Over the past decade, Cost Plus (NASDAQ:CPWM) has been good at two things: increasing sales through opening additional stores, and becoming less and less profitable. So the contents of the company's third-quarter earnings report, released last Thursday, came as no surprise.
Sales in Q3 for the home-decor retailer were $215.4 million, up 7.3% from $200.7 million in Q3 2005. But comparable same-store sales were down 1.3%, following a drop of 4.7% in the third quarter of 2005. Gross margins for the just-completed quarter, meanwhile, slipped 2.6%. And operating margins were negative as the company continues to lose operational leverage to weak sales and continued spending on growth initiatives. The end result for the quarter was a loss of $11.7 million, or $0.53 per diluted share, compared with a loss of $2.7 million, or $0.12 per diluted share, for the same period last year. As expected . more stores, less profitability.
The market has taken a sour view on this persistent trend. Shares of Cost Plus have fallen roughly 75% since they reached their highs back in late 2003. Yet this company is not alone. CreditWatch, the S&P's credit-evaluation agency, rated Linens 'n Things, which was brought private earlier this year, as negative because of that company's continued poor performance. Pier 1 (NYSE:PIR) and Bombay (NYSE:BBA) are also bleeding red ink as they struggle to stay relevant. Even competitor and stock-market darling Bed Bath & Beyond (NASDAQ:BBBY) has stalled over the past couple of years over concerns about future growth potential.
As for Cost Plus, President and CEO Barry Feld stated in the press release that he feels positive on the company's turnaround initiatives and that these initiatives are taking root. Unfortunately, if history has any weight on predicting the future, my guess is that any positive gains will be short-lived. Cost Plus has no competitive advantages and must achieve gains through operational efficiencies. And there is the rub. Cost Plus has neither the size nor the scale to compete with the dominating players such as Bed Bath & Beyond or Target (NYSE:TGT).
The bottom line is that Cost Plus' strategic plan is not working. Increasing sales without maintaining profitability is a recipe for disaster. There is too much risk for me to consider Cost Plus as a potential investment opportunity.
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Fool contributor Matthew Crews welcomes your feedback -- really! He has no financial position in any of the companies mentioned. The Motley Fool has an ironclad disclosure policy.
