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The Company is a specialty retailer of casual home furnishings and entertaining products in the United States.
Cost Plus, Inc. is a specialty retailer of casual living and home entertainment products in the United States and operating through 267 stores as at the end of FY2006. The company's stores offer a large selection of distinctive, value-priced merchandise, both non-consumable and consumable, within four core categories: home décor, gifts and decorative accessories, tabletop items and gourmet food and beverage. Home furnishings accounts for 61% of company revenues, while 39% comes from consumables.Although the $275 billion US home furnishing retail industry is expected to grow at 4-5% per annum for the next 5 years, Cost Plus seems to be having a weaker position in the near term due to continuous operational problems relating to supply chain and inventory flows compounded with ineffective promotional activities.While all companies in this sector are being pressured by a weak housing environment, Cost Plus has more company-specific issues and the turnaround initiatives to date have still not shown themselves to be viable. Further downside risks include the possibility of a weakening economy and the unemployment level, which has remained stagnant at an average of 4.6% for past 6 months.With absolutely no growth in sales and operating margins during the first three quarters in 2007, which was primarily due to a decrease in same stores sales, shift in sales mix to low margin consumables, a poor performance in the margin rich home furnishings segment and an increase of 15% in selling and administration expenses. The financial position of the company seems to be deteriorating inspite of operational changes made by the new management team.
The turnaround is taking longer than expected due to the continuing difficulties in the home furnishing market especially in California, with lower traffic and delays, making life difficult for CPWM. Sales in California continue to lag the rest of the chain due to rising gas prices and the weaker real estate market, as well as continuing promotional activity in the home furnishings category. Traffic that was down 7% is being negatively affected by the new wine strategy, in which the company is moving away from promoting popular brands and offering a more unique selection of wines.Looking ahead, with housing predicted weak into at least second quarter of fiscal 2007 and the fact that our US Economics team looks for weakening consumer spending, would provide a tough backdrop against which for CPWM to mount a turnaround. New store growth potentially could be slowed over the next several years as management further concentrates on improving existing store productivity and differentiating merchandise.Consumers are feeling stingy these days, so increased traffic has not yet driven a larger basket. As cheaper consumables become more prevalent in the stores and pricier furniture is scaled back, the smaller net basket still outweighs any potential traffic increases. All these factors continue to drag comps, making the company a likely under-performer.
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