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

Q2 2010 Earnings Call

August 10, 2010, 8:30 AM ET

Executives

David Stern - EVP and CFO

Joe Jeffries - CEO

David Abelman - EVP and Chief Marketing and Merchandizing Officer

Analysts

Karru Martinson - Deutsche Bank

Bill Armstrong - C.L. King & Associates

Joan Storms - Wedbush

Bernard Sosnick - Gilford Securities

Mark Mandel - ThinkEquity

Judy Crandall - Alpine

Presentation

Operator

Good day and welcome to the AC Moore second quarter 2010 earnings conference call. Today's call is being recorded. At this time, I would like to turn the conference over to Mr. David Stern. Please go ahead, sir.

David Stern

Thank you, [Connie]. Good morning. Before we begin, I would like to remind you that statements contained in this conference call that are not historical facts constitute forward-looking statements within the meaning of Securities laws. These statements are subject to risks and uncertainties, which may cause results to differ materially from our current expectations expressed or implied in such statements.

The risks and uncertainties most likely to cause our results to differ materially are described in our SEC filings. A.C. Moore undertakes no obligation to update or revise any forward-looking statements in the future.

Now I'll turn the call over to Joe Jeffries, CEO.

Joe Jeffries

Thanks, Dave. This morning, in addition to Dave Stern, our CFO, I'm joined by Dave Abelman, our Chief Marketing and Merchandizing Officer. I will begin by commenting on our performance and discuss some operational and merchandizing initiatives in the second quarter. Dave Stern will take you through our financial performance for the quarter and then David Abelman will touch upon some of our activities in merchandizing and marketing.

For the second quarter 2010, total sales declined 4.3% from the same period a year earlier and our same-store sales declined by 5.9%. Our gross margin ended at 43.6%, which is a two percentage point improvement year-over-year.

Our inventory level decreased by 0.3% compared to the same time last year, ending the quarter at $118.4 million. I will elaborate further regarding our inventory management accomplishments and plans later in my commentary. We are still confident that we will finish the year with less than $115 million of inventory.

We are not at all pleased with our top and bottom line performance, however, we are pleased with our margin rate improvement as well as our inventory management. During the quarter we continued to focus on improving our overall execution as it relates to merchandising sets, store level execution and supply chain programs.

At this time, I'd like to discuss some of our accomplishments made during the quarter related to merchandizing, field operations and supply chain beginning with merchandizing.

During the second quarter, significant work was completed in several merchandizing sets transitioning our older products, making room for several thousand new items within the new merchandizing sets, focusing on those departments that have been the majority of our comp sales loss. Those departments are paper crafting and readymade frames.

Our seasonal business has not been strong but we feel confident that our plans entering the back half of 2010 and moving into 2011 are sound and we will repair this business. David Abelman will discuss the related work for these departments further during his portion of today's call.

We remodeled one store during the quarter converting it to our Nevada class model. We have nine remodels in progress that will be completed in the third quarter. We continued to make significant progress related to our supply chain cross talking model, transitioning the majority of store-direct vendors and total purchase volumes to this new model.

Prior to the start of this project only 63% of all purchase volume was being shipped to stores from our distribution center. We are now able to report that 96% of all purchase volume is being shipped directly from our distribution center to our stores. This advancement brings significant savings and efficiencies to our operations.

We have continued to make progress in inventory management. Our conversion to centralized buying model was starting to have a positive impact. While our receipts were down Q1 and Q2, we maintained our in-stock rate. This drop in receipts also coincides with full implementation of our SKU store level sales forecasting and order point generation software, which was in place for all of Q2.

At the end of the second quarter, our automatic replenishment system was managing roughly 37,000 of our SKUs, which represented about 60% of our inventory. The centralized approach has kept in-stocks in the mid-90s as opposed to the high 80s in the old store order model. We continue to look for opportunities to leverage the system and had success with seasonal and short life cycle products in quarters one and two. We will continue to use the system for these types of products in both quarters three and four.

We've also identified opportunities to run inventory in our distribution center leaner. Progress has been a mix of optimizing inventory on basic items ending cleaner and seasonal products and working through pockets of overstocks. We believe that we have the opportunity to run inventory in the distribution center at a significantly lower level than we have historically.

In summary, we have a comprehensive plan to manage our inventory giving us not just less inventory but the right stock. This plan addresses less productive pockets of inventory while maintaining in-stocks and then allowing new products to come into the store at the right time and the right levels.

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