Jo-Ann Stores Q3 Earnings Call Transcript

123jump.com Staff
10 Jan, 2009
New York City

The specialty retailer third quarter sales were flat to $480.1 million on lower traffic and lower average ticket sales. Same store sales decreased 1.5% in the quarter compared to an increase of 2.4% in the year ago period. The retailer projected earnings per share between 75 cents to 85 cents for the full year 2009.

Jo-Ann Stores, Inc. ((JAS))
Q3 2009 Earnings Call Transcript
December 3, 2008 4:30 p.m. ET

Executives

Tim Ryan - Director of Investor Relations
Darrell Webb – President and Chief Executive Officer
James Kerr - Chief Financial Officer

Analysts

Jeffrey Stein - Soleil-Stein Research
William Armstrong - C.L. King & Associates
Karru Martinson – CIBC World Markets
Michael Corelli - Barry Vogel & Associates
Anthony Lebidinsky
John Parkey

Presentation

Operator

Good afternoon. My name is Stephanie and I’ll be your conference operator today. At this time I’d like to welcome everyone to the Jo-Ann Stores fiscal year 2009 third quarter earnings conference call. (Operator Instructions) All lines have been placed on mute to prevent any background noise. After the speaker’s remarks there will be a question-and-answer session. If you’d like to ask a question during that time simply press * then the number 1 on your telephone keypad. If you’d like to withdraw your question you may press the pound key and at this time I’d like to turn the call over to your chair person Mr. Tim Ryan. Sir, you may begin the call.

Tim Ryan – Director of Investor Relations

Thank you and welcome everyone to the Jo-Ann Stores fiscal 2009 third quarter conference call. In just a minute Darrell Webb, our Chairman, President and Chief Executive Officer, and Jim Kerr, our Chief Financial Officer, will review the third quarter results and discuss our guidance for the full year fiscal 2009. They will then respond to your questions. After the market closed this afternoon we issued our third quarter earnings release. If you have not received it, you may obtain a copy from the Investor Relations section of our website at www.joann.com. This conference call is being taped and is available through Wednesday, December 10, by dialing 1-800-642-1687. The conference ID number to access this call is 69142549. In addition, this call is being webcast over the Internet and can be accessed through the website mentioned earlier by selecting Investor Relations at the bottom of the website. For those with access, it is also available through www.streetevents.com. A replay will be available shortly after the call. The replay may be accessed at www.joann.com and at www.streetevents.com. Before we begin I would like to remind you that any forward-looking comments made during this call are subject to certain risks and uncertainties which may cause results to differ materially from our current expectations.

The risks and uncertainties that are most likely to cause our results to differ materially from our current expectations are included in the press release issued this afternoon and also in our periodic filings with the SEC.

Now I’ll turn the call over to Darrell.

Darrell Webb – President & Chief Executive Officer

Thanks Tim. Good afternoon everyone. I would like to begin by acknowledging the outstanding efforts of our entire Jo-Ann team during this challenging economic environment. Our stores have been performing better than many retailers but we are not immune to the current market conditions. So we have focused intensely on the internal operating variables that we can control. This approach allowed us to achieve earnings growth over last year for the third quarter while continuing to strengthen our balance sheet. Sales trends clearly began to soften in the third quarter. Our same store sales decrease of 1.5% was a sharp contrast to the 3.9% increase we delivered through the first half of this year. A slight drop in store traffic accounts for most of that decrease. Sales in our core sewing and craft categories were actually holding up quite well. Quilting, fleece, and sportswear fabric sales were very strong during the quarter while apparel crafts and food crafting remain strong on the non-sewing side of our business.

However, seasonal merchandise and higher ticket items, including custom framing and home decorating fabrics were very soft. This had a negative impact on average ticket and had a disproportionate affect on sales in large-format stores which have more space and more inventory-dedicated to those categories. In spite of the sales trends, we continue to improve our inventory position. We delivered year-over-year improvement in gross margin and we achieved higher earnings for the quarter. Total inventory was down $48.6 million, or 8.5%, compared to last year’s third quarter, while total sales were flat. Basic in-stocks are at record levels, while we continue to reduce the higher risk fashion and seasonal inventories.

Gross margin increased by 100 basis points in the quarter due to less clearance activities than last year and lower costs from global sourcing initiatives, particularly on fabrics. SG&A expenses were up 10 basis points in the quarter as initiatives to tightly manage our operating costs were offset by the deleveraging of sales and training costs related to our new point-of-sale system. The roll out of our new POS system was successfully completed in the quarter as planned. Our solid operating performance resulted in earnings of $0.40 per share for the third quarter, an improvement of $0.08 over last year, or $0.03 better than last year if you excluded the gain from our debt buyback. Our strong balance sheet allowed us to take advantage of favorable terms and retire $20.4 million of senior subordinated notes during the quarter.

Turning to store activity, we opened 12 new stores in the third quarter and opened six more early in this fourth quarter. This takes our total number of new store openings to 21 for the year.

We also made progress in revitalizing our existing store base by finishing six more remodels in the quarter. We have now completed 28 small-format remodels this year. These stores continue to deliver strong results with sales growth typically exceeding our small-format average by 10% in the first year. Even the stores we remodeled two years ago are still enjoying sales trends almost 3% above the company average. We completed 217 small-format store optimization projects during the third quarter. This involved remerchandising stores that were too small to justify a full remodel. It is a bit early to quantify the benefit from this effort but we expect to see a modest incremental sales lift from these stores going forward. Looking ahead to the remainder of our fiscal year, we believe the negative trends for customer traffic and average ticket will continue. In addition, seasonal merchandise represents a larger percent of our sales during the fourth quarter so the weakness in those categories will create additional pressure on overall sales trends.

There is no question that it will be a difficult fourth quarter, which is why we were compelled to adjust our full year guidance. Fiscal year 2010 begins in just two months for Jo-Ann Stores. Our guidance for next year will be provided with our fourth quarter earnings release, as we have done historically. In general, though, I can tell you that we will continue to focus on controlling inventories and SG&A expenses while managing our balance sheet and capital spending very conservatively. At this point we expect to reduce capital spending by roughly $25.0 million next year, to approximately $35.0 million. We remain committed to our strategic plan, which calls for revitalizing our store base by opening new large-format stores and remodeling small-format stores. We currently expect store activities to be about the same as this year, with roughly 20 new stores and 30 remodels. Capital spending on information technology will be significantly lower next year.

I don’t need to dwell on the economic challenges we are all seeing across the country and around the world. We are feeling it here at Jo-Ann stores and we are disappointed to have our sales trend turn negative after six consecutive positive quarters but I believe we are managing through this situation very effectively. Sales in our core sewing and craft categories are healthy. Our balance sheet is stronger than it has been in years, and we continue to invest for future growth. So we are well positioned to take advantage and potentially gain market share in both sewing and crafts going forward. And we may have an opportunity to capture share at a faster rate if competitors fail to adapt to this environment as well as our team is doing.

I will now turn the call over to Jim Kerr.

James Kerr – Chief Financial Officer

Thank you, Darrell. First I will go through the third quarter and year-to-date financial results and then I will wrap up with an update on our outlook for fiscal 2009. Net earnings for the third quarter improved to $10.2 million, or $0.40 per share, versus net income of $8.0 million, or $0.32 per share, for the same period last year. The current quarter includes a $1.3 million after-tax gain, or $0.05 per share, related to the repurchase of a portion of our senior subordinated notes. Excluding this gain earnings for the third quarter were $0.35 per share. Year-to-date net earnings were $1.5 million, or $0.06 per share, versus a net loss of $12.1 million, or $0.50 per share, in the prior year. Excluding the gain on the repurchase of our senior subordinated notes, year-to-date earnings were $0.01 per share.

Net sales for the third quarter were $480.1 million, or flat compared to the prior year. Same store sales decreased 1.5% versus an increase of 2.4% for the same period last year. Same store sales were down primarily due to a reduction in traffic and to a lesser degree, lower average ticket. Large-format stores accounted for 51.5% of total third quarter sales and small-format stores accounted for 46.8%. Internet sales through JoAnn.com accounted for the remaining 1.7% of sales. Same store sales for large-format stores decreased 3.8% for the third quarter versus an increase of 2.4% for the same period last year. Large-format stores have a greater mix of seasonal product and higher ticket items, which had weak performance during the quarter. Same store sales in small-format stores increased 1.2% for the third quarter on top of an increase of 2.4% for the same period last year and sales in our basic sewing and craft categories continue to perform fairly well.

Our sewing business represented 54% of our third quarter sales volume and increased 1.1% on a same-store-sales basis. We continue to experience positive same store sales in the majority of our fabric and sewing notions merchandise categories, especially in quilting and fleece. Negative categories include home décor fabric and holiday fabric. Our non-sewing business represented 46% of our third quarter sales volumes and was down 4.9% on a same-store-sales basis mostly due to declines in seasonal categories and custom framing. Many of our core crafting categories, including basic craft, kid’s craft, and needle arts, were up year-over-year. Year-to-date net sales increased 2.8% to $1.33 billion. Year-to-date same store sales increased 1.9% versus a same store sales increase of 3.5% for the same period last year. Year-to-date same store sales for large-format stores were 0.3% and small-format stores were 3.7%. Third quarter gross margin rate increased 100 basis points to 49%. The improvement in gross margin rate was primarily due to a smaller percentage of clearance sales to total sales this year compared to last year. The gross margin rate for the first nine months of the fiscal year increased 60 basis points to 47.7%.

As a percentage of net sales, SG&A expense of 41.6% for the third quarter is up slightly compared to 41.5% last year. SG&A expense for the current quarter includes incremental store payroll for training related to our store systems roll out. Year-to-date SG&A expense improved by approximately 100 basis points to 43.3%, reflecting our continued focus on managing costs. Year-to-date store pre opening and closing costs were up $3.4 million to $10.0 million. During the first nine months of fiscal 2009 we had 15 openings and 21 closings compared to last year when we opened six stores and closed 22 stores. During the third quarter we repurchased $20.4 million of our senior subordinated notes at a discount of approximately 12% to par value and recorded a $2.1 million pre-tax gain.

Interest expense in the third quarter decreased by $1.3 million due to lower average debt levels. During the third quarter, our debt levels improved from an average of $196.0 million outstanding in fiscal 2008 to an average of $170.0 million in fiscal 2009. We expect our full year effective tax rate to be approximately 39%. Total debt was $113.0 million, an $89.0 million decrease from the same time last year. Out debt includes $80.0 million of senior subordinated notes which are due in March 2012 and $33.0 million of borrowing under our revolving credit facility which we recently amended and extend it through September 2013. We currently have approximately have $266.0 million of excess availability under this facility. Year-to-date capital expenditures were $49.0 million, net of landlord allowances of $6.1 million. Investment in IT and store-related expenditures, including store remodels and new store openings, represented the majority of the capital spending. We expect full year capital expenditures of approximately $60.0 million. We are updating our fiscal 2009 full year outlook. Based on our results through the third quarter and the increasingly uncertain economic conditions, we have adjusted our guidance range to $0.75 to $0.85 per share. Our guidance includes the $0.05 per share gain recognized on the repurchase of our senior subordinated notes. You can find key considerations related to our outlook in the earnings release issued earlier today.

At this time Darrell and I would be happy to address any questions you may have.

Darrell Webb

Operator do you have any questions?

Question-and-Answer Session

Operator

(Operator Instructions) If there is any question during this time you can press * and the number 1 on your telephone keypad. The first question is from Jeff Stein. Your line is open.

Jeffrey Stein - Soleil-Stein Research

Good afternoon guys, couple of things first of all could you talk a little bit about your expectations for SG&A in dollars in the fourth quarter? It looks to me like you did a pretty good job of controlling your expenses even with the incremental training costs, so with that behind you would you expect SG&A, in dollars, to be flat or possibly even down in the fourth quarter?

James Kerr

We won’t speak specifically to SG&A dollars. At this point, though, don’t expect SG&A leverage to be positive. With negative same store sales expected in Q4, as well as we are starting to cycle savings initiatives from last year, if you look back to last year in Q4 we had a 130 basis point improvement in SG&A. So we will continue to do the things we have been doing all year to manage expenses and do the best we can but we are going to be up against a challenge with negative sales.

Jeffrey Stein - Soleil-Stein Research

Sure and just based upon the weighting of the fourth quarter compliance Jim, you’re estimating that the full year will be relatively flat, so what would that imply for fourth quarter comps?

James Kerr

It implies fourth quarter comps will be negative and that they would be more negative than the 1.5 that we saw in Q3. You get a range depending on whether we are slightly positive or slightly negative, but at this point we expect Q4 to be negative comps and worse than the 1.5 that we had in Q3.

Jeffrey Stein - Soleil-Stein Research

So would 3 to 4 be a reasonable expectation to get you to zero?

James Kerr

You can do the math and get to a number that you think is reasonable. Like I said, depending on whether we are slightly positive or slightly negative, you get to a slightly different range.

Jeffrey Stein - Soleil-Stein Research

Okay and final question. Yesterday one of your competitors discussed the fact that they believe that the pricing environment was rational and I’m just wondering if you agree with that statement.

Darrell Webb

This is Darrell. I would say that the promotional and pricing environment is rational but it is a bit more promotional than a year ago. We are seeing peers and competitors take deeper and earlier discounts on seasonal goods. We have seen a little more couponing activity this year with a little more aggressive discounts on those coupons, so rational but certainly a bit more promotional than last year.

Jeffrey Stein - Soleil-Stein Research

Okay and I noticed in doing some store checks that you guys are about 60% off now on your holiday decorative merchandise. Have you broken price and gone to steeper discounts earlier this year compared to last?

Darrell Webb

Yes, we have, Jeff.

Jeffrey Stein - Soleil-Stein Research

Okay thanks.

Darrell Webb

You’re welcome.

Operator

Your next question is from Bill Armstrong. Your line is open Bill.

William Armstrong - C.L. King & Associates

Good afternoon. Can you talk about the progression of same store sales during the third quarter? I would guess that it weakened as the quarter progressed?

James Kerr

As we have done in the past, we won’t speak to inter-quarter how the same store sales trended. We were negative 1.5 for the full quarter.

William Armstrong - C.L. King & Associates

Okay. Could you also update us on what you are seeing in terms of Wal-Mart fabric department closings?

Darrell Webb

Yeah, this is Darrell. As you might remember, last year we identified 298 Wal-Mart stores that remodeled and removed fabric in the process. Through October of this year that number is 375. You are probably aware that Wal-Mart executives also presented a couple of weeks ago in New York City to a group of investors and presented a multi-year capital expenditure and remodel plan and part of that presentation suggested they would be ramping up remodel activity pretty aggressively over the next few years and as we try to evaluate what that means in terms of numbers, it could suggest as many as 500+ remodels next year, ramping up to perhaps 800+ the following year. So we think that bodes pretty well for the future as they continue to take out fabrics.

William Armstrong - C.L. King & Associates

And that 375 through October, that’s a year-to-date? Rough estimate.

Darrell Webb

Calendar year-to-date yeah.

William Armstrong - C.L. King & Associates

Okay. You mentioned before that you are discounting I think I heard you say earlier and deeper on the Christmas merchandise. Is that…?

Darrell Webb

Correct.

William Armstrong - C.L. King & Associates

That’s correct okay. Is that having any positive impact on traffic or average ticket?

Darrell Webb

It is certainly helping us move the goods. Without those discounts we would not be achieving the kind of sales that we are achieving today. Nonetheless, seasonal is our toughest category right now so we’re still not selling at the rate we would like it to be.

William Armstrong - C.L. King & Associates

And given your inventory position where you have really cut back on seasonal purchases of seasonal merchandise, can we surmise that gross margin should hold up reasonably well, given the rest of the environment?

Darrell Webb

The good news is that this is our third year in a row of double-digit reductions and seasonal merchandise purchases but sales are certainly tougher than we estimated when we made the buy for this year, so the margin is not likely to be what we had projected going into the season.

James Kerr

And when we look at Q4 in total, we still have the positives of less overall clearance, positives from sourcing and things we are doing, especially on the fabric side, some strategic pricing things and all those will still be there. However, the margin on seasonal products can put a lot of pressure on that fourth quarter rate.

William Armstrong - C.L. King & Associates

Right and then finally thus far into the fourth quarter and based on what you are projecting for the fourth quarter, is this an extension of the weakness in seasonal and high-ticket type items or is it spreading to other core categories in either fabrics or crafts?

Darrell Webb

And that’s a great question and the answer is that it is a continuation of what we saw in the third quarter, which is our core sewing and craft business remains very stable. In fact, sewing business is a positive. But it’s that seasonal business, as well as some of the higher ticket categories, that are really suffering.

William Armstrong - C.L. King & Associates

Okay thank you.

Darrell Webb

Thank you.

Operator

Next question is from Karru Martinson. Your line is open.

Karru Martinson – CIBC World Markets

Thank you good afternoon, just on the seasonal orders, when do you guys normally place those orders and make those decisions?

Darrell Webb

It would typically be in the late spring. Call it the May time frame.

Karru Martinson – CIBC World Markets

And then your ability to kind of either send back or get valuation allowances against that, I mean is that still an option for you or at this point you are pretty much set?

Darrell Webb

We are pretty much set. About the only flexibility we have is generally a certain percent of P.O.s that are placed end up not being filled, for one reason or another. So in a normal year you would go back and maybe buy some domestic product to fill in so you achieve your open to buy for that season. Under these circumstances we have not gone back to the bills for some of those cancelled P.O.s.

James Kerr

Most of our seasonal finished product assortment is imports so that’s the reason for the longer lead time and why it’s difficult to cancel at a late notice or to do returns.

Karru Martinson – CIBC World Markets

Okay and you guys have kind of just bucked the trend here for a while on custom framing. It seems that you were able to generate some positive traction there. What did you guys see change, whether it was the promotional environment or the couponing or did that customer just completely fall off?

Darrell Webb

First of all, remember that the average ticket in that category, in our stores, approaches $200. So it was one of the first high-ticket categories that consumers decided to postpone purchases. So our promotional activity during the third quarter was pretty consistent with what we had done the prior year and the sales just slowed down. As we have looked at the fourth quarter we have added a couple of promotional events. The good news is we are actually delivering significantly better gross margin dollars out of the business so we haven’t just promoted so aggressively in order to try to get sales that we have given away the gross margin and the profitability.

Karru Martinson – CIBC World Markets

In terms of the bond buyback here, what is your capacity and I guess your appetite for additional purchases going forward?

James Kerr

We currently don’t have anything planned or we’re not out buying right now, but certainly if we could buy at or below current market rate, it is something we would consider. As you have seen in the overall, we have a fairly conservative approach to managing our balance sheet so we will continue to monitor what the external environment is doing and go from there.

Karru Martinson – CIBC World Markets

And the last this I have is going forward looking into 2009, what are the categories that you see providing you with the strength or is it just kind of a continuation of the core right now and then sort of hoping for the best on some home décor, seasonal, and so forth?

Darrell Webb

Certainly our strength is coming from the sewing business currently. So as we get past the magnitude of the seasonal business and get into the first quarter of the calendar year and first quarter of our fiscal year, that drag is certainly a lot less. So we will continue to ride the sewing business. And again, our core craft business has been flat to just slightly down so we think that will stabilize going into the next year as well.

Karru Martinson – CIBC World Markets

Thank you very much guys.

Darrell Webb

Thank you.

Operator

Next question is from Michael Corelli. Your line is open.

Michael Corelli - Barry Vogel & Associates

Hi good afternoon.

Darrell Webb

Good afternoon.

Michael Corelli - Barry Vogel & Associates

Couple of questions for you, do you have any idea what the size of the incremental training costs might have been in the third quarter related to the POS roll out?

James Kerr

We are not going to give it out specifically but it was significant. I mean we have almost 20,000 employees across the chain that needed training since we put in new registers. So it was significant but we are not going to give out a specific dollar amount.

Michael Corelli - Barry Vogel & Associates

Are we talking about in the millions?

James Kerr

Yes.

Michael Corelli - Barry Vogel & Associates

Okay thank you and as far as your guidance is concerned, I mean one of the things that was very impressive about the third quarter was, despite the negative comp and the incremental training costs, you still were able to have slight operating profit expansion and operating margin expansion in the quarter. But it appears that in the fourth quarter you are looking for a pretty significant deterioration I think in margins. Is that just the fact that the seasonal is much more meaningful in the fourth quarter and that is really suffering and some of these bigger ticket items are starting to suffer more so they are going to be much more of a drag in the fourth quarter?

James Kerr

I think a couple of things and seasonal is a big piece of it. When you look at gross margin, as I said, we have got a lot of the same positives we have had all year going for us but depending on what we need to do to move through seasonal, which we are committed to doing and staying clean on our inventory, and that could impact on the gross margin side. On the SG&A side, the fourth quarter, typically our best-performing from an SG&A leverage because you get a lot of incremental sales and you don’t have to add a lot of variable expenses to cover those sales, it’s basically a little bit more store payroll. Unfortunately, though, when you don’t get those sales and we’re in the negative in Q4, there’s not a lot of expenses to reduce, either and that’s what we’re up against in Q4 versus the first nine months of the year.

Michael Corelli - Barry Vogel & Associates

And you have done a very nice job of managing your inventories. Any thoughts about what we should be looking at, at year end, for the inventory line?

James Kerr

We expect inventory to be down slightly, year-over-year. Our merchant group has done an excellent job, not only in managing the level of inventory, but the mix of inventory between the basic and the fashion and the seasonal. So not only are we in good shape in terms of inventory levels, the overall quality of our inventory continues to be strong despite sales not being exactly where we wanted them to be.

Michael Corelli - Barry Vogel & Associates

Because your inventory now is down $48.0 million, I mean does that mean it is going to be down significantly less at year end than it is now?

James Kerr

Yes. We had a nice reduction at last year, year end as well, if I recall correctly. So it will be down from last year. I don’t know the exact magnitude at this point.

Michael Corelli - Barry Vogel & Associates

Okay and as far as the debt repurchases, I commend the company. I think it’s a very good use of the cash here. From what I have been able to tell, the bonds are trading at reasonably lower levels than where you actually purchased them and your CapEx is going to be pretty low next year, much lower than your D&A and you should have some good cash balances at year end. So is that something at this time that you would consider moving forward on?

James Kerr

As I said, we don’t have any specific plans but we will certainly be opportunistic to do anything of any significance and we are clearly going to want to make sure that the economy is starting to get a little bit better before we do anything big. But as opportunities present themselves, we could take advantage of those.

Michael Corelli - Barry Vogel & Associates

Okay great, thanks a lot.

James Kerr

Thank you.

Operator

Next question is from Anthony Lebidinsky (ph). Your line is open sir.

Anthony Lebidinsky

Good afternoon. I was wondering if you saw any notable regional differences when you look at your same store sales performance for the third quarter, if that is something you could comment on.

Darrell Webb

Yes, we did. There are parts of the country that are suffering a little worse than others. When you look at the real estate markets in Florida and Michigan and Phoenix, Las Vegas, those are some of the areas that were a little softer for our business as well.

Anthony Lebidinsky

And as far as the seasonal products, what percent of your third quarter sales were from seasonal, and typically where is seasonal during the fourth quarter, what percentage of your total sales?

James Kerr

We don’t give that mix out. Except for Q3 sewing was at 54%. Our non-sewing, which includes crafts and seasonal, was 46% of our total and obviously in Q4 seasonal is the highest percentage of mix than it would be during the year.

Anthony Lebidinsky

And also when you look at the seasonal and the high-ticket items, there was some softness. Are those higher margin typically types of products? Can you discuss the margin differences between the categories?

Darrell Webb

Generally the higher the ticket the lower the gross margin, the POS margin, so from that perspective it does kind of affect the mix just a bit.

James Kerr

And on the seasonal product, we have done a nice job in the last two years of buying down and managing for increased margin dollars. This year, although we bought down, obviously no one predicted how bad things were going to get in the overall environment in the fourth quarter. So going forward we will continue to manage seasonal promotion dollars.

Anthony Lebidinsky

And then lastly I mean with the strong cash flow that you guys generate and the reduction in CapEx for next year, are you also perhaps looking at buying back your stock? I mean what are your thoughts on that?

James Kerr

Again, as we commented, I guess similar to the debt buyback, no specific plans there to speak of at this point in time, but as you said, we do have a good cash flow. We are going to end the year in great shape from a debt/cash standpoint, with clean inventory. So depending on how things play out, we will look at all the different options and determine what the best use will be.

Anthony Lebidinsky

Okay thank you.

James Kerr

You’re welcome. Thank you.

Operator

Again if you have any questions please press * and the number 1 on the telephone keypad. Your next question is from John Parkey. Your line is open.

John Parkey

Thank you. Good afternoon. I had a question on inventory. What were the inventories per square foot? How much were they down at the end of the third quarter?

James Kerr

I don’t have it necessarily on a square-foot basis, but our inventory was down 8% and our square footage is about 16.0 million feet. Last year at this time it was about 16.1 million. So it is down significantly on a square-footage basis as well.

John Parkey

And then you expect inventories to be on a percentage basis they will not be down as much at year end as they were in the third quarter. They will be a little bit higher? Is that correct?

James Kerr

Correct.

John Parkey

What about going into next year? I realize it is early but would you expect that you will be planning your inventories down again?

James Kerr

I think what we said before is we think we are at a pretty good level on inventory right now. Our goal would be to grow the sales and not have to add a lot of incremental inventory. So there is a certain level of assortment we need in the stores but there is clearly an opportunity to turn it faster and leverage the inventory that we have by growing the top line.

John Parkey

And then with respect to the seasonal inventory, did I hear you correctly saying that you had planned that down double-digits this year?

Darrell Webb

Yes, that’s correct. It was in fact our third year in a row that we bought down double-digit.

John Parkey

I am assuming that there is just a certain level of that type of inventory that you need to have in the store to drive some level of sale and leverage expenses, correct?

Darrell Webb

Right and we would have assumed that this was the year to find that appropriate level. Unfortunately the economy has not cooperated with our planning.

James Kerr

And like I said earlier, we have been successful the last two years with lower purchases and increased margin dollars. This year obviously a lot of unexpected things happened in the fourth quarter for everybody.

John Parkey

Given the availability of the seasonal merchandise at so many different locations, how does that factor into your ordering plans?

Darrell Webb

That’s a very good question. We have made a concerted effort over the last couple of years to change the nature of our seasonal assortments. One to do more with unique relationships, like our Debbie Mumm design of holiday goods, as well as product that the customer has to do something with, that they have to actually complete a craft project. So we have dramatically expanded the amount of craft component in our seasonal assortment. So we have tried to differentiate in ways that gives the customer a reason to come our store for seasonal goods versus a discount.

John Parkey

Is it kind of your thinking, at least this year, because of the extreme weakness in the economy, etc., that the demand wasn’t there for that type of product than it might have been in the prior couple of years?

Darrell Webb

I think in addition to the kind of products I just described, the Debbie Mumm line, the craft seasonal goods, just the entire seasonal category has been soft and it has been soft everywhere at discounters, and drug stores and every type of retail.

James Kerr

And although we are trying to add more products, it does require the crafter to do something with. We do have a lot of finished seasonal products and that is where we are being hurt is on the finished product. As we have mentioned a couple of times, we still continue to see strength in the sewing and continue to see the craft business be stable. So, the customer is still there, and still wanting to participate in crafting and sewing. It is that finished product where there is some discretionary spending where they are not making the purchase.

John Parkey

And lastly, with respect to IT spending, in ‘09 is there anything of a major consequence there? Can you talk a little bit about what remains to be put in place?

James Kerr

This year we had significant spend to roll out new POS, front-end and back-end, across the chain. We have talked about a $20.0 million number for that project. As we go into next year, that number will be down significantly. We will still do some IT spending. We are looking at a demand and fulfillment system but the overall spend on IT will be much less. And that is baked into the numbers Darrell gave, which is about a $25.0 million decrease in capital spending this year versus next year.

John Parkey

Thank you very much.

Darrell Webb

Thank you.

Operator

Your next question comes again from Bill Armstrong. Sir, your line is reopened.

William Armstrong - C.L. King & Associates

Just two follow up, one for Darrell and one for Jim, should we expect that revolver will be fully paid down at year end?

James Kerr

Yes, what we are expecting at year end is we have the $80.0 million of the senior subordinated notes outstanding and then we will have cash in excess of the normal $20.0 million or so that we have, and that level of excess will be dependent on our Q4 performance.

William Armstrong - C.L. King & Associates

Okay and before I get some bulky royalty, given that we are likely to be looking at a soft sales environment for at least some period of time, do you have any levers that you can pull to further reduce SG&A expenses going forward?

Darrell Webb

Well, the new POS system that Jim referred to includes a couple of components that I think will help in that manner. Our work force management system we think will help us schedule labor more efficiently, more effectively as we go into next year. So we do think there is some room for improvement there. But not nearly the magnitude of savings, reductions in SG&A that we have achieved over the past two years.

William Armstrong - C.L. King & Associates

In other words you are pretty lean at this point.

Darrell Webb

We are certainly getting there, yes.

William Armstrong - C.L. King & Associates

Okay thanks.

Darrell Webb

Thanks Bill.

Operator

This concludes the Q&A portion of the call. At this time I’d turn the call back over to Mr. Webb for closing remarks.

Darrell Webb

Thank you operator. We appreciate you joining us for our third quarter conference call. Hope you enjoy a happy holidays and we look forward to talking to you after the fourth quarter.

Operator

This concludes today’s conference call. You may now disconnect.