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Cost Plus, Inc. (NASDAQ:CPWM)

Q4 2007 Earnings Call

March 19, 2008 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

Analysts

Lauren Levitan – Cowen and Company

Budd Bugatch – Raymond James

Kristine Koerber - JMP Securities

David Weiner – Deutsche Bank

Chris Vocalic (ph) - DA Davidson

Operator

Welcome to the fourth quarter 2007 Cost Plus earnings conference call. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to Mr. Barry Feld, CEO of Cost Plus. Please proceed.

Barry Feld

Thank you, operator. Good afternoon and thank you for joining us to discuss our fourth quarter and fiscal year 2007 results. With me for this conference call are Jane Baughman, Executive Vice President and Chief Financial Officer, and Tim Lester, Vice President, Controller and Principal Accounting Officer.

Following my opening remarks, Jane will discuss our financial results in detail, after which I will make some concluding remarks and then open up the call for questions-and-answers. But before beginning today's discussion, I'm going to ask Tim Lester to read the companies Safe Harbor Statement.

Tim Lester

Certain forward-looking statements regarding the company’s future performance and initiatives will be made during this conference call and will usually be proceeded by words such as believe, anticipate, project or expect. Any such forward looking statements are subject to known and unknown risks and uncertainties that could cause the actual results to differ materially from those 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, complications or delay in the store closing are store opening processes, increases in fuel and transportation costs, currency fluctuations, unseasonable weather, terrorist acts or our nation’s response thereto, a material unfavorable outcome with respect to litigation claims and assessments or 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 Feld

Thank you, Tim. Today I will provide a brief review of the fourth quarter and full year and outline the key initiatives and milestones for fiscal 2008. We recognized that our fourth quarter and full year 2007 financial results are complicated by certain accounting adjustments that are non-cash, non-recurring charges.

In today’s press release the company highlighted these adjustments and developed comparable non-GAAP income from operations and earnings per share numbers. We believe that the non-GAAP financial measures will allow analysts and investors to more accurately compare the company’s operating results quarter-over-quarter. My comments will reflect these adjustments.

The dedication and effort put forth by all of our employees since we began the turnaround in May of 2006 has restored the fundamentals of our business. Even in the midst of the weakening economy the company was able to reestablish the world market as the destination for unique, affordable and authentic products for home decorating and entertaining.

Several important financial milestones were achieved in the fourth quarter. Despite lower than expected results announced by many of our peers, we were able to improve our same store sales trend from the previous three quarters enrolled within our guidance. This is the second consecutive quarter the company has achieved the sales and earnings guidance.

Customer acceptance of our everyday value pricing strategy continued to gain traction during the quarter. Well, our merchants worked diligently with suppliers to provide a cost and good structure that would support in everyday low price strategy. The stores were to increase the units per transaction resulting in a higher spend for customer.

The company successfully launched several initiatives at the store level and in-store events to augment the natural increase in units per transaction generated by everyday value pricing. Additional new last minute gift programs and POS improvements to speed customers check out were made during the final weeks before Christmas. Although the average spent for customers increased it was not enough to offset the decline in customer traffic as the customer rolled over the prior year heavy promotional activity that included 40% off coupons.

Gross profit margins for the fourth quarter increased for the first time since 2004 as higher buyer margin and lower variable distribution expense more than offset the impact of fixed occupancy cost. Controlled purchasing and disciplined promotions of seasonal merchandize led the higher saturate from last year despite a highly promotional competitive environment. Excluding the impact of the asset impairment for the closing stores, SG&A expense increased as a percentage of sales for the quarter due to higher advertising expense than a year ago. Total advertising for the full year was flat for last year in dollars and percentage of sales.

In August of 2007, the company initiated its market specific tab advertising program and increased penetration in newer markets, we had previously abandoned advertising. This resulted in flat comps for the eastern region, which represents approximately half of our chain. Inventory per store declined for the second year in a row. Intense focus on supply chain and inventory management will continue to be at the forefront of our turnaround initiatives to increase cash flow, improve our in-stock position on core and advertise merchandize and shorten replenishment times to the stores.

Further reduction of base inventory levels will result in lower variable price and distribution expense. For the fourth quarter on a non-GAAP basis with comparable 13-week period, income from operations increased 25% and earnings per share increased 7% to $0.43 per fully diluted share versus $0.40 per share for the same period last year. This represents the first quarterly increase and earnings per share since we began our turnaround efforts.

The company produced $29 million in EBITDA during the quarter, which enabled us to completely pay down the balance on the revolving line of credit at the end of December. The company ended the year with $18 million outstanding in borrowings under its revolver mainly due to the timing of receipts related to an extremely early Easter and the opening of eight new stores in the first quarter.

The company’s working capital and revolving line of credit continues to provide ample liquidity for our seasonal borrowing needs. As previously announced in January, the company plans to complete the store closures related to exit in the eight media markets by the end of the first quarter.

In fiscal 2007, we reestablished our value proposition with our customers, improved buyer margin, reduced inventory levels, increased customer service, and improved the customer experience to better visual merchandizing and a clear and consistent advertising program.

In fiscal 2008, management remains committed to strengthening the fundamentals of our business model and increasing the average sales line per store to significantly improve the company’s financial results.

Specifically, in 2008 we will look to accomplish the following: complete the roll out of our remerchandising strategy across all categories of business and maintain a constant flow of newness. Maximize the effectiveness of our marketing dollars to increase brand awareness in the specific markets in which we operate. Drive increased traffics in more effective market specific advertising as well as customer and media events, which will include our 50th anniversary celebration. Build on the operational progress to further strengthen our California stores, the oldest and largest segment of the company, continue to improve labor productivity in the stores, conversion rate, customer service levels and our profitability.

Continue to increase margins to lower and cost of goods sold, constant editing of our assortments and controlling markdowns. Increase inventory terms by further optimizing base inventory levels in the stores and distribution centers to discipline purchasing and total receipt flow. Achieve pro-activity improvements in the supply team by capitalizing on the stock and distribution center expansion and limit capital spending to key projects that maximize profitability. By executing on these initiatives, I believe the company will substantially reduce its losses in fiscal 2008.

I will now turn the call over to Jane Baughman for her comments.

Jane Baughman

Thank you, Berry. Net sales for the fourth quarter was $380.2 million, a 4.2% decrease from the 14 week fourth quarter of fiscal 2006. On a comparable 13 week basis, net sales increased in the fourth quarter of 2007 by 1%, same store sales for the fourth quarter decreased 3.2% compared to a 3.9% decrease last year. Comparable customer accounts declined 7% as the company came up against heavy coupon activity that was not repeated this year. The company’s everyday value pricing strategy translated into higher units per transaction increasing the average ticket to $38.43 on increase of 4.2% over last year. The sales mix of home furnishings and consumables as a percentage of total net sales was 57% and 43% respectively for the fourth quarter in both 2006 and 2007.

Regionally, the California market continued to live the chain, but have progressively improved their trends from a year ago. Net sales for fiscal 2007 were $1.02 billion or 1.6% below fiscal 2006, a 53 week year, on a comparable 52 week basis net sales increased in fiscal 2007 by 0.4%. Same store sales decreased 5.4% compared to a 3.3% decrease in 2006, the mix of home furnishings and consumables to total net sales for the year was 61% and 39%, approximately the same percentage mix as the previous year.

We had a successful quarter of our holiday assortment in the fourth quarter, I would like to stress that we have maintained our commitments to end the practice of pack away and accomplish that again for all of our seasonal events including this most recent holiday season.

Growth profit rate for the quarter was 30.3% versus 29.4% last year. Buyer margins for the quarter was approximately 50 basis points higher, which again demonstrate customer acceptance of our everyday value pricing. However fourth quarter buyer margin was impacted by unfavorable exchange rate. Particularly, the Euro and Pound as much of our holiday consumable merchandize comes from Europe.

Our merchants are working hard to mitigate the impact on our cost of goods structure, but the company has anticipated a continuation of this trend in its fiscal 2008 guidance. Year-to-date gross margin of 28.1% is lower than the 28.9% experienced in 2006. Improvement in buyer margin is offset by higher fixed distribution and occupancy cost without the corresponding same store sales growth to absorb the investment.

We announced in our January 24th, press release that we would be exiting eight media markets in fiscal 2008, and we take a charge related to the write-down in assets associated with the store closures. Fourth quarter SG&A of $97 million includes a $2.3 million non-cash charge related to the write-down of property and equipment values of the affected stores. Without this non-cash item fourth quarter 2007 SG&A expense as a percent of sales was 24.9% compared to 24% last year.

An increase in advertising spend account for the 90 basis point difference as the company relied on the EDLT advertising rather than promotional discounting to drive more profitable sales during the critical holiday shopping season. Before the asset impairment discussed earlier SG&A expense in full year was 32% of sales, which is higher than the 30.6% experienced in 2006, primarily due to higher depreciation store pay rolls related to store growth. While there were quarterly timing differences versus last year, advertising expense year-over-year was flat.

Fourth quarter pre-opening expenses decreased over last year by $220,000, a portion of the fourth quarter pre-opening cost relate to stores scheduled to open in early fiscal 2008. We opened two new stores in the fourth quarter of 2007 versus opening four stores in the fourth quarter of 2006. Full year pre-opening expenses were $2.2 million lower than fiscal 2006, with a total of 15 new stores being opened in 2007 versus 24 new stores in 2006.

Net interest expense was $3.4 million and $2.1 million in the fourth quarter of fiscal 2007 and 2006 respectively. Year-to-date interest expense was $11.6 million versus $7.1 million. The interest expense is consistent with a higher debt levels required to fund operations during the turnaround as well as the distribution center capital leases.

Our initial effective tax rate for fiscal 2007 was 38.3% versus 38.5% last year. In the fourth quarter the company recorded a valuation allowance against this deferred tax assets of $20.1 million, this is a non-cash charge that met the prescribed criteria for taking an allowance under FAS-109. Discharge will be reversed for any unexpired deferred tax assets when the company reaches sustained profitability.

Net loss for the fourth quarter of fiscal 2007 was $12.5 million or $0.56 per fully diluted share compared to a net profit of $7.5 million or $0.34 per fully diluted share for the fourth quarter of fiscal 2006. Year-to-date the net loss of $55.5 million or $2.51 per share compared to a net loss of $22.5 million or $1.2 per share in the prior year. Removing the effect of the non-cash item, I’m referring to the tax allowance and the store closure asset impairment as well as the severance cost the fourth quarter of 2007 would have yielded a non-GAAP profit per share or $0.43, and a fiscal 2007 net loss of $1.52 per fully diluted share.

Total inventory increase $8.8 million to $272.9 million when compared with last year, average inventory per store decreased approximately 0.5% despite heavy receipts in January due to the early Easter season. The opening of eight new stores in the first quarter and the acceleration of outdoor (ph) financial receipts to support the post Easter business during April.

Accounts payable was $93.8 million versus $69.9 million last year reflecting the effective better terms with our vendors specifically our new buying agent in Asia and some timing factors. At the end of the fourth quarter, there was $18.1 million outstanding under the revolving line of credit, the increase use of the line with largely caused by the first quarter 2008 new store openings that were paid for in fiscal 2007 and the timing of the inventory investment discussed earlier.

Depreciation charges in the fourth quarter of 2007 were $9.2 million compared to $9.3 million for the same period last year. Capital investments in the fourth quarter of 2007 were $4.6 million, total capital spending on fiscal 2007 project was $27 million, which was about 10% below our plan due to cost reduction taken throughout the year. Approximately $10 million of the fiscal 2007 capital spending was for equipment related to the expansion of our stock and distribution center.

We began fiscal 2007 by having to discuss the restatement of previously published results, due to accounting errors and short comings and the ineffectiveness of our internal controls.

I wanted to take a few moments to ensure everyone that we have taken the necessary steps to address those issues. Our accounting and finance team has been strengthened and is fully set. We have enhanced our reconciliation procedure and related embedded system control. We have established a comprehensive set of policy and procedures and continue to cultivate a cultural of accountability throughout the organization. I’m confident these issues are now behind us.

In this afternoon’s press release we had issued our outlook for the first two quarters of fiscal 2008. The company expects to close the stores in the eight media markets we are exiting in the first quarter. At the time of the actual closure and in the guidance being provided, the effected stores will be classified as discontinued operations.

The company expects net sales from continuing operations for the first half in the range of $423 million to $438 million, based on same store sales in the range of negative 1.5% to positive 2%, and the opening of 14 new stores. We expect to close 16 of the 18 underperforming stores in the first half, as previously announced. 13 of these stores are in the eight media markets we are exiting and will be considered discontinued operations. Last year, the company opened 10 new stores and closed one in the first half.

Depreciation expense for the first half is projected to be $18 million approximately $9 million in each quarter. Interest expense is projected to be approximately $3 million in the first quarter, and approximately $4 million in the second quarter. Store pre-opening expense is expected to be approximately $2 million in the first quarter, and $1.3 million in the second quarter.

For the first half of fiscal 2008, the company is projecting a loss from continuing operations in the range of $35 to $40 million, compared with a $41 million loss from continuing operations in the first half of fiscal 2007.

Related to the deferred tax valuation allowance taken in the fourth quarter of fiscal 2007, the company will continue to record an allowance against the tax benefit associated with the projective loss in the first half of fiscal 2008. However, since the company doesn’t file consolidated returns in off date, some state income tax will be paid based on local results. Therefore, we are estimating an effective tax rate of 1.7% for the first half.

First half capital spending on fiscal 2008 project is expected to be approximately $9 million, which is primarily for new stores. I would now like to turn the call back over Barry for his concluding remarks.

Barry Feld

Thank you, Jane. We have been intensely working at this turnaround for almost two years we have faced some challenging economics headwinds. During the first year we diagnosed the business, developed the turnaround strategy, gleaned (ph) up the inventory, made key management changes and shutdown non core business. Importantly at end of the first year we recruited our Chief Merchandizing Officer, George Whitney. During the second year, we rolled out new merchandize in the stores, we wrapped our advertising strategy, replaced our CFO of Corporate Overhead and exited eight under performing media market.

The benefits from all these initiatives will be reflected in our financial results for fiscal 2008. We’ve already seen early evidence with the positive 2.7% comp in February, this is the first time we have achieved chain wide positive customer count since fiscal 2003.

In closing, I remain confident that the company is positioned to complete the turnaround and return to positive comparable sales in EBITDA during fiscal 2008, despite the challenging economic environment. We have great confidence that all of our initiatives for fiscal 2008 are realistic and achievable. Results have shown that our brand remains relevant and meaningful to our customer.

Today world market is the only destination, where customer can fulfill all of his/her home entertaining and home decorating needs with unique affordable and authentic merchandize from over 50 countries under one roof.

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

Question-and-Answer Session

Operator

(Operator Instructions). And your first question comes from the line of Lauren Levitan from Cowen and Company. Please proceed.

Lauren Levitan – Cowen and Company

Thanks. Good afternoon.

Barry Feld

Hi, Lauren. How are you?

Lauren Levitan – Cowen and Company

I am well. Thank you, Barry. I am wondering if you and Jane can help us understand some of the assumptions embedded in your guidance, if when we hear you talking about positive comps in February and you are providing guidance on a continuing operating basis, which suggest us that you are excluding those stores at present to the greatest drag on operating profitability. Could you just give us some inside as to what the drivers either on the expense side or the expected margin side are that would result in the loss from continued operations being roughly flat to what you did last year before all embedded and completed and related to that, I’m just curious if the promotional cadence for the first half of this year is generally similar to last year? In other words, the elimination of the 40 off coupons, I thought that would -- now we would be looking at ample [inaudible] but correct me if I am wrong on that? Thank you.

Barry Feld

Sure. Let me start with the top line, the first thing that we have done is if you look at the last two quarters where we have been able to achieve our guidance. We’re putting realistic but conservative assessments against both the top line and cost side of the business. On the top line, you know, we’re into some degree and uncharged territory with this dramatic early Easter shift. And with the dramatic early Easter shift we have taken a relatively conservative approach to our comp basically our comp guidance out there, we’re trying to give every body an accurate view of our thinking and even within an almost positive three comp in February, I don’t think we know what the traffic will look like when we come out of the Easter holiday after Sunday.

Additionally, we’ve created a separate program for April to individually launch our outdoor program for the spring, which typically has been coupled with Easter in year’s past because Easter would be obviously launched in April. So, we’ve taken a conservative approach to the top line and to the guidance, that’s appropriately – I will have Jane talk about the cost side of the assumptions.

Jane Baughman

Sure. Lauren I want to make sure first thing you understand that the prior year numbers are already restated and that were likely to exclude the discontinued operation. So, I don’t have the drag in the prior year comparison. So, I’m apple-to-apple continuing operation, in terms of improvement year-over-year the company is anticipating improvement in gross profit for the first half approximately the same percentage on SG&A, and then we have obviously higher interest expense associated with the borrowings under the facility.

Lauren Levitan – Cowen and Company

Related to that Jane, are you going to give us restated quarterly financials that exclude those eight markets for ’07 so we have a basis of comparison because we talk about improvement I assume you mean on the comparable basis?

Jane Baughman

That’s correct. Yes we can provide that data I’m not -- well we will think about the best way to actually get that out of the group.

Lauren Levitan – Cowen and Company

Okay. And then one last clarification, Barry are we pass the point of the heavy discounting and couponing and should we assume it promotional cadence, it’s pretty consistent?

Barry Feld

That’s correct. We are now comparing an everyday low price strategy to an everyday low price strategy. So, the positive comp in February was driven by combination of improved units per transaction and positive customer traffic as I mentioned in my earlier comments for the first time in many years.

Lauren Levitan – Cowen and Company

Okay. But, the overall Q1 top line expectations are related to the calendar messing things up in your assumption is that March and April on a combined basis, won’t live up to March and April a year ago given the earlier Easter?

Barry Feld

That’s correct.

Lauren Levitan – Cowen and Company

Okay. Thank you and good luck.

Barry Feld

Thank you, Lauren.

Operator

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

Budd Bugatch – Raymond James

Good afternoon, Barry. How are you?

Barry Feld

Hi Budd, good, how are you?

Budd Bugatch – Raymond James

You have confused me a bit Jane, so I want to make sure, I understand the $41 million comparison I would take it that as a pre-tax or loss from continuing operations; is that correct from last year?

Jane Baughman

That’s correct.

Budd Bugatch – Raymond James

And, so there is the loss of that was on the Q is that was followed was 48 million pre-tax, so that suggest that the 13 stores had a drag of $7 million pre-tax loss?

Jane Baughman

No, no the income from operations is before interest expense. It’s not pre-tax.

Budd Bugatch – Raymond James

Alright, okay. $43 million then. Okay. So, that’s not a loss from continuing operations does that what include tax interest? Okay, so, it’s the operating loss before -- ?

Jane Baughman

That’s correct.

Budd Bugatch – Raymond James

Okay. I got you. Not a problem. So, the difference is a couple of million and you say, you are not going to provide restated financials because if you are comparing to that and going to classify those with these stocks then we need some way to build the model?

Jane Baughman

Correct. We will provide that information Budd, after the call we will figure out the best way to communicate that to the growth.

Budd Bugatch – Raymond James

My next question goes to Barry to the balance sheet, I’m a little concerned about that, it looks to me that you’ve got you’ve made a wonderful accounts payable setup terms with your vendors to give you a $23 million improvement or reliance on them, why don’t we look like to the year, why don’t we got to peak, are we going to be able to keep that kind of days outstanding in payables to the entire year or is it going to?

Barry Feld

If you go back Budd, if you remember we set on a very aggressive path at the beginning of the turnaround to consolidate vendor relationships to change agent relationships and to really position ourselves to be able to launch an everyday low price strategy at the retail level, part and parcel to that was cash conservation as it relates to improving terms, improving inventory terms while extending vendor terms. And so, what you are seeing in the accounts payable aside from the timing of bringing goods and materially Easter you are seeing the benefits of having those terms now with the suppliers but, also with our key agents that we put into place over the last 24 months. And that -- that’s very sustainable for us.

Budd Bugatch – Raymond James

Okay. So, you are going to be more heavily reliance on your vendors for financing as I get the program here. Where do you think the debt peaks and refresh my memory again as to the debt capacity and how that debt is now structured?

Jane Baughman

Well, we have a $200 million asset-based facility. Last year, we peaked in November which is typically when we peak and last year we picked at 120 million. And so bowling forearm one would anticipate that our peak this year will in November, but we are not going to speculate on what that number would be at this juncture.

Budd Bugatch – Raymond James

Okay but is it going to be higher or lower than last year?

Jane Baughman

After delivery, I’m going to speculate.

Budd Bugatch – Raymond James

I’ll try -- I’ll try to get you there. Talk to me a little bit more, little slower if you would for this aged brain, on average ticket and conversion rate, did you give us any disclosure about what was going in the quarter regarding that and how it looks so far in February if you got positive comps?

Jane Baughman

We did, the average ticket was up in the fourth quarter 4.2% up to $38.43 and as Barry alluded to in February. We have a positive comp that’s driven by both positive customer count and increase in the average ticket. The increase in the average ticket obviously is being driven by higher unit per transaction.

Barry Feld

And we don’t have disclosed conversion rates, but just to reinforce something Jane said, our average ticket is really being driven by the units per transaction improvements that we continue to see as you know one of the center piece of the everyday low price strategy that we’ve been implementing over the last 24 months is to reduce average price points, so we’re today 85% of our excuse in the stores are under $20 and in fact 60% of our excuse actually under $10 and so what’s happening now is that customers come back to our stores, they can come in for these affordable home entertaining and various products at value price points that we were unable to offer 24 months ago and that sign should really show itself quite aggressively particularly in the soft economy where people can coming in and for under $20, you know, quite a meaningful retail experience and that’s really starting to show up in benefiting our overall average spend for customer but its in the form of selling more units.

Budd Bugatch – Raymond James

So, it’s UPT that’s moving up, can you give us a clarification of what UPT is up in percentage terms year-over-year?

Jane Baughman

It’s up in the mid single digit.

Operator

Your next question comes from the line of Kristine Koerber from JMP Securities.

Kristine Koerber - JMP Securities

Yeah, hi. Couple of questions and first of all talks about California market still wagging but has improved, how much are we waiting the lag now, and how much improvement have you seen?

Barry Feld

Well, the confronting fact is that the California markets are also experiencing positive customer increases for the first time in quite a long time over notable level as the chain the in that itself, there are pockets of California that are you know, having great difficulty on the, you know, in terms of the current economic housing situation in markets that you read about like stock in the Riverside California, but the good news is most of our stores are in very core of urban centers whether it's San Francisco or Los Angeles or San Diego. And we are really starting to benefit from the fact that we have repositioned on a value basis for our product categories in those markets and they seem to be holding quite well, and on average they are running about 2% that they were at this time last year.

Kristine Koerber - JMP Securities

Okay, great. That’s helpful. And then you know, Barry, it seems like you have lot initiatives on the plate for ’08 I mean after this year are we pretty much done I mean as far as transitioning of the business or is this still couple of more years?

Barry Feld

Well no there is one more category within our stores I don’t want to get into the details of the merchandising changes, but there is one more category that would be more robust and it is today as we move through the latter part of the first half of the year, but we are really on our way in terms of our remerchandising strategy, our price win initiatives to look and fill the stores, from this point it will be improving evolving the base line platform that we put in place from the merchandising strategy standpoint, and that’s why we believe that not only are we at the point in the turn around we will be able to show continue the progress both on the way we build cash and you know, our same store sales improvement. So, we feel we are on our way and what I would say at this point if you spend time in the stores, you will just see improvements that are continuing to be quite noticeable but they are evolving improvements over a foundation that we spent the last two years putting in place.

Kristine Koerber - JMP Securities

Alright. Thank you.

Operator

Your next question comes from the line of Dave Weiner from Deutsche Bank.

David Weiner – Deutsche Bank

Yeah, hi.

Barry Feld

Hi, Dave.

David Weiner – Deutsche Bank

Hi, how are you? Just sounds like a lot of questions have been answered but I will ask on inventories you know, looks like the trends there on productivity basis preferred per store definitely getting better, can you give a little bit of insight as to what the plan might be if not for the full year, you have been commenting on the full year release may be the first couple of quarters in terms of let’s say inventory preferred, what you think the trends are going to be?

Barry Feld

What I would state is that our plan is again on the first quarter basis we believe this will be the third generally reduce store level inventories. We are still quite skew intensive as you know average stores has moved up 20,000 skews, there are strategic imperative this year as part of our plan to continue to improve inventory terms, because new net goes to the four of our new concept and our EDLP strategy and so we are not get into inventory levels on a you know, per foot per store basis and I can tell you that, in aggregate over the year the plan is to further reduce inventory levels on the per store basis.

David Weiner – Deutsche Bank

Okay. That’s helpful and so thank you.

Barry Feld

Thanks.

Operator

(Operator Instructions) Your next question comes from the line of Chris Vocalic (ph) from DA Davidson.

Chris Vocalic - DA Davidson

Good afternoon everyone.

Barry Feld

Hi, Chirsto.

Chris Vocalic - DA Davidson

Hi, sorry we had a slight technical difficulty so I apologize I don’t think this question has been asked. If you would just clarify the store closures for the full year is it 18 total, 18 are under performing other 18 plus some additional store closures?

Jane Baughman

No, there is a total of 18 closures, that we announced in January, which is the underperforming market or the under performing stores, of those 18, 13 are in the eight media markets that we are completely exiting. The remaining five are in markets where the company will continue to do business. So therefore, they will not be considered discontinued operation.

Chris Vocalic - DA Davidson

Okay. But all 18 you said by the end of Q1?

Jane Baughman

No. The 13 by the end of Q1.

Chris Vocalic - DA Davidson

Okay.

Jane Baughman

16 by the end of Q2. And then the remaining two by the end of the year.

Chris Vocalic - DA Davidson

Wow, excellent thank you, great. And then just looking at are you still looking at for ’08. on a go forward basis in the past you talked about your comp lever point still around positive 1% or 2% is that still make sense with your business model?

Jane Baughman

It’s still on the low single digit.

Barry Feld

Yes. That is our leverage point, as we start getting sustainable low single digit positive comps. It really starts creating particular on EBITDA and operating income bases stability for us and our objective this year. This is the first year where we have real control of our CapEx spending because as you know, when you came in to the turnaround we inherited a fairly rapid store expansion across the country and a stock and distribution center expansion that’s behind us. We have now really been able to slow the store opening programs, so that as you look at ’09, where we have one signed least. And so that’s really going to enable us to keep tight control over the CapEx on a go forward basis and so this year our plan is to add a minimum generated enough EBITDA or operating income to comfortably support interest expense and CapEx expenditures and then as we move into ’09 ‘10 to be always start building cash again.

Chris Vocalic - DA Davidson

Okay great, that’s helpful and then just I guess a question this is the wine department in Q4, you made a fair amount of changes in that and you know hold it’s line of the people running it, how is that work for you compare to the prior year why not it was the bit of a drag on Q4 last year?

Barry Feld

Well if you look our overall consumable business I am not, I am not going to break it out by just wine just simply because the competitive environment is changed so dramatically between Tesco entering markets and Peer 1 is going and experimenting with (inaudible) just talk about consumables in general we continued to see very strong improvement in our overall consumables business. We continued to evolve that you going to stores up to the wine business continuing to evolve, the gourmet food business evolving quiet dramatically. As well as we’ve launched we are now at a place where I think our private label programs become very robust. So, what I would just tell you is the entire bucket of consumables as it relates to our long-term strategy is really taking hold for us.

Chris Vocalic - DA Davidson

Okay great and then you guys I am just in shifting in your marketing spend for Q4 and based on the feedback I know you are coming back traffic being down but one of the strategies was to at least to improve traffic level, so does it make sense for you to repeat the similar strategy for Q4 this year, how successful was that implementation?

Barry Feld

We feel very good about the implementation remember it was in everyday pricing structure against very dramatic promotional and coupon activity the year before. So, we did not have expectations that we would be able to produce a positive comp because we knew the food traffic hurdles would just be so strong. In Q1, we feel that our advertising program is sophisticated spending years it’s really market specific we have media vehicles now that were very comfortable with, and we believe all continue to see the results we experienced in February, which is this continued improvement in customer traffic trends across all of our markets.

Chris Vocalic - DA Davidson

Okay great and then finally I know this is through question of the season really for both you and Jane, when you looked at first half guidance and as you are starting to formula your second half what are you thinking about the as far as your macro assumptions out there?

Barry Feld

Well in terms and in now I’m going to speak for Jane, I will put on when I am done, but look the macros are tough and nobody can keep themselves that while we feel very fortunate that our macros is going to top two years ago, and so we knew as being a middle of the road you know high price medium to furniture store, we would not be existence today if you know really develop a robust strategy to really completely change the way consumer perceive our value offering in our stores. And so we believe, we are very well positioned to be able to successfully operate in this type of climate when you look at our price point, when you look at the fact that consumers are to be they are not as mobiles they were. They are not going to be moving out of their houses, they are going to look for value alternatives to home decorating. They are not going to be eating out as much, they are going to look for very sophisticated value based alternatives to do home entertaining and we are uniquely and well position to play right in to that market. So, nobody wants to see the economy movement and direction that it has been moving on it’s own and owned charted territory, which is why we chose not to give full year guidance at this juncture, but the reality is we feel that we are very, very well positioned in our key markets to write through this now, and actually take market share as other strong value players will be able to in this kind of environment.

Jane Baughman

I am not sure I can add anything to that.

Chris Vocalic - DA Davidson

Okay great thanks and good luck.

Barry Feld

Okay thank you very much.

Operator

There are no further questions in the queue; I would now like to turn the call back over to Barry Feld for closing remarks.

Barry Feld

Thank you everybody for your participation today, we know it’s a tough retail environment out there, and we feel very good about our positioning. We are glad we embarked on our turnaround two years ago, and that way now on the upswing.

Operator, we believe we may actually have one more question if you would just check, I don’t to leave anybody, who is trying queue in unable to ask a question. Will you just check for me on that?

Operator

Just a moment.

Barry Feld

Thank you.

Operator

There are no participants.

Barry Feld

Okay thank you operator. We just thought somebody else was trying to patch in. So anyway to conclude we are going to continue to remain focus on these initiatives. We know there is a lot of -- when you a go through a turnaround such as the valuation allowance -- there is a lot of complex non-cash accounting issues you have to work through. We will help all of our analysts who follow us work through so they can get their models. We calibrated for these adjustments and we will look forward to communicating to you with our Q1 results as we move to this fiscal year. Thank you again.

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Source: Cost Plus, Inc. Q4 2007 Earnings Call Transcript
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