It's one of the funny things about earnings reports: Sometimes bad news is good news -- at least when the bad news isn't as horrible as the Street expected.
Sitching together the numbers
After losing 11% in the past week, A.C. Moore Arts & Crafts (NASDAQ:ACMR) shares rebounded to $18 this morning following an earnings report that beat the Street's bleak estimates. The arts and crafts supplier also received an upgrade to "buy" from BB&T Capital Markets, despite a downgrade to "neutral" from Credit Suisse last Wednesday.
Here are some of the quarter's key points:
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Second-quarter sales came in at $124.4 million, down 4% from 2Q 2006.
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A one-time legal charge set the EPS figure back $0.03, but EPS still improved to a net loss of $0.02 versus a net loss of $0.09 in 2Q 2006.
In today's call, CEO Rick A. Lepley lauded the company's "improving gross margins, inventory, and cash position." Indeed, the company's cash position improved to $29.8 million for the quarter thanks to a 21% per-store reduction in inventory.
A.C. Moore's gross margins still trail those of competitor Jo-Ann Stores (NYSE:JAS), but both retailers are in a highly competitive industry with razor-thin operating margins. Included in the industry is Michaels Stores, the largest arts and crafts retailer in the United States, which finalized its deal with a private equity group consisting of Bain Capital and Blackstone (NYSE:BX) back in October 2006 for $6 billion.
Foolish bottom line
To get ahead in this cutthroat industry, A.C. Moore has to improve its inventory and supply methods. Investors should keep a long-term eye on the effectiveness of Lepley's plan to streamline store inventories, improve its global supply chain, and reduce costs.
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Fool contributor Todd Wenning does not own shares of any company mentioned. The Fool has a disclosure policy.
