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

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…

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…

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…

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…

We will take the first question.

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

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?

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

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?

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

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?

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.

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?

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.

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

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

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.

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

$1.8 million.

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?

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.

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.

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

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.

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.

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

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.

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

That’s correct.

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

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.

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

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.

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

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

And you actually have closed five so far?

That’s right.

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

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.

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

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.

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

No, that is not.

So then we have maybe another four coming?

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.

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

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

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

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

The liquidation is too?

Yes. The liquidation is part of that.

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

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.

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

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

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?

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.

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

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

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

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.

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?

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.

At this time there are no further questions.

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…