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

Thank you. Before we get started today, I would like to review with you our safe harbor statement. Today's discussion may contain forwardlooking statements as such term is defined in the Securities Exchange Act of 1934 and the regulations there under, including without limitation statements as to the company's financial condition, results of operations, liquidity, capital resources, and statements as to management's beliefs expectations or opinions. Such forwardlooking statements are subject to risks and uncertainties and may be affected by various factors, which may cause factual results to differ materially from those in forwardlooking statements. Certain of these risks, uncertainties, and other factors as and when applicable are discussed in the company's filings with the Securities and Exchange Commission, including its most recent Form 10K, a copy of which may be obtained from the company upon request and without charge. This morning, I am joined by Mike Zawoysky, our Chief Financial Officer; Joe Jeffries, our Chief Operating Officer; and by Craig Davis, our Senior Vice President of Marketing and Merchandising. Mike will take you through our financial performance for the quarter; Joe will discuss some of the operational initiatives that we're working on; and Craig will give you a very general outline of our third quarter activities in merchandising and marketing. Before they do that, I would like to make a few remarks about the third quarter. We were not at all pleased with the total sales decline of 4.9% or with our comp store sales decline of 9.4%. These numbers reflect a direct correlation to our traffic count decline, as our basket size is essentially unchanged yearoveryear. It's obvious that we continue to operate in a very challenging macro environment, one in which any meaningful improvement in the future will have to be directly tied to increases in discretionary…

Before I discuss our results for the third quarter, I would like to make a few comments regarding the deferred tax valuation allowance that was mentioned in our press release this morning. The company accounts for income taxes in accordance with Statement of Financial Accounting Standards 109, accounting for income taxes. Deferred income taxes reflects the impact of temporary differences between the amounts of assets and liabilities recognized for financial reporting purposes and the amount recognized for income tax purposes measured by applying currently enacted tax rates. FAS 109 requires that deferred tax assets be reduced by valuation allowances if, based on consideration of all available evidence, it is more likely than not that some portion of a net deferred tax asset will not be realized. As part of our quarterly closing process, we evaluated our deferred income taxes and have concluded that a valuation allowance should be recorded against our net deferred tax asset. The company recorded a valuation allowance of $4.7 million during the third quarter. Considering our net deferred tax valuation allowance and discrete tax items, we do not expect to incur significant income tax expense or benefit in the current fiscal year. Continuing on to the third quarter results, sales for the quarter were $116.7 million, a decrease of 4.9% over sales of $122.6 million during the second quarter of last year. Same store sales decreased 9.4%. Adjusting for the impact of the liquidation of four stores that we're in the process of closing in the fourth quarter, comparable store sales would have been a decrease of 9.8% Gross margin for the quarter was 43.2%, an improvement of 20 basis points from 2007. The drivers of the gross margin increase were continuing improvements in vendor pricing, retail price adjustments as a result of ongoing price elasticity…

I would like to begin by providing you an update on the operational improvement projects mentioned on previous calls. As I have discussed, we are very focused on improving our level of execution in our stores and across our support organization. During the quarter, we implemented several process and service improvement projects that we believe will deliver improved results across the organization as we finish 2008 and embark upon a very important 2009. I am very proud of the level of effort our store general managers and regional leadership teams have displayed during this very challenging quarter. They completed the implementation of our new store level structure as well as our quality customer care program. Both of these are designed to work in tandem, reducing nonvalue added tasks and greatly improving the focus and abilities of our teams as it relates to guest service. We made significant improvement this quarter as we transitioned into the fall merchandising sets. Our merchandising and supply chain teams worked in a much more coordinated effort servicing our stores. These efforts, combined with those of our store teams, allowed us to be set five weeks earlier compared to last year. During the quarter, as we saw a decline in customer traffic, we made an early conscious decision to take a more aggressive pricing stance as it related to fall floral and Halloween merchandising programs. These efforts allowed for the necessary unit turns we needed to insure we had improved level of sellthrough, allowing our stores to transition earlier into the holiday merchandising programs. These coordinated efforts also had a positive impact on our quarter ending inventory levels as mentioned earlier. This is an indication of how the new category management structure, combined with the new systems and processes installed just two quarters ago, can and…

I would like to start my comments today with a few words about sales. The following merchandise categories performed well during the quarter: cake and candy, crossstitch, custom framing, kids' crafts, and children's books. We also saw improving trends in fashion crafts, fine arts supplies, and stitchery. During the early part of the third quarter, we executed 15 side counter resets, affecting over 400 linear feet. This completed our basic planogram changes for 2008. We are pleased with the progress that has been made during 2008 in our basic planogramming process. As mentioned earlier, we have improved our execution of seasonal transitions. This is the result of improved planning, adherence to processes and timelines, and the ability to leverage new inventory management tools mentioned earlier. During the third quarter, these new tools provided visibility to item performance and inventory movement, allowing for the management of sellthrough. We now have perpetual inventory data by item, by location; ladder plans that help manage sellthrough and item pricing in season weekly; and a replenishment team focused on evaluating and distributing nonbasic merchandise. Now, I would like to update you on our Nevada prototype store. As communicated on previous calls, we have made changes to departmental adjacencies, resulting in improved category dominance and product flow. We relocated several of our seasonal categories to the front of the store, providing for a fresh flow of seasonally appropriate merchandise. We believe this will improve the shopping experience and our ability to connect with the customer. We have added a new department navigational sign package, designed to improve way finding and connecting with the customer. We have added in key departments new inspirational display program designed to stimulate ideas and possibilities. We have applied these changes to the stores we opened during the third quarter. We will continue to evaluate the results with an eye towards determining what will be the final model. We remain focused on the top five merchandising and marketing initiatives we had communicated previously. Continuing to improve our seasonal merchandising transitions, raise the talent of the team through internal training and external acquisition, leverage category management and newly implemented processes, evaluate and improve merchandise assortments and promotional events, and finally refine our sourcing strategy both global and domestic. In closing, we believe these five focus areas will deliver sustainable sales and margin improvements over time. Now I will turn the call back to Rick.

I think this would be a good time to take some questions and I will have a few closing remarks toward the end of the hour. Operator, you can open it up for questions.

(Operator Instructions) Our first question is from Karru Martinson Deutsche Bank.

When we look forward here in terms of fuel pricing and freight costs that you saw this past quarter? What's the environment there and your ability to kind of manage those costs down?

We've already been able to see some improvements in fuel costs. We've taken those into account for future purchases, obviously, we will see some margin improvement. Recently returning also from some sourcing trips in Asia, myself and my team, we believe that we're going to see some slight softening in raw material costs as well. We're encouraged about that.

Also we'll have a reduction in the number of runs that we made to Florida for example. That added quite a bit of cost as well.

In terms of the SG&A savings that you talked about for fourth quarter and into 2009, can you share a sense of the magnitude that we're looking at?

Not really in terms of dollars, we are really looking at absolutely everything. We still have a lot of ground to gain. We think there's opportunity to take costs out of almost everything. I will just give you one idea of what we're looking at. This is something that I just happened to note because we were discussing it in a meeting last week. Up until just a month ago, this company paid nearly 300 different phone bills every single month. We now have consolidated that to four. As we look at every expense we incur, we're trying to figure out the very best way to go about reducing it while, at the same time, not affecting the level of service that we offer.

You may ask the question, why didn't we consolidate those earlier, but we were obligated to contractual agreements, therefore, we were not able to act upon those.

In terms of shrink, what percentage are you running at right now? Do we have a sense that this potential savings from that, the equation?

We think we can improve it quite a lot. We have never disclosed that publicly, but our procedures and policies that we're tightening up and changing a little bit in terms of the store operations are really focused at exactly that. Now we can do it because for the first time we've really got an understanding of what our inventory level is at each store by SKU. We never knew that before. All of that is going to make it easier, I believe, to control shrink. Which, in our opinion, never had anything to do with people stealing things. It was just a fact of not knowing what was in every store in order to address it, get it out of the back room, mark it down, sell it, and have it gone and to account for how various products were used sometimes. Because in many cases, we use products in demonstrations or classrooms or whatever. Now we've got really accurate information about how all that is done.

Lastly, in terms of your categories, you said a couple were doing relatively well, cake, and others. Can we infer here seasonal, home decor, floral, those are all the ones really that are drags or anything additional beyond that?

Clearly the ones that I called out are the ones that performed well. I would say to you that as we saw traffic declines early in the quarter, we priced appropriately as Joe mentioned in his comments to move through the units. Therefore, obviously, it didn't perform to the levels that we had planned, but we did move through the units in anticipation against the plan.

On that traffic question, did you see traffic sequentially each week get worse or was it fairly consistent through the quarter?

It got a lot worse toward the end of the quarter. There's no question that as we moved deeper into September, that it dropped off considerably.

Our next question comes from Bill Armstrong – C.L. King and Associates.

As a followup to that last question regarding trends during the quarter, you say traffic really get worse in September. Has that continued into October?

It's difficult to forecast the rest of the year. I would just say generally that we will probably end up, it could be a little bit worse than what our comps are yeartodate. The period that concerns me is the period between Thanksgiving and Christmas. Because if you look at this the way we do, if we achieved the same average daily sales rate in the period between Thanksgiving and Christmas, this is true of every retailer, if every retailer achieves the same average daily sales rate, their sales in that period will be down 15% because there's five less selling days between Thanksgiving and Christmas. That's the sweet spot for retailers in the fourth quarter. I really haven't seen too many people talk about that. That's the period that I think we all need to be concerned about. It's hard to forecast what's going to happen in that period. Will the daily sales rate be up because there are fewer days? Will it be flat? Will it be down? For sure, there aren't as many days in that period and that's our focus on concern.

Although being a projectoriented retailer, don't you tend to get a little of that traffic earlier than maybe other retailers where people are buying closer to need?

You do for people who are buying projects for the holidays, but you still have an awful lot of home decor that you depend on to move out and your seasonal products in that particular period, as well as a lot of gift buying.

Moving on to seasonal, the fourth quarter of last year you were overexposed to seasonal and you had a lot of markdowns. Can you talk about your seasonal inventories now going into the holiday season and how you feel about that?

Just to refresh everyone, what we did last year is because at the time we made the buys for this year, we finally had perpetual inventory. We were able to take into account what we had remaining in stores and what we had in the DC. Last year, during the season, we identified items that we didn't want to carry into this year and we aggressively priced those to move through that inventory. We then adjusted our purchase plan including the carryovers that we knew we had from last year and purchased down significantly for those positions on an average store basis going into this season. We had on average ownership going into the season in the neighborhood of around 30% less than a year ago when we started the season. So, again, that was all done before anybody could ever anticipate the current macro situation that we're in. As mentioned earlier in the comments today, we're looking at items sellthrough on a weekly basis and by location and doing everything that we can with the tools that we have to optimize sales and margin activity while still insuring that we come clean or cleaner than we have historically.

You had some carryover from last year, then.

Yes, we did. That was taken into account and netted down.

Then moving to the SG&A, you mentioned some significant steps being taken. I think you talked about phone bills. That doesn't sound like much, you reduce the number of phone bills, does that reduce the dollars that you're paying for phone bills? And what other types of SG&A reductions might we be looking at?

As Joe mentioned earlier, we had some contracts that we had to work through and we're able to go back and negotiate our SG&A expenses. We continue to have a program in place where we're looking at all of our expenses going back. As they expire, we're going back and renegotiating more favorable rates in that regard. Rick had just mentioned, gave you one example, something that we're looking at. We're looking at everything we possibly can do.

Does this mean more maybe supplies and process versus head count reductions?

It's a combination of everything, Bill.

Our next question comes from Greg McKinley – Dougherty and Company.

I am wondering if you could maybe give us a little context for thinking about how you're looking at your real estate portfolio today? I know in the past you have talked about some of the challenges of supplying understored markets at great distances from your distribution facilities. Where are you at in terms of closing those markets or doing what you want to from a store standpoint in those markets? Then, as you think about the real estate base more broadly, how large of a portion of it is, we'll call it close to a tipping point in terms of a decision where you are saying well the four wall contributions from this store or this market could cause it to be considered for closure? I just want to get a sense for how extensive that real estate review could end up being?

We don't really know at this point because we haven't even started it if you're talking about the analysis that we each year. As we said at the outset of the call, we had said we'll close between, I think, 7 and 10 stores. We're still in that range for this year. The way it looks it will end up at 9. I think that the key to this, Greg, when you analyze these stores, is do you have stores where your losses exceed your rent and CAM? If you do, what do you do to fix it or can it not be fixed in a short period of time and are you better off then to close it? But generally, you would only close a store if your losses exceeded your rent. In today's world, it's not so likely that somebody is going to come along and take the building from you nearly as quickly as they may have a couple of years ago. That's all part and parcel of the kind of analysis that you do. And the cost of serving those, we have become more or less like an army that outran its supply chain with stores in Tennessee and Alabama and Florida and no movement of our supply base forward in other words. It just became really expensive, particularly when we were up against such density in store count by our competitors. One store up against 10 or 12, the cost of that is sometimes prohibitive. We are just trying to look at what makes more sense from the viewpoint of building density and thereby getting our costs in line so that everything is not deleveraged.

So in relation to those comments on Florida, Alabama, Tennessee, etc., where are we today? How many stores do we still have operating in those markets after these closures?

We would still have stores in Florida after this group of closures because it simply doesn't make sense to close some of them, either their loss does not exceed the rent or we see it as coming to at some point in the future of being profitable. I would have to count them to tell you. We can get you that, it's a matter of public record. I don't have it here, but Mike can have it if you call.

Are those basically the only markets where you would say we don't have enough, that southeast region, we don't have enough density and it just costs too much to supply the stores? That's where the equation doesn't work unless revenues are materially higher or do you see density issues in other markets that you're in?

It's not so much market-by-market as it is a selected location perhaps. It just doesn't work maybe because it's a declining area where the demographics aren't good or something and over the last 10 or 12 years it's changed.

And then for 2009, what are your opening plans for 2009? Are you really putting on the brakes and saying, until we get the closures figured out, we're really not going to be opening more?

I think almost everybody has changed their outlook on capital spending for 2009 based on the macro environment. Right now, our plans call for opening four. We could open a couple more or couple less, depending on what happens. Any store that we open, we would want to understand that it could quickly be accretive to earnings or we would probably wouldn't do it. We're more focused on improving the store count of the existing stores in the sense that a lot of these are older locations, no money has been spent on them for a long time. If we had the opportunity to relocate them or somehow improve the shopping experience without going to a full remodel, we would probably tend more to spend a little bit of money that way.

Our next question comes from Laura Richardson BB&T Capital Markets. Laura Richardson BB&T Capital Markets: The last question gave me a good segue. In terms of, your balance sheet is pretty decent at this point, is your focus on keeping cash that you have as opposed to building a new distribution center that you have talked about for a while?

Absolutely. There's no question about that. That's a decision that we put off last year as you know. At some point in the future, we may indeed expend this one, but it's not something that we're going to do in this environment Laura Richardson BB&T Capital Markets: How about, consulting, the studies that you've done on things like a distribution center, is that something that you can hold off on until the macro environment gets better?

It absolutely is. We even have a number of the permits already approved for what we need to do here. We can just turn that whole project back on whenever it seems the appropriate time to do it. Laura Richardson BB&T Capital Markets: When you're talking about your SG&A cuts, are consultants and those things you could cut back on? I think you said people are not out of the question and things like the phone bill, have you had any discussions about rents? Leases that are coming up?

We're looking at everything. Everybody here is looking at everything. There's nothing that's sacred. Actually, it's been that way for quite some time. As Mike alluded to, in some cases we had contracts that we couldn't get out of. As those contracts are now expiring, we're going in and renegotiating everything and we're doing an awful lot of internet bidding on various projects. Laura Richardson BB&T Capital Markets: Can you tell me in terms of what's been incurred in 2008 that's an unusual cost? I guess we've got $0.23 now on the tax allowance. How much is the total for closing stores going to be? Is there anything else I need to add to that list of onetime stuff?

That one paragraph, Mike, enumerated those various charges. Laura Richardson BB&T Capital Markets: I guess I am asking what is going to happen in the fourth quarter, too.

What we've said prior regarding the real estate, that was to your direct question. In the second quarter, we had taken an asset impairment that was $1.8 million of the [$7 to $9] million. And we have store closing costs of $1.8 million to date. We literally have, from the $1.8 million, we literally have up to $5 million that we would potentially be spending in the fourth quarter related to store closing costs on the stores that we will be closing, the four stores that we would be closing. Laura Richardson BB&T Capital Markets: Is it fair to assume you're going to be close to the high end of that since closing nine stores is close to the high end of what see?

I think that's a good assumption. Laura Richardson BB&T Capital Markets: This may sound dumb, but how can it be this close to the end of the year you can still say, not with 100% certainty, it's probably going to be nine stores? Why would you not know?

You can close a store anytime you wanted to up until the last day of the year.

There will be nine stores that will be closing. It would be like a tenth store, whether or not we would have a tenth store or not.

Do you understand? Laura Richards BB&T: Yes. Anything one-time for this year that hopefully doesn't recur next year?

As I went through, as Rick mentioned, I can go back through those again here rather quickly as to what the onetime costs are associated with. There was the $0.23 that we talked about related to the deferred tax valuation. We had $0.08 on the store closing costs. $0.01 for the inventory restatement that happened during the first quarter of this year. One second. The noncash fixed asset impairment was $0.07. And the state tax reserve was $0.03. So there was $0.23 for the deferred tax valuation, $0.07 for the noncash fixed asset impairment, $0.03 for the state tax reserve, $0.01 for the inventory restatement, and $0.08 for the store closing costs. This is all in the press release also. Laura Richardson BB&T Capital Markets: That's the yeartodate. I guess I am trying to anticipate what more is going to happen in the fourth quarter? Sounds like there's going to be more on store closing costs but not fixed asset impairment?

There's nothing else that really we can give any guidance on in that regard. Laura Richardson BB&T Capital Markets: I will let someone else go and then I might come back with some followups.

Our next question comes from Holly Guthrie – Boenning and Scattergood.

Quick question on sales variance by store, I guess more by region. I know you guys don't want to go to the store level. As the economy continued, or the consumer continued to, challenges became more and more difficult through the quarter. Were there differences, great differences by region?

We had begun to see a little difference in Florida, I think, sometime back. But, I don't think so. I think it's pretty general across the board.

Then, the customer loyalty program, if you could just give us an update on how many people have signed up. Then also, just looking at it by region. Are you seeing any response rates that are different by region for the customer loyalty program?

We're not going to share some of the specifics around how big of a registered membership we have at the moment, but I will tell you that we are happy with our results. We're in about 18 stores. We're still analyzing the data, every day, every week, to understand if we're seeing the metrics move in the direction that we anticipated. Thus far, the consumers in those markets have responded well to it. We're happy with it. Our stores have responded well to it as well. So by the end of the year, we will sit back, collectively as a team, evaluate the data, and make a go forward decision.

Are the 18 stores, is it regionally diverse?

It's primarily in the northeast. In one region, primarily, relatively close to our office. We did that on purpose so that we could stay close to it, understand it, and learn more before we take it any further.

And a question for Mike, getting back to the deferred tax asset and revaluation. What were, if you can talk about anything substantial, what were the taxable events that originally caused the timing difference? Was it the acquisition of stores? Was it the new DC? I guess the original asset, was it a few taxable events that created it? And then if you could talk a little bit about why there's a valuation difference now, why you won't have those assets?

As I mentioned, this is part of our closing process. We go back and we evaluate our income taxes. Literally looking back at it, there's a heavy emphasis on the prior periods. We literally collectively had a threeyear cumulative tax loss. That's really what the driver was associated with this. That's why we had taken now in this quarter.

It wasn't any, a revaluation on the taxable asset of the new distribution center where the state came back and said, oh, no, you’re not getting that. Okay. Just overall just a corporate, okay.

Just the valuation, threeyear valuation

Then, let me see. Joe had talked about going live on all systems and that you were testing some SKUs for replenishment. Is that across, I mean I am assuming it would be across all the stores for all the SKUs. I guess could you talk a little bit more about the tests? I don't know if you want to give any specificity on the number of SKUs and, if it is all stores and if not?

It is all stores. We selected a number of vendors and a beginning number of SKUs that we want to understand. Originally we had a lower number we wanted to test, but I actually pushed the team to actually take it further and try and understand early in the testing phase if we had in issues. It will be across all stores, the density of SKUs is respectable. It's a mixture of vendors across categories as well, so that we can understand it. We're excited about this. This can take a lot of pressure off of us in the stores from a productivity perspective. At the same time, it can really assist us with leveraging down our purchasing and on-hand inventory dollars at the same time.

Operator, I think we can try to take one more question.

Our next question comes from Joan Storms – Wedbush Morgan Securities.

I am trying to get a sense of what your basic sales momentum has been. I mean the comps have been negative for several quarters. You have some intentional programs that you're testing, whether it was the advertising and going dark in certain markets, which had a negative impact on your comps. Are any of the programs that you're working on right now that you've talked about still having a negative impact on comps? I am trying to get a sense of what the basic momentum was. Last quarter, you were down a major improvement from the negative double digits. Now obviously, the economy is having a negative effect. I guess prior to the significant downturn in the macro environment, were you still comping at like a negative 5 level?

I don't want to speculate on it. I would just say that generally the one thing that we have done that sometimes still has an adverse effect on comps is to build density within certain markets. If we put a store between two stores, we see an impact on those two stores and that will probably continue for the year until you get into the comp cycle and then things will get better in all three stores. So, I still think that's the right thing to do rather than stretching ourselves out all over the eastern half of the country. Generally speaking, the issue is the one that we outlined at the very beginning; it's getting people into malls and restaurants and out spending money again. Because if they're in the mall, they'll come to our store. I don't think it's a thing that we see ourselves as being in alone. I would say that the majority in our opinion of what is happening now, that at least twothirds of it is the market itself and perhaps a third of it, if you want to guess, I will speculate on it, and a third of it might be the changes that we've made and the things that we've done. Something like that.

Joe, can you give some examples of sort of, you talked a lot about processes and testing. Can you give some more specific examples about exactly what you're doing, whether it's at the stores or at corporate processes?

In the stores, we have implemented many of new processes that are focused on not just servicing our customers but how we handle our merchandise. And the way we start with loading at the distribution center, how we're distributing it, and how the stores receive the product, process the product, replenish the product, account for shrink when using the product, how our front ends are operated, how we staff our store. We have a new structure in place beginning with hourly employees up through the general manager. Each one of those departments and employees and management members also have defined roles and responsibilities that didn't exist before. We're really trying to operate the organization at the store level like a bestinclass retailer. Those processes are relatively new. But they're starting to stick, so we're starting to see early victories and signs that this is going the pay off for us long term. There's lot of improvements out there. Back in the office, the category management structure dictated that we put processes in and procedures and levels of accountability in place for how we, from building ads to purchasing products, to how we actually forecast sales projections on through our purchasing responsibilities as well. A couple of these processes, we've added the system that is I referenced before, that we just went live early in Q4. Now when you bring even advanced systems in place, most of the merchandising teams have been trained on these systems already. So we expect to see positive leverage from that. It's funny to hear someone talk about that on a call. When a company is of the age that ours is. They just didn't exist at the degree, at the level, that we need to operate in retailing today. I am happy to say they're here now. They are still new. We will continue to learn and refine them when and where appropriate to insure that we have the right processes and procedures for us to be successful long term. But we're very encouraged about all the moves that we have made this year.

Operator, I have a couple of comments here and then we'll end the call. You know, we say repeatedly that this is a marathon and not a sprint; and we've been saying that since we understood it was a marathon. I suppose some could argue that it's an uphill marathon being performed at high altitudes, and we may not have understood that until recently. It is a marathon nonetheless. While our current environment is certainly not helping us, we continue to believe that we're doing the right things and that we're going to be rewarded with an improved operation in the future. Our goals remain unchanged. We want to drive topline sales. We want to optimize the distribution network. We want to continue our systems enhancement projects. We want to retain, attract, and develop top talent. And we need to perpetually improve our store and real estate portfolio. Despite our costs being deleveraged against topline sales, we are evidencing a lot of progress here. We continue to improve our store in stock position, while lowering our average store inventory by about 6%. We couldn't have done that without building the merchandising analytical team and getting our perpetual inventory platform in place. Our supply chain is better managed, and we're still working on reducing costs as we indicated. Our efforts related to improving our efficiencies through the use of technology are still on target as Joe mentioned. Our custom framing operations are on target and continue to perform to our expectations. Nearly all of our stores are equipped with visualization technology and state of the art digital support framing software. We're on the way to standardizing the various Nevada model stores to a final format. And we expect to have the Nevada stores all on the same assortment and setup by…