Description
Filed with the SEC from June 21 to June 27:
Cost Plus (CPWM)
Gamco Investors (ticker: GBL) said it owns 1,142,578 shares (5.1%); it bought the entire stake from May 9 through June 20 at prices iof $21.88 to $21.99. On May 9, Cost Plus announced that it had entered into an acquisition agreement with Bed Bath & Beyond (BBBY) for $22 a share, a 22% premium to its prior closing price.
BUSINESS OVERVIEW
The Company
Cost Plus, Inc. and its subsidiaries (“Cost Plus World Market,” or “the Company”) is a leading specialty retailer of casual home furnishings and entertaining products in the United States. Cost Plus, Inc. was organized as a California corporation in November 1946 and opened its first retail store in 1958 in San Francisco, California. As of January 28, 2012, the Company operated 258 stores under the names “World Market,” “Cost Plus World Market,” “Cost Plus Imports” and “World Market Stores” in 30 states. Cost Plus World Market’s business strategy is to differentiate itself by offering a large and ever-changing selection of unique products, many of which are imported, at value prices in an exciting shopping environment. Many of Cost Plus World Market’s products are proprietary or private label, often incorporating the Company’s own designs, “World Market” brand name, quality standards and specifications and typically are not available at department stores or other specialty retailers.
The Company’s stores are located predominantly in high traffic metropolitan, urban and suburban locales. During the fiscal year ended January 28, 2012, the Company closed five stores and relocated one store. All of the stores closed during fiscal 2011 are included in continuing operations, and four of the five store closures had no lease exit costs because their leases had expired.
The Company’s website address is www.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 Securities Exchange Act of 1934, as amended (“Exchange Act”), as soon as reasonably practicable after such materials are electronically filed with, or furnished to, the SEC. This website address is intended to be an inactive, textual reference only. None of the material on this website is part of this Annual Report on Form 10-K.
Merchandising
The Company’s merchandising strategy is to offer customers a broad selection of distinctive products related to the themes of home decorating, home entertaining, and gift giving, overlaid with its core competency in seasonal merchandise.
Products. The Company believes its distinctive and unique merchandise and shopping environment differentiates it from other retailers. A significant portion of the Company’s products are made abroad in over 50 countries, and many of these goods are handcrafted by local artisans. Many of the Company’s products are proprietary or private label. The “World Market” brand name or other brand names exclusive to the Company often incorporate the Company’s own designs, and are typically not available at department stores or other specialty retailers. In addition to strengthening the store’s product offering, proprietary and private label goods typically offer higher gross margins and stronger consumer values than branded goods. The Company classifies its product offering into the home furnishings and consumables product lines.
Within the home furnishings product line, the offerings include home decorating items such as furniture, rugs, pillows, bath linens, lighting, window coverings, frames, and baskets. The Company’s furniture products include ready-to-assemble living and dining room pieces; sofas, chairs; unique handcrafted case goods and occasional pieces; as well as outdoor furniture made from a variety of materials. The Company also sells a number of tabletop and kitchen products including glassware, ceramics, textiles and cooking utensils. Kitchen products include an assortment of products organized around a variety of themes such as baking, food preparation, barbecuing and international dining. The home furnishings product line also includes a number of gift and decorative accessories, including artisan gifts; candles; framed art and wall décor; a unique assortment of jewelry, fashion accessories and personal care items; as well as holiday and other seasonal items. Because many of the gift, jewelry and artisan gift items come from around the world, they contribute to the exotic atmosphere of the stores. 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 (the “Holiday” season).
Within the consumables product line, the Company offers its customers a wide selection of gourmet foods and beverages, including wine, microbrewed and imported beer, coffee, tea, and mineral water. The wine assortment offers a number of moderately priced premium wines, including a variety of well recognized labels, as well as wines not readily available at neighborhood wine or grocery stores that have been privately bottled and imported from around the world. State regulations may limit or restrict the Company’s ability to sell alcoholic beverages. Consumable products, particularly beverages, generally have lower margins compared to the Company’s average. Gourmet foods include packaged products from around the world, seasonal items that relate to “traditional” holidays and customs, private label products and goods exclusive to the Company. Packaged snacks, candy and pasta are often displayed in open barrels and crates. Food items typically have a shelf life of six months or longer.
Store Format and Presentation. The Company’s stores are designed to evoke the feeling of a “world marketplace” through colorful and creative visual displays and merchandise presentations, including goods in open barrels and crates, groupings of related products in distinct “shops” within the store and in-store activities such as food and coffee tastings and wine tasting in some states. The Company believes that its “world marketplace” effect provides customers with a fun shopping experience and encourages browsing throughout the store.
The average selling space of a Cost Plus World Market store is approximately 15,700 square feet, which allows flexibility for merchandise displays, product adjacencies and directed traffic patterns. Complementary products are positioned in proximity to one another and cross merchandising themes are used in merchandise displays to tie different product offerings together. The floor plan allows the customer to see virtually all of the different product areas in a Cost Plus World Market store from the store center where each quadrant, with bulk displays and end caps highlighting everyday value priced items, lead the customer into different product areas. The Company has a seasonal shop, usually located in the heart of the store, which features seasonal products and themes, such as the holiday shop, harvest and outdoor. Store signage, including permanent as well as promotional signs, is developed by the Company’s in-house graphic design department. End caps, bulk stacks and freestanding displays are changed frequently. Approximately 2,900 square feet of back office and stock space are included in the total square footage at a store, which averages about 18,600 square feet per store.
The Cost Plus World Market store format is also designed to reinforce the Company’s value image through exposed ceilings, concrete floors, simple wooden fixtures and open or bulk presentations of merchandise. The Company displays most of its inventory on the selling floor and makes effective use of vertical space, such as a display of chairs arranged on a wall and rugs hanging vertically from fixtures.
The Company believes that its customers usually visit a Cost Plus World Market store as a destination with a specific purchase in mind. The Company makes use of frequent receipts of products, seasonal themes and products, and consumable products to encourage frequent return visits by its customers. The Company also believes that once in the store, its customers often spend additional time shopping and browsing, which results in customers purchasing more items than they originally intended.
Pricing. Cost Plus World Market offers quality products at competitive prices. The Company complements its everyday low price strategy with selected product promotions and opportunistic buys, enabling the Company to pass on additional savings to the customer. The Company routinely shops a variety of retailers to ensure that its products are competitively priced.
Planning and Buying. Cost Plus World Market effectively manages a large number of products by utilizing centralized merchandise planning, tracking and replenishment systems. The Company regularly monitors merchandise activity at the item level through its management information systems to identify and respond to product trends. The Company maintains its own central buying staff that are responsible for establishing the assortment of inventory within its merchandise classifications each season, including integrating current trends or themes identified by the Company into its different product categories. The Company attempts to moderate the risk associated with merchandise purchasing by testing selected new products in a limited number of stores. The Company’s long-standing relationships with overseas suppliers, its international buying agency network and its knowledge of the import process facilitate the planning and buying process. The buyers work closely with suppliers to develop unique products that will meet customers’ expectations for quality and value.
Direct-to-Consumer (“e-commerce”)
The Company operates an e-commerce website at www.worldmarket.com which makes up its direct-to-consumer channel, and is an increasingly important part of the Company’s business, representing approximately 3% of net sales in fiscal 2011, compared to 2% of net sales in fiscal 2010. The direct-to-consumer business is a strategic growth priority of the Company and the Company expects that direct-to-consumer net sales will continue to grow. The Company offers customers a rich online shopping experience, a robust pre-shopping tool with detailed product information and another branded customer channel. The Company believes that the website is convenient for its core customer and enhances the image of its brand. The website also makes the Company’s products more accessible and builds brand awareness in additional and new markets than the retail store channel alone.
Marketing and Advertising
The Company’s marketing program leverages an integrated, multimedia approach to engage the customer and drive traffic. During fiscal 2011, the Company continued to successfully drive acquisition and retention with traditional and new media vehicles that showcased the brand, product assortment and promotional activities. The Company continues to test and expand its marketing programs, utilizing a myriad of tools including electronic media, public relations, partnerships and social media.
In fiscal 2011, the Company continued its efforts with the World Market Explorer customer loyalty program, increasing membership by 40% versus the prior year. This program allows the Company to recognize and reward its best customers. Key program elements are designed to increase shopping frequency, increase average ticket size and engage customers with the brand.
Product Sourcing and Distribution
The Company purchases most of its inventory centrally, which allows the Company to take advantage of volume purchase discounts and improve controls over inventory and product mix. The Company purchases its merchandise from approximately 2,000 suppliers; the largest of which represented approximately 3% of total purchases in the fiscal year ended January 28, 2012. A significant portion of Cost Plus World Market’s products are manufactured abroad in over 50 countries in Europe, North and South America, Asia, Africa and Australia. The Company has established a well developed overseas sourcing network and enjoys long standing relationships with many of its vendors. As is customary in the industry, the Company does not have long-term contracts with its suppliers. The Company’s buyers often work with suppliers to produce unique products exclusive to Cost Plus World Market. The Company believes that, although there could be delays in changing suppliers, alternate sources of merchandise for core product categories are available at comparable prices. Cost Plus World Market typically purchases overseas products on either a free-on-board or ex-works basis, and the Company’s insurance on such goods commences at the time it takes ownership. The Company also purchases a number of domestic products, especially in the gourmet food and beverage area. Due to state regulations, wine and beer are purchased from local distributors, with purchasing primarily directed by the corporate buying office.
The Company currently services its stores from its distribution centers located in Stockton, California and Windsor, Virginia. Domestically sourced merchandise is usually delivered to the distribution centers by common carrier or by Company trucks.
Information Systems
Each of the Company’s stores is linked to the Cost Plus World Market headquarters in Oakland, California through an IBM 4690 Point-of-Sale (“POS”) system and a Multiprotocol Label Switching (“MPLS”) data network that interfaces with an IBM AS/400 computer. The Company’s information systems keep records, which are updated daily, of every merchandise item sold in each store, as well as financial, sales and inventory information. The POS system also has scanning, price look-up and on-line credit/debit card approval capabilities, all of which improve transaction accuracy, speed checkout time and increase overall store efficiency. The Company continually upgrades its in-store information systems to improve information flow to store management and enhance other in-store administration capabilities. Over the past few years, a customer loyalty system, World Market Explorer, was implemented to drive shopping frequency and increase average ticket size, and a returns management system was implemented to minimize fraudulent returns and improve speed of service at the POS.
Purchasing operations are facilitated by the use of merchandise information systems that allow the Company to analyze product sell-through and assist the buyers in making merchandise decisions. The Company’s Central Replenishment system includes stock keeping unit (“SKU”) and store-specific “model stock” logic that enables the Company to maintain adequate stock levels on basic goods in each location. The Company also utilizes an Assortment Planning application to improve SKU level planning and management.
The Company uses several other information systems to manage and control its operations and finances. These information systems are designed to ensure the integrity of the Company’s inventory, support pricing decisions, process payroll, pay bills, control cash, maintain fixed assets and track promotions throughout all of the Company’s stores. The Company’s Warehouse Management system enables its distribution centers to receive, locate, pick and ship inventory to stores. The Company also utilizes a distribution center labor management system to improve distribution center labor planning, tracking and reporting.
Additional systems enable the Company to produce the periodic financial reports necessary for developing budgets and monitoring individual store and consolidated Company performance.
Competition
The markets served by Cost Plus World Market are highly competitive. The Company competes against a diverse group of retailers ranging from specialty stores to department stores and discounters. The Company’s product offerings compete with such retailers as Bed Bath & Beyond, Crate & Barrel, Ethan Allen Interiors, Haverty Furniture, Jo-Ann Stores, Kirkland’s, Michaels Stores, Pier 1 Imports, Pottery Barn, Target, Trader Joe’s, Tuesday Morning, and Williams-Sonoma. Most specialty retailers tend to have higher prices and a narrower assortment of products and department stores typically have higher prices than Cost Plus World Market for similar merchandise. Discounters may have lower prices than Cost Plus World Market, but the product assortment is generally more limited. The Company competes with these and other retailers for customers principally on the basis of price, assortment of products, brand name recognition, suitable retail locations and qualified management personnel.
Employees
As of January 28, 2012, the Company had 1,941 full-time and 4,186 part-time employees. Of these, 5,467 were employed in the Company’s stores and 660 were employed in the distribution centers and corporate office. The Company regularly supplements its work force with temporary staff, especially in the fourth fiscal quarter of each year to service increased customer traffic during the peak Holiday season. Employees in 11 stores in Northern California are covered by a collective bargaining agreement that expires on May 31, 2012. The company is currently re-negotiating the current collective bargaining agreement and expects to have a new contract in place before the current contract expires. The Company believes that it enjoys good relationships with its employees.
Trademarks
The Company regards its trademarks and service marks as having significant value and as being important to its marketing efforts. The Company has registered its “Asian Passage,” “Cab-u-lous,” “Castello Del Lago,” “Cost Plus,” “Cost Plus World Market,” “Crossroads,” “Electric Reindeer,” “Marche du Monde with logo,” “Marche du Monde,” “Market Classics,” “Mercado Del Mundo,” “One World. One Store,” “Pomona,” “Soiree,” “The Big Sipper,” “There with logo,” “World Grill,” “World Market,” “World Market Explorer,” “World Market Pairings” and “Zinfatuation” marks with the United States Patent and Trademark Office on the Principal register. In Canada, the Company has registered its “Cost Plus,” “Cost Plus World Market” and “World Market” marks. In the European Union, the Company has registered its “World Market” logo mark. The Company’s policy is to pursue prompt and broad registration of its marks and to vigorously oppose infringement of its marks.
CEO BACKGROUND
Mr. Coulombe has served as Chairman of our Board of Directors since June 2010. He has been engaged in independent management consulting since April 1995. Previously, he was employed in an executive capacity by several retailing and grocery businesses and as an independent business consultant. From February 1995 to April 1995, Mr. Coulombe served as President and Chief Executive Officer of Sport Chalet, Inc., a sporting goods retailer. From February 1994 to January 1995, Mr. Coulombe served as Chief Executive Officer of Provigo Corp., a wholesale and retail grocer. From November 1992 to February 1994, Mr. Coulombe was an independent business consultant. From March 1992 to October 1992, Mr. Coulombe served as Executive Vice President of Pacific Enterprises, with principal responsibility for Thrifty Corporation, an operator of drug and sporting goods chain stores. He also served as Co-Chairman of Thrifty Corporation during that time. From June 1989 through March 1992, Mr. Coulombe served as an independent business consultant. Mr. Coulombe is the founder of Trader Joe’s, a specialty food grocery chain, and he served as its Chief Executive Officer from 1957 to 1989. Mr. Coulombe currently serves as a director of True Religion Apparel, Inc., a manufacturer of high-end, contemporary, designer women’s and men’s jeans.
As the former chief executive officer and the founder of Trader Joe’s, as well as other retail establishments, Mr. Coulombe has a seasoned, broad business perspective of the retail industry which is of tremendous value to us. From prior positions as both an executive officer and director at Thrifty Corporation and as an independent consultant, he has extensive operating experience in the retail and consumer products industries. In addition, through his extensive executive management and board service experience on the boards of several public and private companies, Mr. Coulombe has developed the leadership, business judgment and consensus-building skills necessary to effectively lead our Board of Directors as non-executive Chairman.
Mr. Einstein served as Chairman of Dailey and Associates, an international advertising agency headquartered in West Hollywood, California, from 1994 until his retirement in 2006. Prior to his position as Chairman, Mr. Einstein served as President of Dailey and Associates from 1983 to 1994. He was Dailey and Associates’ original Executive Creative Director and served in that role as well for 35 years. Mr. Einstein currently serves as a director of Merchant House International, a Chinese manufacturer of home textiles and footwear.
Mr. Einstein brings to our Board of Directors an extensive background spanning nearly forty years in the advertising industry. He contributes strong insight into our marketing and advertising programs from his involvement in leading brands such as White Stag Clothing, Gallo Winery, Mondavi Winery, Callaway Golf, Mattel Toys, LA Gear, Lawry’s Foods, Nestle Foods, Neutrogena and Safeway Stores. He has established a proven track record for creating relevant marketing strategies to build brand awareness and drive sales. His expertise in managing and directing product development, marketing, packaging, distribution and sales provides our Board of Directors with valuable insights as we continue to innovate and strengthen our core brand and grow our market share of brand merchandise.
Mr. Feld was appointed Chief Executive Officer and President of Cost Plus, Inc. in October 2005. From August 1999 until October 2005, Mr. Feld was President, Chief Executive Officer and Chairman of the Board of Directors of PCA International, Inc., the largest North American operator of portrait studios focused on serving the discount retail market. From November 1998 to June 1999, Mr. Feld was President and Chief Operating Officer of Vista Eyecare, Inc., a specialty eyecare retailer. He joined Vista Eyecare as a result of its acquisition of New West Eyeworks, Inc., where he had been serving as President and a director since May 1991 and as Chief Executive Officer and a director since February 1994. From 1987 to May 1991, Mr. Feld was with Frame-n-Lens Optical, Inc., where he served as its president prior to joining New West. Prior to that, he served in various senior management positions at Pearle Health Services for 10 years and, for a number of years, he served as an acquisition and turnaround specialist for optical retail groups acquired by Pearle. PCA International filed for protection under Chapter 11 of the federal Bankruptcy Code in August 2006. Mr. Feld also serves on the Santa Clara University Advisory Board.
As our Chief Executive Officer, President and a member of our Board of Directors, Mr. Feld draws upon over three decades of experience in an array of executive management roles in the retail industry. As Chief Executive Officer, he is responsible for determining our strategy and clearly articulating priorities as well as aligning and motivating the organization to execute effectively and ensure success. These skills, combined with Mr. Feld’s in-depth understanding of the Cost Plus customer, make him exceptionally qualified to serve on our Board of Directors.
Mr. Genender joined Red Mountain Capital Partners LLC as a Partner in February 2011. Mr. Genender previously served as a Managing Director in the Retail and Consumer Group of Carlyle Partners V, a $13.7 billion US buyout fund. Prior to Carlyle, Mr. Genender co-founded and was a Partner at Star Avenue Capital, a consumer growth equity vehicle which he formed in 2008 with Irving Place Capital and Creative Artists Agency. From 1996 to 2008, he was a Managing Director and Partner at Fenway Partners, a leading middle market buyout firm with over $2 billion under management. Prior to Fenway, Mr. Genender held senior sales and marketing positions with Nabisco Holdings Inc. and PepsiCo Inc., and served as a Financial Analyst in the M&A department with Goldman, Sachs & Co. in London and New York. Mr. Genender currently serves as a Director for Nature’s Sunshine Products, Inc. (“NATR”), a leading natural health and wellness company.
Mr. Genender brings extensive experience in finance, marketing and consumer-oriented businesses as well as significant corporate governance experience. Mr. Genender has served as a Director for J Brand Holdings, Easton-Bell Sports, Simmons Holdings, Harry Winston Inc., Delimex Holdings, and Decorative Concepts Inc. At each of these companies, Mr. Genender either chaired or served as a member of either the Compensation Committee or Audit Committee.
Mr. Gurr served as Interim President and Chief Operating Officer of Cost Plus, Inc. from March 2005 until October 2005. Since September 2004, Mr. Gurr has also been serving as Director and President of Make Believe Ideas, Inc., a publisher of children’s books. From January 2002 until July 2003, Mr. Gurr served as the President of Quarto Holdings, Inc., a leading international co-edition publisher. From April 1998 to July 2001, Mr. Gurr served as President and a director of Dorling Kindersley Publishing Inc., a publisher of illustrated books, videos and multi-media products. From September 1991 to February 1998, Mr. Gurr served as President and Chief Executive Officer of Lauriat’s Books, Inc., an operator of various bookstore chains. From November 1995 until June 1997, Mr. Gurr served as President and Chief Executive Officer of Chadwick Miller, Inc., an importer and wholesaler of housewares and gifts. Mr. Gurr is a director of Hastings Entertainment, Inc., a leading multimedia entertainment retailer and Millennium House, a specialist book publisher.
Mr. Gurr brings to our Board of Directors over two decades of experience as both an executive officer and a director of domestic and international companies in the specialty retail sector and the consumer products industry. Mr. Gurr has hands-on operating experience at Cost Plus resulting in in-depth knowledge of our operations and business. In addition, he has extensive knowledge of the publishing industry, importation of goods and retail distribution which is of invaluable assistance to our Board of Directors.
Mr. Pound currently serves as President and a director of Integrity Brands, Inc., a firm that originates and oversees investments in specialty retail and branded consumer products companies. He has held that position since July 1999. Mr. Pound served as a director of The Gymboree Corporation from 2000 to 2010. Mr. Pound also currently serves as a director of Orange 21 North America, a producer of branded eyewear under the Spy Optic brand, and as a member of its compensation and governance committees. He served as Executive Chairman of RedEnvelope, Inc., an online and catalog gift retailer, from May 2007 to March 2008 and as its Chief Executive Officer from November 2007 to March 2008. Mr. Pound was a RedEnvelope, Inc. director from August 2005 to March 2008. RedEnvelope filed for bankruptcy protection on April 17, 2008. Mr. Pound serves as a director of Tactical Holdings, LLC; Hunter Dixon, Inc.; and Three Twins Ice Cream, Inc, all private companies. Mr. Pound has a Ph D. in finance from Yale University, worked on corporate control policies in the mid-1980’s at the Securities and Exchange Commission, taught finance and financial market policy for ten years at Harvard University, and (during that time) served as an advisor to a number of large public companies and investment organizations.
Mr. Pound’s experience as an investor in the specialty retail sector and his finance expertise provides the Company and the Board with an informed perspective on the Company’s business objectives and industry trends, as well as expertise in evaluating opportunities in the sector.
Ms. Robbins is a retired retail executive who worked in various department store and specialty store businesses. From 1997 to 2002, Ms. Robbins was the Director of Product Development for Jack Nadel, Inc., a direct response promotion agency specializing in creative marketing and merchandise solutions. From 1996 to 1997, she was the Executive Vice President and General Merchandise Manager of House of Fabrics, Inc., which operates sewing and craft stores throughout the United States. From 1995 to 1996, she was the Vice President of Merchandising for Sport Chalet Inc., a sporting goods retailer. From 1976 to 1993, Ms. Robbins served in capacities of increasing responsibility at Carter Hawley Hale, culminating in her appointment as Senior Vice President and General Merchandising Manager.
Ms. Robbins brings to our Board of Directors a background spanning over 26 years of extensive retail experience in the department and specialty store business in management and operational roles. She has strong insight into product development, merchandise planning and promotion. In addition to her industry experience, Ms. Robbins’ service on our Compensation Committee since 1999 has provided her with the strong background in executive compensation necessary to serve as Chairperson of our Compensation Committee. She is also one of our longest serving members on our Board of Directors and therefore she has a deep understanding of the Company’s business and operations.
Mr. Roberts is retired and served as Chairman of our Board from March 2005 until June 2010. Mr. Roberts served as President of F.M. Roberts & Company, Inc., an investment-banking firm he established in 1980, for more than 20 years. Mr. Roberts has over 30 years of investment banking experience, including executive corporate finance positions with Lehman Brothers, Loeb, Rhoades & Co., E.F. Hutton & Co. and Cantor, Fitzgerald & Co., Inc. Mr. Roberts served as 1993 Chairman of the Board of Governors of the National Association of Securities Dealers, which at that time owned and operated The Nasdaq Stock Market. From 1994 to 1996, he was a member of the Nasdaq Board of Directors and its Executive Committee. Mr. Roberts also served as a director and Chairman of the Compensation Committee of Tween Brands, Inc, a specialty retailer of branded apparel and lifestyle products for girls from February, 2003 until December, 2009.
With three decades of investment banking experience advising corporate clients on strategic and financial issues, Mr. Roberts brings valuable strategic expertise to our Board of Directors. Mr. Roberts brings a deep understanding of the Nasdaq Stock Market LLC and National Association of Securities Dealers, having served on their boards and committees. Mr. Roberts has strong leadership and consensus-building capabilities as well as a solid understanding of finance and corporate governance.
Mr. Stevens was the Chief Executive Officer and a director of philosophy, Inc., a skin care and beauty company, from 2009 to April 2011. From 2007 to 2008, he served as President and Chief Operating Officer of Tween Brands, Inc., a publicly traded retailer. From 2002 until 2006, Mr. Stevens held various executive positions at Limited Brands, Inc. and its subsidiaries, including Executive Vice President and Chief Financial Officer of Limited Brands, Inc., Chief Executive Officer of Express and President of Bath & Body Works. Prior to 2002, Mr. Stevens held senior leadership positions at several public and private companies, including in Chord Communications, Bank One Retail Group, Taco Bell Corporation and PepsiCo, Inc. From 1983 to 1991, Mr. Stevens was a partner at McKinsey & Company, Inc. Mr. Stevens previously served as a director and audit committee member of Spartan Stores, Inc. and La Quinta Inns, Inc. and as a director, Audit Committee member and chairman of the compensation committee of Virgin Mobile USA, Inc.
Mr. Stevens brings to our Board of Directors over two decades of experience as a financial executive officer and member of the Board of Directors and Audit Committees of four public companies. Additionally, as the chief executive officer of a cosmetics company, Mr. Stevens had firsthand exposure to many of the issues facing retailers, including companies like Cost Plus. His extensive financial and accounting expertise as chief financial officer, deep understanding of accounting principles and financial reporting rules and regulations, including how internal controls are effectively managed within organizations, provide him with the financial acumen and skills necessary to serve as Chairman of our Audit Committee.
MANAGEMENT DISCUSSION FROM LATEST 10K
Overview
Cost Plus, Inc. is a leading specialty retailer of casual home furnishings and entertaining products. As of January 28, 2012, the Company operated 258 stores in 30 states. The stores feature an ever-changing selection of casual home furnishings, housewares, gifts, decorative accessories, gourmet foods and beverages offered at competitive prices and imported from more than 50 countries. Many items are unique and exclusive to Cost Plus World Market. The value, breadth and continual refreshment of products invites customers to come back throughout a lifetime of changing home furnishings and entertaining needs.
Net sales for fiscal 2011 increased 5.2% to $963.8 million from $916.6 million for fiscal 2010, while comparable store sales for fiscal 2011 increased 5.4% compared to a 7.2% increase in fiscal 2010. Net income in fiscal 2011 was $16.5 million, or $0.71 per diluted share, versus net income in fiscal 2010 of $2.9 million, or $0.13 per diluted share, marking two consecutive years of profitability for the Company. The increase in profitability for fiscal 2011 is due to higher gross profit from increased sales, consistent merchandise margin, and leverage on occupancy costs and selling, general, and administrative (SG&A) expenses from higher sales.
As a result of paying off the asset-based credit facility, the Company ended fiscal 2011 with no outstanding borrowings and $9.6 million in letters of credit outstanding, compared to $25.4 million in outstanding borrowings and $10.8 million in letters of credit outstanding at the end of fiscal 2010.
The Company closed five stores and relocated one store during fiscal 2011 to end the year with 258 stores. All of the stores closed during fiscal 2011 are included in continuing operations and four of the five store closures had no lease exit costs because their leases had expired.
Fiscal 2011 Compared to Fiscal 2010
Net Sales Net sales consist almost entirely of retail sales, but also include direct-to-consumer sales, shipping revenue and other miscellaneous revenue. Net sales increased $47.3 million, or 5.2%, to $963.8 million in fiscal 2011 from $916.6 million in fiscal 2010. The increase in net sales was attributable to a 5.4% increase in comparable store sales compared to a 7.2% increase in fiscal 2010. Customer count for fiscal 2011 increased 4.0% and the average ticket increased 1.3% primarily due to strong performance in the furniture business. As of January 28, 2012, the calculation of comparable store sales included a base of 258 stores. A store is included as comparable at the beginning of the fourteenth full fiscal month of sales. As of January 28, 2012, the Company operated 258 stores compared to 263 stores as of January 29, 2011.
The Company classifies its sales into the home furnishings and consumables product lines. Home furnishings were 61% of sales in fiscal 2011 compared to 60% in fiscal 2010 and consumables were 39% of sales in fiscal 2011 compared to 40% in fiscal 2010.
Cost of Sales and Occupancy Cost of sales and occupancy, which consists of the cost of inventory sold during the period, costs to acquire merchandise inventory, costs of freight and distribution, as well as certain facility costs, increased $28.6 million, or 4.6%, to $654.2 million in fiscal 2011 compared to $625.6 million in fiscal 2010. As a percentage of net sales, total cost of sales and occupancy decreased 40 basis points to 67.9% in fiscal 2011 from 68.3% in fiscal 2010. Occupancy as a percentage of net sales for fiscal 2011 decreased 70 basis points as a result of lower costs and the leveraging of the costs on higher comparable store sales. This decrease was offset by a 30 basis point increase in cost of sales as a percentage of net sales related to the clearance of seasonal outdoor merchandise in the first half of fiscal 2011.
Selling, General and Administrative (“SG&A”) Expenses SG&A expenses increased $6.6 million, or 2.4%, to $277.4 million in fiscal 2011 compared to $270.9 million in fiscal 2010. As a percentage of net sales, SG&A expenses for fiscal 2011 decreased 80 basis points to 28.8% in fiscal 2011 from 29.6% in fiscal 2010. The decrease in SG&A expenses as a percentage of net sales was primarily due to increased leverage from higher sales.
Store Closure (Income)/Costs The Company had store closure income from continuing operations of $41,000 for fiscal 2011 compared to costs of $3.2 million for fiscal 2010. The store closure income for fiscal 2011 was due to a payment received in the second quarter of fiscal 2011 from a landlord related to a favorable early lease termination, partially offset by the costs of closing the store and other lease exit cost adjustments. The Company closed five stores and relocated one store during fiscal 2011; all of the stores closed during fiscal 2011 are included in continuing operations and four of the five store closures had no lease exit costs because their leases had expired. This compares to closing six stores and relocating one store during fiscal 2010; five of the six stores closed during fiscal 2010 are included in continuing operations.
Net Interest Expense Net interest expense, which includes debt, interest on capital leases and distribution center sale-leaseback obligations, was $12.8 million in fiscal 2011 compared to $11.1 million in fiscal 2010. Interest related to the distribution center sale-leaseback obligations was $8.5 million and $8.3 million for fiscal 2011 and fiscal 2010, respectively.
Income Taxes The Company’s effective tax rate for fiscal 2011 was 8.6%, compared to 23.1% in fiscal 2010. The rate decrease is primarily due to an increase in the Company’s fiscal 2011 pre-tax book income without a corresponding increase in federal tax related to the use of the net operating losses and a decrease in the state tax rate. The state tax rate decrease is primarily due to the tax expense remaining relatively unchanged due to the Company’s transfer pricing agreement, even with substantial increases to taxable income. For fiscal 2011, the Company reserved against all remaining net deferred tax assets. For more information, see Note 10 to our consolidated financial statements.
Fiscal 2010 Compared to Fiscal 2009
Net Sales Net sales increased $49.5 million, or 5.7%, to $916.6 million in fiscal 2010 from $867.0 million in fiscal 2009. The increase in net sales was attributable to a 7.2% increase in comparable store sales compared to a 7.1% decrease in fiscal 2009. Customer count for fiscal 2010 increased 7.7% and the average ticket decreased 0.4%. As of January 29, 2011, the calculation of comparable store sales included a base of 262 stores. As of January 29, 2011, the Company operated 263 stores compared to 268 stores as of January 30, 2010.
Home furnishings were 60% of sales in fiscal 2010 compared to 59% in fiscal 2009 and consumables were 40% of sales in fiscal 2010 compared to 41% in fiscal 2009. During fiscal 2010, there was a modest shift in sales mix back towards the home categories which is part of the Company’s ongoing strategy.
Cost of Sales and Occupancy Cost of sales and occupancy decreased $12.2 million, or 1.9%, to $625.6 million in fiscal 2010 compared to $637.9 million in fiscal 2009. As a percentage of net sales, total cost of sales and occupancy decreased 530 basis points to 68.3% in fiscal 2010 from 73.6% in fiscal 2009. Cost of sales as a percentage of net sales for fiscal 2010 decreased 380 basis points based on the strong performance in non-furniture home categories as well as significantly lower markdowns and higher initial markups across most categories of the business compared with fiscal 2009. Occupancy as a percentage of net sales for fiscal 2010 decreased 150 basis points as a result of lower costs and the leveraging of the costs on higher comparable store sales.
Selling, General and Administrative (“SG&A”) Expenses SG&A expenses remained flat at $270.9 million for both fiscal 2010 and fiscal 2009. As a percentage of net sales, SG&A expenses for fiscal 2010 decreased 160 basis points to 29.6% in 2010 from 31.2% in fiscal 2009. Included in SG&A for fiscal 2010 is $5.5 million of expense related to the estimated annual bonus payout under the fiscal 2010 Management Incentive Plan. There was no Management Incentive Plan bonus for fiscal 2009.
Store Closure Costs Costs related to closing the stores classified within continuing operations totaled $3.2 million for fiscal 2010 compared to $5.8 million for fiscal 2009. The company closed five stores classified as continuing operations in fiscal 2010 compared to eight stores in fiscal 2009. The store closure costs for fiscal 2010 and fiscal 2009 primarily consist of lease exit costs which are recorded at the time the store is closed as well as other costs related to closing the stores such as relocating and terminating employees.
Net Interest Expense Net interest expense was $11.1 million in fiscal 2010 compared to $11.2 million in fiscal 2009. Included in net interest expense is interest related to the distribution center lease obligations of $8.3 million and $8.2 million for fiscal 2010 and fiscal 2009, respectively.
Income Taxes The Company’s effective tax rate for fiscal 2010 was 23.1%, compared to a benefit of 16.7% in fiscal 2009. The rate increase was primarily due to the Company’s pre-tax book income and corresponding increase in state tax expense. For fiscal 2010, the Company reserved against all remaining net deferred tax assets. For more information, see Note 10 to our consolidated financial statements.
Liquidity and Capital Resources
The Company’s cash and cash equivalents balance at the end of fiscal 2011 was $5.9 million compared to $2.7 million at the end of fiscal 2010. The Company’s primary uses for cash are to provide working capital for operations, to service our obligations, to pay interest and principal on debt, and to fund capital expenditures. Historically, the Company has financed its operations primarily from cash generated from operations and seasonal borrowings under an asset-based credit facility.
Prior to achieving net income in fiscal 2011 and fiscal 2010, we incurred net losses in each annual period since fiscal 2006. As of January 28, 2012, we had an accumulated deficit of $78.1 million. For fiscal 2009, we did not generate positive cash flows from operating activities. There can be no assurance that our business will continue to be profitable or will generate sufficient cash to fund operations in the future or that additional losses and negative cash flows from operations will not be incurred, particularly on a quarterly basis, which could have a material adverse effect on our financial condition. We are dependent upon our asset-based credit facility to fund operations and seasonal inventory purchases throughout the year. Access to our asset-based credit facility is dependent upon meeting our debt covenants and not exceeding the borrowing limit of the asset-based credit facility. There can be no assurance that we will achieve or sustain positive cash flows, particularly on a quarterly basis, from operations or profitability. If we are unable to maintain adequate liquidity, it could have a material adverse affect on our financial condition and future operations may need to be scaled back or discontinued. However, based on our current business plan and revenue projections, we believe that our existing cash balance, our anticipated cash flows from operations and our available asset-based credit facility will be sufficient to meet our working capital and operating resource expenditure requirements for the next 12 months and the foreseeable future.
Cash Flows From Operating Activities Net cash provided by operating activities was $39.5 million for fiscal 2011 compared to $31.6 million for fiscal 2010. The increase in net cash provided by operations was primarily due to higher net income of $16.5 million in fiscal 2011 compared to net income of $2.9 million in fiscal 2010, as well as other working capital improvements, offset by the receipt of a $13.0 million one time tax refund in the first quarter of fiscal 2010 that was not repeated in fiscal 2011.
Net cash provided by operating activities was $31.6 million for fiscal 2010 compared to cash used in operating activities of $5.3 million for fiscal 2009. The increase in net cash provided by operations was primarily due to recognizing net income of $2.9 million in fiscal 2010 versus a net loss of $63.3 million in fiscal 2009 and the receipt of a $13.0 million one time tax refund in the first quarter of fiscal 2010. The increase was partially offset by a moderate increase in inventory levels during the year compared to a large decrease the previous year.
Cash Flows From Investing Activities Net cash used in investing activities was $9.6 million for fiscal 2011, an increase of $5.3 million from fiscal 2010. In fiscal 2011, there were increases in spending related to store projects, information systems and visual merchandise compared to fiscal 2010.
Net cash used in investing activities was $4.3 million for fiscal 2010, an increase of $0.8 million from fiscal 2009. In fiscal 2010, there was a minor increase in spending related to information systems, visual merchandise and store projects compared to fiscal 2009.
The Company estimates that fiscal 2012 capital expenditures will approximate $18.5 million; including $10.9 million for management information systems and distribution center projects and $7.6 million for investments in new and existing stores and various other corporate projects.
Cash Flows From Financing Activities Net cash used in financing activities was $26.6 million for fiscal 2011 compared to net cash used in financing activities of $27.2 million in fiscal 2010. At the end of fiscal 2011, the Company paid its asset-based credit facility off in its entirety (including the $10.0 million term loan), which resulted in having no outstanding borrowings under its asset-based credit facility at the end of fiscal 2011, compared to $25.4 million outstanding at the end of fiscal 2010. The Company had $0.1 million in payments from debt issuance costs compared to $2.3 million for fiscal 2010 due the amended and extended secured five-year credit agreement the Company entered into during the fourth quarter of fiscal 2010. Additionally, proceeds from the issuance of common stock were $0.6 million for fiscal 2011 compared to no proceeds for fiscal 2010.
Net cash used in financing activities was $27.2 million for fiscal 2010 compared to net cash provided by financing activities of $7.8 million in fiscal 2009. The Company had outstanding borrowings from its asset-based credit facility of $25.4 million at the end of fiscal year 2010 which decreased from $48.5 million at the end of fiscal year 2009 because the Company paid down more than it borrowed during the year. Debt issuance cost payments increased by $2.3 million during fiscal 2010 related to the amended and extended secured five-year credit agreement the Company entered into during the fourth quarter of fiscal 2010 compared to no debt issuance costs paid in the prior year.
Revolving lines of Credit The Company has a secured five-year credit agreement with a group of banks and Bank of America, N.A. as the administrative agent, collateral agent, swing line lender, and letter of credit issuer (the “Credit Agreement”). The Credit Agreement allows for cash borrowings under a revolving loan and letters of credit under a secured asset-based credit facility of up to $190.0 million as well as a $10.0 million term loan which was drawn on the effective date. As of January 28, 2012, the Company has paid off the outstanding borrowings from the asset-based credit facility and the $10.0 million term loan in full. 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 or hereafter-acquired by the Company. Interest is paid in arrears monthly, quarterly, or over the applicable interest period as selected by the Company in the Revolving Loan Notice, with the entire balance payable on January 3, 2016. Borrowings pursuant to the 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 Daily 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, change its business, enter into transactions with affiliates, and dispose of assets. 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 Availability (as defined in the Credit Agreement) is not equal to the greater of either $20.0 million or 15% of the loan cap 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 intends to use the proceeds from the Credit Agreement for working capital, issuance of commercial and standby letters of credit, capital expenditures, and other general corporate purposes. As of January 28, 2012, the Company was in compliance with its loan covenant requirements, paid its asset-based credit facility off in its entirety (including the $10.0 million term loan) and had $9.6 million in outstanding letters of credit, and credit available under the Credit Agreement of $135.9 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 during the beginning of the fourth quarter.
Critical Accounting Policies and Estimates
Cost Plus, Inc.’s and its subsidiaries’ discussion and analysis of its financial condition and results of operations are based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Estimates and assumptions include, but are not limited to, inventory values, fixed asset lives, intangible asset values, deferred income taxes, self-insurance reserves and the impact of contingencies and litigation. The Company bases its estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from those estimates under different assumptions or conditions. The Company has also chosen certain accounting policies when options are available, including the retail inventory method of accounting for inventories. Operating results would be affected if other alternatives were used.
The Company believes that the following represent the more critical estimates and assumptions used in the preparation of the consolidated financial statements.
Inventory Inventories are stated at the lower of cost or market with cost determined under the retail inventory method (“RIM”), in which the valuation of inventories at cost and gross margins are calculated by applying a cost-to-retail ratio to the retail value of inventories. RIM is an averaging method that is widely used in the retail industry due to its practicality. The Company’s use of the RIM results in valuing inventories at lower of cost or market as markdowns are currently taken as a reduction of the retail value of inventories. Inherent in the RIM calculation are certain significant management judgments and estimates including, among others, merchandise markup, markdowns and shrinkage, which significantly impact the ending inventory valuation at cost as well as gross margin. Physical inventories are conducted annually during the second fiscal quarter to calculate actual shrinkage and inventory on hand. Estimates are used to charge inventory shrinkage for the remaining quarters of the fiscal year. Consideration is given to a number of quantitative factors, including anticipated subsequent markdowns and aging of inventories. To the extent that actual markdowns are higher or lower than estimated, the Company’s gross margins could increase or decrease and, accordingly, affect its financial position and results of operations. A significant variation between the estimated provision and actual results could have a substantial impact on the Company’s results of operations. Management does not believe there is a reasonable likelihood of a material change in the assumed factors used to create the estimates the Company uses to calculate its ending inventory under RIM. The Company’s RIM utilizes multiple departments in which fairly homogeneous classes of merchandise inventories having similar gross margins are grouped. Management believes that the Company’s RIM provides an inventory valuation that reasonably approximates cost and results in carrying inventory at the lower of cost or market. Inventory costs also include certain buying and distribution costs related to the procurement, processing and transportation of merchandise.
Self-Insured Liabilities The Company is primarily self-insured for workers’ compensation, employee health benefits and general liability claims. The Company determines self-insurance liabilities based on claims filed, including the development of those claims, and an estimate of claims incurred but not yet reported. Factors affecting this estimate include future inflation rates, changes in severity, benefit level changes, medical costs and claim settlement patterns. Should a different amount of claims occur compared to what was estimated, or costs of the claims increase or decrease beyond what was anticipated, reserves may need to be adjusted accordingly.
Income Taxes The Company assesses the likelihood that deferred tax assets will be realized in the future and records a valuation allowance, if necessary, to reduce deferred tax assets to the amount that it believes is more likely than not to be realized. In evaluating our ability to recover our deferred tax assets we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies, and recent financial operations. In fiscal year 2011 the valuation allowance was decreased by $2.7 million, and in fiscal years 2010 and 2009, the valuation allowance was increased by $0.5 million and $16.0 million, respectively. This is a non-cash charge that management felt was appropriate to record due to the cumulative losses in recent years and the store closure activities met the prescribed criteria for taking an allowance. The Company’s effective tax rate may be materially impacted by changes in the estimated level of earnings and changes in the deferred tax valuation allowance.
The Company recognizes tax positions when they are more likely than not to be sustained upon examination. The amount recognized is measured as the largest amount of benefit that is more likely than not to be realized upon settlement. The Company is subject to periodic audits by the Internal Revenue Service and state and local taxing authorities. These audits may challenge certain of the Company’s tax positions such as the timing and amount of income and deductions and the allocation of taxable income to various tax jurisdictions. The Company evaluates its tax positions and establishes liabilities in accordance with the applicable accounting guidance on uncertainty in income taxes. These tax uncertainties are reviewed as facts and circumstances change and are adjusted accordingly. This requires significant management judgment in estimating final outcomes. Actual results could materially differ from these estimates and could significantly affect the Company’s effective tax rate and cash flows in future years.
Section 382 of the Internal Revenue Code (“Section 382”) imposes limitations on a corporation’s ability to utilize its net operating losses (“NOL”) if it experiences an “ownership change.” In general terms, an ownership change results from transactions increasing the ownership of certain existing stockholders and, or, new stockholders in the stock of a corporation by more than 50 percentage points during a three year testing period. Any unused annual limitation may be carried over to later years, and the amount of the limitation may, under certain circumstances, be increased to reflect both recognized and deemed recognized “built-in gains” that occur during the sixty-month period after the ownership change. Based on our analysis to date, we have undergone an ownership change. The resulting limitation does not affect the Company’s ability to utilize its NOL for the year ended January 28, 2012. However, in future years the Company’s ability to utilize net operating losses will be limited. The “ownership change” that the Company experienced also imposes limitations on the Company’s California state enterprise zone credits (“EZ Credits”) carryforwards under Internal Revenue Code Section 383. The resulting limitation did affect the Company’s ability to utilize its EZ Credits for fiscal 2010 and the Company expects it will continue to be limited.
Impairment The Company reviews long-lived assets and intangible assets with finite useful lives for impairment at least annually or whenever events or changes in circumstances indicate that their carrying values may not be recoverable. Using its best estimates based on reasonable assumptions and projections, the Company records an impairment loss to write such assets down to their estimated fair values if the carrying values of the assets exceed their related undiscounted expected future cash flows. Store-specific long-lived assets and intangible assets with finite lives are evaluated along with the stores in their respective media market, which is the lowest level at which individual cash flows can be identified. Corporate assets or other long-lived assets that are not store-specific are evaluated at a consolidated entity level. Based on the impairment tests performed during fiscal 2011, there was no impairment of long-lived and intangible assets with finite lives in fiscal 2011. During fiscal 2010, the Company recorded a $58,000 non-cash impairment charge to write-down property and equipment at the four underperforming stores that closed during the first quarter of fiscal 2011 as they had reached the end of their lease terms. Additionally, during fiscal 2009, the Company recorded a $1.1 million non-cash charge for the write-down of property and equipment at the five stores that closed in fiscal 2010 and certain other underperforming stores.
Accrued Store Closure and Lease Exit Costs The Company records the estimated future liability for any store closures where a lease obligation still exists; associated with the rental obligation on the date the store is closed and the liability for the costs associated with an exit or disposal activity is recognized when the liability is incurred.
Litigation, Claims and Assessments The Company is involved in litigation, claims and assessments incidental to its business, the disposition of which is not expected to have a material effect on the Company’s financial position or results of operations. It is possible, however, that future results of operations for any particular quarterly or annual period could be materially affected by changes in the Company’s assumptions related to these matters. The Company’s policy is to accrue its best estimate of the probable cost for the resolution of claims. When appropriate, such estimates are developed in consultation with outside counsel handling the matters and are based upon a combination of litigation and settlement strategies. To the extent additional information arises or the Company’s strategies change, it is possible that the Company’s best estimate of its probable liability may change.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
Overview
Cost Plus, Inc. and its subsidiaries (“Cost Plus World Market” or “the Company”) 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 competitive prices and imported from more than 50 countries. Many items are unique and exclusive to Cost Plus World Market. The value, breadth and continual refreshment of products invites customers to come back throughout a lifetime of changing home furnishings and entertaining needs.
The Company had net income from continuing operations of $129,000 in the first quarter of fiscal 2012 compared to a net loss from continuing operations of $3.0 million in the first quarter of fiscal 2011. This is the first time the Company has achieved net income from continuing operations during the first quarter since fiscal 2004. The Company reported a net loss of $74,000 in the first quarter of fiscal 2012, or $0.00 per diluted share, compared to a net loss of $3.4 million, or $0.15 per diluted share, for the first quarter of fiscal 2011. The decrease in the net loss was primarily due to a $5.2 million increase in gross profit as well as tightly controlled selling, general and administrative (SG&A) expenses. Gross profit rate was 32.0% for the first quarter of fiscal 2012 versus 31.7% for the first quarter of fiscal 2011. The 30 basis point increase in gross profit rate was primarily due to the leveraging of occupancy costs on higher sales, offset by a slightly lower merchandise margin. Additionally, as a percentage of net sales, SG&A expenses for the first quarter of fiscal 2012 decreased 120 basis points to 30.4% versus 31.6% for the first quarter of fiscal 2011. The decrease in SG&A expenses as a percentage of net sales for the quarter was primarily due to increased leverage from higher sales.
In the first quarter of fiscal 2012, the Company opened one new store and closed none to end the quarter with 259 stores in 30 states.
Recent Development
On May 8, 2012, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Bed Bath & Beyond Inc., a New York corporation (“BBBY”), and Blue Coral Acquisition Corp., a California corporation and a direct wholly-owned subsidiary of Parent (“Purchaser”). The Offer commenced on May 25, 2012. For more information, see the Notes to the Condensed Consolidated Financial Statements (Note 9).
Results of Operations
The three months ended April 28, 2012 as compared to the three months ended April 30, 2011
Net Sales Net sales consist almost entirely of retail sales, but also include direct-to-consumer sales, shipping revenue and other miscellaneous revenue. Net sales increased $14.9 million, or 7.4%, to $214.6 million for the first quarter of fiscal 2012 from $199.7 million for the first quarter of fiscal 2011. Same store sales for the first quarter of fiscal 2012 increased 7.9% on top of a 5.5% increase for the first quarter of last year. The increase in same store sales for the first quarter was attributable to an increase in the average ticket per customer of 5.0% and an increase in customer count of 2.7%. As of April 28, 2012, the calculation of comparable store sales included a base of 258 stores. A store is included as comparable at the beginning of the fourteenth full fiscal month of sales with the exception of relocated stores, which remain comparable upon opening. At the end of both the first quarter of fiscal 2012 and the first quarter of fiscal 2011, the Company operated 259 stores in 30 states.
The Company classifies its sales into home and consumables product lines. For the first quarter of fiscal 2012, home accounted for 62% of total sales versus 60% for the first quarter of last year, and consumables accounted for 38% of total sales versus 40% for the first quarter of last year.
Cost of Sales and Occupancy Cost of sales and occupancy, which consists of the cost of inventory sold during the period, costs to acquire merchandise inventory, costs of freight and distribution, as well as certain facilities costs, increased $9.6 million, or 7.1%, to $145.9 million in the first quarter of fiscal 2012 as compared to the first quarter of last year. As a percentage of net sales, total cost of sales and occupancy decreased 30 basis points to 68.0% in the first quarter of fiscal 2012 compared to 68.3% in the first quarter of fiscal 2011. The 30 basis point decrease was primarily due to the leveraging of occupancy costs on higher sales, offset by a slightly lower merchandise margin.
Selling, General and Administrative (“SG&A”) Expenses SG&A expenses for the first quarter of fiscal 2012 were $65.3 million compared to $63.1 million for the first quarter last year. As a percentage of net sales, SG&A expenses decreased 120 basis points to 30.4% for the first quarter of fiscal 2012 from 31.6% for the first quarter last year. The decrease in SG&A expenses as a percentage of net sales is primarily due to increased leverage from higher sales.
Net interest expense Net interest expense, which includes debt, interest on capital leases and distribution center sale-leaseback obligations, was $3.0 million for the first quarter of fiscal 2012 compared to $3.1 million for the first quarter of fiscal 2011. Included in net interest expense is interest related to the distribution center sale-leaseback obligations of $2.2 million for the first quarter of fiscal 2012 and $2.1 million for the first quarter of fiscal 2011.
Income Taxes The Company’s effective tax rate from continuing operations was a provision of 22.0%, before discrete items, in the first quarter of fiscal 2012 compared to a benefit of 4.0%, before discrete items, in the first quarter of fiscal 2011. The effective tax rate increase is due to an increase in federal and state expense as a result of increased operating income.
Liquidity and Capital Resources
The Company’s cash and cash equivalents balance was $2.5 million at April 28, 2012 and $3.4 million at April 30, 2011. The Company met its short-term liquidity needs and its capital requirements for the three-month period ended April 28, 2012 with existing cash and cash provided from financing activities.
Prior to achieving net income in fiscal 2011 and fiscal 2010, the Company incurred net losses in each annual period since fiscal 2006. As of April 28, 2012, the Company had an accumulated deficit of $78.2 million. For fiscal 2009, the Company did not generate positive cash flows from operating activities. There can be no assurance that the Company’s business will continue to be profitable or will generate sufficient cash to fund operations in the future or that additional losses and negative cash flows from operations will not be incurred, particularly on a quarterly basis, which could have a material adverse effect on its financial condition. The Company is dependent upon its asset-based credit facility to fund operations and seasonal inventory purchases throughout the year. Access to its 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, particularly on a quarterly basis, from operations or profitability. If the Company is unable to maintain adequate liquidity, it could have a material adverse affect on its financial condition and future operations may need to be scaled back or discontinued. However, based on its current business plan and revenue projections, the Company believes that its existing cash balance, its anticipated cash flows from operations and its available asset-based credit facility will be sufficient to meet our working capital and operating resource expenditure requirements for the next 12 months and the foreseeable future.
Cash Flows From Operating Activities Net cash used in operating activities totaled $24.0 million during the first quarter of fiscal 2012 compared to $14.0 million in the same period last year, an increase of $10.0 million. The $10.0 million increase in net cash used in operating activities is primarily due to the change in accounts payable from year end compared with the same period last year due to the timing of inventory receipts and payments.
Cash Flows From Investing Activities Net cash used in investing activities totaled $2.4 million during the first quarter of fiscal 2012 compared to $0.6 million for the same period last year. For the first quarter of fiscal 2012, there were planned increases in spending related to store projects, information systems and visual merchandise compared to the same period of fiscal 2011.
The Company estimates that fiscal 2012 capital expenditures will be approximately $18.5 million; including approximately $10.9 million for management information systems and distribution center projects and $7.6 million for investments in new and existing stores and various other corporate projects.
Cash Flows From Financing Activities Net cash provided by financing activities was $23.1 million during the first quarter of fiscal 2012 compared to $15.3 million for the same period last year. Borrowings, net of payments, under the Company’s asset-based credit facility were $22.8 million for the three-month period ended April 28, 2012 compared to $15.6 million for the same period last year. Additionally, proceeds from the issuance of common stock were $0.8 million for the three-month period of fiscal 2012 compared to $0.2 million during the same period last year.
Revolving Line of Credit The Company has a secured five-year credit agreement with a group of banks and Bank of America, N.A. as the administrative agent, collateral agent, swing line lender, and letter of credit issuer (the “Credit Agreement”). The Credit Agreement allows for cash borrowings under a revolving loan and letters of credit under a secured asset-based credit facility of up to $190.0 million as well as a $10.0 million term loan which was drawn on the effective date. The Company has paid off the term loan in full. 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 or hereafter-acquired by the Company. Interest is paid in arrears monthly, quarterly, or over the applicable interest period as selected by the Company in the Revolving Loan Notice, with the entire balance payable on January 3, 2016. Borrowings pursuant to the 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 Daily 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, change its business, enter into transactions with affiliates, and dispose of assets. 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 Availability (as defined in the Credit Agreement) is not equal to the greater of either $20.0 million or 15% of the loan cap 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 April 28, 2012, the Company was in compliance with its loan covenant requirements, had $22.8 million in borrowings and $6.9 million in issued and outstanding letters of credit, and had remaining credit available under the Credit Agreement of $113.8 million. Based on current projections, the Company expects to be in compliance with its loan covenant requirements throughout fiscal 2012. 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 during the beginning of the fourth quarter.
Summary Disclosure about Contractual Obligations and Commercial Commitments
The Company does not believe there were any 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 28, 2012.
Merger Agreement with Bed Bath & Beyond, Inc.
On May 8, 2012, the Company entered into the Merger Agreement. The Merger Agreement contains certain termination rights for both the Company and Parent and provides that in certain specified circumstances, the Company must pay Parent a termination fee of $16.25 million (including in the event the Company enters into an agreement with respect to a superior proposal). In addition, under specified circumstances, the Company has agreed to reimburse Parent for its actual and reasonable out-of-pocket expenses not to exceed $1.5 million.
Off Balance Sheet Arrangements
Other than operating leases and letters of credit, the Company has no financial arrangements involving special-purpose entities or lease agreements, commonly described as synthetic leases, or any off-balance sheet arrangements that have a material current effect, or that are reasonably likely to have a material future effect, on the Company’s financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
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 28, 2012, in the Notes to the Consolidated Financial Statements (Note 1) and the Critical Accounting Policies and Estimates section in Management’s Discussion and Analysis of Financial Condition and 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. The Company believes this is the general pattern associated with the retail industry.
CONF CALL
Barry J. Feld
Thank you, operator. Good afternoon, and thank you for joining us to discuss our fourth quarter and fiscal year 2011 results. With me for this conference call are Jane Baughman, Executive Vice President and Chief Financial Officer; Anne Mirante, Vice President of Finance; and Charlie Miltner, Vice President and Controller. Following my opening remarks, Jane will discuss the fourth quarter and full year financial results in detail, after which, I will discuss our fiscal 2012 key growth initiatives. Then we'll open the call to questions.
Before beginning today's discussion, Anne Mirante will read the company's Safe Harbor statement.
Anne Mirante
Certain comments made during this call may contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. These forward-looking statements include statements regarding the company's future financial and operational performance, our goals and our strategies and can be identified by the use of words such as may, will, expect, anticipate, believe and other similar words and phrases. The company's actual results or future financial conditions may differ materially from those expressed in any such forward-looking statements as a result of many factors that may be outside the company's control.
Please refer to the company's current press release and SEC filings, including our annual report on Form 10-K for a complete discussion of the major risks and uncertainties that may affect our business. The forward-looking statements made today are as of the date of this call, and we do not undertake any obligation to update our forward-looking statements.
Barry J. Feld
Thank you, Anne. Fiscal 2011 marked another year of significant progress for Cost Plus World Market. We met or exceeded our sales and earnings guidance in all 4 quarters and have now delivered 8 consecutive quarters of same-store sales increases. The strategic pillars of the brand: home decorating, home entertaining and gift-giving, overlaid with our strong core competency and seasonal merchandise continue to provide our customers with unique, authentic and affordable solutions for all of their shopping needs.
Beginning with fall harvest and then continuing through Thanksgiving, Christmas and New Year's, the excitement and momentum builds in our stores with the constant flow of new and exclusively designed merchandise offered at attractive prices. Our deep international sourcing and trend design capabilities sets our product offering apart from the competition. Merchandise resets executed earlier in the year to showcase our unique gift cards, paper and create-a-gift assortments generated sales significantly ahead of their plans.
Also, within the home division, we experienced strong performance across the textiles, bath, framed art and lighting categories. As always, our consumables assortment drove customers into the store to purchase many unique and hard-to-find European holiday treats including chocolates, Storz and Marzipan, Ginger snacks and much more. From stocking stuffers to ornaments and gifts from around the world, our holiday offering has become a tradition for our loyal customers and a conversion pull for those visiting us for the first time.
Our marketing team continue to drive traffic by effectively layering print, electronic and social media augmented with the special offers for our World Market Explorer loyalty program. In the 2-plus years since its inception, we have over 6 million members enrolled in the loyalty program and our total customer database now has over 8 million customers. Our loyalty members shop more frequently and spend 50% more than nonmembers on each trip. We expect membership to continue to increase at a healthy pace in 2012 as we further optimize the program.
In January, we ran our annual furniture promotion and clearance event that sets the stage for the introduction of new merchandise and positions us to enter the upcoming fiscal year with clean inventories. We are pleased to report that the strong response to the furniture business we experienced in the third quarter continued into the fourth quarter and exceeded our expectations, benefiting our average ticket. Overall, in the fourth quarter, we were able to deliver improved sell-through of seasonal and promotional merchandise at a higher-margin rate than last year.
For the full year, our strong top line growth combined with improving gross margins and SG&A expense leverage resulted in more than a 3x increase in net income from continuing operations versus fiscal 2010. During the last few years, the company has retooled and rebalanced its merchandising mix to support the 4 brand pillars, and merchandise margins still have the ability to expand over time.
EBITDA in fiscal 2011 totaled $51.3 million, a 30% increase over fiscal 2010 and we generated $30 million of free cash flow. Importantly, we ended fiscal 2011 debt-free and are well positioned to resume the growth of the business by investing across multiple channels in fiscal 2012.
I would now like to turn the call over to Jane.
Jane L. Baughman
Thank you, Barry. As a reminder, the income statement included in this afternoon's press release clearly breaks out the results from continuing and discontinued operations for both the current year and prior-year period. The company's balance sheet presentation remains unchanged.
Net sales for the fourth quarter of fiscal 2011 was $364.3 million, a 6.7% increase from the fourth quarter of fiscal 2010. Same-store sales for the quarter increased 7.6%, driven by a 3.4% increase in customer count and the average ticket increased 4.1% to $35.77. Net sales for fiscal 2011 were $963.8 million, a 5.2% increase from fiscal 2010. Same-store sales for fiscal 2011 increased 5.4%, driven by a 4% increase in customer count and the average ticket increased 1.3% to $33.87.
During the fourth quarter, we continued to experience strong performance across the Eastern and Western regions, which resulted in an 8.1% and 7.1% comp increase, respectively. The California market continues to strength and delivered a same-store sales increase of 7.7% in the fourth quarter. The mix between home and consumables as a percentage of net sales was 57% and 43%, respectively, for the fourth quarter of fiscal 2011 versus 56% and 44%, respectively, for the fourth quarter of fiscal 2010.
For the full year, the mix between home and consumables as a percentage of net sales was 61% and 39%, respectively, for fiscal 2011 versus 60% and 40%, respectively, for fiscal 2010. As we mentioned on our last call, the increase in the home sales mix is the result of higher furniture sales as a percentage of total sales year-over-year.
Gross profit as a percentage of net sales for the fourth quarter of fiscal 2011 increased 120 basis points to 34.3% compared to 33.1% for the fourth quarter of last year. The improvement in gross profit for the quarter was primarily due to higher merchandise margins, and to a lesser extent, lower occupancy cost as a percentage of net sales.
Gross profit as a percentage of net sales for fiscal 2011 increased 40 basis points to 32.1% compared to 31.7% last year. The improvement in gross profit for the year was due to lower occupancy cost, partially offset by lower merchandise margins related to the clearance of seasonal outdoor merchandise in the first half of fiscal 2011.
As a percentage of net sales, selling, general and administrative expenses, SG&A, decreased 80 basis point to 22.6% for the fourth quarter of fiscal 2011 from 23.4% for the fourth quarter last year. For fiscal 2011, as a percentage of net sales, SG&A decreased 80 basis points to 28.8% from 29.6% last year. The decrease in SG&A as a percentage of net sales is largely due to increased leverage from higher same-store sales.
Net income from continuing operations for the fourth quarter was $36.8 million or $1.56 per diluted share compared to $28.8 million or $1.24 per diluted share last year. Net income from continuing operations for fiscal 2011 was $17.7 million or $0.76 per diluted share compared to $4.7 million or $0.21 per diluted share for fiscal 2010.
For the fourth quarter of fiscal 2011, the company had non-GAAP earnings before interest, taxes, depreciation and amortization, or EBITDA, from continuing operations of $47.2 million compared to EBITDA of $37.6 million last year. For fiscal 2011, the company had EBITDA from continuing operations of $51.3 million compared to EBITDA of $39.5 million last year. The company continues to maintain a full valuation allowance against its deferred tax assets, which was $75.6 million at the end of fiscal 2011, of which $37.1 million is comprised of net operating loss carryforwards.
As we look forward to the end of fiscal 2012, the company may be in a position to revert some or all of the valuation allowance, which would result in an extraordinary one-time noncash tax benefit. However, because the company expects to generate its profit in the fourth quarter, the analysis will not be performed until that time. Therefore, today's guidance for fiscal 2012 does not contemplate any reversal of the tax valuation allowance.
Net interest expense for the fourth quarter of fiscal 2011 was $3.2 million versus $2.9 million last year. Net interest expense for the full year was $12.8 million versus $11.1 million last year. Included in net interest is interest related to the distribution center lease obligations of $8.5 million and $8.3 million for the full year of fiscal 2011 and 2010, respectively.
The company achieved another milestone and ended fiscal 2011 with no bank debt on its balance sheet. After paying off our revolving asset-based credit facility in its entirety, we ended the fourth quarter with no borrowings and $9.6 million in letters of credit outstanding compared to $25.4 million in borrowings and $10.8 million in letters of credit last year. The company has returned to its normal cadence of paying off the credit line in its entirety each year.
For the year, capital investment for 2011 projects were $9.1 million versus $4.3 million for 2010 projects. Capital spending for fiscal 2012 projects is forecasted to be approximately $18.5 million for the full year.
In this afternoon's press release, we have provided our outlook for the first quarter and full year of fiscal 2012. Our guidance takes into account the current level of volatility in commodity prices, fuel prices and geographic instability. There are few important callouts on the 2012 guidance that I would like to address.
Revenue growth is based on a 5% to 6% same-store sales increase on a 53 to 53 week comparable basis, a 44% increase in e-commerce revenue and the opening of 8 new stores offset by 2 store closures. Additionally, fiscal 2012 is a 53-week year, which we estimate to contribute approximately $16 million in sales.
The improvement in gross profit rate for fiscal 2012 is the result of improvement in merchandise margins, as well as leverage of 6 occupancy expense. The company's merchandise margin rate is sensitive to the overall sales mix of the business. Our unique and diverse assortment has been strategically designed to provide customers with the projects -- products ranging from higher-margin home goods to lower-margin consumables. While some categories drive traffic and unit velocity, others drive volume, resulting in an overall healthy company margin. Our merchants have worked diligently these past few years to restore margins by increasing exclusive designs and elevating the quality of our merchandise while maintaining affordable pricing.
Our customers are responding to this clear and recognizable value. We will continue to pursue opportunities to expand merchandise margin rates, but ultimately, we are focused on the margin dollar to generate profitability and we'll invest in businesses accordingly.
SG&A expense continues to benefit from sales leverage, even as the company reinvests to resume the growth of the business. Advertising expense is expected to be $51 million for the year, up slightly from last year, due to the 53rd week. Depreciation for the full year is planned to be $18 million and net interest expense is planned to be $12 million.
As discussed earlier, our full year guidance does not contemplate the reversal of any of the valuation allowance. The company will be a partial federal taxpayer in fiscal 2012 due to timing limitations on a net operating loss carryforward required under Section 382 of the Internal Revenue Code. It is important to note that these are annual timing limitations and the full value of the NOLs will be recognizable over time.
EBITDA from continuing operations is planned to increase $12 million to $15 million or 23% to 29% over fiscal 2011, resulting in EBITDA in the range of $63 million to $66 million for the full year of fiscal 2012. Diluted weighted average shares outstanding are expected to be $24.7 million for the full year. The company expects to incur $1.2 million in expense for discontinued operations, which relates to ongoing adjustments to the lease exit liabilities for stores closed in prior years.
Lastly, the impact of the 53rd week is estimated to be $0.10 per diluted share from continuing operations for the full year. On a 52-week to 52-week comparison, earnings per share from continuing operations for fiscal 2012 are planned to increase 28% to 34%, and in including the 53rd week, increase 41% to 47%.
I will now turn the call back over to Barry for his concluding remarks.
Barry J. Feld
Thank you, Jane. With the successful fiscal 2011 behind us, I would now like to discuss our key strategic initiatives for fiscal 2012, which keep us on track to achieve our financial targets of 6% EBIT margin, 3% net income margin and 8% EBITDA margin over the next 2 to 3 years.
First, we will continue to drive sales per square foot productivity in our existing stores. In fiscal 2011, we generated $231 sales dollars per square foot, up from $218 in fiscal 2010 and are steadily progressing toward our target of $270 sales dollars per square foot where the company performed for many years. Sales productivity improvements will come from increases in both traffic and ticket and are planned at $243 sales dollars per square foot in fiscal 2012.
Product assortments will continue to evolve, making World Market the destination for exclusively designed, high-quality merchandise while maintaining the integrity of our everyday value pricing. Ongoing improvements in visual merchandising will provide more lifestyle and solution-based merchandising, and store-level customer engagement initiatives have been designed to drive conversion and units per transaction. Refinements to our marketing strategy will continue to increase brand awareness, and when combined with the optimization of our World Market Explorer loyalty program, will continue to drive traffic to our stores.
Second, with only 258 stores in 30 states, we believe significant opportunity exists to expand our existing store base over time to 500 stores nationally. We plan to open 5 to 10 new stores in fiscal 2012, moving towards 15 to 20 new store openings annually.
Our first new store, Mount Prospect, opens in Chicago this week. In the near term, we have identified 100 plus new locations within our existing markets which will allow us to leverage our marketing and distribution cost structure. We believe our 2 state-of-the-art distribution centers, 1 million square feet on each coast, can support the next 100 stores without additional fixed cost. Longer term, we see significant opportunity in new markets.
Third, we have the ability to increase our e-commerce business to $100-plus million during the next 3 to 5 years. In fiscal 2011, e-commerce generated revenue of $26 million, up 54% from the prior year. Our e-commerce model is profitable and is accretive to the bricks-and-mortar business on the operating margin line.
During 2012, investment in our e-commerce business will provide for new platform technology and upgrading search functionality. The redesigning of the website and online assortment will more closely mirror the look and feel of our stores, creating a seamless customer experience across all customer touch points. We plan to begin testing site to store, in-store pickup and shipping to home door in 2012 and expect to rollout chain-wide in 2013.
Lastly, we will continue testing other wholesale and store-within--store concepts. We are currently conducting a pilot in 4 Bed Bath & Beyond locations that showcases our entire consumables assortment, excluding alcohol, in a world market branded shop. We are optimistic about the prospects of this pilot, which will continue in 2012, and both companies are in the process of evaluating the results in next steps.
In closing, we are pleased with the significant progress we have made toward restoring our historical operating metrics. We are entering 2012 with no bank debt on the balance sheet and healthy cash flow to support our key growth initiatives. Given the multiyear growth opportunity in the e-commerce business, combined with our ability to methodically increase the number of bricks-and-mortar locations over time, Cost Plus World Market is strategically advantaged over other large national retailers with more store fleets. Substantial operating leverage in the business model will continue to generate meaningful returns for our loyal shareholder base.
And with that, I would like to turn the call back over to the operator for the Q&A portion of the call.
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