Good day and welcome to the AC Moore second quarter 2010 earnings conference call. Today's call is being recorded. At this time, I would like to turn the conference over to Mr. David Stern. Please go ahead, sir.

Thank you, [Connie]. Good morning. Before we begin, I would like to remind you that statements contained in this conference call that are not historical facts constitute forward-looking statements within the meaning of Securities laws. These statements are subject to risks and uncertainties, which may cause results to differ materially from our current expectations expressed or implied in such statements. The risks and uncertainties most likely to cause our results to differ materially are described in our SEC filings. A.C. Moore undertakes no obligation to update or revise any forward-looking statements in the future. Now I'll turn the call over to Joe Jeffries, CEO.

Thanks, Dave. This morning, in addition to Dave Stern, our CFO, I'm joined by Dave Abelman, our Chief Marketing and Merchandizing Officer. I will begin by commenting on our performance and discuss some operational and merchandizing initiatives in the second quarter. Dave Stern will take you through our financial performance for the quarter and then David Abelman will touch upon some of our activities in merchandizing and marketing. For the second quarter 2010, total sales declined 4.3% from the same period a year earlier and our same-store sales declined by 5.9%. Our gross margin ended at 43.6%, which is a two percentage point improvement year-over-year. Our inventory level decreased by 0.3% compared to the same time last year, ending the quarter at $118.4 million. I will elaborate further regarding our inventory management accomplishments and plans later in my commentary. We are still confident that we will finish the year with less than $115 million of inventory. We are not at all pleased with our top and bottom line performance, however, we are pleased with our margin rate improvement as well as our inventory management. During the quarter we continued to focus on improving our overall execution as it relates to merchandising sets, store level execution and supply chain programs. At this time, I'd like to discuss some of our accomplishments made during the quarter related to merchandizing, field operations and supply chain beginning with merchandizing. During the second quarter, significant work was completed in several merchandizing sets transitioning our older products, making room for several thousand new items within the new merchandizing sets, focusing on those departments that have been the majority of our comp sales loss. Those departments are paper crafting and readymade frames. Our seasonal business has not been strong but we feel confident that our plans entering…

Thank you, Joe. I'll start with a review of results for the second quarter and year-to-date results followed by a review of the cash and inventory positions as of July 3, 2010. Sales for the quarter were $99.9 million, a decrease of 4.3% compared to sales of $104.4 million during second quarter of last year. This decline is primarily due to a decrease in comparable stores sales of 5.9% partially offset by operation of additional stores during the quarter. The comparable store sales decrease was composed of a 6.6% decrease in transactions partially offset by a 0.7% increase in the average ticket. At the end of the quarter, there were 135 stores in operation compared to 133 at the comparable point of last year. Gross margin for the quarter was 43.6%, a two percentage point increase from the second quarter of last year. This increase is primarily the result of improved promotion management and vendor participation in merchandise resets. Selling, general and administrative expenses for the quarter were $51.1 million, an increase of $0.3 million or 0.6% compared to last year. The increase was a result of the operation of additional stores during the quarter, partially offset by reductions in payroll. Selling general and administrative expenses were 51.6% of sales, compared to 49.0% of sales in the second quarter of last year. This deleverage is primarily due to the decline in sales since SG&A dollars were relatively flat. Depreciation and amortization expense was $3.8 million and $4.5 million in the second quarter of 2010 and 2009 respectively. Store pre-opening and closing costs for the second quarter totaled $1.0 million and were primarily non-cash charges related to revisions in the estimates for the future net rent obligations for stores that were closed in prior years. Fiscal 2009 second quarter expense was…

Thanks, Dave. I'll touch upon both merchandizing and marketing initiatives through our Q2 2010 and provide some insight on progress we've made in stabilizing growth in some of our key businesses. While overall comp sales declined 5.9%, we continued to improve our trends in several key businesses and improve our overall gross margin. Several of our destination categories, which is everyday floral, [high arc] and home accents, experienced growth. We are pleased with the progress we've made in these areas after investing significantly in these businesses during the past year. Joe mentioned earlier our emphasis on resets and the continued focus on unique and differentiated product mix. Our two largest resets, both paper crafting and readymade frames, address two categories that have been large factors in our comp sales decline during the past year. These two departments, along with seasonal, were responsible for the majority of our comp sales loss. Our largest comp loss occurred in paper crafting. Our reset was completed in mid-May after many months of extensive testing and analysis. Our resetting incorporated many changes including the addition of over 1600 new items. This program was introduced with a fully integrated marketing and advertising campaign. Next was our frame program. Our readymade frame department was relaunched in late June. Here, again, there was a meaningful investment in both product development and analysis necessary to relaunch this department. Our assortment was expanded and hundreds of new styles and sizes are now available in our stores. A key component to keeping our stores fresh and exciting in addition to resets is the merchandizing of our seasonal businesses, which includes both floral and seasonal décor. Our seasonal business experienced a difficult quarter as we continued to refine our mix and sell through merchandise that will not be part of our product…

Thanks, David. Operator, at this point, I think it would be good to open it up for questions.

(Operator Instructions) Your first question comes from the line of Karru Martinson - Deutsche Bank.

With the resets for paper crafting in mid-May kind of what would have been the early signs on that and the trend lines let's say through the month of June and beyond, if you have that?

I think in our paper crafting, scrapbooking area there's well over 7000 items. So through our Q2 there was obviously some disruptions in terms of clearing our old product, adding in the new labor hours to set this area and with our launch and continued emphasis on marketing, there's some great pockets of optimism and there's still some areas that we're working on tweaking but improved performance [over to trend] for sure.

Then a lot of retailers have talked about how they placed seasonal orders kind of in the early part of the year. Obviously the outlook for many of them has changed. How are you feeling in terms of the orders that you guys placed as we come towards the holiday season?

Well, a couple of things for us, we were in a unique position. To be frank with you, we did such a poor job last year with seasonal in the back half of the year. Many of our products that were very, very good lines arrived later than we would have liked, therefore, our sell-through wasn't at a level that we would have hoped for. So that put us in a buying position this year and planning position where we could be at market sooner. We're actually out for our fall program about five weeks earlier this year compared to last and our seasonal sets for Q4 will be out ahead of time as well and we like the product assortments and mix that we have put in place. So we're expecting better performance internally in our seasonal departments compared to last year.

In terms of SG&A here with the lower sales volume, do we feel that we could contract that in or are we kind of at a dollar run rate for where we need to operate the store base right now?

So we've contracted it in significantly. If you look back over the years you'll see that we are currently operating at the lowest SG&A dollars per store that the company has at least going back 10 years. However, having said that, we'll continue to drop costs where we can. The increase that we've experienced year-to-date as well as for the quarter are both driven by the increased store count. Excluding that, SG&A would be lower than LY. So I've said that we've made these reductions and we'll continue to do it going forward but the low-hanging fruit has been picked.

Your next question comes from the line of Bill Armstrong - C.L. King & Associates.

Just a follow-up on that last question; we've seen other retailers that are struggling with some shipping delays, containers that are in pretty tight supply. I was wondering if you can comment on that. How much carry over seasonal inventory do you have from last year that you can put back on the selling floor?

Yes, I think that is a legitimate concern on what's happening with the containers and availability. But would you believe that between our agent and our logistics group here has done a fantastic job and we are for the most part fully received on our product to set [boat] Q3, which Joe mentioned, which it was set on time and earlier than last year along with getting a jump on Q4. So we're in very good shape this year.

On advertising you mentioned some initiatives. I was wondering if maybe you could, in advertising and marketing, maybe just get into a little more detail on what those specific initiatives might be.

Yes, without giving too much of our cards -- because obviously there's a lot of listeners in on this call -- we all know what's happening in the newspaper business with declining circulation and harder and harder to meet the mass market and we continue to shift towards more direct marketing and one-on-one marketing. But with that print or circular along with every other major retailer is an important part of the mix. So we're looking to optimize new circulation, looking to optimize page channel, looking at [lot] performance, looking at your market basket. There are 15 or 20 levers that we actively manage each and every week and we've made, I think, significant improvements in Q2 and more profitable ad sales, as simple as that, looking at page count, looking at the profitability of products and associated purchases.

It looks like you've been in the Sunday papers every other week with coupons for the current week and then a post-dated coupon for the following week. What kind of redemption rates are you getting for that week two coupon compared to what you normally would expect?

I think part of the test we're doing on our circular with obviously such a large expense is we have more dark weeks and that does impact both traffic and sales but we're doing a lot of testing with our financial team to understand, ultimately, the profitability and come up with the right mix. So your question about the redemption and the dark week, I really am not comfortable sharing that number.

Just a housekeeping, it looks like you finished the quarter with 135 stores, which is down from 136 three months ago. Did you close a store or is there even more of a relocation where one's closed and the other one hasn't opened yet?

Yes, we did close one store.

So that's -- I think you said you want to close three to four for the year?

Yes, currently.

Or is that three to four more just for the second half of the year?

It's three to four more.

Your next question comes from the line of Joan Storms - Wedbush.

I wanted to ask a question on the resets and the comps and just trying to understand previously those three categories had been the majority of the comp drag and you did a minus 4.7 in the first quarter and that seems to have deteriorated in the second quarter when you actually were making improvements in those three categories. So following on, I guess, Karru's question from earlier, can you give us potentially comps by month and then also potentially comment on July and then for August? Are we seeing any improvement there? If not, what would be the cause of a sequential decrease in comps from the first quarter?

Yes, Joan, that's a multifaceted question and I'll try to break it down in components. So I think Q2 there was a lot of work in the last year going into our reset on frames with not only refining our product mix but with very long lead times where we source a lot of our frame business. So we successful did roll that out at the end of Q2. At the same time, scrapbooking, which is our largest business, paper crafting, scrapbooking, and the most SKU intensive business, we had that going on at virtually the same time. I'll throw in the mix and we just launched last week our jewelry and beading area, which we have not discussed before. That happened pretty much at the same time and that is virtually as SKU intensive as scrapbooking. So we had during Q2 several of our key businesses kind of broken at store level for all the right reasons gearing up for a more productive back half of the year in 2011. So we think the investments we made in time to get this thing right, I think walking in our stores today our customers are absolutely responding to the changes. The feedback we're getting from our store associates is fantastic on these new resets. While I can't comment on the trends in Q3 to date, I think the plans we put in place were for all the right reasons.

So are you saying that deception at the store level potentially including clearance plus out-of-stock federal disruption at the store level was the primary reason for the sequential decrease in comps?

Joan, this is Joe. It certainly had a factor. At the same time, the end of the quarter was more soft than anticipated. That came to us as a slight surprise. But the disruption was real.

Would you attribute that to macro conditions or consumer spending, environment or are there other categories that are now plaguing you?

No, no, the ones that David mentioned and you throw in the fashion jewelry, that takes us up to a very high concentration of our total comp decline. I think a little bit was macro. It was a difficult month for many retailers fro things that I'm reading as well and we saw traffic declines in our stores in that month. Now the other thing I want to point out related to paper crafting and scrapbooking is we made significant improvements and we're seeing some nice trends on the weeks that we're advertising. I also want to call out the technology business within paper crafting is soft and from what we're hearing after just returning from the CHA show in Chicago is it's soft across the industry and those are big average ticket purchases historically that we're just not seeing the velocity and volume that we once had.

That leads to another question -- I'll try and keep this brief -- on the advertising. During the turnaround there has been a lot of time spent on figuring out what is the best return on ad spend, which markets do we need to advertise? We know in the business generally of Joanne's and Michael's that are out there every week. So I'm a little bit curious as to after having tested for I don't know how long why you are doing dark weeks in an industry that where the big players are advertising weekly?

Joan, I hate to correct you, but if you go back and look at how Michael's advertises historically, they have many dark weeks, in some cases equal to, if not more, than us. So that's just -- I think everybody in this space, that I see, is experiencing the same thing from what I can tell is that ad sales are probably declining. We know readership is down and it's a major spend. So if you're able to shift your advertising spend from some of your slower periods of the year to your more important quarters, I think you're seeing retailers do that. But I see a lot of dark space on a weekly basis or rotating weeks through the markets in which we compete.

Yes, and I'll throw one thing on that is whether it's in our space or retail in general or any consumer facing business, everyone's diversifying their mix and we never truly have a dark week. So even when we don't have a print ad there are other vehicles in communications that work every day of the year that are driving traffic and, in a lot of cases, more profitably when we look at the cost of running an ad.

So it seems that -- I mean, generally I collect the ads every week out of two different newspapers and it's literally almost every week. So you're talking about a few here and there that you may not advertise. We're not talking about every other week not advertising.

Not at all, Joan.

Then the last couple of quarters you have given us some statistics of the Nevada prototype store performance versus the rest of the chain and I was wondering if you care to share that with us for the second quarter.

Just to give you an update on the status of our Nevada models, we've got 30 in the chain now, 19 of which are the optimized or final iteration of it. 26 of those are in our comp store base and the performance relative to the traditional stores is in line with what we've talked about the past couple of quarters. Q4 was 710 basis points better. Q1 it was 720 basis points better.

What about Q2?

Well, we're backing off giving that specific information going forward but I can tell you it's in line with what we've seen previously.

Then, finally, is there a reason - is it because you're really absorbed with the resets that the Nevada type conversions seem to be somewhat back-end loaded?

Well, we had the -- for a couple of reasons. We need to negotiate a few things out with our particular landlords in those sites. At the same time we needed to ramp up our internal and external workforces so that we could get those done. I didn't want to have a remodel going on -- a large group of remodels taking place in the chain at the same time we were carrying up 136 store merchandising sets from framing to paper crafting into jewelry. It just seemed -- as we looked at the workload on paper it seemed to be somewhat more disruptive than we wanted to deal with.

(Operator Instructions)Your next question comes from the line of Bernard Sosnick - Gilford Securities.

I'm curious about the seasonal business, which becomes important, Halloween coming up and whatever you said you're already set with inventories. My question relates to the merchandisers who are planning the seasonal products. You had disappointment a year ago. Is the current seasonal set planned by the same merchandisers? Have you had a change in the organization in some way? What can we expect with regard to the seasonal set for Halloween and particularly holiday?

We actually have three merchants that came to part of our seasonal team since January. So we've added a lot of experience onto that team. Obviously we have a long lead time, so the plans are in place in seasonal many months ahead. I think our fall set, which Joe had mentioned, was set pretty much five weeks earlier than last year, which, number one, helps our sell-through at a higher margin and we're out there in a bigger, more impactful way, advertising is stronger. So I think our mix is out there looking better. It's differentiated and we're in better shape than a year ago and I think all the subsequent seasons with the team we have in place and understanding where we've had success and where we've had weakness and tweaking our mix. We feel good about our seasonal moving forward. Yes, there's a lot more resources against that business to get it right.

Let me ask about the new team. You have three new buyers and there is a long lead time. Were these people able to influence the selections for the upcoming holiday season?

We actually -- I was part of the buy. We had our VP of Merchandizing over in China. I was there as well to coordinate the seasonal buy. Key members, we had an individual who's handled seasonal for years and moved on to other areas, so he is more well-balanced and has more understanding in other core areas of our business and was one of the best seasonal merchants this company ever had and he's handling a key portion of our seasonal today. So we've added to the team but there's been no disruption. We've improved upon what we think were weaknesses in the past and feel good about our mix.

What about the field organization? You say that you added regional VPs and two regional merchandizers. Is the effect of this organizational change seen broadly? I noticed positive developments in stores that I visited but I don't know whether or not it's isolated instances or the organizational change has had an opportunity to spread benefits throughout the entire chain.

Bernie, I'm very excited about the impact that we're already starting to see out of this structure change. Our regional vice presidents are experienced craft veterans with A.C. Moore and a couple of our competitors. We've been able -- but this structure has reduced the span of control for our district managers, so they're having more frequent, more productive visits in our stores, which not that there's only good things that can come out of that, as you know. They've been in the office for a few days of some intense training around merchandising accountability and expectations. Most of these -- all of these are internal promotions. Then moving to the regional merchandizing positions, it's a position that's new to this organization but we've staffed it with some really strong talent internally. The impact that they're having in the stores, it's visible. It's also being felt back in the office, the conduit of information going back and forth from the field has been streamlined. It's more concise. It's more sales and service merchandizing focused and we're moving real quickly and we're taking advantage of exploitation of items. I don't want to share a lot more but I got to tell you, I'm really, really encouraged about the impact that that change has had in the short amount of time and that entire organization's led by Dan Maguire, our VP of Operations, and he's done a nice job of putting us back on a track that I believe will lead us to success.

Your next question comes from the line of Mark Mandel - ThinkEquity.

You had mentioned a gross margin improvement stemming from better promotional management and vendor participation in the resets. I wonder if you could give us some additional color as to the magnitude of those two forces and do you see the vendor participation in the resets as largely a non-recurring positive?

Yes, I think the majority of our margin improvement was in better promotion management, really understanding those items that are triggers to trafficking growth and working our mix much more efficiently with some of the tools that we put in place the last year to manage our market basket and understand out productivity. I think that was the majority of it. Some of it was just what you do as a retailer and shopping the market and optimizing everyday shelf prices. The vendor contribution part, yes, a reset in some of the support we get is a one-time deal but that was a very small component in our gross margin improvements.

Then I know you had mentioned the shipping [formation], the container availability issues. Any impact on the cost of that? I guess containers are available. Are you seeing higher costs in shipping from overseas?

The cost of shipping and availability costs are higher but when we look at how most of our product [comes out] and we look at the cost differential, buying mainly from China versus domestic, there's still plenty of margin in those products.

Then, finally, I don't know if you can give us any kind of, in a holistic sense, color for the comp outlook for Q3, any kind of guidance.

Not at this time we're not.

Historically we don't provide any type of guidance of that nature.

Your next question comes from the line of Judy Crandall - Alpine.

Yes, I have a question on seasonal. Since the category seems to be so difficult as well as a consumer position right now, are you reducing seasonal as a percent of your total business on an annual basis? I mean, perhaps it should just overall be a smaller category.

Judy, I think our seasonal businesses declined over the past four years simply because of poor execution as a company and that's the facts. So we believe that there's still a level of seasonal contribution that we can be at and should be at just by executing better here. Then with the impact of David and his team bringing a different breadth of product that's more differentiated, we actually see our seasonal business improving simply because we're going to execute better and I like the plans that I've seen not just for the back half of this year but I've had a chance to look at those coming up next year and the early part of the year. I'm extremely encouraged and excited about what I've seen thus far.

Build-A-Bear announced they're doing something with Michael's to have -- I guess you can buy a kit to build a bear at home. I don't know exactly. Is there anything you're doing a little bit more unique in proprietary that you can talk about in terms of just creating destination traffic to your store?

That's a good question and it's a big challenge for a company our size. David and I talk about this a lot. We've done some things internally where we've piloted a few things related to scrapbooking and custom framing and some of the digital advancements that are out there and we have a four-store pilot going on there that we're watching closely. It adds a level of service element to our business that we think could make some sense for us. As it relates to proprietary goods, we're always looking for those opportunities. It's not something that I can get into too much detail here on this call but I know that David and I and his team look for those opportunities to exploit. You've got to think about what he's done recently with our paper crafting department. We have seven vendors that are unique to the retail craft chain space that's exclusive to A.C. Moore. Historically vendors of that nature only sold to independents but David's done a wonderful job with his team and building relationships with these smaller vendors that have really great, unique, niche-type product. So those are just some examples of some things that we've done.

Yes, and I think department by department, if we're not differentiated then there's not a reason to make a left rather than a right. We have competition in virtually every market we do business and differentiating our mix and we do have a lot of proprietary product and brands and getting credit for it is absolutely critical moving forward.

Just a final question; I understand you don't want to comment on July trends but you commented June was a little bit difficult lingering on the economic impact as well as the resets. July had less disruption, clearly, it sounds like, perhaps maybe the jewelry a little bit but the rest was much less disruptive at that point. Could you just comment a little bit on June versus July despite the economic impact? Did you start to see less disruption and was it at least a positive trend?

I'll tell you I can comment on that. There was less disruption but I haven't been overly thrilled with the transition from June into July. We're starting now to see a little bit of momentum in the right direction. Keep in mind the heat that we've been dealing with here as well. The craft business is historically soft anyway in the summer and compounded by some of these temperatures I don't think that's been that helpful as well. But we're still confident on what we said earlier in the call, that we're going to have back half of the year improvements and I’m excited because of what I see in our buildings. Our conditions are greatly improved. Our in-stock is greatly improved and our seasonal programs are out like we talked about. So we're looking forward to the back half of the year. Operator, I think we've got time for one more question.

Your next question comes from the line of Joan Storms - Wedbush.

I think I was mostly done but speaking of sort of heading into August, September, can you comment on what you're doing for back-to-school that might be -- or anything related to that that might help your business?

Yes, I guess I would characterize the craft business, Joan, as more of a back-in-class than a back-to-school and the products that do extremely well for us are fine art and those products associated with teachers' supplies and back-to-class projects. Here, again, like Joe mentioned earlier in our fall, we said earlier our back-in-class program it's going to be promoted, advertised with, we believe, a greater impact than we have in past seasons. It's an important part of our mix. As we look at moving into the back half for the year, our critical months are ahead of us and we think we're well-poised as school is back and crafters are back doing what they love.

At this time we have no further questions in the queue. I'd like to turn the conference back over to your presenters for any additional or closing remarks.

Thank you, operator. In summary, I'd like to leave the group on the call with a message that please know, as a management team, we're not happy with our performance and we've put plans in place and we're working aggressively to stabilize the top line and return this company to a level of profitability. Having said that, I'd like to thank our store associates and our corporate associates for their efforts, all of whom are working extremely hard and are committed to improving our performance. Thank you all for joining us today on our call and thank you for your continued interest in A.C. Moore.

This concludes today's conference. We thank you for your participation.