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
Neely Tamminga – Piper Jaffray
Joan Storms – Wedbush Morgan Securities
David Magee – Suntrust Robinson Humphrey
Budd Bugatch – Raymond James
David Weiner – Deutsche Bank
Cost Plus, Inc. (CPWM) Q2 2008 Earnings Call August 21, 2008 4:30 PM ET
Operator
Good day ladies and gentlemen and welcome to the second quarter 2008 Cost Plus earnings conference call. My name is Marsha and I will be your coordinator for today's call. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Mr. Barry Feld, President and CEO. Please precede sir.
Barry Feld
Thank you, operator. Good afternoon everyone and thank you for joining us to discuss our second quarter 2008 results. With me today 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 the financial results in more detail, after which I will make some concluding remarks and then we'll open it up for questions. Before beginning today's discussion, Tim Lester will read the company's 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 preceded 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 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 process, 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 and changes in accounting rules and other regulations. A more complete listing of risk factors is included in company documents on file with the Securities and Exchange Commission.
Barry Feld
Thank you Tim.
We are pleased to report our second consecutive positive comp quarter, which is driven by increases in customer accounts across all regions, including California. Increases in customer count more than offsets expected pressure on the average ticket resulting from our everyday value pricing strategy.
Higher conversation rates also contributed to the positive 1.2% comp for the quarter and just under a positive 1% for the first half of fiscal 2008. The Eastern region continues to out perform the West which has been disproportionally impacted by the downturn in the housing market, higher appointment rates and declining consumer confidence, particularly in California.
Chain wide improvement in both customer count and conversion rate continues to validate our customers’ acceptance of our unique authentic and value driven merchandise offering. Coupled with the changes we've made for our marketing programs and our differentiated in-store experience, World Market is well positioned to meet the needs of today's extremely cost-conscious consumer.
Unfortunately a combination of inflationary pressure on cost of goods and the expense of responding to Pier 1’s unsolicited bid drove our loss of the quarter above what we had expected. The company had a successful outdoor entertaining season, driven by strong performance in outdoor furniture, textiles and consumerables.
We believe that World Market benefited from consumers staying home and entertaining the summer, particularly around the July 4th holiday, due to the significant increase in the cost of gasoline that limited traditional travel plans. Traditionally, strong response to both our mother's day and father's day gift giving campaign reinforced that, despite a weak economy, gift giving still remains relevant and important to our customers.
During the second quarter the company recorded EBIT loss from continuing operations of $22.1 million compared to an EBIT loss of $25.3 million last year. Higher sales and gross margins, coupled with lower advertising expense, generated the year-over-year improvement. Slightly lower than planned buyer margin, combined the 2.8 million we had to spend to respond to the unsolicited merger proposal from Peir 1, where the primary cause for the missed guidance.
Buyer margin was lower than planned due to increases in product and transportation cost, caused by rising energy prices and a weak US dollar. Up to this point, the company has held the line on retail prices and not passed on higher commodity cost in order to ensure we maintain the pricing credibility we fought so hard to re-establish. However, in light of the factors affecting the supply chain cost that are beyond our control, we've began to tactically increase prices on certain items to relieve the near term pressure on buyer margin, without compromising the momentum we are achieving at the top line. Additionally, we have identified other infrastructure cost reductions to preserve cash and to return the company to profitability, including a reduction in number of new stores planned for fiscal 2008; economizing the number of inbound containers and outbound trailers, to approve space maximization, implementation of a labor management program to improve distribution center productivity, changes to our store receiving program, a reduction in fixturing costs and a number of other initiatives within the corporate field SG&A expense structure. At the end of the second quarter, the company had $72 million outstanding under its revolving credit facility and $105 million available. The company continues to aggressively manage inventory, it's most significant source and use of cash.
Average inventory per store was roughly flat to last year. The acceleration of receipts earlier in the year taken as a precautionary measure against shipping delays from a potential longshoreman’s strike to the Olympics, will normalize in August. Our fall season merchandise has been received into our distribution centers and is now flowing to the stores. The company's $200 million asset base credit facility provides ample liquidity to accomplish the turnaround. At the end of the second quarter of 2008, combined accounts payable and borrowings under the revolver were $42.5 million higher than the same period last year. This is an improvement over the $48.2 million year-over-year increase at the end of the first quarter of 2008. The $5.7 million improvement liquidity is the result of tight controls on expense, capital expenditures and strong inventory management.
Since beginning the turnaround, management has significantly reduced its discretionary capital spending and does not intend to increase store count in 2009. All contractual capital commitments that were in progress prior to the turn around have been completed and maintenance capital requirements going forward are minimal.
I will now turn the call over to Jane to review the second quarter financial highlight, after which I will make some concluding remarks before opening the call up for the question and answer portion.
Jane Baughman
Thank you Barry. The company reports separate results for continuing and discontinued operations. The second quarter of fiscal 2007, has been restated to exclude the 13 stores closed during the first quarter of 2008 from continuing operations. The income statement included in this afternoon's press release fairly breaks out the results of continuing and discontinued operations for both the current year and prior year period. The company's balance sheet presentation remains unchanged.
Total net sales for the second quarter of fiscal 2008 were $221 million, a 5.6% increase above the second quarter of fiscal 2007. Same-store sales for the second quarter increased 1.2%. Customer count increased 3.8% and was positive in the eastern and western regions and in California. The average transaction decreased to $36.25 or 2.5% below last year. Conversion rate also increased 1.2 %. The mix between home and consumables as a percentage of total net sales was 67% and 33%, respectively, for the second quarter of 2008, versus 66% and 34% respectively for the second quarter of 2007.
The increase in home was generated by the furniture division, and was primarily the result of success with the outdoor and living furniture campaigns and our newly emerging lamp business.
Year-to-date, net sales of $432.6 million, are 5.1% higher than the first half of fiscal 2007. Same-store sales for the first half increased 0.9%. Customer count for the first half was also positive in all regions, including California. Gross profit rate for the quarter was 26.6% versus 24.5% last year, a 210 basis point increase. The improvement in margin relates to a trailing 12-month shrink adjustments that occurred following a chain-wide physical inventory in the second quarter of last year. Shrink expense for the 12 month period ending with the second quarter of fiscal 2008 was lower than last year. Buyer margin decreased by 36 basis points, due to higher than expected inflationary pressure on the cost of merchandise. The gross profit rate for the first two quarters of fiscal 2008 was 27% versus 26.3% for the same period last year. Again the improvement can be attributed to a lower loss from inventory shrink offset by higher store occupancy costs related to new stores.
Second quarter SG&A expenses, as a percentage of net sales, was flat to last year at 36.1%. The expected savings from a shift of advertising expenses to the first quarter caused by the early Easter was offset by the cost incurred to respond to the Pier 1 offer, and higher than expected employee health insurance cost. The health insurance variance can be attributed to unusually higher number of large dollar claims.
Year-to-date SG&A expense, as a percentage of the net sales, was 35.9% or 20 basis points higher than the same period last year. Absent the unexpected spending related to the Pier 1e offer, the SG&A expense, as a percentage of sales for the second quarter and year-to-date, would have been lower than last year and in line with guidance at 34.8% and 35.3% respectively.
Depreciation expense in the second quarter of fiscal 2008 was $9 million compared to $9.1 million for the same period last year. Year-to-date depreciation expense was $17.8 million in fiscal 2007 and 2008.
Capital investments for 2008 projects in the second quarter were $3.4 million versus $6.7 million last year. On a year-to-date basis capital investment for 2008 projects were $6.2 million versus $14.3 million last year.
Second quarter pre-opening expenses of $1.3 million were $150,000 higher than the second quarter of fiscal 2007. We opened seven new stores, all within existing states, during second quarter, versus opening four new stores in the second quarter of last year. For the first half of fiscal 2008, we spent $3.1 million in pre-opening expense to open 15 new stores versus $2.2 million to open 10 stores in the first half of 2007.
The second quarter loss before interest and taxes for continuing operations or EBIT loss $22.1 million, or $3.2 million better than the prior year. For the first half of fiscal 2008, the EBIT loss of $41.7 million is slightly higher than $41 million in fiscal 2007. I want to emphasize that absent the spending to respond to the unsolicited Pier 1 offer, the EBIT resultsin the first quarter of fiscal 2008, would have been $39 million or $1 million worse than our previously provided first half guidance.
Net interest expense was $3.2 million in the second quarter of fiscal 2008 compared to $2.9 million for the second quarter of fiscal 2007. Year-to-date interest expense of $6.2 million compared to $4.9 million in the first half of 2007. Our tax benefit in the first half of 2008 of $645,000 is a reflection of several discreet tax events and the on-going effects of maintaining evaluation allowance against deferred tax assets.
The $1.4 million loss from discontinued operations in the second quarter of 2008 primarily reflects additional lease settlement costs due to the challenging real estate market. The company's net loss for continuing operations for the second quarter of fiscal 2008, was $25.2 million or $1.14 per fully diluted share compared to the net loss of $17.2 million or $0.78 for fully diluted shares in the second quarter of fiscal 2007. It is important to note that the loss per share for the second quarter of fiscal 2007 included an $11 million tax benefit or $0.50 per fully diluted share.
Total inventory increased $3.2 million, or 1.2% to $256.9 million, when compared to last year. Accounts payable was $68 million versus $54.1 million last year, reflecting slightly higher inventory levels and improved terms from vendors. The company continues to maintain a policy of using the line of credit to pay our vendors partners according to agreed upon terms which are typically 60 days with the exception of certain state regulated merchandise categories.
At the end of the second quarter, there were $72.2 million borrowings and $11.5 million in letters of credits drawn under a $200 million revolving line of credit, excluding $50 million accordion feature. As inventory levels increase, with the receipt of goods for the holiday season, we project our peak borrowing requirements will be well within our credit line's capacity. In this afternoon's press release, we have provided our outlook for the third quarter of fiscal 2008. Our guidance anticipates that the current level of inflationary pressure on the price of raw materials and transportation that is heavily tied to fuel, will begin to be offset by tactical price increases and operating efficiencies achieved in our supply chain.
The company expects total third quarter revenue in the range of $217 million to $228 million, based on the same-store sale performance in the range of -2 to +2. We have completed all of our new store openings for fiscal 2008. Last year, the company opened one net new store in the third quarter.
For the third quarter of fiscal 2008, the company is projecting a loss through continuing operations ,before interests and taxes, in the range of $19 million to $24 million versus a comparable loss of $19 million last year.
The company expects depreciation expense in the third quarter of $8 million and expects net interest expense of $3.5 million. Total capital spending for the full fiscal year will be approximately $12 million to $14 million.
I would like to turn the call back over to Barry for his concluding remarks.
Barry Feld
Thanks Jane. Notwithstanding the heavy economic headwinds, we continue to make steady progress rebuilding the company's loyal customer base through our pricing, merchandising and marketing initiatives. Our updated market-specific advertising approach has changed the way we present ourselves in weekly newspaper tabs and on our website and has resulted in the increased customer traffic momentum necessary to restore our historic sales per square foot performance. This is a foundation for the turnaround and gives us confidence that we are making progress and will be successful even during these challenging economic times.
I want to reiterate that our ability to complete the turnaround will not be prevented by the current macro economic environment. The company is taking the necessary steps to mitigate the inflationary pressures on margin, caused by rising energy costs and the weak dollar. As previously discussed, the company has reduced its capital spending and expects a reduction in store count at the end of 2009.
We feel good about our customer traffic and comparable sales numbers and are 100% focused on maintaining credibility with our customer base. All aspects of our cost structure continue to be under review and I remain firmly committed to taking whatever actions are required to return the company to profitability.
With that, I would like to turn the call over to operator for the Q&A portion of the call.
Question-and Answer Session
Operator
(Operator instructions)
And our first question comes from the line of Budd Bugatch from Raymond James. Please proceed.
Budd Bugatch – Raymond James
Good morning. How are you Barry?
Barry Feld
Good morning Budd. Fine. How are you?
Budd Bugatch – Raymond James
Anyway, afternoon, I'm sorry
Barry Feld
For both of us
Budd Bugatch – Raymond James
Help us out a little bit on this quarter. You were $1 million somewhat above your loss projection for the second quarter, excluding the Peir 1 issue. Where did the variance come to your plan?
Barry Feld
The variance is in two very specific areas. It was fuel related costs in freight and additional large claim healthcare increases. A combination of those two things.
Budd Bugatch – Raymond James
Quantify that, and what looks like it’s continuing?
Barry Feld
I am not going to break it out individually, but certainly the fuel cost is anybody's projection. Although, as we said in our formal scripted remarks that we're taking the requisite actions on a very specific basis to increase prices to offset some of these costs. I think that will be reflected on a go-forward basis and healthcare is anybody's guess. We've just had an unusually high number of claims that hit our stop loss and I don't want to characterize it as one time because it’s really speculative.
Budd Bugatch – Raymond James
But if you would have had those within the normal range, your guidance was 16 to $18 million I think pre-tax loss.
Yes, if it wasn’t for those two discreet events, we would have been within our guidance range?
Budd Bugatch – Raymond James
Middle or above, can you help us on that or not?
Barry Feld
No, we would of just been within our guidance range.
Budd Bugatch – Raymond James
Okay, now, help me out in drilling down into the third quarter guidance, as somewhat with the potentially positive comp, its still a fairly sizeable loss. Can you help us where that would come, is gross margin going to be down year-over-year?
Jane Baughman
Yes, gross margin will still be down year-over-year, a combination of greater than anticipated cost of goods as well as the impact of occupancy for the new stores.
Budd Bugatch – Raymond James
And so, is it just the de-leverage of the occupancy?
Jane Baughman
Primarily correct.
Budd Bugatch – Raymond James
What about the SG&A portion? Would that also be above last year in terms of, I guess it has to be, because you are going to have more stores.
Jane Baughman
Right, if you kind of split the difference between the high end and low end of the range, it would be close to flat as a percentage of net sales.
Budd Bugatch – Raymond James
So, it would come in as a percentage of so, help me make sure I understand by what you mean by split by high end. If you …
Jane Baughman
Okay, so high end of guidance SG&A as a percentage of net sales is better than last year
Budd Bugatch – Raymond James
So, at $21.5 million pre-tax loss the SG&A will be flat than last year as a percentage of sales?
Jane Baughman
It will be fairly better on the high end.
Budd Bugatch – Raymond James
Well, the $21.5 million is the middle of that
Jane Baughman
Well, I am sorry, yes.
Budd Bugatch – Raymond James
Will be, Okay. Alright, thank you Jane. Thank you Barry.
Barry Feld
Thanks Budd
Operator
And your next questions comes from the line of Dave Weiner from Deutsche Bank Securities, please proceed.
David Weiner – Deutsche Bank Securities
Hi. Good afternoon.
Barry Feld
Hi Dave
David Weiner – Deutsche Bank Securities
You got my name right this time. A couple of questions for you. On the $2.4 million charge related to Q1, that seems like a high number? Can you just talk a little bit of what that is?
Barry Feld
Yes, it’s primarily investment banking fees and legal. It’s $2.8 million.
David Weiner – Deutsche Bank Securities
2.8 million, sorry.
Unidentified Company representative
Correct.
David Weiner – Deutsche Bank Securities
Okay, right, fair enough. And then on the merchandise margin, so that’s down basically because the transportation costs are up, is that right? Is that the take away there?
Jane Baughman
Its transportation cost on the inbound side as well as the outbound side to the the stores. As well as the cost of the product related to increases in fuel that impact raw materials in the manufacturing process for our vendors.
David Weiner – Deutsche Bank Securities
Okay, so the vendors are increasing their cost?
Jane Baughman
That’s correct.
David Weiner – Deutsche Bank Securities
And then, two other quick ones here. Can you break out; I think you gave this in the queue, the COGS in the occupancy. Can you give break out that year-over-year basis points change?
Jane Baughman
We actually don’t break that out, we show the sales and occupancy combined.
David Weiner – Deutsche Bank Securities
Thought you did. And then on the strategically raising prices, can you talk a little bit about how you are going about that and how you can make sure you don’t dissuade your customers who may be were recently reintroduced to your stores because of lower prices?
Barry Feld
Yes, Dave without getting obviously into too much granularity for competitive reasons, we stay very close to the competitive environment, do weekly comp shops of everyone of our competitors, ranging obviously from, Trader Joe’s to Target, to Cosco, all of the folks you think about in the market place, Williams-Sonoma, so on and so forth. And we are look at it on a per SKU basis how we are positioned from a value standpoint against that landscape. And we just stay very close on a weekly basis in any place where we believe we have opportunity, as other value competitors are forced to raise prices on certain commodities, whether it’s olive oil, pasta or rice. We are also going to take the same type of price increases as appropriate still maintaining a very strong everyday low price value position.
David Weiner – Deutsche Bank Securities
Okay. So without, as you said giving everything away, is it mostly going to be on a consumable side then?
Barry Feld
No, I would say is it’s across every item within our merchandising mix that we believe we have opportunity to raise prices while still maintaining a strong value statement.
David Weiner – Deutsche Bank Securities
Okay. Fair enough. I'll give it to someone else. Thanks.
Barry Feld
Thanks Dave.
Operator
And our next question comes from the line of Kristine Koerber from JMP Securities. Please proceed.
Unidentified Analyst
Hi it’s Jennifer filling in for Kristine.
Barry Feld
Hi Jennifer.
Unidentified Analyst
Hi, as you look ahead to the Q4 period, how are you planning your seasonal décor and then I have a couple of questions also around the holiday period. When you look ahead to holidays what do you think of the competitive environment and what are your plans around advertising?
Barry Feld
I am not going to get into, obviously, merchandising specifics for the holiday seasonal business. Seasonal has more of a fashion orientation for us than our core everyday products. So I really don't want to get into specific discussion as it relates to our positioning ourselves for the holiday, but we are going to stay as we have been, very focused in our core methodology, which is around finding the most unique and authentic product and then putting it out there for our consumer at the most affordable price points practical. So we believe as we were positioned both for mother's day and father's day as I mentioned to be absolutely one of the go to places for extraordinary gift giving opportunities within our stores for the holiday season and so everything that we are doing revolves around maximizing that strategic and competitive positioning in the market place.
In terms of the competitive environment, I think it will be what it is right now, a lot of retailers fighting for a share of wallet as they currently are. Value price retailers such as ourselves, I think will have the ability to have a stronger position in the market place and consumers today really have their antennas looking for quality and value. And we play very strongly in that in that competitive positioning right now. So as we move into the holiday season, particularly as people are focused on gift giving, we think we will be one of the go to retailers of choice during that period that period of time.
Unidentified Analyst
Okay. Then lastly on advertising do you have any thoughts about your advertising plans?
Barry Feld
Yes, am not going to talk specifically about our advertising for the holiday season. Our advertising is in place and we believe that a broad range of very effective media vehicles, but I really don't want to get into specifics around that for the holidays.
Unidentified Analyst
Okay. Thank you
Operator
And our next question comes from the line of Neely Tamminga from Piper Jaffray. Please proceed
Neely Tamminga – Piper Jaffray
Good afternoon. I just have a couple of questions for you guys. First one for Jim, first with respect to the comp on the lever (inaudible) what sort of comps then would you guys actually need for maybe to go even on occupancy or actually lever it?
Jane Baughman
On an annualized basis?
Neely Tamminga – Piper Jaffray
Yes well, particularly for the quarter guidance and maybe on an annual basis. it.
Jane Baughman
On an annualized basis its easier to address, because the seasonality of the business and movement within the buyer margin piece. But on the annualized basis, once we restore our average sales volumes, north of the 3.5 million where it sits currently today, you need just a low single digit positive comp to leverage.
Neely Tamminga – Piper Jaffray
Okay, and then about occupancy expense, I mean, you guys do have co-tenancy with the Linens-N-Thingsthat might be closing maybe, are you seeing some disruption from that and are you actually able in those locations able to work with the landlords so that maybe your able to get some of your occupancy costs lowered given that the occupancy rates are going to go down., any sort of color on that?
Barry Feld
I'll take that in two pieces, first in a number of markets where the Linens-N-Things are closing or liquidating, that has put pressure on certain categories within our stores as it relates to towels, bath and body products, things of this nature. You know we saw the same thing in markets when furniture retailers would liquidate, that we would get similar pressure in stores located nearby, you just have to work through that.
The second piece is that we are constantly in discussions with all of our landlords as it relates to opportunities to reduce occupancy cost in centers where major tenants, whether its Linens-N-Things or other retailers have gone dark so that's an ongoing working process for us.
Neely Tamminga – Piper Jaffray
I understand its ongoing, but are you finding that the decisions are becoming favorable for you guys.
Barry Feld
Well I think it's been a mixed bag, it really is center specific. We had in many cases favorable outcomes and in some cases resistance from the landlord simply because of their abilitie to meet their own financial obligations gets diminished if there is only a handful of large big box retailers in that particular center. So it's really is quite center specific.
Neely Tamminga – Piper Jaffray
Okay, and then just going back to Jennifer’s question on seasonal, , obviously you guys are big Christmas business, you just do some Halloween business, we noticed in some of our store checks that you just simply didn't even have a presence its seems like over the fourth. So are you, in terms of specific the Fourth of July product etcetera, are you guys de-emphasizing some of your maybe lower tier type volume, seasons, at this point, or is there some sort of shift in which seasons you are actually going to focus your fire power.
Barry Feld
No, not at all. In fact, I don’t know store specifics for Fourth of July, but the Fourth of July holiday weekend was actually very strong for us. And what we emphasized was the home entertainment, particular emphasis on beer and wine products and it was really quite successful for us. It wasn't better than the stores so it's not one of those holidays where its out in front in a dramatic fashion like when we said Halloween or Christmas, things of this nature. But Fourth of July was fairly robust and a fairly successful period for us.
Neely Tamminga – Piper Jaffray
I dialed in a little bit late, did you make any comments as to how you are currently trending?
Barry Feld
No, we are not commenting for our third quarter at this juncture.
Neely Tamminga – Piper Jaffray
Would you at least be willing to say whether or not your current comp plan is, where you are general, I mean, would you set a comp plan outside of where your currenttrends are?
Barry Feld
Given the fact that the third quarter encompasses the election period, whichais a retailer, I have always seen unpredictable volatility. We put a range in our guidance on the top line that takes into account the volatility that can occur throughout the quarter and I'm just going to leave it at that.
Neely Tamminga – Piper Jaffray
Alright, good luck
Barry Feld
Thank you very much.
Operator
And your next question comes from the line of Joan Storms from Wedbush Morgan please proceed.
Joan Storms – Wedbush Morgan Securities
Hi good afternoon guys.
Barry Feld
Hey Joan.
Joan Storms – Wedbush Morgan Securities
Just a couple of housekeeping items. For the year, your CapEx plan, you gave us the year to date, what is the CapEx for the year now that you've eliminated a couple of new stores.
Jane Baughman
The projection for the year is $12 to $14 million
Joan Storms – Wedbush Morgan Securities
And I understand that all your stores openings are done, are all the closes done as well?
Jane Baughman
No there is one closure to happen in the back half
Joan Storms – Wedbush Morgan Securities
And then, just on the increase cost coming from your fuel domestically inbound and outband, as well as cost of product. I guess you haven't really necessary talked about that before, is this something just with the recent spike in gas prices has happened, I guess more specifically related to the over seas stuff.
Barry Feld
Yes, I mean Joan, specifically if you look at, internally we look at our fuel cost as they were budgeted just five or six months ago, compared to what fuel costs are today, and theres a significant delta.
Joan Storms – Wedbush Morgan Securities
Ummh .Okay I mean I guess with regards to your product coming from over seas.
Barry Feld
Correct.
Joan Storms – Wedbush Morgan Securities
Okay, that’s it thank you.
Barry Feld
Thank you.
Operator
And your next question comes from the line of David Magee from Suntrust Robinson Humphrey please proceed.
David Magee – Suntrust Robinson Humphrey
Hi, good afternoon,
Jane Baughman
Good, afternoon,
Barry Feld
Hi David
David Magee – Suntrust Robinson Humphrey
Just a couple of questions. On, the traffic number is impressive, what do you think is the most effective tool to driving higher trafficfor you all?
Barry Feld
Well David, I will take a minute, I will be a little bit long winded on the traffic number because if you go back to the beginning of the turnaround, there are really are two things that are extraordinarily complex to fix in the process for a retailer like us. One, was getting our price value credibility back and getting our customer traffic back, and the second one was having enough runway to get through that process.
We went out, we got a $200 million credit facility that ensured that we had the runway so we solved that. Then we made a significant number of moves over the last 24 months to really focus on getting that price credibility back and getting the positive customer traffic back in place. And excluding California, many of the customers traffic numbers are really even more dramatic than that.
So, now that we have essentially even in a climate like this a relatively stable top line, its really all hands on getting the business model profitable at this juncture. And while we've had a few pot holes as related dramatic escalation in commodity and fuel pricing specifics, we are looking at every opportunity here now to get underneath the top line, and make whatever requisite structural changes need to occur so that the business model is profitable.
We are very confident, based on what we see and what we hear from our customers that the traffic momentum that we have experienced all year, is really becoming rock solid and should play well as we move throughout the year particularly into the holiday season. So, we feel very very good about that. I am now going into specific about the variety of drivers that we are using to bring the customers in. But the overaching driver, I would just have to say is we've had a multi-decade reputation for being a value retailer for unique and authentic products, and we are getting that credibility back out there in the market place, and its having very good yield. We have to get our average ticket back up, we've got to get underneath the cost structures to mitigate some of these other issues that occurred. But this continues to give us a tremendous amount of confidence that our concept resonates in the market place that it has a very strong position relative to our competitive landscape, and that its a long term sustainable trend that we can work with now that we have this solidification of the top line in the customer traffic.
David Magee – Suntrust Robinson Humphrey
Barry did you mention what the conversion rate was year-over-year?
Barry Feld
No we don't talk about the conversion rate but it has improved.
David Magee – Suntrust Robinson Humphrey
You mentioned about the differential performance between the eastern stores and western stores? Are there some pockets of stores in east that are close to profitability at least on a contribution basis?
Barry Feld
Yes, there would bea meaningful number throughout the South Eastern United States and in Texas and in many markets east of the Rockies.
David Magee – Suntrust Robinson Humphrey
Is there a big difference between those stores and the California stores? Is it a sales per foot issue?
Barry Feld
Sales per foot issue would be one, but I wouldn't say it’s meaningful on aggregate, its so individualized I don't want to comment.
David Magee – Suntrust Robinson Humphrey
Then lastly, are you benefiting at all from consolidation out there? You've mentioned some of the near term pressures. Are there any areas that are benefiting from the same trend?
Barry Feld
Well, when you look at the number of the other retailers that are falling by the wayside, and when you look at our customer traffic trends, I do think ultimately we will benefit from the consolidation going on. We have a very strong level of confidence that our concept is quite sustainable, we have a very unique position in the market place, and as other retail concepts that are either pedestrian or relevant and they go away. I think they are voids that we can fill and we'll continue to build on our unique positioning as well, to ensure that we are one of the companies when this economy continues to improve in whatever period of time that is, that we’ll be one of the folks to benefit from sort the next level of economic up turn.
David Magee – Suntrust Robinson Humphrey
Great thank you Barry and good luck.
Barry Feld
Thank you very much.
Operator
And our next question comes as a follow up from the line of Budd Bugatch from Raymond James please proceed.
Budd Bugatch – Raymond James
Hi.
Barry Feld
Hey Budd.
Budd Bugatch – Raymond James
Jane, can you help just to go over again the borrowing base, and where you think that peaks and maybe help us give us a little bit of visibility of where you think inventory peaks third quarter and maybe for fourth quarter?
Jane Baughman
Okay. I can answer or I will answer some of that. We've addressed with commentary in both the press release and our script. The borrowing base right now is about $189 million; it steps up to the $200 million of full availability during the third quarter, well advanced of our peak borrowing period. And with regard to where its going to peak, we're not going to comment on that, It will peak in early to mid November, as it has historically done.
Budd Bugatch – Raymond James
And what do you think, can you you talk a little bit about cash flow from operations for the year and what do you think that comes to?
Jane Baughman
Can’t really comment on that, we've not provided guidance for the fourth quarter at this point.
Budd Bugatch – Raymond James
Okay. And inventory did you give us where you think that would peak?
Jane Baughman
Well we commented on inventory being at the end of fiscal year down $25 million to last year.
Barry Feld
But I would add two comments to that, one our inventories are very well under control, both from a weak supply on hand and in terms of being able to manage terms of the freshness of the inventories thats going to stores. And just to reiterate what Jane is saying, because I think these are two very important points from the liquidity stand point.
Number one we will finish this year with inventory down $25 million over last year, number one. And then number two, from a capital expenditure, this is the first time as you know, since we started the turn around that we no longer have any contractual CapEx expenditures that we have obligations on, and which is going to be very healthy for us on the go forward basis because the company's capital needs really quite minimal at this juncture as we look out in front of us.
Budd Bugatch – Raymond James
And you see no issues next year as you look forward for, I realize you are not giving guidance for the fourth quarter, but I think one of the investor concern is the viability and the ability of the company to handle an extended period of time of difficult economics, you see running into none of that next year?
Barry Feld
What I said in my comments, Budd, is that I am absolutely committed to taking whatever actions are going to be required to return our company to sustainable profitability and to manage cash as we've managed it. For several years now, as many of our competitors have gone into chapter and this liquidity question has come up and I've said and reiterated over and over again, we manage cash very tightly, we watch the company very closely. We are firmly committed to getting positive customer traffic back on track, and once we are through with the commitment of contractual CapEx obligation, we'll be in a place where we will be very selective in the way that we put dollars out.
All of those things taken in context, position us in a place where we believe we have very good flexibility to weather a long term down turn. And as I said on many of these calls, regardless of how tough macro economics gets we believe we have the capability and the resources to manage the business through it and to be one of the winners that come out on the other side. We've been saying that for a couple of years now.
Budd Bugatch – Raymond James
I understand and I am just trying to make sure that nothing has changed on that. So if you get the inventory down to $247 million by or thereabouts by at least no higher than that by the end of the year, we will have more inventory in the storage, we will have more stores open right year over year? So less on the DC's, less on the water. Have a way to read that?
Barry Feld
That’s correct.
Budd Bugatch – Raymond James
Okay. Alright, thank you Barry
Barry Feld
Thanks Budd.
Operator
(Operator Instruction)
We have no further questions on the line at this time; I would now like to turn the call over to Mr. Barry Feld for closing remarks. Thank you.
Barry Feld
Hey, everyone again thank you for continuing to follow and reach out for the company, we are working at our end to continue to move down a very successful path. We continue to be very pleased that customers are responding to our merchandise repositioning. And we are working diligently to restore shareholder value for all of our valued shareholders out there and believe we are extremely well positioned to move to what we believe it going to be difficult holiday season.
So thanks you again for your participation and we look forward to updating everybody as we work through our third quarter. Thank you very much.
Operator
Thank you for your participation in today's conference. This concludes the presentation and you may now disconnect.
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