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Cost Plus, Inc. (CPWM) is a leading specialty retailer of home furnishings. The company also offers products like gourmet food and wines through its stores, which are located in high-traffic metropolitan and suburban areas, primarily near major malls. The company operates 294 stores in 34 states, mostly in the western part of the U.S. Cost Plus offers a wide variety of unique and moderately priced products, most of which are imported. Several products are marketed under proprietary or private labels that incorporate the company's in-house designs and the World Market brand name. Cost Plus also supplies a number of tabletop and kitchen items, including ceramics, glassware, and cooking utensils, as well as gift and decorative items, such as collectibles, jewelry, cards, and wrapping paper.
The company's turnaround strategy is not working as well the company had hoped. This is because of the difficult macro conditions impacting consumers and the poor environment for home furnishings retailers. Many retailers are struggling against the backdrop of a weak housing market, mortgage market troubles, high gas prices, and moderating consumer spending. Retailers of home furnishings are getting the brunt of these difficult conditions. High gas prices act like a tax on consumers and reduce consumer demand for discretionary goods. The weak housing market and problems in the mortgage market have pretty much shut the door on further home refinancings. This has eliminated an important source of disposable income for consumers and reduced the amount of discretionary income consumers have, creating a poor environment for the home furnishings industry. Unfortunately for CPWM shareholders, when consumers decide to tighten their belts, the merchandise on the company s shelves tends to be more discretionary than that of many other stores. As a result, Cost Plus recent results have been hindered by uneven sales and soft profit margins in recent quarters. Cost Plus had a 6.6% decline in traffic in the third quarter of fiscal 2007 and 4.3% decline in the same-store sales. We note that these trends, while still quite soft, are smaller declines than in prior few quarters. Moreover, Cost Plus third quarter gross margins contracted by 220 basis points, due to de-leveraging of occupancy and distribution costs on declining same-store sales. SG&A expenses as a percentage of sales fell 20 basis points. While a small positive on its face, the lower SG&A expense was a result of a reduced advertising spend and cost controls. Reducing its advertising will have a negative impact on store traffic and sales growth. Lastly, Cost Plus has 298 stores across the country. However, it has 72 stores, or 24% of its total store base, located in California. Unfortunately, California is experiencing one of the worst housing markets in the nation. With about 24% in California, Cost Plus' overall results will continue to be negatively impacted by housing problems on the west coast. Until that situation stabilizes, Cost Plus will continue to struggle.
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