Good day and welcome to the ACMR third quarter 2009 earnings conference call. Today's conference is being recorded. At this time for opening remarks and introductions I will turn the conference over to Mr. Rick Lepley please go ahead sir.

Thank you operator good morning. 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 on the Securities and Exchange Act of 1934 and the regulations there under, including without limitation statements as per the companies financial condition, results of operations, liquidity, 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 companies filings with the securities and exchange commission including its most recent Form 10-K a copy of which may be obtained from the company upon request and without charge. This morning I am joined by Dave Stern, our Chief Financial Officer; Joe Jeffries our Chief Operating Officer and by David Abelman our Chief Marketing and Merchandizing Officer. Dave will talk to you about our financial performance for the quarter and Joe will talk to you about our operations performance then David will comment on merchandizing and marketing. Before they do that I would like to take a few minutes to talk about the third quarter. During the quarter our comp store sales decline was 7.7% considerably better than the previous two quarters but obviously still not where we want to be. While we are disappointed with that decline, the latest CHA Attitude and Usage Study does confirm a drop in the overall consumption of art and crafts products are about 9%. It confirms our thought that less consumer discretionary spending is continuing to adversely affect our business. But during the quarter, we increased our ad…

Thank you Rick. Good morning. I will start with the review of results for the quarter followed by our year-to-date results and finally a review of inventory, cash and debt. Sales for the quarter were $106.1 million a decrease of 9.1% compared to sales of $116.7 million during the third quarter of last year. This decline was primarily due to a decrease in comparable stores sales of 7.7% and the operation of fewer stores during the quarter. At the end of the quarter there are 133 stores in operation compared to 135 stores at the comparable point last year. Gross margin for the quarter was 38.4% a 480 basis point decrease from the third quarter of last year. This decrease was primarily driven by increased advertising and promotions, increase transactivity and shift in product mix. Selling, General and Administrative expenses for the quarter were $53.2 million, a reduction of $0.2 million compared to last year. This decrease is primarily the result of reductions in pay roll partially offset by an increase in advertising expense. Selling, General and Administrative expenses were 50.1% at sales compared to 45.8% of sales in the third quarter of last year. Although SG&A expenses were essentially flat the increase as a percentage of sales was a result of de-leveraging expenses over a lower sales base. Depreciation and amortization expense for the quarter was $3.9 million compared to $4.2 million for the same period last year. Store pre-opening and closing costs were $0.3 million for the quarter. This consisted of cost for the two stores that will open in the fourth quarter and one store that will relocate the fourth quarter and stores that were previously closed. In the third quarter of last year, pre-opening and closing cost were $1.3 million, this consisted of $0.3 million of…

Thank you Dave and good morning. I'd like to begin my comments by discussing recent activities and progress made related to our supply chain division during the quarter. During the third quarter of fiscal 2009, in addition to our ongoing supply chain initiatives including improving our in-stock positions, optimizing inventory levels, increasing merchandise returns and improving distribution efficiencies. We continue to focus on two key projects. Automated replenishment and advance shipment notification supported gross stocking. The auto replenishment rollout for 2009 finished a month ahead of schedule. We have 30,000 plus cues on automated replenishment across all departments with the exception of floral, seasonal and front end check outs. In-stocks have continued to improve from a range of 86% to 90% under the store order method to a range of 93% to 96% on auto replenishment. This is been consistent across businesses and departments. We have seen no adverse impact on sales and hesitate to credit this initiative as the sole reason for the change in trend in some of our basic businesses. The in-stock improvement did come at an increased inventory cost. We estimate that the seasonally adjusted inventory increase on replenishment skews has been in the mid-single digits. We believe that over time, as we work through the pre-existing inventory bubbles, the inventory will stabilize at lower levels. We will look to maximize sales and optimize inventory levels with the implementation of a dynamics sales forecasting engine that will be implemented in Q1 2010. This forecasting engine with provide recommended order quantities to help us maximize return on inventory investment, specifically this tool will provide order points to give us the optimal placement for inventory investment and in-stock intersect to maximize our profit opportunity. We will add a small group of basic skews to auto replenishment in 2010…

Thank you, Joe. As Rick mentioned earlier, comp sales and transactions while still down in Q3, showed nice improvement from our trend during the first half of the year. We did experience margin erosions, which I'll touch upon in more detail. And while we're never happy with margin loss, we believe that our actions during the quarter were strategic and necessary. Let's first touch upon sales. We believe we were successful in gaining market share during the quarter by increasing our promotional intensity in improving our advertising and marketing programs. While our comp sales were down 7.7% for the quarter, our comp sales on amortized products compared to the same period last year, were up 15%. Comp transactions as Rick mentioned earlier, were down 2.2% versus same period last year. Important to note, that our comp transaction trend have shown continuous improvement in each quarter in 2009. Many of our departments delivered the best results of the year. In fact 12 of our departments show comp sales increases during the quarter versus the same period last year. Our best performing categories included yarn, taking candy making supplies, everyday floral and kids activities. Unfortunately, we continue to experience significant losses in several other departments. While components of our business targeting the DIY home enhancement consumer, which includes everyday floral, home accents and seasonal, have shown improvement, our seasonal business continues to suffer as consumers have cut back on discretionary purchases in this area, along with us competing against an ever increasing retailer universe. Our seasonal business accounted for 41% of our comp sales lost during the quarter, combined with continued losses in scrapbooking and readymade frames. These three departments were 72% of our comp sales decline. As I mentioned during our last call, reversing the trend in these businesses is our…

Okay. Thanks David. Operator, I think we can take questions now.

The question-and-answer session will be conducted electronically. (Operator Instructions). If you are utilizing a speaker phone, please make sure that your mute function is turned off to allow your signal to reach our equipment. We will proceed in the order that you signalize and we'll take as many questions as time permits. (Operator Instructions). And we'll pause for just a few moments to assemble our queue. (Operator Instructions). Wait for a few more moments as we assemble our queue. We will take our first question from Holly Guthrie of Boenning & Scattergood Holly Guthrie - Boenning & Scattergood I was hoping to get some more, some clarification on the SG&A dollars that were spent in the quarter. The last two quarters you guys saw a significant reduction in the dollar expense and you guys actually produced a flat SG&A number. I know you said advertising was I think it was $800,000 incremental the last year, but what else was in that number and is that what we should be looking for going forward a flattish type SG&A relative to the prior year.

Sure Holly. This is Dave. We did have reductions in our core operating expenses which were offset by increased advertising that David referred to earlier. And as you know, we don't give a lot of guidance going forward, but we have said previously that we expected the promotional going into Q4 as well. Holly Guthrie - Boenning & Scattergood And I am just trying to figure out why there was a change in the third quarter relative to the last two quarters. In the last two quarters you saw significant reduction in and around $4 million in each quarter. As far as the dollar expense goes to the SG&A line and now it's flat in the third quarter. So, I guess what you are saying is that what happened in the third quarter, you are looking at as far as your current expense structure to occur to continue to go going forward we should look for dollar reduction in SG&A?

Well, without getting into more detail than we've previously given guidance on, we do expect to continue to be promotional as referred to earlier and we do expect to continue to offer top customer service and have [favor] on the stores to support that. Holly Guthrie - Boenning & Scattergood And then another expense question, Joe said that you expect by the summer of 2010 to have 25% of your stores in Nevada prototype which is a great model logically doing that, but the cost, if I am looking at it correctly is, is it 25% in the stores at $40k per store is around $10 million. And I am wondering, what part of that is expense? Is all of that expense or some of the capitalized can either go through expense of that in a cost to the P&L?

The cost of the remodel Joe referred to, I think he said it is less than 400,000 on a per store basis and part of that is capital and very roughly about 75% is capital and remaining would pre opening stuff. Holly Guthrie - Boenning & Scattergood And then a question for David Abelman. David, could you just give me a little bit more detail on the mix issue within the quarter the discounted. I think you referred to a couple of mix things that were going on in Q3, discounted products versus full priced products. And then if there were changes in categories may be some categories of lower margins get a little bit better. I couldn't quite understand everything that you're saying as far as how mix totally impacted margin in Q3.

Yeah I think Holly, that mix was a smaller component but a contributing component into our margin decline. I mentioned a category like yarn that is experiencing some very, very nice growth but is traditionally much lower margin than we experience overall. And there is two or three other categories that fall and I've seen both. I think the biggest issue that impacted margins was obviously increasing our promotional activity not only did we add to the dark week and added a circular to it we increased page count and we tested and experimented with other vehicles that had item priced promotion that shifted our mix dramatically. as I mentioned ad sales up 15% at around a 30% lower margin on advertising versus promotional, it affects that margin line real quick. Holly Guthrie - Boenning & Scattergood Okay and then on this prepared comments you talked about the average ticket being down 5.5%. How much of that do you guys think came from your out-of-stocks and as you move through the quarter your in stock improved I guess if you could. I am trying to use this as a forecasting tool but I am trying to understand that as you are now in mid-90s within stock. It should come without a (Inaudible). So if you could give me some color, the average basket, could you fill the average basket because there you were out of stock and that's why the average trends was down and the average ticket was down any kind of.

We told you that 14% of it was seasonal related to not purchasing seasonal. Then obviously we had a sizeable impact but I don't think that we had an out of stock issue, anything we are probably better now than we have been the last couple of years as we have moved more SKUs on to the AR and in fact that's we indicated in some departments the inventory actually went up as we switch to AR and away from taking it out of the hands of the stores.

Our presentation standards up and down on our isles have improved throughout the course of the year and I can tell you that in Q3 they were probably at a year high as far as in-stock goes on our basic everyday craft assortments and I believe that have no impact on that. In fact, we are very proud of the progress that the office teams have made and more importantly that the store teams have made throughout the year in the quarter. Holly Guthrie - Boenning & Scattergood Did you see improvement throughout the quarter or is that statement true or as true at the beginning of the quarter versus the end of the quarter?

I think [reading] in, each year we've seen sequential, each quarter we have seen sequential improvement on our in-stock and actually that trend started last year. So, as we move more products, categories on to automated replenishment throughout the course of the year more in-stocks improved. David?

I want to walk through one more thing here as in terms of basket size or average transaction, everyone in our segment (inaudible) brand is; I think it has experienced the decline in average basket. I think the good thing about the craft business is that the [shopper] is still out there, they are spending. But they are not doing nearly as much impulse purchasing as they have done in the past where the economy is. So, I think our improvement in our transaction trend is really a good indicator of health of your business and as discretionary spending improves that basket size is likely to go back up.

Our next question comes from Bill Armstrong, C.L. King & Associates.

Inventory seems to be pretty lean and good shape going into the quarter. So I am surprised that the impact of clearance marked down on your margins, why was there such a need to do so much clearance.

This is David. I will answer that. We elected this year we thought there were some great opportunities to refresh assortment based on things happening in the marketplace and we elected to really ramp up our recent activity and refreshing our assortment in a lot of our key categories during the year. Obviously when you do resets those products that were not as productive as others that were replaced with new product we have to plan a home for those products and we made a concerted effort as an organization to move through the discontinued product and that impacted margin but we believe that our presentations are better than they've been in a long, long time. And we believe we are in far better shape moving into 2010 that we don't anticipate nearly the same amount of recent activity or opportunity to replace items we call that a line in line out on a much smaller group of product but we believe that the significant activity we did in 2009 will be much more strategic in 2010 against some very, very stringent guidelines. And against categories we believe we still have nature upside and will provide us the point of difference, the recent activity was the largest contributor to our clearance thing and it impacted in inventories as well when you go through a reset you normally rate your inventory significantly. It should bring in new products and push off the old.

It sounds like that should moderate in the fourth quarter then?

No we are going to continue closing after the fourth quarter. One of the things that these systems now provide us is better information that we've ever had before and while we still don't have a tool of it actually forecast our inventory for us in the sense. We are much more knowledgeable about what SKUs sell, what the turnover is at each store individually. So as we go forward, if it's possible, we would like to take our skew count down and we are hoping to do that because we are going to have much better information about what's SKUs turn in at what rate. So we are going to continue close outs if we take products out of our parts out of planograms that could continue even into the first quarter as we try and work down the SKU count.

David I will just throw one more thing on the inventories that's a little different in the first three quarters and as in Q4 is Q4 with all the seasonal activity and the gifting activity and the highly promotional nature to business between Black Friday and the Christmas is as Rick mentioned earlier we tend to ramp up our inventories anticipation or very good selling season so the take of inventory we have changes significantly in Q4.

Speaking seasonal that's been a V category for you and your competitors for a number of years now. What were the same store sales just as the seasonal life categories in Q3? I don't know if you have that broken out or not?

We had provided that, this is Dave Stern, David did mention that in excess of 40% of our comp store sales decline was related to seasonal.

Okay so if I take that 40% out of the 7.7 overall comp, is it mathematically correct to then say that the non comp excluding seasonal was down 4.5%?

Yes. That is doing the math I haven't drawn the map but you just did but yes that would be correct.

Yes got it. Okay thank you.

We will now move on to our next question in queue coming from Mark Mandel, FTN Equity Capital Markets.

Hi good morning thanks I just wanted to clarify a couple of items, on the expenses where the capital allocation for the Nevada prototype, was that $400,000 per project?

It is per project but its south of 400.

Okay what's the economics on a brand new store if you exclude the net inventory investment?

We haven't provided that on the new store and I think it was mentioned previously we are much more cautious into new stores going forward. The economics on a remodel which was with a 400,000 related to as was mentioned we have done one complete remodel the traditional store to the new current prototype we have been pleased with those results however its one data point so we want you to get comfortable with that and a few more unroll before we share it. We look at that very stringently we will break it into four phases, the pre-remodels during the remodel, the promotional period after the remodel and then when things are returning to normal after the promotional period. If we assess the post promotional period to the pre-remodel period relative to the rest of the chain and looking at it across metrics for comp store sales, traffic changes, average ticket changes, labor rates and a pretty detailed assessment. As I mentioned, we're pleased with what we've seen but we just need more data points.

Have you looked at your overall capital allocation? You haven't given a budget for 2010, but can you give us any kind of direction or color as to what your CapEx might be and how it might be broken down by remodels, reallocations, new stores, infrastructure spending etcetera?

Right, this is Dave again. We haven't provided that from 2010. I'll try to share a little bit more color on that in the future. However, what you can draw out of the statements that were made during this call would be that, I think words stringent and cautious were used on new stores going forward, and Joe had referenced, since we're pleased with the remodel and what we are seeing from that, that will skew a little more towards that going forward.

And Rick was alluding to existing stores that are coming under closed scrutiny in terms of their decisions that are going to be made going forward about their continued operation. Is it fair to say that you are becoming a little bit more intense in your, look at the store base to see what stores might not make the cut?

Sure. I wouldn't say we're becoming intense. It's as we continually review that. At this point in time, we don't have any stores as of for closure. As you are aware in this industry, Q4 is the heaviest quarter of the year. And so, that would be the most indicative of any changes that will need to be made. So I wouldn't say we've become more stringent on that, it's a continuous process of assessing the store base.

And I guess finally I understand all the moving pieces that you have in place right now, but I guess one of the most disturbing things is that some of your competitors are doing quite well and you of course have continued to struggle. If you look at the regional differences in your store base, how are you faring in your strong markets, your core markets, the mid-Atlantic for example, versus some of the other territories where you don't have that competitive presence?

Well, we obviously do better where we have more storage density because we can leverage our advertising expenses across more stores. So, I would say in that sense we do better through the mid-Atlantic or the North Eastern than we do in the southeast where we don't have as much store density. It's very difficult to compare us to our competitors in some respects too. In August, they were not selling fabric and as one of our competitors is. And we also did not have a lot of new stores coming into our comp cycle because of the stores we took out in the southeast last year. So, if you've got a national presence of stores, and you are opening 50 or 60 or 70 stores a year, those new stores in year one, two, three, four and five are carrying the comps of your whole company in many cases. But when you have a smaller base that's regional, you have to rely on sometimes your older stores to help improve your comps which isn't always so easy because those stores particularly in a company like ours, where we historically didn't spend a lot of money remodeling or the nature of the markets changed and perhaps you are not in a location, all those things have to be considered when you are looking at your comps. One of the things that I think encourages us a great deal is Nevada and we're really beginning to feel like if we can start this transition to Nevada's in the first quarter that we've talked about, we can dramatically improve our comp sales in those stores, now time will tell. And it also has to be the type of investment from a CapEx standpoint that's going to give us the right return on our investment, but we feel pretty good about it.

Okay, operator I think our time's up. There aren't anymore questions as far as I can see or understand. So, thank you all very much for taking part in the call. Thank you for your interest in AC Moore and have a great holidays.