ACM Research, Inc.
Q4 2007 Earnings Call Transcript

Published: 24 Mar 2008

[Operator:]

At this time I’d like to welcome everyone to the A.C. Moore Fourth Quarter 2007 Earnings Conference Call. (Operator Instructions) I’ll now turn the call over to Mr. Rick Lepley.

[Rick Lepley:]

Good morning everyone. Before we get started today I would 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 and Exchange Act of 1934 and the regulations there under including without limitation statements as to the company’s financial condition, results of operation and 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 company’s filings with the Securities and Exchange Commission including its Form 10-K to be filed later this week. On the call today I’m joined by Marc Katz our Chief Financial Officer, Joe Jeffries our Executive Vice President of Operations and Craig Davis our Senior Vice President of Marketing and Merchandising. Marc will talk to you about our financial performance for the quarter and for the year and he’ll also have some remarks about the restatements we will be filing later this week. At the outset I would like to thank him and his entire team for all the work they put in to quantifying the errors and completing the restatements of our financials. They have had a very, very busy six months and the entire organization appreciates their hard work. I cannot possibly tell you just how glad we all are to be at the point where we can finally file. After Marc’s comment Joe Jeffries will have some remarks about our overall operations and Craig will have some specific remarks about merchandising and marketing. Before they do that I’d like to update you briefly by touching on a few of the pertinent highlights related to the fourth quarter and last year in general. As we indicated in our press release of February 20th we were disappointed with the results of the fourth quarter. As we’ve explained in detail on previous calls we think that the various steps we’ve taken in an effort to right size the company has accounted for most of the overall decline in comps sales. We still believe those were all necessary steps that had to be taken. Now we are of the opinion that harsher macro economic headwinds may have been introduced into the equation during November and December. While quantifying the softness in the overall arts and crafts market is an imprecise endeavor at best we think the market for our products was probably off about 4% or 5% in the fourth quarter. Particularly we think the softness in seasonal and children’s categories in November and December as pointed out by Target and other retailers extended to those same category offerings that we had available in quantity on our shelves. In retrospect we think we played a very good game for the first three quarters, in fact we’ve played a good game for 10/12th of the year as we were pleased by our October performance. The last 60 days of the year were not what we had hoped they would be. Those same economic headwinds have continued to play a part in the overall sales performance equation on in to the first quarter of 2008. On the last call I explained that we believed we had reached a point of diminishing returns on many expenses directed toward driving sales. Throughout the past year we worked to get those expenses back in line relative to the amount that each represents as a percent of total sales. We focused on expenses we could control in an effort to get them to levels that one would consider more normal for an average retail chain. Of course along with the decline in sales came a certain amount of expense de-leveraging. We began the focus on expenses late in Q1 just about one year ago. We increased the intensity in Q2 and Q3 and continued it on into Q4 when it became apparent to us that we needed to change our approach due to the change in the retail environment. We started the fourth quarter by not chasing after high comp and low margin events and then found ourselves doing exactly that in an effort to reduce the store inventories in the remaining six weeks of the fourth quarter. In that period we became highly promotional, we put more hours back into the stores and we made every effort we could to sell down inventory. That allowed us to avoid shipping any products back to the DC. While we thought that was necessary for the situation we were in we are clearly of the opinion that a less margin injurious approach is our preferred way of marketing going forward. This doesn’t mean we are not going to be promotional it just means that we really don’t want to do it to the extent that it hurts us so much. Throughout the fourth quarter we operated an auxiliary warehouse to accommodate our increase in direct source products. As I mentioned on the last call Mike Metheny our VP of Supply Chain arranged for more space after studying the speed of which we’ve begun to switch to more direct imports and private label products. Breakouts of import products for store distribution require more floor space and the additional warehouse facility provides for that. This temporary expansion continues to provide a short term solution and we will keep it in place at least through the balance of this year. The supply chain study we mentioned on the last call we be complete sometime during the second quarter. Some time after that we expect to go to work on our permanent solution, one of two distinct choices. One choice is to provide for another warehouse or cross docking facility located someplace else, probably south of here. The other choice is to expand our current facility. We continue to believe that our overall supply chain operations offer us an opportunity for substantial improvement in efficiency and cost savings and we wouldn’t embark on any expansion in warehouse space if we didn’t think it was a vital and integral part of achieving both. During the fourth quarter we opened seven new stores bringing our total to 12 new store openings during the 2007 calendar year. We also closed two stores in the fourth quarter. Our year end store count was 132. All of the new store openings since last September have been variations of the Nevada Class store. As we previously discussed we are committed to 14 store openings during the 2008 calendar year and four of these stores are already up and running leaving 10 more to open throughout the year. Total Nevada Class stores in operation right now total 14. Our custom framing business continues to perform to expectation and we exceeded our two objectives. One was to end the year with more than 100 stores having framing installations and we ended the year with 109 operating units. The other objective we imparted to you was related to our desire to have more than have our framing operations switch to digital and we ended the year with 70 stores equipped with the visual technology and digital support framing software. Both new installations and retrofitting of non-digital operations are continuing through this year. Oversize flat screen digital monitors are being added and we expect to be fully operational in nearly all stores with this new digital technology by the fourth quarter of 2008. On past calls we’ve stated our goal of launching perpetual inventory for the chain in January of 2008. I’m really proud of Mike’s IT team lead by our CIO Dennis Hodgson and the job they did in getting the perpetual inventory program designed and installed on time. We now have complete visibility of our inventory within our retail and warehouse locations. Items movement is tracked real time as product flows from warehouse to store and finally into the hands of the consumer. In the first quarter we have been focused on teaching our store associates how to utilize the information. As expected the launching of such a useful and necessary tool has spawned many new ideas we believe could bring quicker payback in our current environment. The organization made a conscious decision to alter the Oracle implantation time table. We decided to look at ways of further enhancing our perpetual inventory capability so as to experience better in stock positions much earlier than we could achieve via our original automated replenishment initiative time table. Resources were redirected to write additional reporting, build visibility into vendor lead times, open orders and our external supply chain. Without the need to build a basic infrastructure so we could better launch the larger initiative. We also allocated resources to enhancing the new RF gun functionality within the stores. That will give them key inventory data on demand that they never had before. We expect to deploy these new tools during the second quarter in order to reduce store out of stock conditions. In summary, we continue to make good progress on our overall system installations altering our time table and redirecting resources to the projects I just outlined will add six months to the target completion date. We are still using a phased approach throughout 2008 followed by full implementation and allocation 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. Our web platform which went live during the fourth quarter 2007 continues to grow exponentially although the numbers are relatively small in comparison to our total business. We’ve already sold products in all 50 states. We believe that like most e-commerce start ups the ramp up will be gradual. The growth continues to fall within our expectations. Web customers within driving distance of our stores can use the locator, class schedule feature and will find they also have the functionality to download advertising and coupon information. As I indicated earlier Joe Jeffries is here and he’ll have some remarks 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 then have some other comments after you hear from Marc and Joe and Craig will also have some comments before we open it up for questions.

[Marc Katz:]

Good morning. Before I discuss our results for the quarter I would like to make a few comments regarding our recently completed financial restatement. We have concluded that our cumulative inventory overstatement through 2006 was $24.3 million at the high end of our previously estimated range. The pre-tax impact to 2006 was $4 million. Each of the first three quarters of 2006 was impacted by $0.02 per share with the largest impact in Q4 of $0.08 per share. Each of the first three quarters of 2007 was only impacted by $0.01 per share. The restated inventory amount at the end of 2007 calculated under the revised retail inventory method is within 2% of weighted average costs. This will be recorded as a change in accounting principle on January 1, 2008. We incurred approximately $650,000 in costs associated with the inventory restatement. From a tax point of view we have already begun the process to obtain a refund for overpayment of taxes. We anticipate being able to take a deduction on our 2007 Federal Tax Return which will result in a refund of approximately $7 million. While the timing on actual collection is not known at this time we believe we will collect this refund during the 2008 calendar year. I will now highlight financial performance for the quarter and year. Two thousand six financial results will be discussed on a restated basis. Sales for the quarter were $177.3 million a decrease of 10.4% over sales of $197.8 million during the fourth quarter of last year. Same store sales decreased 14.5%. Gross margin for the quarter was 38.7% up 340 basis points in 2006. The increase is primarily related to the mix of merchandise sold which was positively impacted by favorable vendor pricing and higher initial mark up on import merchandise. SG&A expenses were 33.9% of sales, 410 basis points over last year. The components of the increase are costs associated with the inventory restatement 40 basis points, capturing sku level inventories 50 basis points, store payroll 50 basis points and the majority of the remaining increase is the result of de-leveraging of occupancy costs against the decline in comparable store sales. I would like to point out that capturing sku level inventories as opposed to taking inventories at the department level which was the historical practice will become a cost of doing business in the future. Pre-opening costs for the quarter were $1.2 million last year pre-opening costs were $1 million. Net interest expense in the quarter was $323,000 compared to net interest income of $18,000 in 2006. Two thousand seven interest expense includes a one time charge of $350,000 related to interest accrued on the settlement of Federal Income Tax audit for the 2004-2006 tax years. For the quarter there was net income of $4.7 million or $0.23 per share. This compares with net income of $4.90 million or $0.24 per share in 2006. Fourth quarter 2007 results include $0.02 per share related to the inventory restatement, $0.02 per share related to the closing of two stores, $0.03 per share related to taking sku level physical inventories and a $0.01 per share related to the one time interest charge. Fourth quarter 2006 results include $0.04 per share related to a store closing and lease termination and $0.01 per share related to management change costs. For the 12 months of 2007 sales were $559.7 million a decrease of 5.1% over 2006 sales of $589.5 million. Comp store sales were down 10.3%. Gross margin for the year was 40.9% up 240 basis points from 2006. The increase is due to the mix of merchandise sold which was positively impacted by retail price adjustments resulting from price elasticity studies, more favorable vendor pricing and higher initial markup on imports. SG&A expenses were 39.3% of sales, 210 basis points over last year. The increases were comprised of cost related to capturing sku level inventories 20 basis points, costs related to a one time legal settlement 20 basis points, costs related to the inventory restatement of 10 basis points and the remainder was due to the de-leveraging of store occupancy expenses against the decline of comparable store sales. Pre-opening costs were $2.6 million during 2007 compared with $3.2 million in 2006. Net interest income was $206,000 compared to net interest expense of $323,000 in 2006. For the year net income was $3.8 million or $0.19 per share. This compares with a net loss of $406,000 in 2006 or $0.02 per share. Year to date results for 2007 include the same items mentioned in Q4 plus $0.03 per share a one time legal settlement and a $0.01 per share for management change costs. Year to date 2006 results include expenses of $0.10 per share for management change costs and $0.04 per share related to a store closing and lease termination. Inventory at December 31 was $128.4 million down 3% on a per store basis. Year to date capital expenditures were $19 million. Depreciation was $3.7 million for the quarter and $14 million for the year. This compares with $3.4 million for the fourth quarter of 2006 and $12.3 million for last year. Cash net of debt was $43.6 million versus $51.9 million last year. Finally I just want to mention that our 10-Q for the third quarter and our 2007 10-K will be filed by, right now, best case Wednesday close of business, that’s our current belief is Wednesday close of business for both again the third quarter 10-Q and our 10-K for 2007. Within that 10-K restated results will be included by quarter for 2005 and 2006 and that will include an income statement, balance sheet and cash flow. Now I will turn the call over to Jeff.

[Jeff Jeffries:]

Good morning. As many of you know I recently arrived at A.C. Moore and have been in position since late November 2007. I’m excited to be part of the organization that Rick has assembled and to be part of what I see as a unique opportunity to create a very special and successful retail story. During the past three plus months I’ve taken the opportunity to get immersed in all aspects of the business. During this time I’ve recognized opportunity across all fronts with many improvement plans already in motion and some that are additional that we’ve instituted. Our objective is to transform the corporate support center into a store centric support organization. It’s our belief that when we focus on our thinking, planning and efforts with our store team’s top of money we position them for success that creates improved levels of execution on a daily basis. The realization of the store centric model will translate into a superior level of customer service. Because of improved execution, more available and knowledgeable associates positively impacting the customer experience. Beginning with the merchandizing division we have begun the process of implementing category management planning designed to optimize sales, expand gross margins and lower our inventory investment. Supporting this new process we are also restructuring our merchandising department creating three merchandise divisions led by specific divisional merchandise managers supported by merchandise planners, inventory allocation managers and visual merchandisers. This combined effort will position A.C. Moore to better manage seasonality, planogram execution and speed to market with new merchandise and service offerings. Let’s turn to advertising, as you know last year considerable time was spent analyzing the effectiveness and productivity of our insert program. This work has yielded success in most markets and some fine tuning in select markets is underway. Phase two of our advertising efforts is constructed around connecting more closely with the customer at the local level through targeted marketing vehicles. We see an opportunity to increase our message towards gift making and the emotional benefit of crafting. I want to touch upon store operations at this time. The importances of customer service, store execution and in stock position at shelf edge are the three top priorities we currently have in stores today. It’s fair to say that these will never change as they are the basics of retailing and those in which A.C. Moore’s reputation was built upon. In an effort to ensure we don’t lose focus on these we’ve launched some internal efforts to improve each of the three points. Customer interviews have taken place over the past 10 weeks using a third party firm in markets where we have good density and a variety of store formats. The objective was to understand strengths and weaknesses as well as identify purchase motivation factors. Early indications show that we are still hitting the mark in service we can further support this as we’ve seen a 36% decrease in complaints since October ’07 and a 99% increase in compliments for the same period. In 2008 all field team members will receive formal training with annual recertification designed and focused on the service experience we want to deliver and that our customers expect from A.C. Moore. In 2009 we will formally introduce a three component customer service index program. The structure will consist of a monthly mystery shop, online submission and reportable complaints and compliments directly to our support center. Improving store execution on a daily basis is a common priority of ours. We are building upon the work conducted last year surrounding a task based labor model. This is important as we progress with the Oracle project and those new systems and functionalities that impact us at the store level. This is being further enhanced by phase two of the process reengineering project recently kicked off in February. We are using the same firm used in phase one and the objective is quite clear, to deliver standardized consistent and efficient process across stores. Those tasks identified in 2007 will now be reengineered to eliminate redundant ones while remaining tasks will be simpler and efficient allowing us to free up labor redeploying it into service and selling activities while supporting this with improved documented store operating procedures. In stock at shelf edge is a topic that we find critically important as we are focused on improving top line within the organization. As you know this industry is a components business and not being in stock on the key item the customer needs for a project is unacceptable. In mid Q1 we began a full court press at store and corporate levels addressing this subject. This effort is made easier in 2008 with the addition of perpetual inventory at the item level. We can now see on hand quantities at the item level in each store and in our distribution center. Our IT partners have provided a tool that allows stores to scan their outs and we in turn can pull the stated back understanding our out of stocks across all vendor partners. Source switches made in 2007 were designed to drive gross margin expansion and these efforts have been realized. However, because source switching in some cases resulted in extended lead time required we have determined that additional changes are necessary in order for us to continue this expansion while positively impacting our in stock position. This is simply the process in which we procure merchandise from our vendor partners. Other items impacting outs were the available windows to order product at store level. These have been adjusted providing more time to the store for ordering requiring the distribution center team to adjust their schedules appropriately to ensure we have a quick turn around with picking and delivery of these items. The last item addressed was the number of discontinued items remaining in active planograms far after being sold out. This is now understood and correctible because of the addition of perpetual inventory with visibility at the item level and then leveraged because of the new category management structure within merchandizing. Since our focus effort beginning in late February we have seen a 25% improvement in out of stock at shelf edge. In Q4 of this year A.C. Moore plans to implement Oracles retail merchandising system and Oracles retail data warehouse. Q4’s phase one of our long term inventory management strategy in phase one we will deliver base merchandising which includes automated replenishment at the store level phased in approach with select categories and skus. Oracles retail data warehouse will supply A.C. Moore with access to hundreds of merchandise reports designed to provide greater visibility at all inventory touch points. Future phases will include expanded roll out of automated replenishment to core A.C. Moore products, warehouse automated replenishment and Oracles allocation module. At this time I’d like to turn it over to Craig Davis our SVP of Merchandising and Marketing.

[Craig Davis:]

Good morning everyone. I would like to start my comments today with a review of sales. As was previously mentioned we are not pleased with our sales performance during the quarter. Several key factors previously mentioned contributed to the results. First a challenging macro retail market, second a very difficult year for seasonal décor merchandise and third a less than acceptable in stock position at shelf edge. We saw strength in several of our core crafting departments that performed well during the quarter. First silk floral, Q4’s positive performance was driven by Christmas stems, bushes and garlands. Margins improved year over year the result of lower acquisition costs and improved ad performance. Second, wicker, positive performance is the result of new content added into the basic planogram as well as new home décor items. Margins in wicker improved versus last year this was driven by lower acquisition costs. Third, cake and candy making, the area continued its relative positive performance driven by cup cake making as well as a couple of key items driven by the revitalized class program. Fourth, several new home décor programs added during Q3 performed well during the quarter. All of these programs delivered incremental sales to last year and at higher than chain margins. We continue to monitor and leverage these new programs. Let me now address our seasonal business. Christmas seasonal décor had a very difficult season. We experienced the same difficulty in this area that others in retail and specifically in our channel experienced. Due to long lead times required for planning, buying and receiving imported products commitments were made back in March 2007 to significantly increase the buy and floor space committed to this category at the expense of every day traditional programs. As the quarter progressed and the severity of the softness became apparent we found ourselves needing to stimulate sales and reduce inventory. In response to this situation we did two things. First we identified products that were not performing and would not be part of next year’s assortment. We aggressively accelerated discounting and early season markdowns to burn off the inventory. Second we identified historically proven basic seasonal décor items that were performing but were just over bought. Knowing these items will be part of next years assortment we then management the flow to the stores so that the forecasted carry over remained mostly in the DC. The resulting margin was below planned but above prior year while optimizing the sales opportunity in the market place. We have taken a very conservative approach to seasonal purchases going forward. Perpetual inventory provides visibility at the store level improving our ability to right size these buys. I would like to make a few comments about our new Nevada Class prototype store. As we went through the fourth quarter and now into the first we have observed and learned several things that we believe will improve both performance and the in store experience. These adjustments will be applied to our new openings beginning in late April. Changes will be made to department’s adjacencies resulting in improved category dominance and products while enhancing the shopping experience. In addition certain fixtures will be expanded for improved shop ability and additional sku presentation. Finally we will complete the last phase of the Nevada prototype by implementing the enhanced inspirational signing and creative elements. We remain focused on the top five merchandise and marketing initiatives communicated in previous calls. Staying focused on executing quarterly plans and improving our seasonal merchandise transitions. Evaluating required skill sets for positions within merchandising and marketing necessary to drive future sales and margin growth. Review of our current processes and changes required to implement a category management structure to improve speed, efficiency and accountability for results. A detailed review of merchandise category performance as we develop assortments and promotional events to drive business in fiscal ’08 and beyond. Continue development of a global sourcing and vendor strategy to support sales and margin growth. In closing we remain 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 there are a few more things that I’d like to add perhaps in anticipation of some of your questions that may not be related to our financials. First of all we’ve said a number of times we view this as a marathon and not a sprint. It’s very important for us to stay focused on what’s good for the company in the long run and not on what might appear to be best quarter by quarter. Beginning about a year ago we outlined a three year plan. We said that in 2007 we needed to assemble a team at the corporate level and begin to centralize some of the decision making processes. We said that in 2008 we needed to begin to introduce to the stores some of the process improvements and refinements that new systems and advances would allow. We said that if everything went well we expected to see growth again beginning as early as 2009. Today you have the results of the first full year. We fully expect the next few quarters to be equally as challenging as the last one as we deal with the changes in the macro environment and continue working on our own internal restructuring issues. In short we have not seen nor have we experienced anything which would lead us to believe that we could accomplish any of the things we set out to do in less time than the original plan we outlined. We know that there is some sentiment that arts and crafts retailers may come through a recessionary period unscathed. In the last economic down turn wherein expendable income was less of a factor than peer of travel specifically in 2001 and 2002 our industry did grow and prosper and indeed we hope that would be the case again. With rising gas and food prices cutting into discretionary income the possibility exists that we may not fair as well if this down turn does fully develop and then process. Since Marc and I arrived here our policy has been one of not providing financial guidance and we have no plan to change that policy in the near future. However we will share one fact with you one time. Our financial plans and our budgets for 2008 do not provide for an overall comp store increase in this calendar year. We expect the first half of this year to be very difficult. Our expectation for the second half of this year is that it will be considerably better than the first half. Of course there is no way to know for sure but that’s how we are planning our year. Our goals today remain unchanged, improved store profitability, increased gross margins and increased efficiencies and economies of scale throughout the organization and that would predominantly be done through better utilization of information technology. The change in the retailing environment is causing us to condense our long list of to dos into five major areas of focus; the first is to drive top line sales. We are working on a lot of initiatives regarding new products, new vendors, fresh categories, expanded exclusive product offerings and unique and different marketing vehicles and strategies. Earlier you heard Joe discuss other ideas and concepts included in this area of focus. I can tell you from personal experience that there’s no one I know of to better lead this effort than Joe. I would also caution you not to expect too much too soon and to keep in mind that we have to drive some top line sales growth just to get back to zero. The second area of focus is to optimize our distribution network. This includes everything from vendor selection to a satisfied and happy customer leaving the parking lot. Our soon to be completed warehouse study will be part of this endeavor. We are also restructuring our merchandising department to incorporate the idea of product category management. The third area of focus is to continue our systems enhancements project. We began this effort in 2007 and as I mentioned earlier we are making steady progress. Bringing the company up to par with robust systems like those employed by other retailers including our pure play competitors can create enormous savings for us in future years. The fourth sphere of our focus is to rationalize our real estate portfolio. This means we need to take another look at individual store performance. We want to reanalyze the likelihood that we could fix underperforming stores in underperforming markets in a reasonable amount of time. We want to know if we might be better off focusing our resources on our newly opened stores and/or in our higher performing markets. Such a study is about to begin and we believe the results will be known some time in the second quarter. Finally our fifth focus is to retain, attract and develop top talent. We want an organization that reflects the values of passion and enthusiasm, integrity and a desire to be the best. That will give you a high level sense of our direction as we enter our second year of restructuring plan and deal with an uncertain economic environment. At this time we’d like to begin to take questions.

[Operator:]

(Operator Instructions) Your first question comes from the line of Seth Basham with Credit Suisse.

[Seth Basham:]

A couple questions, since you talked about the outlook for 2008 Rick maybe you could give us a broad overview of why you are expecting down comps relative to your competition, Michaels in particular, that is expecting flat comps? What’s different about your business versus theirs?

[Rick Lepley:]

I didn’t say we were expecting to comp down for the year what I said was we were not building a comp increase for the year.

[Seth Basham:]

So flattish. Since you went down that path would you be willing to talk about where you expect margins to be flowing throughout the year?

[Rick Lepley:]

No we wouldn’t. I would say simply that we hope to continue doing what we’ve been doing and we hope that leads to some improvement again this year. In terms of how much I really wouldn’t want to say.

[Seth Basham:]

One other question on in stock, it sounds like you guys have really studied the issues and are taking a lot of action. At what point in 2008 or beyond do you think that the issue will be fully resolved to your satisfaction.

[Joe Jeffries:]

As it relates to out of stocks that you mentioned we recognize when visiting stores ordered this year that was a problem. We’ve put a full court press on that I’ve talked about initially coming back working with Marc and Dennis Hodgson we made some really, really strategic changes here to make a material difference this year. We are seeing week after week when we scan our outs we are seeing the number improve. I’d like to think that when we come out of Q2 that we are going to be in much, much better position in in stock at shelf edge. Everybody in the organization is purely focused on this.

[Rick Lepley:]

Two things that I would add to it, one of the issues is caused by what we call lack of planogram integrity. In other words, every store doesn’t have exactly the same planogram and that leads to some challenges but now at least we know what every store has in stock so that will help. The second one is we mentioned earlier Joe alluded to it is changing vendors in some cases that left us with some period where the old vendor wasn’t supplying us and the new vendor wasn’t supplying us yet either. That also hurt us.

[Seth Basham:]

Have the merchandising category resets has that process been improved so that’s not causing out of stocks any more.

[Rick Lepley:]

It’s not good enough yet. As you look at the whole comp issue we are getting better at that but we are still not world class by a long shot. We are not where we need to be.

[Seth Basham:]

One last question, have you seen any change in terms from some of your important vendors?

[Rick Lepley:]

Not at this point but we are expecting that there are going to be some increases from global resource products.

[Seth Basham:]

In terms of price because of inflation?

[Rick Lepley:]

Yes, exactly, because of the weakness of the Dollar and what’s been happening in China.

[Seth Basham:]

No one is requiring you to pay more quickly?

[Rick Lepley:]

No, we haven’t seen that yet.

[Operator:]

Your next question comes from the line of Greg McKinley with Dougherty.

[Greg McKinley:]

Could you run through a general, I think you mentioned the fourth one off items in Q4 that hit earnings $0.02, $0.02, $0.03 and $0.01 what were those again please?

[Marc Katz:]

Greg, $0.02 for inventory restatement, $0.02 for closing two stores, $0.03 related to taking the sku level physical inventories and that one will become a cost of doing business in the future and then $0.01 was related to a one time interest charge.

[Greg McKinley:]

In terms of us better understanding the out of stock issue can you give us a sense for how you measure the stock positions and where that had been historically versus what you experienced in the December quarter?

[Joe Jeffries:]

I can’t speak for the historical accuracy of the reporting what I can tell you today is our systems are good but they’re not best in class yet. Today our store managers actually take the RF guns and scan their outs after they’ve done a drop and fill holes. They are self reporting their outs therefore that’s the number we take in totality, I’m able to see across all vendor partners and then we are able to analyze it and take actions even down to the sku level to make sure we are getting back in stock. I’m happy to say that each time that we do the scan outs process we are seeing a significant improvement. We just completed one this past Saturday and I’m expecting to see another significant drop in the numbers. As we progress further with the Oracle retail merchandizing systems I’m going to be able to see the outs per planogram of active sku on a daily basis. Once that happens we will really see an improved condition in stores. I think the future holds a much, much better in stock position for us across stores.

[Greg McKinley:]

So I can better understand where did the stock outs occur? It sounds like to me you in hindsight over invested in seasonal so I’m assuming that wasn’t an out of stock issue in that category. Where did it really hurt you guys from a category standpoint?

[Rick Lepley:]

Two points I would make, historically we always took the tact that if we maintained really high inventories at the store level we could cover out of stocks. That worked so as we begin to bring inventory down throughout the year we could see that there was more and more of a problem to stay in stock. Most of the out of stocks and Joe may even know the percentage but most of the out of stocks are from EDI vendors, they are not from our preferred sourcing vendor and they are not from our warehouse, most from EDI vendors.

[Operator:]

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

[Michael Corelli:]

Does the company have a share repurchase authorization in place?

[Rick Lepley:]

No it does not right now.

[Michael Corelli:]

Is there any stock to sell at the six to seven year low here its about three and a half times trailing EBITDA well below book its almost 40% of your stock price is net cash. Are there any thoughts about possibly instituting a program?

[Rick Lepley:]

The board is always looking at those kinds of issues.

[Michael Corelli:]

A question about the fourth quarter and the seasonal bed, I know you explained obviously that you had made this decision well in advance of the fourth quarter. Some of your competition had announced over the last couple of years that they thought that those categories were just becoming too competitive and they had been pulling back on those categories even before they saw signs of the economic weakness. How come your company didn’t see some of those same signs or do some of those same things?

[Craig Davis:]

Research that was done in the market prior to going into that planning cycle indicated that there was a favorable disposition for our customer base to increase their purchases from us versus competition. The perception was that there was a natural opportunity to add to the transaction value by being able to sell more of that type of product to our existing customer base. Two things transpired, one was the overall difficult macro market for the product. It was traded off for space with some of the basic business that we traditionally have been stronger in during that selling period.

[Operator:]

Your next question comes from Bill Armstrong with CL King & Associates

[Bill Armstrong:]

You indicated that you had overbought on some basic holiday seasonal merchandise through the year. Where do you stand with those inventory levels currently?

[Joe Jeffries:]

I will tell you that I’m not going to share with you exactly what the value is I will tell you that on the items that we did not want to have as part of our go forward assortment next year that the inventory levels that we have are not material to our overall inventory ownership.

[Bill Armstrong:]

You are comfortable with your inventory position in those categories?

[Joe Jeffries:]

Yes, there are two other things to realize as we go into this next planning cycle that we didn’t have previously. It’s been mentioned several times the importance perpetual inventory and knowing the ownership at store level by sku. Even as recent as last years planning cycle that visibility of knowing what was owned by store was not available. We’ve taken all of this carry over inventory into account into next years plan.

[Bill Armstrong:]

Earlier in your opening comments you mentioned that you needed an auxiliary warehouse that you probably will need throughout 2008 for direct imports. Did I hear you mentioned that these products take up more space?

[Rick Lepley:]

In sense that when we unload a container we break it down by store, we do need more space in order to do that. We have to set, for example you are unloading 50 containers and you need to set up 132 pallets to send out to 132 stores. You need staging space. In that sense they do require more floor space.

[Bill Armstrong:]

How does that differ from domestically sourced merchandise?

[Rick Lepley:]

A lot of domestically sources merchandise is broken down by store by the vendor and shipped directly from the vendor; it doesn’t necessarily come through here. The total amount would be the difference because in the past a lot of our imported products were essentially purchased from local vendors not necessarily local in the sense that are close to here but already in the US who purchased them overseas.

[Bill Armstrong:]

For the first half of this year obviously comps are going to be negative. Are you attributing that pretty much to the economy or are there still inventory issues that you are working through that will contribute to that?

[Rick Lepley:]

I think it would be too simplistic to attribute it to the economy. If you really want a detailed analysis it comes in three buckets. One is caused by things that we did and we did those things intentionally and we knew that they would have an adverse affect on comps but we believed that they would improve our profitability. For example throughout the year we reduced our advertising reach and frequency and changed the timing. We expected that that might have an adverse impact on comps in the short term. We reduced labor at stores; we reduced our inventory throughout the year at the store level. We reduced the number of coupons that we put out in the market place. We went from three warehouse deliveries each week to two. All of those things we did with our eye on saving costs and we expected that they might have an adverse impact on comps but we thought it was worth doing them. We still do I believe. In the second bucket I think there is probably four things that we either did or didn’t do that were disruptive to comps sales. One was as we’ve mentioned inefficient and untimely resets of categories and seasonal. Two, we mentioned there was a lack of planogram integrity that led to outs. Three would be changing sourcing that led to outs. If you don’t have the product it’s going to hurt your comps. The fourth one is that throughout the year we are insufficient new products or categories or services introductions like for example custom framing. It wasn’t anything new. That’s another bucket that I think impacts comp sales. The third bucket you would have to include competitive openings because if they are close to you for the first year or so you are going to comp down. The other part of the third bucket is the reason that I think is least understood. That involves the opening of our own new stores that are in markets adjacent to our existing stores. That can have a significant adverse impact on your comps in markets where you do that for several quarters after you do it. I can give you one real life example of how that impacts us. There’s a metro market where we went from two stores to four. In other words we doubled the store count so while we had two stores those two specific stores were comping down in the range of 3.5% to 5%. Since we went to four stores those two stores are now comping down mid double digits. Our total sales for all four stores in that market are up 24% since we went to four stores. For four consecutive quarters those original two stores will probably continue to comp down in mid double digits. The two new stores that we put in won’t even be included in our comp sales until the first day of the fourteenth month after each of them respectively opened. If you keep that example in mind and then take a look at what we did in the State of New Jersey, in the past six months we increased our store count in the State of New Jersey by 30%. When you look at it that way you don’t get overly concerned about comps because you are more focused on the temporary increase in the SG&A that new store openings cause until they get ramped up to be more profitable. That’s why we are trying to take a longer term view. With regard to that specific example if we were taking it quarter by quarter view or if we were only focused on comps then we probably wouldn’t open so many stores in markets where we are trying to build density. I can’t give you a number for how much each one of those things impacts comps but clearly all of them have some effect. What we are trying to do is build a stronger base for going forward. Maybe that explains it.

[Bill Armstrong:]

Thank you for the detail. A quick follow up on that. In that first bucket I knew about that impacting your ’07 comps. Have you pretty much cycled against that or will that continue to have an impact through the first half of 2008.

[Rick Lepley:]

I think it will have an impact but what we are hoping is that as each quarter goes by it will be less and less of an impact. We hoped that would happen in the fourth quarter too, but it didn’t. That’s our hope that it will have less of an impact as we move forward.

[Operator:]

Your next question comes from Karru Martinson with Deutsche Bank.

[Karru Martinson:]

In terms of the economic headwinds that you reference here continuing through the quarter, I was wondering if you could provide some color on the impact on traffic versus the average basket?

[Rick Lepley:]

No, the only thing I would say in general is our average basket is up a little bit. We won’t give details but our baskets are up a little bit. So obviously our traffic is down.

[Karru Martinson:]

You mentioned less promotional going forward does this take the place of fewer coupons, less advertising or how are you going to go about that? Rick Lepley We did do fewer coupons. It’s probably more the breadth of the assortment that’s discounted at one time, for example. In other words if you had 50% off all of some categories maybe it will be 50% off part of the category or something like that.

[Karru Martinson:]

In terms of the price inflation coming out of China or other markets what’s your ability to price offset that?

[Rick Lepley:]

That’s the unknown. Craig do you have a comment on that?

[Craig Davis:]

As part of category management one of the strong elements is the ability to monitor gross margin performance and we really take a look at three areas to ensure that we are monitoring that performance. The first is we have a system in place where we regularly monitor retail prices not only in our channel but in retail in general so that we get a sense of where things are moving. So much is made at retail out of China anyways so the ability to watch other retailers is important. We use a product life cycle approach as we move in and out of items and products and programs so that we better understand that impact on margin. Of course we continue to develop our global and vendor sourcing strategy where we will be better able to leverage our purchasing power as we move forward. Certainly we are seeing increases and anticipate increases from mid digits to mid teens as we go forward. We’ve not seen much of it yet but we believe that the other things will work aggressively and I can’t give you an idea as to where it will go but we constantly work to improve our margins.

[Karru Martinson:]

Seasonal was weak but in terms of category you felt you had strength in the outlook for the year. Are there any new trends or new categories where you feel that the consumer is responding?

[Rick Lepley:]

I had mentioned in my opening comments several areas that were of strength for us in core categories. I believe that those will continue as we go forward. We are also aggressively looking at new categories to be able to add new comps to our business.

[Operator:]

(Operator Instructions) We have no further questions at this time.

[Rick Lepley:]

Before we sign off I’d like to express my gratitude to our entire organization, in particular our field staff and our store managers up and down the East Coast. In the past year we have really accomplished a lot. We’ve gotten perpetual inventory up and running, we’ve started to work on the automatic order replenishment initiative. We have a functioning website business that’s growing. We’ve made steady progress bringing some of our costs in line at the store level and in improving store profitability. We’ve rebuilt the management team and brought some very talented people on board and more will be joining us as we invest in future growth. We’ve improved our margins and we think that can continue. We’ve developed a new store prototype incorporating a store within store concept that we think will be the fundamental basis for our craft store of the future. We continue to adjust and experiment with our advertising effectiveness in order to get the very best result out of each dollar that we spend. We’ve instituted a new orientation of providing first class service to our stores because without that the stores cannot in turn deliver first class experience to our customers. I’m very proud of our team and the way that they’ve dedicated themselves to these endeavors and to a number of other issues in which we didn’t expect to be spending any of our time in. Everybody’s adapted to the work at hand; everyone remains committed to making this company a really great place for our associates to work and to making it a better place for our shareholders to invest. Thanks so much for joining us this morning; we appreciate your interest in A.C. Moore.

[Operator:]

Thank you for participating in today’s conference call. You may now disconnect.