A.C. Moore Arts & Crafts, Inc. Q1 2008 Earnings Call Transcript

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 |  About: A.C. Moore Arts & Crafts, Inc. (ACMR)
by: SA Transcripts

A.C. Moore Arts & Crafts, Inc. (NASDAQ:ACMR)

Q1 2008 Earnings Call

May 12, 2008 8:30 am ET

Executives

Rick A. Lepley - President, Chief Executive Officer, Director

Marc D. Katz - Chief Financial Officer, Executive Vice President

Joseph A. Jeffries - Executive Vice President of Operations Craig R. Davis - Senior Vice President of Merchandising and Marketing

Analysts

Karru Martinson - Deutsche Bank Securities

William Armstrong of C.L. King & Associates, Inc.

Ralph Jean - Wachovia Capital Markets

Seth Basham - Credit Suisse

Gary Balter - Credit Suisse

Gregory J. McKinley - Dougherty & Company, LLC

Holly Guthrie - Janney Montgomery Scott, LLC

Jack Balos - Midwood Research

Michael Corelli - Barry Vogel & Associates

Laura Richardson - BB&T Capital Markets

Operator

Good morning, my name is Maryanne and I will be your conference operator today. At this time I would like to welcome everyone to the A.C. Moore First Quarter 2008 Earnings Conference Call. (Operator Instructions)

Rick Lepley

Before we get started today, I’d like to review with you our Safe Harbor Statement. Today’s discussion may contain forward-looking statements as such term is defined in the Securities Exchange Act of 1934 and the regulations there under including without limitation statements as to the company’s financial condition, results of operations, liquidity and capital resources and statements as to managements beliefs expectations, or opinions.

Such forward-looking statements are subject to risks and uncertainties and may be affected by various factors which may cause actual results to differ materially from those in forward-looking statements.

Certain of these risks, uncertainties and other factors as and when applicable, are discussed in the companies filings with the Securities and Exchange Commission, including its most recent Form 10-K, a copy of which may be obtained from the company upon request and without charge.

This morning I am joined by Marc Katz our Chief Financial Officer and Joe Jeffries our Executive Vice President of Operations; Craig Davis our Senior Vice President of Marketing and Merchandising is also here.

Marc will talk to you about our financial performance for the quarter and Joe will talk about our operational performance, then Craig will have a few remarks about merchandising and marketing. Before they do that, I’d like to take a few minutes to touch upon some of the more important themes or issues with which we’ve been dealing during the first part of 2008.

As we indicated on our last call, just six or seven weeks ago, it’s our opinion that the overall negative macro environment we experienced in the fourth quarter continued into the first quarter of 2008. We also indicated on numerous calls that other issues related to our efforts at right sizing the company were having an adverse affect on our comp sales performance. One of those issues, for example, was our out of stock position. At the time of the last call it was not very good, due to a number of factors which we explained and to which Joe will devote some attention in his remarks.

The overall weakness in consumer spending and the pace of our activities related to right sizing were major contributory factors to our comps sales decline in the first quarter.

Our out of stock condition is much improved and in fact is much less of an issue. Joe and his team did a great job of reducing the outs and, I should add, they did it without increasing our inventories on a per store basis: a testament to the use and value of the perpetual inventory tools we developed during the past few months.

As a result of these efforts, in combination with improved advertising content, reach, and frequency, our comps through the first 40 days of this quarter are down about half of the decline we recorded in the first quarter. Remember, our quarter ends on March 31.

We have now fully cycled the initial changes we brought about right sizing the company a year ago. We are hopeful that the beginning of Q2 was our inflection point and that we can sustain improved comps through out the balance of this quarter.

Of course our performance for the first half of Q2 may not be indicative of what the entire quarter will yield, but that’s where we are at the moment.

During the first quarter we opened four new stores, bringing our total store count to 136 at the end of the quarter. Our store-opening schedule currently calls for three more stores to be opened and for one relocation during the second quarter and one of those stores has already opened. All of these openings are what we term stage 4 Nevada class stores and bring our total to 15 Nevada operating models of varying sizes and configurations. Each group of openings is more advanced than the last as we improve departmental adjacencies, section counts, SKU levels, etc…

With each new class of Nevada that we open, we expect the performance to improve over the earliest prototypes that served to foster our learning curve. We’ve learned a lot from those early stores that we think will help us going forward. By the end of Q3 we will have settled on final, fully optimized prototype and after concluding the fourth quarter all Nevada variance will be standardized to the final format. Assuming we have the results we expect, we will then focus on testing some remodels early next year.

During the first quarter we also opened four new framing operations, bringing our total to 113 operating units. This business continued to perform to expectation through out the quarter. All of these stores are equipped with visualization technology and digital support framing software. In many operations oversize flat screen digital monitors have been added and we now believe we are the largest single user of this type of custom framing technology in the United States.

During the first quarter our web business continued to grow at an acceptable rate. While the numbers continued to be small they are meeting our expectations and we expect the increases from quarter-to-quarter to be gradual, but steady.

During the first quarter we completed and reviewed an in depth study of our supply chain focused on helping us understand the correct action to take in expanding our warehousing capability. Two distinct options are available to us: one is to build a second warehouse in order to supply our growth in store count, the other option provides for an expansion of a current facility here in New Jersey. A final decision will likely be reached some time during this quarter.

While we realize the current economic and credit climate may not seem ideal for making capital expenditures such as this, finding a permanent solution to our warehousing space constraint is necessary and may actually be less expensive than the temporary solution we’ve been utilizing for the last year. The temporary solution involves leasing 120,000 square feet about eight miles away from our current distribution center, requiring its own team of associates and additional freight costs.

Our perpetual inventory system is in place and we continue to tweak it. As our store and merchandising associates become more comfortable and more familiar with it, we are increasing our reliance on the information provided about our store inventories that we never had available to us before. The best example is the one I already mentioned about utilizing it to greatly reduce our out of stocks without increasing our overall inventories.

We’re pleased with our progress on our overall systems initiatives. Last call we told you about a series of special requests that Joe made of our systems teams after he got here. Most of those changes have now been implemented. We’re still using a phased approach through out 2008 for our new merchandising suite, followed by full replenishment in the second half of 2009. While we anticipate realizing some benefit from the automated replenishment system in the second half of 2009, the majority of the benefit is likely to be realized in 2010.

As I indicated earlier, Joe Jeffries is here and he will have some comments about our business during the quarter, but first I’d like to turn the call over to Marc Katz, who will comment on our financial performance. I’ll have some additional comments before we open it for questions.

Marc Katz 

Sales for the quarter were $126.5 million, a decrease of 6.5% over sales of $135.4 million during the first quarter of last year. Same store sales decreased 11.6%.

Gross margin for the quarter was 42.8%, up 190 basis points from 2007. The drivers of the gross margin increase were similar to the ones that drove last year’s improvement retail price adjustments as a result of on going price elasticity studies, more favorable vendor pricing, and a higher initial mark up on imports.

SG&A expenses were 43.9% of sales, 370 basis points over last year. Costs related to the inventory restatement performed during the quarter represented a 30 basis point increase; store payroll represented a 30 basis point increase; and advertising costs represented a 50 basis point increase. The majority of the remainder was due to the deleveraging of occupancy expenses against the decline in comparable store sales.

Pre-opening costs for the four stores opened during the quarter were $628,000. Last year pre-opening costs for the one store that opened were $314,000.

Net interest expense in the quarter was $306,000 compared to net interest income of $233,000 for the same period in 2007.This year includes and interest component of the company increasing a state tax reserve of $336,000.

For the quarter there was a net loss of $1.8 million or $0.09 per share. This compares with a net income of $345,000 or $0.02 per share in 2007.

First quarter 2008 results include $0.01 per share related to the inventory restatement and $0.03 per share related to increasing a state tax reserve.

Inventory at March 31 was $134.3 million, for the most part flat with last year on a per store basis.

Year-to-date capital expenditures were $3.7 million.

Depreciation was $3.8 million for the quarter, compared with $3.5 million for the first quarter of 2007.

Cash net of debt was $32.2 million, versus $44.2 million last year. I’d like to add that our 10-Q for the quarter will be filed probably within an hour of this call ending.

Now I will turn the call over to Joe.

Joseph Jeffries 

I’d like to take a moment and update you on many of the points I outlined on the previous call.

Our efforts to transform the corporate support center into a store centric support organization are on track and we are seeing a marked improvement in execution both in the support center and in our stores.

At the end of Q1 we introduced a category management planning structure that consists of three distinct merchandising divisions designed to optimize revenue and profits while providing A.C. Moore the agility to react quicker to business trends and to opportunities which we see as a clear advantage we have within the sector.

Craig will elaborate further on the specific details regarding the structure in a few minutes.

Phase 2 of our advertising efforts continue as we have adjusted some specific market strategies based on our continual research of available sales within the market place. The look and feel of our insert program continues to evolve as we strive to drive traffic with incredible values and making the emotional connection with our customers regarding the benefits of crafting and gift giving.

Additional work continues at the local level, which will further enhance our reach and use of new vehicles to create a call to action with our customers locally.

Our plan to introduce a formal customer service-training program will kick of the end of May as we conduct training sessions with our district and general managers. We’ve engaged an outside firm who has been entrenched within our organization visiting stores, interviewing customers and associates alike. We will have a simple three-step approach to quality customer care that will focus our team on optimizing their time with our customers, delivering the level of service our customers deserve and expect from A.C. Moore. The full roll out of this new and exciting program will be complete by mid-August.

In 2009 we still plan to introduce a three-component customer service index program consisting of a monthly mystery shop, online submission, and reportable complaints and compliments directly to our support center.

In order to deliver the quality customer care we desire we are still focused on improving store operations. Phase 2 of the 2006 process reengineering project is progressing very well in the small group of model stores. We have developed the processes that make us more efficient and provide the ability to redeploy labor to service and selling activities.

Our store tactical approach is to create a better service environment and simplify our operations. This program, named Project Renaissance, is centered on store staffing, scheduling, and standard operating procedures. We will further enhance and implement new processes in our receiving, stocking, ordering, and recovery programs in all of our stores. The implementation across the chain starts in July and should be completed by the end of September.

As I mentioned on the previous call, in stock at shelf edge is a priority across the organization. We made great strides in improving this position across the chain. Being a components driven business we understand the importance and impact this has on the basket size and top line performance.

The new functionality our IT partners deployed in early Q1 has already had a positive impact across the chain. To date we have reduced our outs by 60+% and we will continue to measure and report our scan outs every two weeks.

The following features are now available at the SKU level on our RF handheld devices: one, quantity on hand from the perpetual inventory system; two, sales last ten days this year and sales last ten days prior year; three, vendor lead times; and four enhanced EDI vendor minimums.

As you can see, our store merchandisers are now armed with a better [peen] allowing them to make more intelligent ordering decisions. The improvement we have seen in our in stock position has not led us to being overstocked across the chain. Our average store inventory levels have remained flat to LY during the quarter.

Our oracle retail data warehouse implementation continues as outlined earlier by Rick. Phase 1 will deliver base merchandising tools for our merchandise division and automated replenishment at the store level being phased in with select departments and SKUs.

At this time I would like to turn the call over to Craig Davis, our SVP Merchandising and Marketing.

Craig Davis

I would like to start my comments today with a review of sales.

We saw relative strength in several of our core departments:

Florist and wicker continued at strong positive performance into and through out the quarter. Sales were driven by new items combined with new promotional offers and margins improved year-over-year

Second: Stitchery continued to improve delivering a positive performance for the quarter. New programs and strong performance in baby related items continued to grow and here again, margins improved over last year.

Third: Cake and candy making continued its relative positive performance driven by cupcake making and basic cake decorating which continues to benefit from our revitalized class program and as well, margins were better this year.

Fourth: Fine arts strengthened during the quarter delivering significant improvement. This result was driven by the improved in stock position at shelf edge, combined with strong promotional sales performance, and here again, margins were better than last year.

Now I would like to update you on the continued refinement of our Nevada class prototype store.

As communicated on previous calls, we went through the fourth quarter and into the first quarter observing and evaluating several things that we believe will improve both performance and the in store experience. Some of these adjustments were phased in and applied to our new openings beginning in late April. Changes have been made to department adjacencies resulting in improved category dominance and product flow, enhancing the shopping experience.

One example is the relocation of seasonal to the front of the store. This will improve the shopping experience and our ability to connect with the customer, providing for fresh and seasonally appropriate products.

In addition, certain fixtures will be expanded for improved shop-ability and additional SKU presentation.

Finally, changes will be made to signing and display enhancing inspiration and creativity.

As Joes mentioned, we introduced and implemented category management at A.C. Moore. What does this mean?

First: The merchandising organization will have complete responsibility for the life cycle of each item or program from the beginning of development to the final clearance and removal from the A.C. Moore offering.

Second: A reorganization and alignment creating cross-functional buying teams. Each of these teams will include a buyer, merchandise coordinator, financial planner, store space planner, along with a replenisher.

Third: We have organized the business around three merchandising divisions. Each division will be led by a divisional merchandise manager and each division will be made up of several cross-functional buying teams. The divisions were created to align similar businesses.

We have promoted Lisa Williston to DMM for basic crafts; previously Lisa was the director of merchandise planning. Sandy Smith has assumed the role of DMM for occasions and kids, and the third division is seasonal floral and home décor. We are actively searching to fill this role from within the craft industry. In addition, we have hired Brooke Lynch as Director of Merchandise Planning. Brooke comes to us with 18 years of experience in buying and planning.

Our expectations are that this organization and these teams will allow us to get closer to our business, improving speed, accuracy, and financial performance. We are enthusiastic about the positive changes that we have made in the merchandising department and look forward to a successful transition.

We remain focused on the top five merchandise and marketing initiatives communicated in previous calls:

1. Staying focused on executing quarterly plans and improving our seasonal merchandise transitions. We have begun to make progress.

2. Evaluating required skill sets for positions within merchandise and marketing necessary to drive future sales and margin growth. We have raised the bar and have been successful in acquiring new talent as required. We have hired two new buyers and we are actively searching for a DMM from within the industry.

3. Implemented process and changes to fully support a category management structure to improve speed, efficiency, and accountability for results.

4. A detailed review of merchandise category performance as we develop assortments and promotional events to drive business in fiscal ’08 and beyond, and continued refinement of our global sourcing and vendor strategy to support sales and margin growth.

In closing, we remained focused on activities that will deliver sustainable sales and margin improvements over time.

Now I’ll turn the call back to Rick.

Rick Lepley 

Before we go to questions, I have some additional comments.

On each of these calls we make the statement that this is a marathon and not a sprint. It’s very important for us to stay focused on what is good for the company in the long run and not on what might appear to be best quarter-by-quarter.

In that regard we told you some weeks ago that our long-term goals remain unchanged: improve store profitability, increase our gross margins, and increase efficiencies and economy’s of scale through out the organization predominantly through the better utilization of information technology.

The change in the retailing environment is causing us to condense our focus on just five areas that we believe will have a favorable long-term impact on our operations: the first is to drive top-line sales. We’re working on a number of initiatives regarding new products and categories, new vendors, expanded exclusive product offerings, and unique and different marketing vehicles and strategies.

The secondary of focus is to optimize our distribution network. This includes everything from vendor selection to creating a happy and well-satisfied customer body. A final decision on which warehousing option we will employ is an example of the work within this area.

The third area of focus is to continue our systems enhancements project. As I mentioned earlier, we’re making good progress and we see the real benefit coming to us one and two years down the road, bringing the company up to par with robust systems like our competitors have is long over due, but will be very, very beneficial when it is completed.

The fourth area of focus is to retain, attract, and develop top talent. We want an organization that reflects the values of passion, enthusiasm, integrity, and a desire to be the best.

The fifth area of focus is a complete review and rationalization of our store and real estate portfolio. Now this means we need to take another look at individual store performance.

Some weeks ago we initiated a study to analyze our entire portfolio with most of the focus on stores that are not profitable. This is more than the opportunity store review that we and most retailers conduct annually. That type of study often leads to a detailed plan for dealing with the worst performing 5% or 10% of stores throughout a chain.

The analysis we are employing with the help of an outside consultant has been directed not just at the four wall profit issues of specific stores, but also at the variable cost of our corporate support service level to each of the stores on that list.

This study is underway and will need to be considered in conjunction with our warehouse expansion plan. It could, and I want to emphasize the word could, lead to changes in our new store opening strategy and philosophy.

While we may believe that each under performing store we have can be fixed, the focus is on the cash over time estimate of fixing it. In other words, how long will it take and what is the burn rate on the way to break even? Beyond that, what’s the real longer term upside potential past the break-even point? Said another way, we want to know the likelihood that we could fix under performing stores in under performing markets in a reasonable amount of time. We believe the results of this work will be known some time in the second quarter.

Once again, that will give you a high-level sense of our direction as we move on into this calendar year and continue work on our restructuring plan and deal with an uncertain economic environment.

I think this will be a good time to take questions and I may have a few closing remarks at the end of the hour.

………..

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Karru Martinson of Deutsche Bank.

Karru Martinson - Deutsche Bank Securities

In terms of the comps here how much of that was traffic versus price?

Joseph Jeffries

[Audio gap] we’ve seen it in traffic.

Karru Martinson - Deutsche Bank Securities

So it’s been primarily all traffic?

Joseph Jeffries

Yes, sir.

Karru Martinson - Deutsche Bank Securities

Just with that, are you seeing the customer kind of trading down or switching categories here, what’s the strength there, or weakness?

Joseph Jeffries

We’ve not seen them trading down, but we have seen them spending in our core crafting categories and then some of those winners that Craig mentioned, for example stitchery we’ve seen some nice increases, but they are value oriented, customers reactions right now, as you provably know.

Karru Martinson - Deutsche Bank Securities

What’s the advertising increase that you’ve done and being a bit more value oriented? Have you seen a competitive response here?

Joseph Jeffries

Yes, I think everybody is testing new things and efforts to drive traffic in sluggish consumer spending times. We have seen them react in a way similar to us. We have seen some competition do some things exactly like us and that’s okay. What we’ve got to do is be smart about where we spend, how we spend it, and what we choose.

We’ve got some things that we’ve tested that yielded some results, but also led us in directions of there things that we can do in this quarter and through out the rest of the year that we think are going to be very exciting.

Karru Martinson - Deutsche Bank Securities

Your gross margin was up nicely; I was wondering what kind of pricing pressure you’re seeing and cost of goods coming out of China, and kind of the outlook on that front?

Joseph Jeffries

There’s no doubt that there’s pressure on goods coming from China and I think it just puts more emphasis on our ability to work with our suppliers to make sure that we reengineer products that provide improved values over time. The pressures are real on costs through China.

Operator

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

Bill Armstrong - C.L. King & Associates

Could you talk about the impact during the quarter of any post Christmas seasonal markdowns?

Craig Davis

The impact in the quarter was minimal. As I had mentioned in my Q4 call, we had taken some steps to identify product that we wanted to liquidate that would not be part of the go-forward assortment this year and then moved through in the quarter on items that we didn’t want to carry forward in an aggressive manner; so, the impact was minimal.

Rick Lepley 

Bill there is one thing I would add to that and that is that keep in mind that we’re on a calendar year, so our quarter ended March 31 and if you look at the retail market and the numbers posted by people who report monthly sales, April seems to have been much better most likely, than at January let’s say, or February, or even March for that matter.

Our quarter was January through March, where as some of the quarters you’re seeing close with some retails are February, March, April.

Bill Armstrong - C.L. King & Associates

Right, I was aware of that, that’s why I was asking that questions. Can you talk about any of your, you know you mentioned some strong categories. What were the weak categories and were there any category specific areas of concern?

Rick Lepley 

Well we’re constantly trying to improve categories that are not performing the levels that we would expect. We did have some improvement in overall sell through in our seasonal programs, although with the Easter being in early it actually compressed the selling cycle and in many cases what happens, you give up larger weeks later with an Easter than you do when it moves forward.

So, although we didn’t have the seasonal selling performance that we had, we had structure the buys in such a way, much different than previously, and we had significantly higher sell-throughs than we’ve seen most recently and the minimum impact on pack away was small.

With respect to other categories, what we’ve structured with category management and the processes we’ve put in place to go through assortment reviews is a process that we’re going through right now. We’ve continually been going through it, but now we’re ready to start making some changes and you’ll see some of those changes coming forward.

Bill Armstrong - C.L. King & Associates

With the hopeful inflection point that you’re seeing now in the comp trend, is that focused or concentrated in any specific categories or is it more broad based?

Rick Lepley 

I would say that it’s broad based. We’re seeing a relative performance by category move in the same direction as the overall business.

Bill Armstrong - C.L. King & Associates

Are we seeing any trends in crafting that might be have the potential to move sales? Any emerging trends, sort of like we saw with yarn a few years back or scrapbooking, that sort of thing?

Rick Lepley 

Speaking of yarn we hope it’s finally near the bottom.

Joseph Jeffries

We’re not seeing any material trends. We see some slight indications across some of the core categories within the industry, but we’re not going to wait for trends to happen. We feel that is the word agility that I used in my commentary, I believe that we can evoke that call of action and get back to the roots of the industry with our store managers, our merchants, and our vendor partners and truly start to exploit some things that we have within the four walls.

Bill Armstrong - C.L. King & Associates

Finally, just house keeping: did I hear you say that the state tax reserve that you took, the $0.03, is that a net interest expense?

Rick Lepley 

There’s two components to it Bill, when we invoked 248 we decided that any interest charges would go on the interest side and penalties would go on the tax side. So increasing the state taxes there was a total of $0.03, $0.01 was on the interest slide, $0.02 was on the tax slide, $0.03 in total.

Bill Armstrong - C.L. King & Associates

So, $336,000 that’s the sum of the total charge?

Rick Lepley 

That was the total charge that hit the interest slide.

Bill Armstrong - C.L. King & Associates

That hit the interest slide, okay.

Operator

Your next question comes from Ralph Jean of Wachovia.

Ralph Jean - Wachovia Capital Markets

You made a decision to right size, which led to a reduction of store labor, store assistant managers and also big inventory reductions and sales per square foot at the time were about $240, now you’re dropped under $200. Did you have a target in mind when you started making these changes, and have you reached that, do you think we’ll stabilize it somewhere between $190 and $200?

Rick Lepley 

Yes, I would hope so. I mean we were focused more on the cost of each of these things as a percentage of sales, each of these expenses, as opposed to focusing on the impact it would have on sales per square foot; so we are where we are in that sense. Now of course our focus is with the cost perhaps. We’ve seen deleveraging, so we’ve got to try and drive the sales back up in order to get those percentages back in line.

Ralph Jean - Wachovia Capital Markets

Then do you feel like you’ve gotten our inventory? I know you talked a lot about how inventory per store did not go back up, but you did have better in stocks. Do you feel like you’re kind of at an optimal level either on a per store or per square foot basis?

Rick Lepley 

Personally I don’t think we’re optimal yet, I think there’s still room to take more out, but it has to be the right product, slow turn types of things and we’re doing a lot of analysis on our minimum order quantities and that sort of work.

Joseph Jeffries

Yes, the other thing too to add to that is you really start to optimize your inventory levels once we have the automated replenishment system in line. That’s the next sweet spot for us. Now we have to just focus on execution and leveraging those tools I referenced, but when the automated replenishment system hits we’ll have greater, we’ll have a different level of visibility and be a lot more intelligent about turns.

Rick Lepley 

Yes, we may have done as much as we can afford to do before those systems are in place, because when we took inventories way down in the second, third and even going into the fourth quarter last year, it didn’t help us. We probably went a little bit too far in fact, so I think without systems we aren’t really looking for big reductions right now.

Ralph Jean - Wachovia Capital Markets

Okay that makes sense. Last question, you talked about the review and rationalization of the real estate portfolio, is that your way of suggesting store openings may be less than the 12 to 14 range in the future?

Rick Lepley 

No, it’s my way of saying we’re looking at all those things. There’s really not much more I can tell you at this point

Operator

Your next question comes from Seth Basham of Credit Suisse.

Seth Basham - Credit Suisse

I have a couple questions for you: first starting with the comp trends that you pointed to improving the second quarter. Is there anything in your monthly comps or something that’s driving this, or do you think it’s just the strength across retail in April?

Rick Lepley

Yes I think that’s part of it, I also think our in stocks are better. I just think that we’re getting a little bit better at this, in general is how we would respond to that. 

Seth Basham - Credit Suisse

As we look forward through the year, I think in the last conference call, Rick, you pointed to getting some where close to flat in comps. Do you still think that’s achievable?

Rick Lepley 

I hope so. I mean that’s what we would, that’s our goal. I don’t know if we can quite get there or not, but a lot depends on what happens I think I the second half of the year.

Seth Basham - Credit Suisse

The comp improvement that we’re seeing in the second quarter, it’s not the expensive margin right, it’s just that the, you know, because of the stronger trends?

Rick Lepley 

Not at the expense of margins.

Seth Basham - Credit Suisse

The last thing I had and Gary might have a question, is just back to the question around the real estate review. As we think about what you’re analyzing in terms of the stores that might close, are there certain markets or certain geography’s that you consider paring back in, or is it just looking at individual stores and what not?

Rick Lepley 

Well we are looking at individual stores, of course. Actually, I read the article that you wrote recently and I thought it was pretty good. I think one of the things we have to look at is that if we go off in many different directions and put stores in, we become like an army that’s outrun its supply chain, and so in theory, I think when we got here the first year we stopped a whole group of stores that were going into Tennessee.

Then we began to close a couple of stores based on the convenience of leases expiring and the cost of, or the lack of cost, in closing. Now I just think it’s time to take a real good look at, in conjunction with what we do with the warehouse. What is it we’re trying to do here in terms of servicing stores and we can’t be like the example I used, like an army that’s outrun its supply chain. We’ve got to figure out how we’re going to cost effectively supply all of these new store openings. So, I think this is all tied together with the solution to warehousing.

Gary Balter - Credit Suisse

This is Gary. Everybody is talking about the stimulus package and it making a difference and we’re all of a week into it. Have you seen anything?

Rick Lepley 

It is too soon, so we haven’t seen any impact from that at all but, but beyond that I really wonder just how much of it’s just going to go in increased food and gas and it doesn’t seem to me that after a month or so that was the solution anyway.

Gary Balter - Credit Suisse

So you’re not starting putting up gas stations in front of your stores or adding more food to your selection?

Operator

Your next question comes from Gregory J. McKinley of Dougherty.

Gregory McKinley of Dougherty & Company, LLC

Just as a quick reminder in terms of timing, when did the perpetual systems fully go on line?

Rick Lepley 

January.

Gregory McKinley of Dougherty & Company, LLC

Okay, so system wide they were on as of January?

Rick Lepley 

Yes, but I would add to that, Greg, that we had to teach people how to use it after it was online.

Gregory McKinley of Dougherty & Company, LLC

In terms of the drivers for improved sales performance, you talked about reduced stock up, you said your stock ups were down by 60%. What is your in stock level approximately?

Joseph Jeffries

I wish I had that, I wish I could tell you what it was. We don’t have that particular functionality where I can see our in stocks and be able to tell you a true out of stock. I will very soon. What we do with our outs, if you’re not familiar with it, it’s a self-reported program that we have where we use the RF guns at store level, and our store teams are all instructed on a certain day and time of the quarter to scan their holes and then we report that way.

Prior to doing that thought, obviously they’re also instructed to make sure that we’re filling holes before we’re scanning them. This isn’t optimal, but it’s what we have today.

What it does is it actually puts a discipline and it puts a spotlight at the store level and many, many managers, if you have any type of intelligence, you always want to report the best numbers and therefore they’re working extremely hard to insure that they are filling the holes first. And, we’re being able to confirm and substantiate this through different district manager audits and executive visits that we’re doing at the store level.

Gregory McKinley of Dougherty & Company, LLC

I guess I was just trying to get a sense for, you know 60% reduction of, guess it depends on what your starting level is to determine how big of a change in dollar terms that really is for an impact on sales, but you guys believe that’s a very substantial, given what you think were real high stock out levels.

Joseph Jeffries

Yes we do.

Rick Lepley 

I know what the number was, I’m not going to share, but it was a [audio gap] number. We’ve come down significantly and when you walk our aisles and you visit our stores, you can see it.

Gregory McKinley of Dougherty & Company, LLC

Okay and then your real estate comments and specific to distribution, I’m assuming it’s not just related to new store build outs, but maybe understanding whether it makes sense to operate some of these markets at great distances from your current DC? I mean, are you looking at whether the Florida or Alabama markets make sense at all, that type of thing?

Rick Lepley 

Well I think in some respects Florida makes sense, because people know us in Florida and that’s where people are going long term anyway. But, I think it’s more market-by-market and the cost and the fact that it drives up our SG&A when we put one store in a multi-store market.

For example, a store in, I don’t know pick a market, one store in Tampa, one store in Orlando, we’re looking at a lot of those kinds of things right now to try and understand how long would it take you to get to parity to put enough stores in to be able to leverage your costs and supply it and if you can’t do that in a reasonable amount of time, what’s the cost of hanging on until you can?

Gregory McKinley of Dougherty & Company, LLC

Okay and then my last question is, are you seeing anything competitively. We know some of the testing and experimentation at the company has created some pressures on sales, but what are you seeing from your competitors in the market that may be also benefiting them in market share relative to A.C. Moore?

Rick Lepley 

I would just say in general that one of our competitors in particular does everything we do, it seems to us, and the key in the long run for all of us I suppose, because I think everybody in this industry is working hard, is execution. So it’s not always what you do, but sometimes it’s how you do it and what’s the cost benefit ratio of doing it? You can analyze almost every aspect of our business that way, from couponing to advertising, to visual merchandising in the store, we’re just trying to get better at every little thing that we do.

I don’t know how else to answer you, I mean obviously I can’t speak for our competitors, you have to ask them what they see and how they feel about it. But, I think we just have to get better and more efficient at everything that we’re doing.

Operator

Your next question comes from Holly Guthrie of Janney Montgomery Scott, LLC.

Holly Guthrie - Janney Montgomery Scott, LLC

Rick, could you just give me some clarification on your guidance for comps? I think you said for the last 40 days that you’ve seen comps at about half of the level and I guess that would put it at the 5.5% decline.

Then going forward, I thought you said you were looking for the second half of the quarter to be flattish, but I guess, could you just give me a little bit more color and what your thoughts are on comps?

Rick Lepley 

We’re not giving guidance, so I can’t tell you what the second half of the quarter will be, even if I knew.

Holly Guthrie - Janney Montgomery Scott, LLC

I’m sorry; I thought I heard you give it.

Rick Lepley 

What we said was that we’re down about a half of the rate of the first quarter and that we don’t know how that will play out through the rest of the quarter; we hope it sustains itself at a minimum.

Holly Guthrie - Janney Montgomery Scott, LLC

Okay and then one of the other questions was traffic versus price and I believe the comment was total traffic, so does that mean that traffic is down less right now through the first 40 days?

Joseph Jeffries

Yes, that’s correct Holly.

Holly Guthrie - Janney Montgomery Scott, LLC

A question on Joe’s commentary: he had mentioned something about automatic replenishment being phased in, in certain departments. Is that something that you expect to do before January ’09 when you, I guess, flip the switch for automated replenishment?

Joseph Jeffries

No, we look to do that after January ’09 and we will strategically select those departments and those SKUs that we want to bring on to the system first. Obviously when you go live on a system like this you have to run your legacy system at parallel until you get to a point in time where you can fully emerge with the new systems.

So Holly, said another way, we’re going to test certain SKUs by the end of this year, a handful of SKUs, just to test it. Then as we get into ’09, throughout ’09, we will continue to layer in more SKUs and categories. So hopefully by the back half that entire basic repeatable product is on, but the back half of ’09.

Holly Guthrie - Janney Montgomery Scott, LLC

Any opportunities in real estate, are you guys seeing deals that are a little bit easier to negotiate or a little bit less costly? I saw that your pre-opening costs per store were down a little bit then where they’ve been averaging. I know it’s a little bit different than a real estate question, but I guess that I could throw those two questions out there.

Rick Lepley 

Well it is different than the real estate question. We’ve been working really hard to lower our costs of getting into business, because we think that our store opening costs have historically been higher than they should have been, so we’re trying real hard to work that down. I still think we can perhaps improve it a little bit more.

With regard to real estate, most of what we’re working on right now is 2009 and 2010 even. Because those projects aren’t started, we haven’t seen a really big difference in real estate costs.

I think where you may see some of that might be in some markets that other retailers might choose to exit or something, where there may be some empty buildings at various places, I don’t know, but for us they would have to selectively be really, really good spots that we, markets where we wanted to be for a long time and probably markets where we would hope to lower the cost of doing business across a whole group of other stores in those markets.

I don’t think this would be a time for us to, for example, Nashville, or something like that.

Holly Guthrie - Janney Montgomery Scott, LLC

A question on the incremental costs in SG&A in the first quarter, the inventory restatement, payroll, and advertising, could you talk about if you expect any of those to carry through into the second quarter?

Marc Katz

Inventory restatement costs should be minimal, Holly. In store payroll and advertising probably flattish.

Operator

Your next question comes from Jack Balos of Midwood Research.

Jack Balos - Midwood Research

This is a question for Craig and that is I saw some of your stores in Long Island last week and obviously at this stage you haven’t done much in terms of redoing the existing store base. What we see today is, that is where your primary potential improvement can occur on overall macro basis more than new stores.

I was wondering if you have an overall vision in terms of what aspects of Nevada can be reincorporated into an existing store base and also in general, how do you see A.C. Moore differentiating itself from say Michaels, where as before A.C. Moore was known for having robust inventories and better service and also you had examples of a project and so forth.

I was just wondering, in general Craig, how do you see the company evolving and differentiating itself?

Rick Lepley 

Jack, this is Rick. I’ll tell you first of all that if we told you how we’d differentiate ourselves we wouldn’t be differentiated very long. Secondly, we don’t want to get into a lot of detail on that.

The first part of your question is really interesting, because for most retailers it is generally a better decision to open a new store than to remodel an existing store. I would say that the cost benefit is usually better if you open a new store.

One of the interesting things to us is to really be able to test a complete remodel to see if we get a lift that might exceed what IRR we could get out of a new store. It’s probably unlikely, but it could be one of those exceptional times when we might get a lift, a long lift of savings and operations that may in fact be a better investment for us then some of our stores.

We won’t know that until we test it and I don’t think we’re in a position to test it until the first quarter.

Jack Balos - Midwood Research

So you’ll be testing your remodels in the first quarter of ’09?

Rick Lepley 

Yes, we do have on relocation that’s taking place this quarter, so in a sense it’s kind of a combination of a remodel and a new store, but it’s moving far enough that I don’t know that we’re going to be able to learn what we’d like to from it; so we will begin to do some remodels, but a couple in the first quarter of next year if everything goes well.

Jack Balos - Midwood Research

Will there only be two remodels that you would be doing in ’09?

Rick Lepley 

We haven’t decided yet how many. We’re going to do at least two to test it that would be better than a one store test. Hopefully we’ll do as many as two or three or even four it just depends. I can’t tell you that right now. We have two that we’re working on at the present time, both of which would be done in the first quarter. Beyond that I can’t really tell you until we put some more numbers on paper.

Jack Balos - Midwood Research

Maybe I didn’t hear you clearly, but in general what is the overall strategic vision for how an A.C. Moore store should differentiate itself?

Rick Lepley 

Well you didn’t, I think you did hear me clearly. If we enunciated that, I think we’d put ourselves in a position where we’d just be helping our competitors understand what they should test.

We have a lot of different tests going in different stores, but the overall vision for how we’ll differentiate ourselves will be the completed Nevada model when it’s all done.

Jack Balos - Midwood Research

So that completed Nevada model is that going to be poured over the remodeling effort?

Rick Lepley 

Yes exactly, so the idea would be that when we have that optimized, when we know that it’s exactly the store we envisioned and it’s everything we could be, we could make it, then we want to go on and take that exact store and do a remodel of an existing store.

Operator

Your next question comes from Michael Corelli of Barry Vogel & Associates.

Michael Corelli - Barry Vogel & Associates

I don’t recall, is the company on the share repurchasing authorization available?

Rick Lepley 

No, it does not right now and I would think that most retailers who did repurchase shares in the past year are probably wishing that they hadn’t based on the way that stock prices look at the moment.

Michael Corelli - Barry Vogel & Associates

That may be true, but looking at the Cohen situation, you know your stock is about $3.00 below your book value, it’s about 4 ½ times trailing EBITDA and you’re still really pretty much generating cash with these kind of depressed earnings and that’s pretty depressed EBITDA, so with your stock where it is today, I would think that the company would think it’s a pretty attractive investment.

Considering your cash balance, don’t you think it might make sense to have an authorization to act upon here?

Rick Lepley 

It depends on the capital expenditure program and what we ultimately decide probably to do with store openings and with the warehouse.

Keep in mind that the company was not able to buy back any stock until we filed our K and now that that’s done our next board meeting is next month. Our boards always trying to think about what’s the best way to maximize shareholder value, so I’m sure it will be discussed at that meeting.

Michael Corelli - Barry Vogel & Associates

Okay because I would think if the company is successful what it’s trying to do that would have a significant cash generation going forward and probably could balance all the things you want to pursue.

Operator

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

Laura Richardson - BB&T Capital Markets

How sustainable do you guys think that the gross margin increases you’ve been seeing are, lets say for the rest of this year and into next year?

Rick Lepley 

Good question, there are a lot of factors that contribute to gross margin rate and I’m not going to go into the hard pieces of it, but I will say that as part of life cycle management and review of SKUs and programs; we continue to work on improving gross margin performance. Some of those elements are being priced right every day and we’re continuing to work on right sizing our promotional purchases so we can lessen the impact on margin by resulting from promotional markdowns and discounts as well as, you know continuing to leverage our global sourcing strategy going forward.

Those are the levers and we continue to work on them on a daily basis.

Laura Richardson - BB&T Capital Markets

It looks like private label continues to be a bigger part of your assortment. Do you have a stat as to where you stand on that right now percentage wise?

Rick Lepley 

We do. It’s not a metric that we share, nor is it a metric that we chase. We’re very conscious of the importance of private labeling in the overall gross margin management, but we also look at it in a holistic, all the other vendors and sources that we have. We’re happy with [inaudible], we have a wonderful partner that we continue to work with and we continue to exploit it intelligently in the short term and end of the month.

Laura Richardson - BB&T Capital Markets

Same question about SG&A basically. I guess I keep modeling and being pleasantly surprised by the gross margin and if there’s a downside it usually ends up being the SG&A higher than expected. I’m still trying to get a sense of how much of that is because of projects you’re working on like the new consultants your working with on the store analysis or studies you’re doing on distribution and the cost of installing all the technology versus what’s the store operations piece of that.

Any more help you can give on that would be helpful.

Rick Lepley 

All I can tell you is again the inventory restatement piece will be minimal in Q2. There are [inaudible] consulting studies going on for our DCs that will have an impact. From a systems point of view, all the work that we’re doing is really historical. It’s really at this point not an SG&A item, because it’s all capitalizable, it’s all new function really that doesn’t exist at A.C. Moore.

Laura Richardson - BB&T Capital Markets

Following up on that also, because usually in this industry, when you open a store in the second quarter you expect it to be a drag on the quarters earnings; so for the three new stores we have opening in Q2 what kind of drag are you expecting from them on top of what we’re already seeing?

Rick Lepley 

We’ll not comment on our new store performance.

Laura Richardson - BB&T Capital Markets

Just historically, because it’s a seasonally weak quarter so you lose money on those stores in the second quarter.

Operator

Your last question comes from Ralph Jean of Wachovia Capital Markets.

Ralph Jean - Wachovia Capital Markets

You talked about how same store sales trends have improved to half of the negative level of Q1 and you mentioned it was all traffic. Do you have the systems in place to tell whether it’s more people walking through the door or it’s a higher conversion rate or both?

Joseph Jeffries

No, if you’re talking about electronic counters, we do not.

Ralph Jean - Wachovia Capital Markets

So there’s no way to know whether it’s conversion rate or just more people coming through the door at this time?

Joseph Jeffries

That’s right, that’s correct. It is transaction based.

Rick Lepley 

In summary, having now fully cycled the initial set of major changes we enacted a year ago to help right size the company, we are hopeful and hopeful is the key word, that our comp sales declines will begin to moderate going forward. At the same time we hope to see at least a moderate recovery in consumer spending later this year and we hope to execute better as we move through some of our internal restructuring.

So, our expectation for the second half of this year is that it will be somewhat better than the first half and of course we all hope that it’s considerably better, but there’s no way for us to know that Without a clear understanding of the future, the most prudent thing for us to do is to simply stay focused on the five priorities we outlined earlier. If we do that, we still expect to emerge from all this change with a transformed company, one that’s built on a solid foundation.

We appreciate the hard work of our staff and of our store managers up and down the east coast. We have high expectations for ourselves and for the future of our company.

Thanks so much for joining us today and thanks for your continued interest in A.C. Moore.

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