ACMR ACM Research Inc-A

Operator

Welcome to the A.C. Moore second quarter 2008 earnings call. (Operator Instructions) Mr. Lepley, you may begin your conference.

Rick A. 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 management’s 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 company’s filings with the Securities and Exchange Commission including its most recent Form 10K, a copy of which may be obtained from the company upon request and without charge. This morning I’m joined by Mike Zawoysky, our Acting Chief Financial Officer, and Joe Jeffries, our Chief Operations Officer. I’m also joined by Craig Davis, our Vice President of Marketing and Merchandising. Mike will take you through our financial performance for the quarter, Joe will discuss some of the operational initiatives we’re working on, and Craig will give a very general outline of our second quarter activities in merchandising and marketing. Before they do that, I’d like to make a few remarks about the second quarter in particular about the announcement that we made in June. That announcement pertaining to our review of our real estate portfolio was made on June 9, 2008. It recapped in summary form the results of our review. We indicated we intend to close between seven and 10 stores in this calendar year and that we will reduce the number of planned store openings for 2008. While this review pertained to all 139 A.C. Moore stores, the majority of recommended closings were in the Southeastern United States where our costs of supplying products from New Jersey were considerably out of line versus the chain-wide average. Advertising costs for many of these markets were also problematic as a result of the dispersed store population and lack of density in any one market. Creating awareness for one store, Palm Beach for example, might come at the same dollar cost as creating awareness for several stores in Palm Beach County. So the dollar burden placed on one store put it at a severe disadvantage in working toward profitability. One solution was to apply the company-wide percentage of sales average to the advertising spend in these markets but that generally resulted in not being able to generate enough customers to work toward profitability. The other solution was to open a warehouse in the Southeast, put more stores in each market as soon as we could, and then bet on a quick ramp up in volume to quickly begin to recover our costs. In a stronger retail environment we may very well have opted for that decision. But the current slump in the housing market in Florida made that alternative seem too risky for a small company such as we are. While we fully believe that the retail market in Florida is a good bet for the long term, we also believe that the consumer demand for our products in the short term would not be strong enough to profitably support the very small and geographically dispersed number of A.C. Moore stores that we have down there. The economies of scale we incorporated in our forecast for the coming 10 or 12 quarters based on our cost of servicing the deep South and the lack of store density in any one metro market contributed to our impairment of assets decision in that specific group of stores. So that background may give you a better understanding of the June announcement particularly as it impacted the stores located the greatest distance from our warehouse. Through the end of the second quarter we had not actually ceased operations in any location and we ended the quarter with 139 stores. While we began closing some stores during the second quarter, the final dates of operation and closure actually fell into the current quarter. So far in this quarter, the third quarter, we have finalized closing five stores. In this quarter we also began the process of closing a few more stores. In the second quarter we also opened three new stores and relocated one store into new space. We expect to open one new store in the third quarter and one new store in the fourth quarter. At the present time it still appears to us that the ranges of store openings, closings and charges to earnings that we enumerated in our announcement of June 9 are accurate. Now I’d like to turn the call over to Mike Zawoysky who will discuss the financials for the quarter.

Michael G. Zawoysky

Sales for the quarter were $126.4 million an increase of 1.6% over sales of $124.4 million during the second quarter of last year. Same store sales decreased 4.8%. Adjusting for the impact of stores that closed in early July, comparable store sales would have been a decrease of 6.3%. Gross margin for the quarter was 41.4% down 50 basis points from 2007. The drivers of the gross margin decrease were freight cost increases related to fuel prices and the liquidation of inventory for the stores that were closed in early July. This decrease was partially offset by continuing improvements in vendor pricing, retail price adjustments as a result of ongoing price elasticity studies, and a higher initial mark-up on imported merchandise. Removing the impact of the stores closed in early July and the freight cost increases, gross margin would have improved by 40 basis points. SG&A expenses were 45.6% of sales, 320 basis points higher than last year. Costs related to the impairment of assets from the real estate portfolio review announced in June represented a 150 basis point increase. Store payroll represented a 30 basis point increase. The majority of the remainder was due to the deleveraging of occupancy expenses against store sales. Store pre-opening expenses for the three stores that opened and the one store that relocated during the quarter along with stores that will open later this year were $602,000. Last year pre-opening costs for the one store opened during the quarter and stores opened later in the year were $177,000. Store closing expenses for the quarter were $726,000. Net interest expense in the quarter was $65,000 compared to net interest income of $217,000 for the same period in 2007. This decrease is attributable to a lower cash position and lower interest rates throughout the quarter. For the quarter there was a net loss of $4.3 million or $0.21 per share. This compares with a net loss of $559,000 or $0.03 per share in 2007. Second quarter 2008 results include $0.07 per share related to the non-cash fixed asset impairment and $0.02 per share related to store closing costs. 2007 results include costs of $0.03 per share related to a one-time legal settlement. For the six months of 2008 sales were $253 million a decrease of 2.6% compared with 2007 sales of $259.8 million. Same store sales were down 8.4%. Gross margin for the first six months was 42.1% up 80 basis points over 2007. This improvement is due to merchandise expanded margin on both direct and indirect globally sourced merchandise, vendor cost leveraging, and retail price adjustments as a result of ongoing price elasticity studies. This was partially offset by increases in freight costs related to fuel and the liquidation of the stores which closed in early July. SG&A expenses year to date were 44.8% of sales an increase of 350 basis points over last year. Costs related to the impairment of fixed assets represented 70 basis points, store payroll represented 30 basis points, the inventory restatement represented 20 basis points. The majority of the remainder of the increase was due to the deleveraging of occupancy costs against store sales. Pre-opening costs were $1.2 million for the seven stores which opened and the one store which relocated in the first half of 2008 and stores that we’ll open later this year compared with $491,000 for the two stores opened in the first half of 2007 and lease costs for stores opened later in the year. Net interest expense for the first six months of 2008 was $371,000 compared with net interest income of $450,000 for 2007. This year includes an interest component of the company increasing a state tax reserve of $336,000, a lower cash position, and lower interest rate. For the year there is a net loss of $6 million or $0.30 per share. This compares with a net loss of $214,000 or $0.01 per share last year. The net loss for this year includes $0.07 per share related to the non-cash fixed asset impairment, $0.03 per share related to increasing a state tax reserve, $0.01 per share related to the inventory restatement, and $0.02 per share related to store closing costs. 2007 results include costs of $0.03 per share related to a one-time legal settlement. Inventory at June 30 was $136.6 million which represents a 3.3% decline from last year on a per store basis. Year-to-date capital expenditures were $8.6 million. Depreciation was $4.9 million for the quarter and $8.6 million for the year. This compares with $3.4 million for the second quarter of 2007 and $6.9 million for the first six months of last year. Cash net of debt was $25.3 million versus $31.6 million last year. Our 10Q for the quarter will be filed shortly after this call. Now I will turn the call over to Joe.

Joseph A. Jeffries

I would like to begin by providing you an update on the operational improvement projects mentioned on previous calls. Improving execution across the entire company is a high priority of ours. It is our belief that high level retail execution begins with top talent and exceptional tools, systems and structure. Our new category management structure has been in place for an entire quarter and we are already beginning to see positive results across many merchandising fronts. Narrow lines of focus within the merchandise division are enabling us to recognize opportunities in sales, margin and cash flow. An example of this is our average store level inventory. For the quarter we ended at an average of $982,000 per store versus $1.15 for the same period last year, an improvement of $4.5 million. The new structure has already proven to support our continual belief in our ability to react quickly and execute at the store level. Beyond just structure and enhanced systems we’ve also added new talent within the merchandise organization. Three new merchants have joined A.C. Moore, all from strong retail organizations such as QVC, Chico’s and the Christmas Tree Shop. Phase 2 of our advertising efforts continue. We are focusing our efforts on driving traffic into our stores by retaining customers and expanding our brand with new vehicles in an effort to attract new customers. One of our primary objectives is to become more intelligent about our customers and target those that are high-value consumers in ways which leverage our advertising spend and drive more frequent visits and larger baskets. In stores our management teams and associates have been very busy focused on service, merchandising and operations in preparation for quarters three and four. Our quality customer care training began its deployment in the quarter and has been very well received by our associates and customers alike. The energy and commitment given this program by our store teams is very impressive and we have very high expectations related to this new program. Many new and exciting merchandising programs were also introduced in the quarter. The entire scrapbooking department was updated with new products, programs with inspirational signing. Our occasions department was updated and expanded providing a much greater selection and ease of shopability. Several other programs were updated as well and our craft paint program was aggressively marked down and sold in advance of our new program setting this month launching our new private brand craft paint My Studio. Our transition from season to season has improved greatly this year. Our new merchandise planning process has enabled us to transition from the summer program into fall three weeks earlier than last year. Craig will elaborate further on the overall merchandise performance during his commentary. Our process re-engineering improvement project began its deployment across the chain and is scheduled to be complete this quarter. The improved processes provide new efficiencies with greater productivity freeing up task time allowing our store teams to spend more time with customers assisting them with their needs, not ours. Our Oracle Retail Data Warehouse implementation continues as planned scheduled to launch parallel to our current systems during the fourth quarter of this year. During this parallel period we will be testing automated replenishment on a few select categories. The parallel test will allow us to vet out any potential issues with the system without creating any inventory jeopardy during this critical selling period. The pilot will continue until January 09 at which time we will be converting our financial calendar to standardized weeks. This will allow us to take advantage of the comparative sales reporting available within the new systems. Once our financial weeks and sales history have been aligned, the Oracle retail system will go live as our system of record. Throughout ‘09 we will continue to expand the breadth of product that will be processed via automated replenishment. Concurrently we will build the roadmap for additional merchandise modules, we will deploy and begin the implementation of these modules during 09 with completion slated early in 2010. The additional capabilities include Oracle demand forecasting and allocation already purchased as well as a product to be selected that will replace our antiquated space and fixture planning tool. We are extremely about the capacities we foresee from these systems and believe the functionality will assure us cleaner inventories while having the right product in the right place at the right time. I want to take a moment and outline our internal actions to improve our operating margins. First, leveraging our open to buy process within the category management structure is critical. This is allowing our merchandising and replenishing teams to make more intelligent buys, having greater visibility of inventory, and working from more realistic sales forecasts. Second, we have conducted another round of price elasticity studies that have yielded some additional margin opportunity. These coupled with better vendor terms should allow us to hit our year ending margin plans. Third, managing costs across the organization is something we are very focused on. We will manage store labor more proportionately to sales and task levels. Our contracts and services have been reviewed and measures are in place to reduce some expenses the back half of 2008 and into 2009. Fourth, we have focused efforts and programs underway designed to reduce and prevent shrink across the organization. I want to reassure you that the entire A.C. Moore team is dedicated to reducing controllable expenses while growing sales profitably. At this time I’d like to turn the call over to Craig Davis who will elaborate further on our merchandising performance.

Craig R. Davis

I’d like to start my comments today with a few words about sales. The following merchandise categories performed well during the quarter: Cake and candy, craft paints and accessories, as well as fine art supplies. I’m also pleased to report that yarn for the first time in many quarters was positive for the period. We saw improving trends in wood, frames and floral. The second quarter is an important transitional quarter as we prepare for the very important back half of the year. During the quarter we completed 22 resets affecting 550 linear feet of basic side counter programs. While we are pleased with the progress it has been made in our basic programming processes and the results we are seeing in specific categories, there is still more to do. During the early part of the third quarter we will complete the remaining 15 side counter resets affecting 437 linear feet required to drive the balance of the year. As mentioned earlier we have begun to make progress with our execution of seasonal transitions. This is the result of improved planning and adherence to processes and timelines. We entered the third quarter with tools to monitor seasonal performance that we did not have this time last year. First, we have perpetual inventory data by SKU and by location which will begin to help with improving our ability to get the right product in the right store at the right time. Second, we have ladder plans that will help manage sell-through and SKU pricing within season. Third, as part of our category management we have a team focused on evaluating and distributing non-basic merchandise. Now I’d like to update you on our Nevada prototype store. As communicated on previous calls, during the fourth quarter last year and into the first quarter of this year we observed and evaluated several things that we believe will improve both performance and the in-store experience. Some of these changes were phased in and applied to our new openings during the second quarter beginning in late April. We have made changes to departmental adjacencies resulting in improved category dominance and product flow. We relocated several of our seasonal categories to the front of the store providing for a fresh flow of seasonally appropriate merchandise. We believe this will improve the shopping experience and our ability to connect with the customer. We have added a new department navigational sign package designed to improve way-finding and connecting with the customer. We have added in key departments a new inspirational display program designed to stimulate ideas and possibilities. While we started this process in late April, many of these items were installed during the quarter. So for now we will apply these changes to the stores we will open during the rest of the year. We will continue to evaluate the results with an eye towards determining what will be the final model. We remain focused on the top five merchandising and marketing initiatives we have communicated previously. One, improving our seasonal merchandise transitions. Two, raise the talent of the team through internal training and external acquisition. Three, leverage category management and newly-implemented processes. Four, evaluate and improve merchandise assortments and promotional events. Five, define our sourcing strategy both global and domestic. In closing, we believe these five focus areas will deliver sustainable sales and margin improvements over time. Now I’ll turn the call back to Rick.

Rick A. Lepley

We will take the first question.

Operator

(Operator Instructions) Our first question comes from Caru Martinson - Deutsche Bank.

Caru Martinson

I just wanted to follow up on the same store trends here. What are you seeing in terms of customer traffic here versus pricing and just kind of a geographic split going forward?

Joseph A. Jeffries

Our customer traffic has improved slightly on a cost basis and our average transaction seems to be staying flat.

Caru Martinson

I thought I heard you say that you’re seeing positive trends for framing. Is this the custom framing side of it or the tabletop frames?

Joseph A. Jeffries

Well I didn’t mention framing directly. We are seeing positive trends in both.

Caru Martinson

I’m curious in terms of the better pricing coming from vendors. Most folks that we’ve talked to all have said inflation coming out of China, raising prices trying to offset some of the fuel costs themselves. How are you going about securing the improved pricing?

Joseph A. Jeffries

Well as part of the category management process we’re constantly evaluating SKU items within the assortment and finding ways to drive volume into SKUs that will help us leverage pricing. Also the ability to work through the specs of products overseas, particularly to help improve costing and help them leverage their ability to acquire raw materials will also help as well.

Caru Martinson

In terms of the competitive environment as you’re perhaps exiting some of these markets, what are you seeing in your core markets that you’re going to be retaining whether it’s from JoAnne’s or Hobby Lobby or Michaels or others?

Joseph A. Jeffries

We’ve not seen any material change thus far this year and they’ve opened a few stores in some markets but nothing out of the ordinary.

Operator

Our next question comes from William Armstrong - C.L. King & Associates, Inc.

William Armstrong

I just wanted to clarify the impairment charges. Were they all in that SG&A?

Michael G. Zawoysky

Yes, they were. Let me clarify that. The impairment charges were SG&A and then the closing costs, the $726,000, were the pre-opening and closing costs line.

William Armstrong

What was actually the dollar amount of the impairment charge in SG&A?

Michael G. Zawoysky

$1.8 million.

William Armstrong

The seasonal category seems to have been the weakest for both you and your main competitors. Can you talk about your seasonal inventories now going into the fall? Have you been buying less? How do you feel about your inventory position in seasonal going into the fall?

Craig R. Davis

I’ll go back to some comments I made on previous calls. We feel that we’ve right-sized our purchases for the available sales in the market place. We took into account specifically in Christmas last year where we wanted to build the assortments and we’ve purchased appropriately. I feel very comfortable about where we’re at today.

Joseph A. Jeffries

The thing that’s helped us the most is the visibility by SKU by store of what we carried over last year. We never had that before so we were always ordering based on a sales expectation without any regard to what product may have been left in the back room of the store from the year or years before. So now for the first time we’re able to map that out and we think that’s helped us appreciably.

William Armstrong

So do you think that your seasonal mark-down exposure ought to be less then going forward than say last holiday season?

Rick A. Lepley

Yes. Last holiday season was pretty rough because we had ordered so heavily and we do expect that we should do a lot better marking down products and closing out products at the end of this seasonal period.

Joseph A. Jeffries

In addition to that I mentioned in my comments that in addition to the perpetual inventory that Rick discussed we also have ladder plans built now and coupled with the perpetual inventory it will allow us to manage pricing within season that will allow us to optimize the margin opportunity within this season.

William Armstrong

Did I hear you say earlier that you transitioned for fall three weeks earlier than last year?

Joseph A. Jeffries

Yes, that’s correct. And that’s typically the transitionary timeframe that’s existed within the industry for many years. Last year due to lack of planning and the ability to execute well we were able to reverse that from last year and we’re out in a strong way this year in the market place.

William Armstrong

So you were basically just late last year and now you’re correcting that.

Joseph A. Jeffries

That’s correct.

William Armstrong

On another topic, store closings, are you exiting Florida altogether?

Rick A. Lepley

Probably not. In other words, the idea was to get out of any store that it was convenient to get out of and not so costly and where we would stay we would try to build store density in those markets. So as it looks right now we will end the year with stores in Florida and will continue to have some stores in Florida. And the thing that I really want to emphasize is that we’re not down on Florida. We think Florida’s a terrific place to be. What we can’t do is support the philosophy of putting one store in a multiple store market where perhaps our competitors have 10 or 12. That’s what doesn’t work for us.

William Armstrong

For modeling purposes, how many stores are you planning to close then in Q3 and in Q4?

Rick A. Lepley

I can’t tell you specifically. I would rather just have you net out our original statement and the guidelines that we gave you on June 9.

William Armstrong

So we’re still looking at the seven to 10 range then?

Rick A. Lepley

Yes. In other words, everything we’ve said then based on what we know right now is still accurate.

William Armstrong

And you actually have closed five so far?

Rick A. Lepley

That’s right.

Operator

Our next question comes from Laura Richardson - BB&T Capital Markets.

Laura Richardson

I just am confused still on the cost for the store closings. I’m trying to reconcile what you said you’ve already incurred this quarter with when you announced the store closings you said it was $7 million to $9 million in costs. So how much of that have we already incurred in the second quarter and can you again talk about the gross margin side? You said clearance was a factor in there I assume for those store closings.

Rick A. Lepley

She’s talking about the margin for the quarter being impacted by the stores that we closed.

Michael G. Zawoysky

Right. In early July we had closed four stores and the liquidation of that started towards the back half of June and that impact was 60 basis points is what the impact on that liquidation was.

Laura Richardson

Is that part of the $7 million to $9 million that you outlined for the closing costs?

Michael G. Zawoysky

No, that is not.

Laura Richardson

So then we have maybe another four coming?

Michael G. Zawoysky

To date we have $1.8 million for the impairment of assets that was in the SG&A section and then there was $700,000 that appeared in the store pre-opening/closing line. You’ll see that on the financials. So the balance $5 million to $7 million is what we expect to incur during the back half of the year.

Laura Richardson

Okay. And that’s going to be in S&GA and the pre-opening/closing line?

Michael G. Zawoysky

That would be in the pre-opening/closing line is where you would see that.

Laura Richardson

But then it sounds like we should have also inventory stuff or margin stuff for the liquidations, too?

Michael G. Zawoysky

Right. The liquidation costs are all appearing on the store pre-opening/closing line.

Laura Richardson

The liquidation is too?

Michael G. Zawoysky

Yes. The liquidation is part of that.

Laura Richardson

Then I guess I’m confused as to how there was some of that in the gross margin line.

Michael G. Zawoysky

The gross margin has to do simply with the price to liquidate the cost. When I’m talking about the liquidation costs, I’m talking about incurring the actual costs, the wages associated with literally the cost to move that inventory, the third party that helped us liquidate that product. That’s the $120,000.

Laura Richardson

Are you going to post a list somewhere of the store closings?

Michael G. Zawoysky

Yes. When you see the 10Q, that’ll have that information listed out on it Laura.

Laura Richardson

I want to ask another question related to gross margin too. Any comments on use of coupons in the quarter? To me it looked like you might have stepped it up a little in terms of some of these percent off your entire purchase coupons but was there any deliberate thought about doing that with it just where I live or was it everywhere and did it help the traffic and what did it do to the margin?

Joseph A. Jeffries

We’re testing a few things. Based on some learnings that we’re getting, we did test the waters with a couple of different offers to see what the reaction would be from the consumer. And you learn from these things especially in the economic times that we’re experiencing now. Some of the conventional things that worked well in the past may have quieted down a little bit so we have tested some offers; we’ve tested a couple of different vehicles as well; and you’ll see some more things coming from us in the future.

Laura Richardson

Anything that was successful enough that you’re going to use it everywhere?

Rick A. Lepley

If we told you that, we’d be telling our competitors too wouldn’t we?

Laura Richardson

Good point. My last question. In the comps was there any difference by months in what you saw?

Rick A. Lepley

Generally I would say our experience was similar to what we’ve been able to find out about other retails or what we’ve heard. We don’t really have any facts but it seems as though the quarter got weaker as it got deeper into it. I read for example a report that some analyst had out on CarMax, I think it was CarMax, and it was quite specific about how much weaker the quarter had gotten as they moved through it. And it just seems to me generally that that may have been applicable to retail in general.

Laura Richardson

One more follow up on that. Rick, I forget how you phrased it but you made the comment and we all interpreted it to mean you’ll probably have some positive comps in the fourth quarter to get you to flat for the year. How do you feel about that at this point?

Rick A. Lepley

I would say that it was our hope initially that that would be the case. At this point we don’t know what’s going to happen in the second half of the year. In fact there’s an article by [Kelly Evans] I think in this morning’s Wall Street Journal that says the United States is poised for a weak end to the year. So who knows? A few weeks ago everyone said oil was going to $200 a barrel before we’d ever see $100 again and then lately it looks like it’s headed toward $100. So we just don’t know. We’re hopeful that there will be some sort of a rebound in consumer spending in the second half of the year but we don’t know anything now that would make us feel better about the second half than the current market conditions.

Operator

At this time there are no further questions.

Rick A. Lepley

I’d like to say in summary something that we say quite often. This is a marathon and it’s not a sprint. Our goals remain unchanged. We want to drive top line sales. We want to optimize our distribution network. We’d like to continue our systems enhancement projects. We want to retain, attract and develop top talent. And we need to perpetually improve our store and real estate portfolio. Our efforts related to improving our efficiencies through the use of technology and right-sizing of the company are pretty much on target. As Craig indicated, throughout the quarter we saw our store in-stock position continue to improve and by the end of the quarter we believe it was in better balance than at any time in the past few years. And on a per store basis it was actually somewhat lower than last year. The efficiency with which we’re now able to conduct resets is much improved and the timeliness of the resets as well as our ability to adhere to our seasonal calendar is also the best that it’s been in several years. We’re on the way to standardizing the various Nevada model stores to a final format, and we expect to have the Nevada stores all on the same assortment and the same setup by the end of the first quarter. Our custom framing operations are on target and continue to perform to our expectations. Nearly all of our stores are equipped with the visualization technology and state-of-the-art digital support framing software. Our web business is on target and continues to grow at a steady and acceptable rate. Our supply chain is better managed and new experiments in reducing freight expenses are underway. The perpetual inventory system is functioning and the organization is getting more accustomed to using it and relying upon it. Our work toward employing state-of-the-art systems through the application of merchandising sweep is going just fine. We’re still on our timelines for installing automated replenishment and we still expect a major economic impact of that to be quite favorable beginning in 2010. In short, we feel pretty good about what we’re doing and where we’re going as it concerns all the things we can control. But we’re not oblivious to the fact that there are influences on our business that we can’t control, like the price of gas or the erosion of consumer confidence or the softening in consumer spending. Those influences are what they are. And while we cannot totally ignore them, we also cannot allow them to deter our focus on what’s good for the company in the long term. In closing, let me say that we’re especially pleased with the condition of our stores right now and the hard work and efforts put forth by our store general managers to get them ready for the second half of 2008. As I just mentioned, like most retailers we’re concerned about the macroeconomic environment. While we don’t know when to expect improvement, we do remain hopeful of seeing at least a moderate recovery in consumer spending later on this year. We’re staying focused on the five priorities that we outlined earlier. We still expect to emerge from all this change with a transformed company built on a solid foundation and we still 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.