growing at lower single-digit rates. I was thinking right now is that we would incrementally open an additional ten stores per year over the next few years. So our guidance this year is 12 to 15. We would hope to be looking at 22 to 25 next year and continue that kind of growth over the next few years.

Laura Richardson - BB&T

And size-wise are they all big?

Darrell Webb

Really what we’ve determined is that we can set everything we need in a 30,000 square foot store. So 30 and 25, that’s opposed to 35 and 25 would be our primary focus going forward and we also see an opportunity to open some smaller stores in the 20,000 square foot range in markets that don’t have a fabric store today, maybe why Wal-Mart has exited the business in a small community.

Laura Richardson - BB&T

Okay. And putting all that together, what does that get you roughly in terms of an earnings growth rate?

Jim Kerr

That surface we haven’t provided at this point. I mean we gave that general guidance on sales and then we expect to see SG&A improvement as well as gross margin improvement but at this point as Darrell said with some of the things going on in the economic environment, we didn’t want to get any more specific than that at the time being on the shares gain.

Laura Richardson - BB&T

Yeah. Okay, that’s fair. Thanks guys.

Operator

Your next question comes from Brad Leonard from BML Capital Management.

Brad Leonard - BML Capital Management

Hi. Thanks for taking my call. As far as the guidance for this coming year, it doesn’t look like there’s a whole lot between the -- at the low end there would be barely any improvement in operating margin and the high end maybe 350, 400 basis points. I guess when I go forward from there, talking about prior comments of getting back to the 6% level, what is the time frame you still think you can get there and what are your thoughts on that?

Darrell Webb

Again at this point we don’t want to speak to the time frame. We think the path to get in there is both on the margin and SG&A lines. We think we have opportunity in both of those. You mentioned net for fiscal year ’09, what leverage might look like, a lot of it will depend on this top line as we demonstrate it, if we can get 3% plus comps we can do pretty well on the SG&A leverage, at a 1% we will do what we can on the expense management side, we’ll get some additional leverage to the internet business. It will be tough to have significant improvement in SG&A if we don’t have the top line, so we are continuing to model that out and we’ll provide additional updates as we -- down the road.

Brad Leonard - BML Capital Management

Okay. I mean it just seems kind of conservative with what’s going on in the fabric business. I guess with the fabric comps being up 10, why were those so unusually strong in the fourth quarter?

Darrell Webb

I think one of the things that worked in our favor is the fleece business was extraordinarily strong and we had swaddled a bit the prior year in both, in the stocks and our assortment, so that helped a great deal. It’s a big category in the fourth quarter and we had very strong double digit comps.

Brad Leonard - BML Capital Management

And is that partially due to the benefit of the competitive landscape also?

Darrell Webb

I think it’s more fortunate that was -- but that was just the category that we had not managed particularly well the prior year and so I had a lot of ground to make up.

Brad Leonard - BML Capital Management

So on a go-forward basis you wouldn’t expect to see the disparity between the non-sewing and the sewing comps.

Darrell Webb

No, I think that disparity will compress going forward.

Brad Leonard - BML Capital Management

Okay. And you commented on year-to-date comps were positive. Are they positive for both selling and non-selling or do you want to get that specific.

Jim Kerr

Yeah, we want to get that specific at this point. As Darrell mentioned, we don’t even count that on it, but given what’s going on what’s going on in the environment, we saw that was important to say at this point that we are not positive.

Brad Leonard - BML Capital Management

Sure. Well, I guess and this is my last question. Last time the joint margins compressed and they really got back to the 5.5%, 6% level very quickly and it looks like now with selling at the top of the range at 40 basis points and puts you at like a 2.4% EBITDA or something. I mean that’s a long way away. I mean at what point -- what has to happen to make up that extra 350 basis points to get back to where you had liked to be or where you possibly could do or were.

Jim Kerr

When last time we had a downturn and then quickly got back to our historical margins, as you pointed out I think a couple of things happened. We had very strong comps the year after that which gave us a lot of leverage, plus the structure was different with the additional large format stores that we have now in some of the fixed expense structure. That’s a little bit different of a model. We need to continue to grow the top line and continue to get the bottom line leveraged. I think we have made comments before that we don’t see this being equipped one year turn around like we saw years ago. It will be more of a slow steady improvement, but when you look back at the Company’s history and like it sounds like you have there were a lot of ups and downs. I mean what we are committed to and what our plans are all built around are making this sustainable sales in earnings growth and not having those ups and downs.

Brad Leonard - BML Capital Management

Okay, thank you.

Darrell Webb

Thank you.

Operator

And your next question comes from Jeff Stein. Mr. Stein you have the floor.

Jeff Stein

Okay thank you. Looking at the -- your inventories, Jim you commented that you got more basic inventory and I am just wondering if your were to kind of normalize your receipt here on a year-over-year basis, where -- I mean where are your store-for-store inventories if you take away the fact that perhaps receipt flow, the time of your receipt flow is a little bit different.

James Kerr

We look at our store inventories, our large format stores are basically even year-over-year at the end of the year. Our small format store inventories are up slightly and part of that is the improvement in the in-stocks as well as we have expanded some of the craft assortments for example and the remodels that we have done. But we have also had a build in inventory in our distribution center. Again that was a plan build and we have referenced it on previous calls, our DC service level wasn’t where it needed to be and now we feel we have that DC service level to the point it should be and we won’t deliver that extra inventory to support that. We think it pays off in the long run.

Jeff Stein

Okay. And can you give us an estimate of what your store opening and closing costs might be this year compared to last?

Jim Kerr

It will be up. A couple of things I guess I should point out on that. We have the additional store openings, but keep in mind as we ramp back up on the new store openings; this year we have gifted the start we wanted and we don’t have as many openings as in the beginning of the year as we would normally. As we get into fiscal year 10 we’ll have more openings in the beginnings of the year and start to incur some of those pre-opening cost in this year. So when you factor in what you think that might give it’s not only the increase in openings this year but we will have to fund some of the pre-openings for next year’s stores. Also based on the accounting rolls we have to start charging -- expensing rent from the day we take possession and depending on the type of store it is whether it’s a turnkey or whether we are doing some constructions, it can be three or four months of rent expense that we need to incur that goes to our pre-opening and closing line as well.

Jeff Stein

So what is your best guess at this point; up, down or side ways?

Jim Kerr

It’s going to be up. If you -- that will be up about 40% I would say.

Jeff Stein

Okay and just kind of -- talk a little bit about -- again it seems to me your sales are positive, your comp store sales are positive, your looking for higher gross margin, your looking for expense leverage and even if you look at the low end of your range, if you get some -- any kind of gross margin improvement which I think you should get. If you continue to control your inventories you should have a favorable mix because your fabric margins are higher than your craft margins. It just seems to me you guys are being ultra conservative on your forecast and I’m just wondering is there anything you see other than your concerned about the environment or is there something we are missing from an investment or cost stand point that we haven’t talked about today.

Darrell Webb

Jeff I don’t disagree with anything you said. We just don’t have that crystal ball that tells us what the economy is going to do for this year and how bad it might get, so we have taken a fairly conservative, pragmatic approach to how we have planned expenses for the year and how we have provided guidance for the year.

Jeff Stein

Okay, so I presume you are planning expenses based upon a very conservative sales forecast, so just wondering what is the leverage point? Jim mentioned that at 3% you can get great leverage, do you get leverage at plus 1%?

Jim Kerr

In a normal year and plus 1% it would be tough to get leverage. We have referenced before that we need to be 2%, 2.5% to get leverage. The reason this year we maybe able to get leverage on a plus 1% would be we’ve got the internet business bringing additional top-line sales and not a lot of SG&A expense and we continue to work on our expense reduction initiatives. I think a lot of those were built into last year and a lot of those are behind us but as Darrell mentioned in his portion of the call, we continue to everyday work on ways to find SG&A savings and in particular find SG&A savings that don’t impact the customer.

Jeff Stein

Okay, final question. When Wal-Mart closes a store -- I’m sure you guys have taken a real hard look at this, what percent of those Wal-Mart sales based upon your best guess of what Wal-Mart is doing in those departments, are you capturing -- and the business your not getting, where is it going to? Is it just going away and the customer just gives up on sewing or is it going to a never capitalized Hancock or where is it going?

Darrell Webb

Jeff, we have had some what I would consider good estimates of what Wal-Mart’s total fabric business is, but we don’t have a good handle at all on what an individual store does in terms of fabric volume, so we have not done a comp analysis your asking about.

Jim Kerr

And I think until they get further along on the clothing, one main alternative for those customers is to go to other Wal-Mart’s in the area that sell fabric, so although we are still seeing a nice lift in our stores, clothing it’s still tough to interpret how much of that we are getting due to the fact that they are not closing market-by-market, they are closing store-by-store.

Jeff Stein

Got it and in those 170 plus locations where you do overlap, can you tell us roughly on a trailing 12 month basis, what the spread is in comps in those locations versus the nine overlap locations?

Darrell Webb

I don’t think we want to get to that level of detail. We did speak to the last quarter or maybe the quarter before on the call that based on our analysis that looked like we were getting a little more than a 100 basis points in total company seems to a sales improvement from the competitive closures or the fabric withdrawals.

Jeff Stein

And do you believe since you last made that disclosure that you are at least holding the line on that 100 basis points?

Darrell Webb

Yes, we do.

Jeff Stein

Okay great. Thank you.

Darrell Webb

Thank you.

Operator

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

Bill Armstrong - C. L. King & Associates

Good afternoon. Got a couple of questions. On the gross margin, on the dot-com site, it says lower than retail due to shipping cost. If we exclude shipping costs are the margins pretty much comparable or are there factors that might make them different.

Darrell Webb

There are other factors in there as well Bill. We sell a lot of high end items like Sewing Machines and art lights, those kinds of products make up a disproportionate percent of the mix and those tend to carry a lower gross margin.

Bill Armstrong - C. L. King & Associates

Okay so a different mix. So if your including dot-com for a full year this year, which would depress your restrain gross margin, your still looking for an overall increase in gross margin. How will you accomplish that?

Jim Kerr

Several ways, one is out clearance mark downs this year will be significantly less than they were a year ago when we were still getting our inventory positions right, cleaning up a lot of the old math residue, going though and resetting planograms to lower heights and so on, so that’s the big saving. Also making some big strides in our global sourcing one example of that would be the way we buy fabric. Today we buy fabric on very large roles that come is from overseas and then we send those to a third party that converts them into bolts. So it’s a -- that’s called a double enrolling process that cuts the fabric into smaller amounts and puts them onto a cardboard bolt that we sell in the store. This year we are changing that process, well we are having that activity done over seas in Asia, so about 70% of our volume this year will be double enrolled overseas and through that process we expect to save significantly on our fabric cost.

Bill Armstrong - C. L. King & Associates

Okay. CapEx budgets for ’08 is up a lot. Is this just from more stores or do you have another big projects on tab?

Jim Kerr

The IT spending is a big piece of that increase as well. As Darrell mentioned earlier all the projects that we are working on for the current year, obviously hardware, when you have as many stores as we do can add up, so the IT spend is a big piece of the increase.

Bill Armstrong - C. L. King & Associates

Okay inventory. I think you pretty much addressed that on a per square basis up about 6%. Sounds like its dot-com and additionally warehouse inventory. Is that -- are you comfortable with your inventory position at this point?

Jim Kerr

We are very comfortable with our inventory position. We’ve mentioned the increase in basics is big driver. dot-com is not a big piece of the increase, there was very little inventory there. We did mention earlier that our DC has an inventory increase which has improved our service levels and therefore improved our store in-stocks as well.

Bill Armstrong - C. L. King & Associates

Okay and well finally I just though back to Wal-Mart. Lets see, did I hear you say before that you expect roughly about the same number of Wal-Mart stores to exit fabrics this year versus last year.

Darrell Webb

That’s correct Bill yes.

Bill Armstrong - C. L. King & Associates

Is there anything that you’re hearing from Wal-Mart that indicates that or you’re just kind of sort of extrapolating?

Darrell Webb

Well, a little of both. We do hear some things from the field, the -- our folks in the field that have talked to some of their folks, we also hear from the vendor communities.

Bill Armstrong - C. L. King & Associates

Okay, so you fell pretty comfortable with that then?

Darrell Webb

Yeah comfortable as we can, yeah.

Bill Armstrong - C. L. King & Associates

Right, Right okay. I think that’s all I have thanks.

Darrell Webb

Great thank you.

Operator

Your next question comes from Laura Richardson with BB&T.

Laura Richardson - BB&T

Quick follow up. Jim I though I hear you say that the store opening and closing line and the income statement will be up to 40% in ’09 is that correct?

Jim Kerr

Yeah, Yeah.

Laura Richardson - BB&T

Okay thanks. If you want to elaborate that’s fine with me but I got what I needed.

Jim Kerr

What I was trying to explain earlier, not only do you have the increase in the number of openings but as we start getting into our normal real-estate cycle, preferably we open stores earlier in the year so we’ll start incurring some cost in fiscal year ’09 and this year for fiscal year ’10 opening. So it’s more than what you would map out to if you extrapolated the number of additional opening this year versus last year.

Laura Richardson - BB&T

Okay and to keep the square footage growth low single digits you are going to have some closings in there too I would assume.

Jim Kerr

Yes we put that in our release.

Laura Richardson - BB&T

Yeah okay, missed that. Thanks.

Jim Kerr

Okay

Operator

And your next question comes from Joan Storms with Wedbush Morgan.

Joan Storms - Wedbush Morgan

Hi, just a couple of quick follow-ups. Your in-stock levels, you’ve made some pretty significant improvement and I guess now at the DC as well. What further opportunities do you think you might have this year with that?

Darrell Webb

I think the DC service level that we are currently running which is north of 90%, we don’t see a lot of additional upside there. The opportunity we still have is refining our perpetual inventory accuracy at store level. So making sure that we are doing timely exception counts when see an out of stock in the store or an excess inventory quantity…

Joan Storms - Wedbush Morgan

The goal to be sort of more in the sort of the mid 90’s for the stores.

Darrell Webb

Mid to high 90’s yeah.

Joan Storms - Wedbush Morgan

Okay. And then last year you sort of, you changed up a little bit your reset activities and I guess the markdown came, so I went with that, will I have the similar pattern of this year and recognizing that you will not have -- you cleared a lot of it, so you have --

Darrell Webb

That’s correct on both counts. So the cadence of the markdowns will be very comparable to a year ago and we would have not expect the same magnitude of markdown given that we are not making such dramatic changes with our planograms this year.

Joan Storms - Wedbush Morgan

Okay, perfect. Thank you.

Darrell Webb

Thank you Joan.

Operator

Your next question comes from Doug Pardon with Brigade Capital.

Doug Pardon – Brigade Capital

Hi good afternoon. Just quickly on free cash flow, just looking at your guidance and the CapEx guidance that you gave and kind of backing into the -- using that tax rate and what your interest expense will be. If looks like you guys should generate maybe $20 million to $25 million of free cash flow. Just trying to understand a little bit about what your uses are, plans are for that and more specifically I guess in your bonds which traded a pretty healthy discount to par just given what’s going on in the markets right now. Is there any interest in may be buying some of those back.

Jim Kerr

At his point we haven’t made any decisions and our board hasn’t approved either a debt buy back or a stock buy back. It is something that we have had ongoing conversations with and we will continue to have conversations about, but at this point we don’t have any intention to do that.

Doug Pardon – Brigade Capital

Okay, but just that those kind of round numbers that I’m using that seems to make sense. You guys anticipate generating a fair amount of free cash flow this year.

Jim Kerr

Yeah as you look at it I mean our CapEx is about the same as our depreciation expense from the way your looking at it from an earnings stand point, make sense and the rest of the balance sheet, pretty much it should stay farley stable.

Doug Pardon – Brigade Capital

Okay great thank.

Jim Kerr

Thank you.

Operator

Your next question comes from Brad Leonard with BML Capital Management.

Brad Leonard - BML Capital Management

Hi, I may have missed this. What was the gross interest growth for this coming year if any?

Jim Kerr

It will be up slightly we didn’t give a square footage growth out for this year. What we said was we’ll have 12 to15 openings. They’ll average over less that 30,000 sqft and we said we’d have 25 closings and our closings typically are of the small format size.

Brad Leonard - BML Capital Management

And what will be a full year run rate of the internet biz.

Darrell Webb

We are not going to give that our specifically. We referenced it in the fourth quarter. It was 11.9 million. They get a little bit of a lift in the season but its fairly constant throughout the year, so you can get to a round number.

Brad Leonard - BML Capital Management

Okay, had it been your reference when you bought it. Something in that had -- I think you -- did you reference the full year when you made the purchase of --?

Darrell Webb

Yeah I think what it said it was they had done the year before and $30 some million, I can’t remember that exact number right now.

Brad Leonard - BML Capital Management

And it had been drawn at roughly 20% something like that.

Darrell Webb

If you take a longer term track record on it yeah.

Brad Leonard - BML Capital Management

Okay but it would less than that on a go forward basis probably.

Darrell Webb

We’ll see. There is a lot plans with things we want to do with it expanding the overall product assortment, integrating better with the store experience. So we are not to give our guidance where we expect it to be but we do expect to be able to grow sales in the internet business.

Brad Leonard - BML Capital Management

Okay and it’s not as seasonally as the rest of the business?

Darrell Webb

Not as much.

Brad Leonard - BML Capital Management

Okay alright. And then as far as on the comps in the leverage, on a three comp end what would you expect to be on the leverage SG&A, just round numbers here.

Jim Kerr

Yeah, we are not going to comment specifically to that. I -- this year we had significant SG&A leverage improvement on that type of increase. I wouldn’t expect it to be of that magnitude because as we’ve mentioned each quarter we’ve done a lot of things this year to reduce expenses, not just to leverage expenses and as time goes on those opportunities are going to become a little less, so we are not going to comment specifically on it.

Brad Leonard - BML Capital Management

Okay but it would less than -- this year what was it was a 140 basis points may be or something like that.

Jim Kerr

Right.

Darrell Webb

Yeah.

Brad Leonard - BML Capital Management

So its want be a great going forward even if you hit that three comp, but okay and now on the gross margins, is there a gross margin -- I know you give to the sales list on the closings of the Wal-Mart and Hancock, but is there a gross margin list, are you able to -- I mean with less competition to get a better margin on the product itself.

Darrell Webb

We haven’t really taken that approach but there is a little bit of a mix improvement because the fabric does carry a higher gross margin than the craft business.

Jim Kerr

And today we don’t have its own pricing ability either. I mean something down the road that could be an opportunity for us, not just for that situation but for other situations but today we don’t have its own pricing.

Brad Leonard - BML Capital Management

Okay great thanks guys.

Darrell Webb

Thank you.

Operator

Your last question comes from Bill Armstrong, CL King and Associates.

Bill Armstrong - C. L. King & Associates

Just a quick follow up Jim. Could you give us on average what it costs to open a store and to close a store on a per store basis?

Darrell Webb

On a -- you are looking for the investment or the P&L cost?

Bill Armstrong - C. L. King & Associates

The P&L cost.

Darrell Webb

On a large-format store, the pre-opening cost I’ll tell you about $170,000, $175,000 of pre-opening cost. Closing, I don’t have the number in front of me.

Bill Armstrong - C. L. King & Associates

I assume it’s less than, the cost, less to close a store than to open it.

Darrell Webb

Yeah, yeah.

Bill Armstrong - C. L. King & Associates

It’s like $100,000 maybe or even less than that?

Darrell Webb

Yes, a little less than that.

Bill Armstrong - C. L. King & Associates

Okay. Alright, thanks.

Darrell Webb

Thanks Bill.

Operator

There are no more questions in queue.

Darrell Webb

Okay. Well, we appreciate your interest in Jo-Ann Stores and look forward to touching base again after the first quarter-end. Thank you and have a good evening.

Operator

This concludes your conference call for today. You may now disconnect your lines.

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Source: Jo-Ann Stores F4Q08 (Qtr End 02/03/08) Earnings Call Transcript
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