Cost Plus, Inc. and its subsidiaries (“Cost Plus World Market,” or “the Company”) is a leading specialty retailer of casual home furnishings and entertaining products in the United States. Cost Plus, Inc. was organized as a California corporation in November 1946 and opened its first retail store in 1958 in San Francisco, California. As of January 31, 2009, the Company operated 296 stores under the name “World Market,” “Cost Plus World Market,” “Cost Plus Imports” and “World Market Stores” in 33 states. As discussed below, the Company is in the process of closing 26 stores. Cost Plus World Market’s business strategy is to differentiate itself by offering a large and ever-changing selection of unique products, many of which are imported, at value prices in an exciting shopping environment. Many of Cost Plus World Market’s products are proprietary or private label, often incorporating the Company’s own designs, “World Market” brand name, quality standards and specifications and typically are not available at department stores or other specialty retailers.
The Company’s stores are located predominantly in high traffic metropolitan and suburban locales, often near major malls. During the fiscal year ended January 31, 2009, the Company opened a total of 15 new stores, including 12 in the existing markets of Palm Desert, CA; Houston, TX; Lubbock, TX; Nashville, TN; Naples, FL; Phoenix, AZ; DC Area, VA; Columbia, SC; Chicago, IL; and three in the new markets of Flagstaff, AZ; Palm Beach, FL and Panama City, FL. In addition to opening 15 new stores in fiscal 2008, the Company also closed 17 stores. The Company did not open any stores in new states during fiscal 2008. In fiscal 2009, the Company does not intend to open any new stores.
On January 5, 2009, the Board of Directors of the Company, approved a plan for the Company to close 26 of its underperforming stores while exiting eight media markets during fiscal 2009. In addition, the Board of Directors approved a plan to reduce home office and distribution center staff by approximately 18% and implement a number of additional cost reduction initiatives. The Company is taking these actions to reduce costs in response to the challenging retail environment.
Merchandising
Cost Plus World Market’s merchandising strategy is to offer customers a broad selection of distinctive items related to the theme of casual home furnishing and entertaining.
Products. The Company believes its distinctive and unique merchandise and shopping environment differentiates it from other retailers. Many of Cost Plus World Market’s products are proprietary or private label. The “World Market” brand name or other brand names exclusive to the Company often incorporate the Company’s own designs, and have quality standards and specifications typically not available at department stores or other specialty retailers. In addition to strengthening the stores’ product offering, proprietary and private label goods typically offer higher gross margins and stronger consumer values than branded goods. A significant portion of Cost Plus World Market’s products are made abroad in over 50 countries and many of these goods are handcrafted by local artisans. The Company’s product offering is designed to provide solutions to customers’ casual living and home entertaining needs. The offerings include home decorating items such as furniture, rugs, pillows, bath linens, lamps, window coverings, frames, and baskets. Cost Plus World Market’s furniture products include ready-to-assemble living and dining room pieces, unusual handcrafted case goods and occasional pieces, as well as outdoor furniture made from a variety of materials such as rattan, hardwood and wrought iron. The Company also sells a number of tabletop and kitchen items including glassware, ceramics, textiles and cooking utensils. Kitchen products include an assortment of products organized around a variety of themes such as baking, food preparation, barbecue and international dining.
Cost Plus World Market offers a number of gift and decorative accessories, including collectibles, candles, framed art, and holiday and other seasonal items. The Company’s offering also includes a unique assortment of jewelry, fashion accessories and personal care items. Because many of the gift, jewelry and collectible items come from around the world, they contribute to the exotic atmosphere of the stores. The Company’s business is highly seasonal, reflecting the general pattern associated with the retail industry of peak sales and earnings during the fourth quarter holiday season.
Cost Plus World Market also offers its customers a wide selection of gourmet foods and beverages, including wine, microbrewed and imported beer, coffee, tea and bottled water. The wine assortment offers a number of moderately priced premium wines, including a variety of well recognized labels, as well as wines not readily available at neighborhood wine or grocery stores that have been privately bottled and imported from around the world. State regulations may limit or restrict the Company’s ability to sell alcoholic beverages. Consumable products, particularly beverages, generally have lower margins compared to the Company’s average. Gourmet foods include packaged products from around the world and seasonal items that relate to “traditional” holidays and customs. Packaged snacks, candy and pasta are often displayed in open barrels and crates. Food items typically have a shelf life of six months or longer.
The Company replaces or updates many of the items in its merchandise assortment on a regular basis in order to encourage repeat shopping and to promote a sense of discovery. The Company marks down retail prices of items that do not meet its turnover expectations.
Format and Presentation. The Company’s stores are designed to evoke the feeling of a “world marketplace” through colorful and creative visual displays and merchandise presentations, including goods in open barrels and crates, groupings of related products in distinct “shops” within the store and in-store activities such as food and coffee tastings and wine tasting in some states. The Company believes that its “world marketplace” effect provides customers with a fun shopping experience and encourages browsing throughout the store.
The average selling space of a Cost Plus World Market store is approximately 15,700 square feet, which allows flexibility for merchandise displays, product adjacencies and directed traffic patterns. Complementary products are positioned in proximity to one another and cross merchandising themes are used in merchandise displays to tie different product offerings together. The floor plan allows the customer to see virtually all of the different product areas in a Cost Plus World Market store from the store center where four zones, with bulk displays highlighting sharply priced items, lead the customer into different product areas. The Company has a seasonal shop, usually located in the heart of the store, which features seasonal products and themes, such as the holiday shop, harvest and outdoor. Store signage, including permanent as well as promotional signs, is developed by the Company’s in-house graphic design department. End caps, bulk stacks and free standing displays are changed frequently. Approximately 3,000 square feet of back office and stock space are included in the total square footage at a store, which averages about 18,700 square feet per store.
The Cost Plus World Market store format is also designed to reinforce the Company’s value image through exposed ceilings, concrete floors, simple wooden fixtures and open or bulk presentations of merchandise. The Company displays most of its inventory on the selling floor and makes effective use of vertical space, such as a display of chairs arranged on a wall and rugs hanging vertically from fixtures.
The Company believes that its customers usually visit a Cost Plus World Market store as a destination with a specific purchase in mind. The Company makes use of frequent receipts of products, seasonal themes and products, and consumable products to encourage frequent return visits by its customers. The Company also believes that once in the store, its customers often spend additional time shopping and browsing, which results in customers purchasing more items than they originally intended.
Pricing. Cost Plus World Market offers quality products at competitive prices. The Company complements its everyday low price strategy with selected product promotions and opportunistic buys, enabling the Company to pass on additional savings to the customer. The Company routinely shops a variety of retailers to ensure that its products are competitively priced.
Planning and Buying. Cost Plus World Market effectively manages a large number of products by utilizing centralized merchandise planning, tracking and replenishment systems. The Company regularly monitors merchandise activity at the item level through its management information systems to identify and respond to product trends. The Company maintains its own central buying staff that are responsible for establishing the assortment of inventory within its merchandise classifications each season, including integrating current trends or themes identified by the Company into its different product categories. The Company attempts to moderate the risk associated with merchandise purchasing by testing selected new products in a limited number of stores. The Company’s long-standing relationships with overseas suppliers, its international buying agency network and its knowledge of the import process facilitate the planning and buying process. The buyers work closely with suppliers to develop unique products that will meet customers’ expectations for quality and value.
Advertising
The Company’s marketing program is a multimedia strategy utilizing print, electronic and non-traditional media, including weekly newspaper circulars, daily newspaper advertisements, direct mail, radio, e-mail correspondence and online search functionality. Each medium is used to highlight product offerings and communicate promotional activity. In addition, the Company uses a series of advertising elements and store-based event activity to highlight grand openings of new stores. This activity is targeted to be both specific to each store opening and to the general market in which the new store is located.
The Company offers selected products on its website at www.worldmarket.com which provides customers with purchase options and product information for items sold in stores. The Company’s website is designed to leverage a multi-channel philosophy, giving customers an additional touch point with its merchandise and marketing and to increase traffic at its stores.
Product Sourcing and Distribution
The Company purchases most of its inventory centrally, which allows the Company to take advantage of volume purchase discounts and improve controls over inventory and product mix. The Company purchases its merchandise from approximately 2,000 suppliers, one of which represented approximately 10% and another which represented approximately 9% of total purchases in the fiscal year ended January 31, 2009. A significant portion of Cost Plus World Market’s products are made abroad in over 50 countries in Europe, North and South America, Asia, Africa and Australia. The Company has established a well developed overseas sourcing network and enjoys long standing relationships with many of its vendors. As is customary in the industry, the Company does not have long-term contracts with any suppliers. The Company’s buyers often work with suppliers to produce unique products exclusive to Cost Plus World Market. The Company believes that, although there could be delays in changing suppliers, alternate sources of merchandise for core product categories are available at comparable prices. Cost Plus World Market typically purchases overseas products on either a free-on-board or ex-works basis, and the Company’s insurance on such goods commences at the time it takes ownership. The Company also purchases a number of domestic products, especially in the gourmet food and beverage area. Due to state regulations, wine and beer are purchased from local distributors, with purchasing primarily controlled by the corporate buying office.
The Company currently services its stores from its distribution centers located in Stockton, California (“California”) and Windsor, Virginia (“Virginia”). Domestically sourced merchandise are usually delivered to the distribution centers by common carrier or by Company trucks.
Information Systems
Each of the Company’s stores is linked to the Cost Plus World Market headquarters in Oakland, California through an IBM 4690 Point-of-Sale (POS) system and a Multiprotocol Label Switching (MPLS) data network that interfaces with an IBM AS/400 computer. The Company’s information systems keep records, which are updated daily, of every merchandise item sold in each store, as well as financial, sales and inventory information. The Point-of-Sale system also has scanning, price look-up and on-line credit/debit card approval capabilities, all of which improve transaction accuracy, speed checkout time and increase overall store efficiency. The Company continually upgrades its in-store information systems to improve information flow to store management and enhance other in-store administration capabilities.
Purchasing operations are facilitated by the use of merchandise information systems that allow the Company to analyze product sell-through and assist the buyers in making merchandise decisions. The Company’s Central Replenishment system includes stock keeping unit (SKU) and store-specific “model stock” logic that enables the Company to maintain adequate stock levels on basic goods in each location. In fiscal 2008, a new Assortment Planning application was implemented to improve SKU level planning and management.
The Company uses several other information systems to manage and control its operations and finances. These information systems are designed to ensure the integrity of the Company’s inventory, support pricing decisions, process payroll, pay bills, control cash, maintain fixed assets and track promotions throughout all of the Company’s stores. The Company’s Warehouse Management system enables our distribution centers to receive, locate, pick and ship inventory to stores. In fiscal 2008, a new DC Labor Management system was implemented to improve DC labor planning, tracking and reporting.
Additional systems enable the Company to produce the periodic financial reports necessary for developing budgets and monitoring individual store and consolidated Company performance.