Cost Plus 10Q 2010 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended October 31, 2009

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 0-14970

COST PLUS, INC.

(Exact name of registrant as specified in its charter)


California		94-1067973
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

200 4th Street, Oakland, California		94607
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code (510) 893-7300

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨

Accelerated filer x

Non-accelerated filer ¨

(Do not check if a smaller reporting company)

Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

As of December 8, 2009, the number of shares of the registrant’s Common Stock, $0.01 par value, outstanding was 22,087,113.

COST PLUS, INC.

FORM 10-Q

For the Quarter Ended October 31, 2009

TABLE OF CONTENTS


		Page
PART I.	FINANCIAL INFORMATION

ITEM 1.	Condensed Consolidated Financial Statements (unaudited)

	Balance Sheets as of October 31, 2009, January 31, 2009 and November 1, 2008	2

	Statements of Operations for the three months and nine months ended October 31, 2009 and November 1, 2008	3

	Statements of Cash Flows for the nine months ended October 31, 2009 and November 1, 2008	4

	Notes to Condensed Consolidated Financial Statements	5

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11

ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk	15

ITEM 4.	Controls and Procedures	15

PART II.	OTHER INFORMATION

ITEM 6.	Exhibits	17

SIGNATURE PAGE		18

PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

COST PLUS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts, unaudited)


	October 31, 2009			January 31, 2009			November 1, 2008
ASSETS
Current assets:
Cash and cash equivalents	$	2,913		$	3,707		$	3,506
Merchandise inventories, net		228,114			218,105			314,311
Other current assets		19,389			23,446			23,628

Total current assets		250,416			245,258			341,445
Property and equipment, net		170,938			195,018			203,711
Other assets, net		4,149			4,716			13,889

Total assets	$	425,503		$	444,992		$	559,045


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	82,516		$	75,163		$	82,658
Accrued compensation		13,350			12,819			12,211
Current portion of revolving line of credit		—			—			117,392
Current portion of long-term debt		862			823			811
Other current liabilities		34,485			27,680			36,484

Total current liabilities		131,213			116,485			249,556
Long-term portion of revolving line of credit		94,100			38,500			—
Capital lease obligations		7,480			7,133			7,263
Long-term debt – distribution center obligations		112,937			113,588			113,798
Other long-term obligations		26,863			33,077			33,878
Commitments and contingencies
Shareholders’ equity:
Preferred stock, $.01 par value: 5,000,000 shares authorized; none issued and outstanding		—			—			—
Common stock, $.01 par value: 67,500,000 shares authorized; issued and outstanding 22,087,113; 22,087,113 and 22,087,113 shares		221			221			221
Additional paid-in capital		171,253			170,151			170,223
Accumulated deficit		(118,564	)		(34,163	)		(15,894	)

Total shareholders’ equity		52,910			136,209			154,550

Total liabilities and shareholders’ equity	$	425,503		$	444,992		$	559,045

See notes to condensed consolidated financial statements.

COST PLUS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts, unaudited)


	Three Months Ended						Nine Months Ended
	October 31, 2009			November 1, 2008			October 31, 2009			November 1, 2008
Net sales	$	181,878		$	202,957		$	549,503		$	615,494
Cost of sales and occupancy		135,935			149,014			407,639			448,807

Gross profit	��	45,943			53,943			141,864			166,687
Selling, general and administrative expenses		65,041			74,830			194,047			223,251
Store closure costs		241			—			6,317			—
Store preopening expenses		223			84			223			3,228

Loss from continuing operations, before interest and taxes		(19,562	)		(20,971	)		(58,723	)		(59,792	)
Net interest expense		2,679			3,689			8,366			9,857

Loss from continuing operations before income taxes		(22,241	)		(24,660	)		(67,089	)		(69,649	)
Income tax expense/(benefit)		37			(621	)		397			(1,266	)

Net loss from continuing operations		(22,278	)		(24,039	)		(67,486	)		(68,383	)
Income/(loss) from discontinued operations		221			(1,728	)		(16,913	)		(16,018	)

Net loss	$	(22,057	)	$	(25,767	)	$	(84,399	)	$	(84,401	)


Net loss per weighted average share from continuing operations
Basic	$	(1.01	)	$	(1.09	)	$	(3.05	)	$	(3.10	)
Diluted	$	(1.01	)	$	(1.09	)	$	(3.05	)	$	(3.10	)


Net income/(loss) per weighted average share from discontinued operations
Basic	$	0.01		$	(0.08	)	$	(0.77	)	$	(0.72	)
Diluted	$	0.01		$	(0.08	)	$	(0.77	)	$	(0.72	)


Net loss per weighted average share
Basic	$	(1.00	)	$	(1.17	)	$	(3.82	)	$	(3.82	)
Diluted	$	(1.00	)	$	(1.17	)	$	(3.82	)	$	(3.82	)


Weighted average shares outstanding
Basic		22,087			22,087			22,087			22,087
Diluted		22,087			22,087			22,087			22,087

See notes to condensed consolidated financial statements.

COST PLUS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands, unaudited)


	Nine Months Ended
	October 31, 2009			November 1, 2008
Cash Flows From Operating Activities:
Net loss	$	(84,399	)	$	(84,401	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		21,907			25,968
Deferred income taxes		—			(225	)
Share-based compensation expense		1,102			1,430
Loss on asset disposal		153			2,023
Impairment of property and equipment		536			1,106
Changes in assets and liabilities:
Merchandise inventories		(10,009	)		(41,456	)
Income taxes receivable		318			13,560
Other assets		4,278			5,149
Accounts payable		7,977			(9,542	)
Other liabilities		6,273			2,160

Net cash used in operating activities		(51,864	)		(84,228	)


Cash Flows From Investing Activities:
Purchases of property and equipment		(2,711	)		(13,270	)
Proceeds from sale of property and equipment		8			34

Net cash used in investing activities		(2,703	)		(13,236	)


Cash Flows From Financing Activities:
Net borrowings under revolving line of credit		55,600			99,332
Principal payments on long-term debt		(612	)		(577	)
Principal payments on capital lease obligations		(1,215	)		(1,068	)

Net cash provided by financing activities		53,773			97,687

Net (decrease)/increase in cash and cash equivalents		(794	)		223


Cash and Cash Equivalents:
Beginning of period		3,707			3,283

End of period	$	2,913		$	3,506


Supplemental Disclosures of Cash Flow Information:
Cash paid for interest	$	8,295		$	9,035

Cash paid/(received) for income taxes	$	132		$	(13,827	)

See notes to condensed consolidated financial statements.

COST PLUS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three and Nine Months Ended October 31, 2009 and November 1, 2008

(Unaudited)

1. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared from the records of Cost Plus, Inc. (the “Company”) and, in the opinion of management, include all adjustments that are normal and recurring in nature necessary to present fairly the Company’s financial position at October 31, 2009 and November 1, 2008, and the interim results of operations for the three months and nine months ended October 31, 2009 and November 1, 2008, and cash flows for the nine months ended October 31, 2009 and November 1, 2008. The balance sheet at January 31, 2009, presented herein, has been derived from the audited financial statements of the Company for the fiscal year then ended. The condensed consolidated statement of operations for the three-month and nine-month periods ended November 1, 2008 have been revised to present certain components as discontinued operations (see Note 3). Unless otherwise indicated, information presented in the notes to the financial statements relates only to the Company’s continuing operations.

Accounting policies followed by the Company are described in Note 1 to the audited consolidated financial statements for the fiscal year ended January 31, 2009 in the Company’s Annual Report on Form 10-K. Certain information and disclosures normally included in the notes to the annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted for purposes of presenting the interim condensed consolidated financial statements. Such statements should be read in conjunction with the audited consolidated financial statements, including notes thereto, for the fiscal year ended January 31, 2009.

Including fiscal 2008, the Company has experienced net losses each annual period since fiscal 2006. As of October 31, 2009, the Company had an accumulated deficit of $118.6 million. For fiscal 2007 and for each annual period since fiscal 2004, the Company had decreases in cash and cash equivalents. There can be no assurance that the business will be profitable in the future or that additional losses and negative cash flows from operations will not be incurred, which could have a material adverse affect on the Company’s financial condition. The Company believes that its existing cash balance, combined with cash flows from operations and borrowings under its asset-based credit facility, will be sufficient to enable it to meet planned expenditures under the turnaround plan through the next 12 months. The turnaround plan includes, among other things, the closure of 26 underperforming stores that occurred in the first quarter of fiscal 2009, corporate and distribution center work force reductions that occurred in the fourth quarter of fiscal 2008, delaying new store expansion, reductions in marketing and capital expenditures, and delaying new hires. The Company is dependent upon its asset-based credit facility to fund operating losses and seasonal inventory purchases. The Company does not plan on fully paying off its asset-based credit facility during fiscal 2009 or 2010. Access to the Company’s asset-based credit facility is dependent upon meeting its debt covenants and not exceeding the borrowing limit of the asset-based credit facility. There can be no assurance that the Company will achieve or sustain positive cash flows from operations or profitability. If the Company is unable to maintain adequate liquidity, future operations will need to be scaled back or discontinued.

The results of operations for the three-month and nine-month periods ended October 31, 2009, presented herein, are not indicative of the results to be expected for the full year because of, among other things, seasonal factors in the retail business. The Company has evaluated subsequent events through December 8, 2009, the filing date of this Form 10-Q (see Note 9).

2. CONTINUING OPERATIONS STORE CLOSURE ACTIVITIES

In January 2009, the Board of Directors of the Company approved a plan for the Company to close 26 of its existing stores; eight of these stores are classified within continuing operations. All eight stores classified within continuing operations were closed during the first quarter of fiscal 2009 and, with the exception of finalizing any lease settlement activities, all store closure activities were completed during the first quarter of fiscal 2009.

The costs associated with closing the stores were accounted for in accordance with ASC 420-10, “Exit or Disposal Cost Obligations,” in which the liability for the costs associated with an exit or disposal activity is recognized when the liability is incurred. During the third quarter of fiscal 2009, the costs related to closing the eight stores during the quarter totaled $0.2 million, consisting primarily of estimated lease exit costs net of estimated sublease income. There were no store closure costs in the third quarter of fiscal 2008 relating to closed stores that were classified within continuing operations.

Additional charges or gains related to the planned disposition of stores may be incurred as a result of changes to management’s current estimates and assumptions. The timing of future transactions and charges related to this disposition are subject to significant uncertainty, including the variability in future vacancy periods, sublease income or negotiations with landlords regarding buy-out payments on leases.

Following is a year-to-date summary of the reserve for store closures in continuing operations, which is included in total current liabilities as of October 31, 2009 (in thousands):


Balance at January 31, 2009	$	—
Lease exit costs, net of estimated sublease income		5,442
Severance and closure costs		875
Payments for leases and settlements		(1,639	)
Payments for severance and closure costs		(875	)

Balance at October 31, 2009	$	3,803

3. DISCONTINUED OPERATIONS

During the fourth quarter of fiscal 2008, the Board of Directors of the Company approved a plan for the Company to close 26 of its existing stores; 18 of these stores are classified within discontinued operations as they were in eight underperforming media markets that the Company exited. All 18 stores classified within discontinued operations were closed during the first quarter of fiscal 2009 and, with the exception of finalizing any lease settlement activities, all store closure activities were completed during the first quarter of fiscal 2009. Income from discontinued operations of $221,000 for the third quarter of fiscal 2009 includes remaining lease liability costs related to 13 stores that were closed in the first quarter of fiscal 2008, which are also reported as discontinued operations.

The 18 stores closed in the first quarter of fiscal 2009 and the 13 stores closed in the first quarter of fiscal 2008 are reported as discontinued operations in accordance with ASC 205-20, “Presentation of Financial Statements – Discontinued Operations,” which requires the Company to report the results of operations of a component of an entity that either has been disposed of or is classified as held for sale, in discontinued operations. As such, both current and prior year results for these stores are classified as discontinued operations on the Company’s condensed consolidated statements of operations.

Also included in discontinued operations are the costs associated with closing the stores reported as discontinued operations. These costs were accounted for in accordance with ASC 420-10, “Exit or Disposal Cost Obligations” and were approximately $16.3 million for the nine-month period ended October 31, 2009 and $12.6 million for the nine-month period ended November 1, 2008. The recognition of the costs associated with closing the stores requires the Company to make judgments and estimates regarding the nature, timing, and amount of costs, including estimated lease exit costs net of estimated sublease income, employee severance and various other costs related to the closure of stores. At the end of each quarter, the Company evaluates the remaining accrual balance to ensure its adequacy.

Results from discontinued operations were as follows:


	Three Months Ended						Nine Months Ended
(In thousands)	October 31, 2009			November 1, 2008			October 31, 2009			November 1, 2008
Store sales	$	—		$	10,016		$	7,495		$	40,274
Costs and expenses:
Cost of sales and occupancy		—			7,982			5,723			30,907
Operating and administrative expenses¹		49			3,390			3,907			13,611
Lease exit costs, net of estimated sublease income¹		(270	)		372			14,218			11,195
Severance and closure costs¹		—			—			560			579

Income/(loss) before income taxes		221			(1,728	)		(16,913	)		(16,018	)
Income tax benefit		—			—			—			—

Income/(loss) from discontinued operations, net of tax	$	221		$	(1,728	)	$	(16,913	)	$	(16,018	)

Costs associated with store exit activities consisting primarily of estimated lease exit costs net of estimated sublease income, employee severance and various other costs related to the store closures totaled $16.3 million for the nine-month period ended October 31, 2009 and $12.6 million for the nine-month period ended November 1, 2008. For purposes of the table above, $1.5 million and $0.8 million of the costs associated with store exit activities for the nine-month periods of fiscal 2009 and 2008, respectively, were included in operating and administrative expenses, as these costs related primarily to consulting and administrative services to close the stores.

Following is a year-to-date summary of the reserve for store closures in discontinued operations, which is included in total current liabilities as of October 31, 2009 and November 1, 2008 respectively (in thousands):


	As of the Nine Month Period Ended
	October 31, 2009			November 1, 2008
Beginning Balance	$	3,110		$	—
Lease exit costs, net of estimated sublease income		14,218			11,195
Severance and closure costs		560			579
Payments for leases and settlements		(7,167	)		(5,593	)
Payments for severance and closure costs		(560	)		(579	)

Ending Balance	$	10,161		$	5,602

4. SHARE-BASED COMPENSATION

The Company accounts for share-based compensation arrangements in accordance with ASC 718-10, “Share-Based Payment.” Under the provisions of ASC 718-10, the Company is required to measure the cost of services received in exchange for an award of equity instruments based on the fair value of the award. For employees and directors, the award is measured on the grant date and then recognized over the period during which services are required to be provided, usually the vesting period. The Company had share-based compensation expense of $271,000 for the three months ended October 31, 2009 compared to $528,000 for the three months ended November 1, 2008. Share-based compensation expense for the nine months ended October 31, 2009 was $1.1 million compared to $1.4 million for the nine months ended November 1, 2008. Share-based compensation is recorded as a component of selling, general and administrative expenses. As of October 31, 2009, there was $1.2 million of total unrecognized compensation cost related to unvested share-based compensation that is expected to be recognized over a weighted-average period of approximately 1.8 years.

There were no stock options granted during the third quarter of fiscal 2009. During the third quarter of fiscal 2008, the Company granted options to purchase 96,000 shares of common stock to its employees and non-employee directors. The weighted average fair value per option granted during the nine-month period ended October 31, 2009 was $0.57. The weighted average fair value per option granted during the three-month and nine-month periods ended November 1, 2008 was $0.96 and $1.69, respectively. The following table presents the weighted average assumptions used in the Black-Scholes-Merton option pricing model to value the stock options granted during the nine-month period ended October 31, 2009 and the three-month and nine-month periods ended November 1, 2008:


	Three Months Ended		Nine Months Ended
	November 1, 2008		October 31, 2009		November 1, 2008
Expected dividend rate	—	%	—	%	—	%
Volatility	65.3	%	83.3	%	55.9	%
Risk-free interest rate	2.9	%	1.76	%	2.4	%
Expected lives (years)	4.8		4.5		4.8

5. RECONCILIATION OF BASIC SHARES TO DILUTED SHARES

Basic EPS is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted EPS is computed by dividing net income by the weighted average number of common shares and dilutive common stock equivalents outstanding during the period. Diluted EPS reflects the potential dilution that could occur if options to purchase common stock were exercised into common stock.

The following is a reconciliation of the weighted average number of shares (in thousands) used in the Company’s basic and diluted earnings per share computations:


	Three Months Ended							Nine Months Ended
	Basic EPS			Effect of Dilutive Stock Options (treasury stock method)	Diluted EPS			Basic EPS			Effect of Dilutive Stock Options (treasury stock method)	Diluted EPS
October 31, 2009
Shares		22,087		—		22,087			22,087		—		22,087
Amount	$	(1.00	)	$0.00	$	(1.00	)	$	(3.82	)	$0.00	$	(3.82	)

November 1, 2008
Shares		22,087		—		22,087			22,087		—		22,087
Amount	$	(1.17	)	$0.00	$	(1.17	)	$	(3.82	)	$0.00	$	(3.82	)

Certain options to purchase common stock were outstanding but were not included in the computation of diluted earnings per share because the effect would be anti-dilutive. For the three-month and nine-month periods ended October 31, 2009 and November 1, 2008, there were 3,463,386 and 3,206,503 anti-dilutive options, respectively.

6. LONG-TERM DEBT AND REVOLVING LINE OF CREDIT

The Company’s long-term debt as of October 31, 2009, January 31, 2009, and November 1, 2008 is summarized as follows:


(In thousands)	October 31, 2009			January 31, 2009			November 1, 2008
Obligations under sale and leaseback:
California distribution centers	$	62,219		$	62,642		$	62,778
Virginia distribution center		51,580			51,769			51,831

Total long-term debt – distribution center obligations		113,799			114,411			114,609

Less current portion		(862	)		(823	)		(811	)

Long-term debt – distribution center obligations, net	$	112,937		$	113,588		$	113,798

The Company’s long-term debt includes financing obligations related to the sale-leaseback of its distribution centers in Stockton, California and Windsor, Virginia. The Company has accounted for the sale-leaseback transactions as financings whereby the net book value of the assets remain on the Company’s consolidated balance sheet. The Company also recorded a financing obligation which is being amortized over the period of the leases (including option periods) and approximates the discounted value of minimum lease payments under the leases. The monthly lease payments are accounted for as principal and interest payments on the recorded obligations. For further details on the Company’s long-term debt, see Note 6 to the consolidated financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2009.

On June 25, 2007, the Company entered into a secured five-year revolving credit agreement (the “Credit Agreement”) with a group of banks that terminated and replaced its existing credit agreements. The Credit Agreement allows for cash borrowings and letters of credit under a secured asset-based credit facility of up to $200.0 million. The amount available for borrowing at any time is limited by a stated percentage of the aggregate amount of the liquidated value of eligible inventory and the face amount of eligible credit card receivables. The Credit Agreement includes three options to increase the size of the asset-based credit facility by up to $50.0 million in the aggregate. All borrowings and letters of credit under the Credit Agreement are collateralized by all assets presently owned and hereafter-acquired by the Company. Interest is paid in arrears monthly, quarterly, or over the applicable interest period as selected by the Company, with the entire balance payable on June 25, 2012. Borrowings pursuant to its asset-based credit facility bear interest, at the Company’s election, at a rate equal to either (i) the higher of Bank of America’s prime rate or the federal funds effective rate plus an applicable margin; or (ii) the LIBOR rate plus an applicable margin. The applicable margin is based on the Company’s Average Excess Availability, as defined in the Credit Agreement. In addition, the Company pays a commitment fee on the unused portion of the amount available for borrowing as described in the Credit Agreement. The Credit Agreement includes limitations on the ability of the Company to, among other things, incur debt, grant liens, make investments, enter into mergers and acquisitions, pay dividends, repurchase its outstanding common stock, change its business, enter into transactions with affiliates, and dispose of assets including closing stores. The events of default under the Credit Agreement include, among others, payment defaults, cross defaults with certain other indebtedness, breaches of covenants, loss of collateral, judgments, changes in control, and bankruptcy events. In the event of a default, the Credit Agreement requires the Company to pay incremental interest at the rate of 2.0% and the lenders may, among other remedies, foreclose on the security (which could include the sale of the Company’s inventory), eliminate their commitments to make credit available, declare due all unpaid principal amounts outstanding, and require cash collateral for any letter of credit obligations. In addition, in the event of a default or if the Company’s Average Excess Availability is 15% or less of the borrowing capacity under the asset-based credit facility, the Company will be subject to additional restrictions, including specific restrictions with respect to its cash management procedures.

The Company uses the borrowings under the Credit Agreement for working capital, issuance of commercial and standby letters of credit, capital expenditures, and other general corporate purposes. As of October 31, 2009, the Company was in compliance with its loan covenant requirements, had $94.1 million in borrowings and $11.5 million in outstanding letters of credit, and had remaining credit available under the Credit Agreement of $63.3 million. The Company’s business is highly seasonal, reflecting the general pattern associated with the retail industry of peak sales and earnings during the fourth quarter (Holiday) season, therefore borrowings under the line of credit often peak early in the fourth quarter.

The borrowing base, based on inventory and accounts receivable value less certain reserves, at October 31, 2009, at January 31, 2009 and at November 1, 2008 consisted of the following (in millions):


	October 31, 2009			January 31, 2009			November 1, 2008
Account receivable availability	$	6.1		$	8.0		$	6.8
Inventory availability		170.4			153.3			240.1
Less: reserves		(7.6	)		(10.0	)		(9.2	)

Total borrowing base¹	$	168.9		$	151.3		$	237.7


The aggregate borrowing base is reduced by the following obligations (in millions):

Ending loan balance	$	94.1		$	38.5		$	117.4
Outstanding letters of credit		11.5			13.5			10.4

Total obligations	$	105.6		$	52.0		$	127.8

The availability at October 31, 2009, at January 31, 2009 and at November 1, 2008 was (in millions):


Total borrowing base¹	$	168.9		$	151.3		$	200.0
Less: obligations		(105.6	)		(52.0	)		(127.8	)

Total availability	$	63.3		$	99.3		$	72.2

1.	Total borrowing base per the calculation above was $237.7 million at November 1, 2008. However, the Credit Agreement limits the borrowing base to $200.0 million. Therefore, $200.0 million is the adjusted total borrowing base at November 1, 2008.

7. INCOME TAXES

The Company’s effective tax rate from continuing operations was a provision of 0.4% in the third quarter of fiscal 2009 compared to a benefit of 2.4% in the third quarter of fiscal 2008. Because the Company has recorded a full valuation allowance on its net deferred tax asset, no federal or state tax benefit has been recorded on its operating loss in the third quarter of fiscal 2009.

The Company accounts for income taxes in accordance with the provisions of ASC 740-10, “Income Taxes,” which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial statement carrying amount and the tax bases of the assets and liabilities. The recording of the net deferred tax asset assumes the realization of such asset in the future; otherwise, a valuation allowance must be recorded to reduce the asset to its net realizable value. The Company considers future pre-tax income and, if necessary, ongoing prudent and feasible tax planning strategies in assessing the need for such a valuation allowance. The Company has recorded a full valuation allowance as of October 31, 2009 and November 1, 2008.

At January 31, 2009, the Company had $2.0 million in unrecognized tax benefits; the recognition of which would have an impact of $338,000 on the Company’s income tax provision. At October 31, 2009, the Company had $1.3 million in unrecognized tax benefits; the recognition of which would have an impact of $326,000 on the Company’s income tax provision. At the end of the third quarter, it is reasonably possible that the total amounts of unrecognized tax benefits could decrease by $671,000 within the next 12 months due to the expiration of the statute of limitations.

The Company recognizes accrued interest and penalties related to unrecognized tax benefits in income tax expense. At October 31, 2009, the Company had accrued $173,000 and $6,000 for the potential payment of interest and penalties, respectively.

As of October 31, 2009, the Company is subject to U.S. federal income tax examinations for tax years 2006 and forward, and is subject to state and local tax examinations for tax years 2001 and forward.

8. FAIR VALUE MEASUREMENTS

The Company adopted ASC 820-10, “Fair Value Measurements,” for financial assets and financial liabilities beginning in fiscal 2008 and for nonfinancial assets and liabilities beginning in fiscal 2009.

ASC 820-10 establishes a three-tier fair value hierarchy, which prioritizes inputs used in measuring fair value. The tiers include:

Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities;

Level 2 - Inputs other than quoted prices included within Level 1 that are either directly or indirectly observable;

Level 3 - Unobservable inputs which are supported by little or no market activity.

The fair value of impaired long-lived assets and the initial estimates of store lease exit costs were measured at fair value on a nonrecurring basis using Level 3 inputs as defined in the fair value hierarchy. Fair value of long-lived assets and store lease exit costs are determined by estimating the amount and timing of net future cash flows (including rental expense for leased properties, sublease rental income, common area maintenance costs and real estate taxes) and discounting them using a risk-adjusted rate of interest. The Company estimates future cash flows based on its experience and knowledge of the market in which the store is located and, when necessary, uses real estate brokers.

During the third quarter of fiscal 2009, the Company recorded a $536,000 non-cash impairment charge for the write-down of store assets to fair value in two underperforming stores compared to a $1.1 million non-cash impairment charge for the write-down of store assets to fair value in five underperforming stores during the third quarter of fiscal 2008. There were no impairment charges for the write-down of store assets during the first six months of fiscal 2009 or fiscal 2008. Additionally, there were no impairments related to financial assets during the first nine months of fiscal 2009 or fiscal 2008.

9. SUBSEQUENT EVENTS

On November 6, 2009, the Worker, Homeownership, and Business Assistance Act of 2009 was signed into law. The Company expects to receive an income tax refund of approximately $12 million in 2010 related to the additional carry back of the Company’s net operating losses.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of financial condition, results of operations, liquidity and capital resources should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and notes thereto for the three-month and nine-month periods ended October 31, 2009 and with Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in the Company’s Annual Report on Form 10-K for the year ended January 31, 2009. The results of operations for the three-month and nine-month periods ended October 31, 2009, presented herein, are not indicative of the results to be expected for the full year because of, among other things, seasonal factors in the retail business.

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements reflect the Company’s current beliefs and estimates with respect to future events and the Company’s future financial performance, operations and competitive position and may be identified, without limitation, by use of the words “may,” “should,” “expects,” “anticipates,” “estimates,” “believes,” “looking ahead,” “forecast,” “projects,” “continues,” “intends,” “likely,” “plans” and similar expressions. Such forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause our actual results, performance or achievements to differ materially from those expressed or implied by such forward-looking statements, including those set forth in the Annual Report on Form 10-K for the fiscal year ended January 31, 2009 and elsewhere in this Quarterly Report on Form 10-Q. The reader should carefully consider, together with the other matters referred to herein, the risk factors set forth in the Annual Report on Form 10-K for the fiscal year ended January 31, 2009 as well as in other documents the Company files with the Securities and Exchange Commission (the “SEC”). The Company may from time to time make additional written and oral forward-looking statements, including statements contained in the Company’s filings with the SEC. The Company does not undertake to update any forward-looking statement that may be made from time to time by or on behalf of the Company.

Overview

Cost Plus, Inc. is a leading specialty retailer of casual home furnishings and entertaining products. The stores feature an ever-changing selection of casual home furnishings, housewares, gifts, decorative accessories, gourmet foods and beverages offered at everyday low prices and imported from more than 50 countries. Many items are unique and exclusive to the Company.

During the first quarter of fiscal 2009, the Company exited eight media markets by closing 26 stores, 18 of which are reported in discontinued operations for both the current and prior periods and eight of which are reported in continuing operations. The sales and all costs from operating and closing the discontinued operations stores have been removed from the results of continuing operations and are reported in discontinued operations for both the current and prior periods. The 13 stores closed in the first quarter of fiscal 2008 are also reported as discontinued operations. For the third quarter of fiscal 2009, income from discontinued operations was $221,000 compared to a loss of $1.7 million for the third quarter of fiscal 2008. The income from discontinued operations in the third quarter of fiscal 2009 was primarily the result of adjustments to estimated lease exit costs net of estimated sublease income.

Net sales for the third quarter of fiscal 2009 were $181.9 million, a 10.4% decrease from $203.0 million for the third quarter ended November 1, 2008. Comparable store sales for the quarter decreased 9.1% compared to a decrease of 3.4% last year. The decrease in same store sales was attributable to an 8.8% reduction in the average ticket per customer primarily due to lower furniture sales and a relatively flat customer count compared to last year.

The Company reported a net loss of $22.1 million in the third quarter of fiscal 2009, or $1.00 per diluted share, compared to a net loss of $25.8 million, or $1.17 per diluted share, for the third quarter last year. The decrease in the net loss was primarily due to a reduction in Selling, General, and Administrative expenses which resulted from the Company’s cost cutting initiatives offset by lower gross profit. Gross profit margin for the third quarter was lower due to decreased leverage of fixed occupancy expenses on lower same store sales. Reductions in the cost of merchandise were offset by promotional activity required to compete with aggressive discounting among higher end specialty retailers and discount chains.

In the third quarter of fiscal 2009, the Company opened two new stores and closed one store to end the quarter with 270 stores in 30 states.

Results of Operations

The three months (third quarter) and nine months (year-to-date) ended October 31, 2009 as compared to the three months and nine months ended November 1, 2008.

Net Sales Net sales consists almost entirely of retail sales, but also includes direct-to-consumer sales and shipping revenue. Net sales decreased $21.1 million, or 10.4%, to $181.9 million for the third quarter of fiscal 2009 from $203.0 million for the third quarter of fiscal 2008. Year-to-date, net sales were $549.5 million, a 10.7% decrease from $615.5 million for the same period last year. Comparable store sales decreased 9.1% in the third quarter of fiscal 2009, compared to a decrease of 3.4% in the third quarter of fiscal 2008. The decrease in comparable store sales in the third quarter of fiscal 2009 was attributable to an 8.8% reduction in the average ticket per customer primarily due to lower furniture sales and a relatively flat customer count compared to last year. Year-to-date, comparable store sales decreased 9.6% compared to a decrease of 0.6% for the same period last year. As of October 31, 2009, the calculation of comparable store sales included a base of 267 stores. A store is generally included as comparable at the beginning of the fourteenth month after its grand opening. At the end of the third quarter of fiscal 2009, the Company operated 270 stores in 30 states versus 278 stores (after adjusting for the 18 stores now classified as discontinued operations) in 30 states at the end of the third quarter of fiscal 2008.

The Company classifies its sales into home and consumables product lines. For the third quarter of fiscal 2009, home accounted for 61% of total sales versus 63% last year, and consumables accounted for 39% of total sales versus 37% last year.

Cost of Sales and Occupancy Cost of sales and occupancy, which consists of costs to acquire merchandise inventory and costs of freight and distribution, as well as certain facilities costs, decreased $13.1 million, or 8.8%, to $135.9 million in the third quarter of fiscal 2009. As a percentage of net sales, total cost of sales and occupancy increased 130 basis points to 74.7% in the third quarter of fiscal 2009 compared to 73.4% in the third quarter of fiscal 2008. The 130 basis point increase was entirely due to decreased leverage of fixed occupancy expenses on lower comparable store sales. Year-to-date, total costs of sales and occupancy were $407.6 million and decreased $41.2 million, or 9.2%, compared to the same period in fiscal 2008. As a percentage of net sales, total cost of sales and occupancy for the year-to-date period increased 130 basis points to 74.2% from 72.9% last year.

Selling, General and Administrative (“SG&A”) Expenses SG&A expenses decreased $9.8 million, or 13.1%, to $65.0 million in the third quarter of fiscal 2009 compared to $74.8 million in the third quarter of fiscal 2008. As a percentage of net sales, SG&A expenses were 35.8% in the third quarter of fiscal 2009 compared to 36.9% in the third quarter of fiscal 2008. The decrease in SG&A expenses as a percentage of net sales was due to the Company’s cost-cutting initiatives, including store closures which resulted in lower payroll, advertising and other controllable expenses. The decrease was partially offset by decreased leverage on lower comparable store sales. Year-to-date, SG&A expenses decreased $29.2 million, or 13.1%, to $194.0 million compared to $223.3 million for the same period last year. As a percentage of net sales, year-to-date SG&A expenses decreased 100 basis points to 35.3% compared to 36.3% for the same period last year.

Store Closure CostsCosts related to closing the eight stores classified within continuing operations totaled $241,000 for the third quarter of fiscal 2009 and $6.3 million year-to-date. There were no store closure costs in the first nine months of fiscal 2008 relating to closed stores that were classified within continuing operations.

Store Preopening Expenses Store preopening expenses typically include rent expense incurred prior to opening as well as grand opening advertising and preopening merchandise setup expenses. Preopening expenses for the third quarter of fiscal 2009 were $223,000 compared to $84,000 for the third quarter of fiscal 2008. The Company opened two new stores in the third quarter of fiscal 2009 compared to no new stores in the same period last year. Year-to-date, preopening expenses for fiscal 2009 were $223,000 compared to $3.2 million for the same period last year, with two new store openings compared to 15 for the same period last year. Store preopening expenses vary depending on the amount of time between the possession date and the store opening, the particular store site and whether it is located in a new or existing market.

Net interest expenseNet interest expense, which includes interest on capital leases and debt, net of interest earned on investments, was $2.7 million for the third quarter of fiscal 2009 compared to $3.7 million for the third quarter of fiscal 2008. Year-to-date, net interest expense was $8.4 million compared to $9.9 million for the same period last year. The decrease in interest expense was due to a lower interest rate and lower borrowings under the Company’s asset-based credit facility.

Income TaxesThe Company’s effective tax rate from continuing operations was a provision of 0.4% in the third quarter of fiscal 2009 compared to a benefit of 2.4% in the third quarter of fiscal 2008. Because the Company has recorded a full valuation allowance on its net deferred tax asset, no federal or state tax benefit has been recorded on its operating loss in the third quarter of fiscal 2009.

Liquidity and Capital Resources

The Company’s cash and cash equivalents balance was $2.9 million at October 31, 2009 and $3.5 million at November 1, 2008. The Company met its short-term liquidity needs and its capital requirements for the nine-month period ended October 31, 2009 with existing cash and cash provided from financing activities. The Company believes that the combination of its cash and cash equivalents, cash generated from operations, available borrowings under its asset-based credit facility and the estimated $12 million tax refund will be sufficient to finance its working capital and other capital projects for the next 12 months.

Cash Flows From Operating Activities Net cash used in operating activities totaled $51.9 million year-to-date compared to $84.2 million in the same period last year, a decrease of $32.4 million. The decrease in net cash used in operations compared to last year was primarily due to decreased merchandise inventories and an increase in accounts payable for the first nine months in fiscal 2009 compared to a decrease during the nine-month period last year due to timing. This decrease was partially offset by a smaller decrease in income taxes receivable compared to the same period last year.

Cash Flows From Investing ActivitiesNet cash used in investing activities totaled $2.7 million year-to-date, a $10.5 million decrease compared to the same period last year. Net cash used in investing activities decreased mainly because there was less spending related to new store projects as there were two new stores opened during the first nine months of fiscal 2009 compared to 15 new stores in the prior year.

The Company estimates that fiscal 2009 capital expenditures will approximate $3.2 million; including approximately $1.6 million for management information systems and distribution center projects, $1.1 million allocated to investments in existing stores and various other corporate projects and $500,000 million for new stores. The Company will not open any new stores in the fourth quarter of fiscal 2009.

Cash Flows From Financing ActivitiesNet cash provided by financing activities was $53.8 million year-to-date compared to $97.7 million in the same period last year. Borrowings under the Company’s asset-based credit facility increased $55.6 million as of October 31, 2009 from the level at January 31, 2009, compared to an increase of $99.3 million for the same period last year. Principal payments on long-term debt were $612,000 compared to $577,000 in fiscal 2008 and principal payments on capital lease obligations were $1.2 million compared to $1.1 million in fiscal 2008.

Revolving Line of CreditOn June 25, 2007, the Company entered into a secured five-year revolving credit agreement (the “Credit Agreement”) with a group of banks that terminated and replaced its existing credit agreements. The Credit Agreement allows for cash borrowings and letters of credit under a secured asset-based credit facility of up to $200.0 million. The amount available for borrowing at any time is limited by a stated percentage of the aggregate amount of the liquidated value of eligible inventory and the face amount of eligible credit card receivables. The Credit Agreement includes three options to increase the size of the asset-based credit facility by up to $50.0 million in the aggregate. All borrowings and letters of credit under the Credit Agreement are collateralized by all assets presently owned and hereafter-acquired by the Company. Interest is paid in arrears monthly, quarterly, or over the applicable interest period as selected by the Company, with the entire balance payable on June 25, 2012. Borrowings pursuant to its asset-based credit facility bear interest, at the Company’s election, at a rate equal to either (i) the higher of Bank of America’s prime rate or the federal funds effective rate plus an applicable margin; or (ii) the LIBOR rate plus an applicable margin. The applicable margin is based on the Company’s Average Excess Availability, as defined in the Credit Agreement. In addition, the Company pays a commitment fee on the unused portion of the amount available for borrowing as described in the Credit Agreement. The Credit Agreement includes limitations on the ability of the Company to, among other things, incur debt, grant liens, make investments, enter into mergers and acquisitions, pay dividends, repurchase its outstanding common stock, change its business, enter into transactions with affiliates, and dispose of assets including closing stores. The events of default under the Credit Agreement include, among others, payment defaults, cross defaults with certain other indebtedness, breaches of covenants, loss of collateral, judgments, changes in control, and bankruptcy events. In the event of a default, the Credit Agreement requires the Company to pay incremental interest at the rate of 2.0% and the lenders may, among other remedies, foreclose on the security (which could include the sale of the Company’s inventory), eliminate their commitments to make credit available, declare due all unpaid principal amounts outstanding, and require cash collateral for any letter of credit obligations. In addition, in the event of a default or if the Company’s Average Excess Availability is 15% or less of the borrowing capacity under the asset-based credit facility, the Company will be subject to additional restrictions, including specific restrictions with respect to its cash management procedures.

Summary Disclosure about Contractual Obligations and Commercial Commitments

Borrowings under the Company’s revolving credit line increased by $55.6 million from January 31, 2009 to October 31, 2009. Otherwise, the Company does not believe there were any other significant changes to its contractual obligations that were not in of the ordinary course of business, from those reported on its Annual Report on Form 10-K for the fiscal year ended January 31, 2009.

Critical Accounting Policies

The Company’s condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. Preparation of these statements requires management to make judgments and estimates. Some accounting policies have a significant impact on amounts reported in these financial statements. A summary of significant accounting policies and a description of accounting policies that are considered critical may be found in our Annual Report on Form 10-K for the fiscal year ended January 31, 2009, in the Notes to the Consolidated Financial Statements (Note 1) and the Critical Accounting Policies and Estimates section.

Impact of Recent Accounting Pronouncements

On February 3, 2008, the Company adopted Accounting Standards Codification (“ASC”) 820-10, “Fair Value Measurements.” ASC 820-10 clarifies the definition of fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This statement does not require any new fair value measurements. Additionally, on February 1, 2009, in accordance with ASC 820-10, the Company adopted the provisions of ASC 820-10 for all other nonfinancial assets and nonfinancial liabilities. Refer to Note 8 within this Quarterly Report on Form 10-Q for additional information.

In June 2009, the FASB approved the “FASB Accounting Standards Codification,” (“Codification”), as the single source of authoritative U.S. GAAP for all non-governmental entities, with the exception of the SEC and its staff. The Codification, which launched July 1, 2009, changes the referencing and organization of accounting guidance and is effective for interim and annual periods ending after September 15, 2009. Since it is not intended to change or alter existing U.S. GAAP, the Codification is not expected to have any impact on the Company’s financial condition or results of operations.

Seasonality

The Company’s business is highly seasonal, reflecting the general pattern associated with the retail industry of peak sales and earnings during the fourth quarter (Holiday) selling season. Due to the importance of the Holiday selling season, the fourth quarter of each fiscal year has historically contributed, and the Company expects it will continue to contribute, a disproportionate percentage of its net sales and most of its net income, if any, for the entire fiscal year.

Available Information

The Company’s website address iswww.worldmarket.com. The Company has made available through its Internet website, free of charge, its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Definitive Proxy Statement and Section 16 filings and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after such materials are electronically filed with, or furnished to, the SEC. Cost Plus, Inc. was organized as a California corporation in November 1946.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes to the Company’s market risk from those disclosed in the Company’s Form 10-K filed for the fiscal year ended January 31, 2009.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Company’s management evaluated, with the participation of its principal executive officer and its principal financial officer, the effectiveness of its disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. The Company maintains disclosure controls and procedures that are designed to ensure that the information disclosed in the reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

As of October 31, 2009, the Company’s management, including its principal executive officer and principal financial officer, concluded that its disclosure controls and procedures are effective. This conclusion is based on management’s evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures.

Changes in Internal Control Over Financial Reporting

There was no change in the Company’s internal control over financial reporting that occurred during the quarter ended October 31, 2009 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 6. EXHIBITS

(a)

Exhibits



31.1		Certification of the Chief Executive Officer of the Registration pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of the Chief Financial Officer of the Registration pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of the Chief Executive Officer and Chief Financial Officer of the Registration pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	COST PLUS, INC.
	Registrant

Date: December 8, 2009	By:	/s/ Jane L. Baughman
		Jane L. Baughman
		Executive Vice President Chief Financial Officer (Principal Financial & Accounting Officer)

INDEX TO EXHIBITS


31.1		Certification of the Chief Executive Officer of the Registration pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of the Chief Financial Officer of the Registration pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of the Chief Executive Officer and Chief Financial Officer of the Registration pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. junior Avg

Cost Plus (CPWM) Inactive 10-Q2010 Q3 Quarterly report

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