Attention, discount stock shoppers! Cost Plus (NASDAQ:CPWM), the company behind the ever-popular-with-yuppies World Market chain of treasure-hunting stores, is all set to report its Q4 and full-year 2005 earnings numbers. News is due tomorrow, before the market opens.

Wall Street Wisdom:

  • General consensus. For a $400 million company, Cost Plus gets a lot of attention from the analyst community. Seventeen analysts track the stock. Six like it; two don't; nine more have no opinion either way.
  • Revenues. Analysts believe that sales for the quarter grew 7% year over year, to $366.6 million.
  • Earnings. Profits, on the other hand, are thought to have declined 8%, to $0.98 per share. Both the sales and profits predictions fall toward the low end of the company's previous guidance. No surprise there -- Cost Plus admitted as much back in January and then confirmed a few weeks later that sales came in at $367 million, with profits likely to hit $0.98.

Margin watch:
How do rising sales turn into falling profits? Sadly, that's exactly what's going on at Cost Plus. Although gross margins haven't fallen much in recent quarters, the rolling operating margin is down 30% over the past 18 months, and net profitability has declined more than 40%.

Margins %

7/04

10/04

1/05

4/05

7/05

10/05

Gross

34.9

34.7

34.1

34

34.1

34.1

Op.

6.6

6.3

5.7

5.3

5

4.6

Net

3.9

3.8

3.3

2.9

2.7

2.3
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ending in the named months.

Foolish lookout:
When last we heard from Cost Plus, the mood was upbeat. Sales were accelerating in Q4 and comparable-store sales were positive. I'm not sure management is on the same page as investors here, though. Sure, 7% sales growth in Q4 is an improvement over the average 6% rise we saw in the past six months. Meanwhile, though, selling, general, and administrative expenses (SG&A) increased 12% and inventories grew 17% -- roughly twice and three times the rate of sales growth, respectively.

The rise in SG&A costs helps to explain the company's downward operating and net margin trends. The rise in inventories -- which may need to be discounted to move them -- promises further margin depression in the future. Unless we see a few of these trends reverse tomorrow, I see declining share prices in Cost Plus's future.

Fool contributor Rich Smith has no interest, short or long, in any company named above.