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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended May 1, 2004

OR

For the transition period from              to             

Commission file number 0-14970

COST PLUS, INC.

(Exact name of registrant as specified in its charter)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes  x    No  ¨

The number of shares of Common Stock, $0.01 par value, outstanding on May 29, 2004 was 21,871,526.

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COST PLUS, INC

FORM 10-Q

For the Quarter Ended May 1, 2004

INDEX

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

COST PLUS, INC

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts, unaudited)

See notes to condensed consolidated financial statements

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COST PLUS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts, unaudited)

See notes to condensed consolidated financial statements

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COST PLUS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands, unaudited)

See notes to condensed consolidated financial statements

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COST PLUS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three Months Ended May 1, 2004 and May 3, 2003

(Unaudited)

1. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared from the records of Cost Plus, Inc. (the “Company”) without audit and, in the opinion of management, include all adjustments (consisting only of normal recurring accruals) necessary to present fairly the Company’s financial position at May 1, 2004 and May 3, 2003, the interim results of operations for the three months ended May 1, 2004 and May 3, 2003, and the changes in cash flows for the three months then ended. The balance sheet at January 31, 2004, presented herein, has been derived from the audited financial statements of the Company for the fiscal year then ended.

Accounting policies followed by the Company are described in Note 1 to the audited consolidated financial statements for the fiscal year ended January 31, 2004. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted for purposes of presenting the interim condensed consolidated financial statements. Such statements should be read in conjunction with the audited consolidated financial statements, including notes thereto, for the fiscal year ended January 31, 2004.

The results of operations for the three month period ended May 1, 2004 presented herein are not necessarily indicative of the results to be expected for the full year.

2. EMPLOYEE STOCK COMPENSATION

Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation,” establishes a fair value method of accounting for stock options and other equity instruments. SFAS No. 123 requires the disclosure of pro forma net income and earnings per share as if the Company had adopted the fair value method. For determining pro forma earnings per share, the fair value of the stock options and employees’ purchase rights were estimated using the Black-Scholes option pricing model.

The Company’s calculations are based on a multiple option approach, and forfeitures are recognized as they occur. Had compensation cost for these stock option and stock purchase plans been determined based on the fair value at the grant dates for awards under those plans consistent with the methods of SFAS No. 123, the Company’s net income and net income per share would have been reduced to the pro forma amounts indicated below:

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3. RECONCILIATION OF BASIC SHARES TO DILUTED SHARES

The following is a reconciliation of the weighted average number of shares (in thousands) used in the Company’s basic and diluted per share computations:

Certain options to purchase common stock were outstanding but were not included in the computation of diluted earnings per share because the effect would have been anti-dilutive. For the three months ended May 1, 2004 there were no anti-dilutive options. For the three months ended May 3, 2003 these options totaled 240,949.

4. REVOLVING LINE OF CREDIT

The Company has an unsecured revolving line of credit agreement with a group of banks that expires on June 1, 2005. The agreement allows for cash borrowings and letters of credit up to $30.0 million from January through June of each year, increasing to $75.0 million from July through December of each year to coincide with Holiday borrowing needs. Interest is paid quarterly in arrears on base rate loans and at each interest period applicable to IBOR loans (30, 60 and 90 days) based on the Company’s election of the bank’s reference rate or IBOR plus 1.125% from June 2, 2003 to June 1, 2004 and increasing to IBOR plus 1.25% from June 2, 2004 to June 1, 2005. The agreement requires a 30-day “clean-up period” where outstanding credit advances, as defined in the agreement, must be zero for not less than 30 consecutive days during the period from January 1, 2005 through March 31, 2005. The Company is subject to a minimum consolidated tangible net worth requirement, and annual capital expenditures are limited under the agreement. In the case of a continuing event of default, the lenders under the agreement may eliminate their commitments to make credit available, declare due all unpaid principal amounts outstanding, and require cash collateral for any letter of credit obligations. At each of the balance sheet dates, the Company complied with the loan covenant requirements. At May 1, 2004, the Company had no outstanding borrowings under its line of credit agreement and had $13.5 million outstanding under its letters of credit.

5. SHAREHOLDERS’ EQUITY

Stock Repurchase Program

In February 2003, the Company’s Board of Directors approved an additional repurchase of up to 500,000 shares of common stock, which was announced by the Company in March 2003. No shares were repurchased under this program in fiscal 2003. During the first quarter of fiscal 2004 the Company repurchased 200,500 shares of its common stock for $7.7 million. The program does not require the Company to repurchase any common stock and may be discontinued at any time.

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6. SUBSEQUENT EVENTS

In May 2004, the Company completed the $26.5 million purchase of its existing 500,000 square foot Virginia distribution center, which it had previously held under a capital lease. The Company financed $20 million of the purchase through a new 10 year fully amortizing commercial real estate loan, which bears interest at LIBOR plus 0.9% and matures in June 2014. The Company also entered into an interest rate swap agreement to effectively fix the interest rate on this note at 4.82%. The swap will be accounted for as a cash flow hedge in accordance with SFAS 133, “Accounting for Derivative Instruments and Hedging Activity.”

In order to meet its future growth requirements, the Company also plans to begin construction on a 500,000 square foot expansion to the existing Virginia distribution center. The added capacity is anticipated to come online in the first half of fiscal 2005. The Company estimates that it will spend approximately $24 million to $25 million on the expansion project, with approximately $21 million being spent in this fiscal year and the remainder being spent in fiscal 2005. The timing of such payments may vary substantially from these estimates due to inclement weather, construction delays or other factors, most of which are likely to be outside of management’s control. The Company intends to fund the majority of the expansion project through a new $20 million interest only revolving line of credit that matures on November 14, 2005, and the remaining amount will be financed through internally generated funds.

Upon completion of construction, the revolving line of credit will be retired, with up to $20 million converting to a new 10 year fully amortizing commercial real estate loan. This note will bear interest at LIBOR plus 0.9%. The Company has entered into an interest rate swap agreement, which will be accounted for as a cash flow hedge in accordance with SFAS 133, to effectively fix the interest rate on the first $18 million of this note at 6.65%.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This document contains forward-looking statements, which reflect the Company’s current beliefs and estimates with respect to future events and the Company’s future financial performance, operations and competitive position. Forward looking statements are identified, without exception, by use of the words “expect,” “anticipate,” “estimate,” “believe,” “looking ahead,” “forecast,” “may,” “will,” “should,” “project,” “continue,” “aims,” “intends,” “likely,” “plan” and similar expressions. Actual results may differ materially from those discussed in such forward-looking statements, and shareholders of Cost Plus, Inc. should carefully review the cautionary statements set forth in this form 10-Q, including “Factors that May Affect Future Results” beginning on page 10 hereof. The Company may from time to time make additional written and oral forward-looking statements, including statements contained in the Company’s filings with the Securities and Exchange Commission. The Company does not undertake to update any forward-looking statement that may be made from time to time by or on behalf of the Company.

Overview

Cost Plus, Inc. is a leading specialty retailer of casual home furnishings and entertaining products. As of May 1, 2004, the Company operated 212 stores in 26 states under the names “World Market,” “Cost Plus World Market,” “Cost Plus” and “Cost Plus Imports.” The Company’s business strategy is to differentiate itself by offering a large and ever-changing selection of unique products, many of which are imported, at value prices in an exciting shopping environment. Many of the Company’s products are proprietary or private label, often incorporating the Company’s own designs, “World Market” brand name, quality standards and specifications and typically are not available at department stores and other specialty retailers.

The Company’s strategy is to increase market share through expansion by opening stores primarily in metropolitan and suburban markets that can support multiple stores and enable the Company to achieve advertising, distribution and operating efficiencies. The Company may also selectively enter mid-size markets that can support one or two stores and the Company believes can meet its profitability criteria. The Company has announced plans to grow its store base by another 16%, adding a net of 33 new stores in fiscal 2004.

Results of Operations

The three months ended May 1, 2004, as compared to the three months ended May 3, 2003.

Net Sales Net sales consist of sales from comparable stores and non-comparable stores. Net sales increased $26.5 million, or 16.6%, to $185.7 million in the first quarter of fiscal 2004, from $159.2 million in the first quarter of fiscal 2003. The increase in net sales was attributable to an increase in comparable and non-comparable store sales. Comparable store sales rose 3.4%, or $5.2 million, in the first quarter of fiscal 2004, compared to 3.0%, or $3.8 million, in the first quarter of fiscal 2003. Comparable store sales increased primarily as a result of an increase in average transaction size per customer. The increase in average transaction size per customer resulted primarily from strong net sales increases in products such as furniture that carry a higher average price. Non-comparable store sales, which include all stores open less than fourteen full fiscal months, increased $21.3 million for the first quarter. As of May 1, 2004, the Company operated 212 stores compared to 181 stores as of May 3, 2003.

The Company classifies its sales into the home furnishings and consumables product lines. Home furnishings were 64% of sales in the first quarter of 2004 compared to 63% in the prior year first quarter and consumables were 36% in the first quarter of 2004 compared to 37% in the prior year first quarter. The sales mix shift to home furnishings was primarily due to strong furniture sales.

Cost of Sales and Occupancy Cost of sales and occupancy, which consists of costs to acquire merchandise inventory, costs of freight and distribution, and certain facility costs, increased $18.4 million, or 17.6%, to $123.2 million, in the first quarter of fiscal 2004 compared to $104.8 million in the first quarter of fiscal 2003. Cost of sales increased $15.4 million primarily due to

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increased sales volume. Occupancy costs increased $3.1 million due to the addition of 31 net new stores as of May 1, 2004 compared to a year ago, higher real estate tax assessments, and increased common area maintenance costs passed through by landlords. Total cost of sales and occupancy as a percentage of sales was 66.4% for the first quarter compared to 65.8% for the first quarter of fiscal 2003 as a result of higher markdowns and increased occupancy rates.

Gross Profit As a percentage of net sales, first quarter gross profit was 33.6% in fiscal 2004 compared to 34.2% in fiscal 2003. The decrease in gross profit is primarily due to additional markdowns and higher occupancy rates.

Selling, General and Administrative (“SG&A”) Expenses SG&A expense increased $6.3 million, or 12.9%, in the first quarter of fiscal 2004 compared to the first quarter of fiscal 2003. The increase was primarily due to the addition of 31 net new stores as of May 1, 2004 compared to a year ago. As a percentage of net sales, SG&A expense decreased to 29.5% compared to 30.5% in the prior year. The decrease was primarily due to lower advertising and store payroll expense as a percent of sales, as well as tight control over other operating expenses and increased leverage on corporate overhead.

Store Preopening Expenses Store preopening expenses, which include grand opening advertising and preopening merchandise setup expenses, were $1.5 million in the first quarter of fiscal 2004 compared to $1.1 million in the first quarter of fiscal 2003. The Company opened eight stores in the first quarter of fiscal 2004 compared to six stores in the same period last year. Expenses vary depending on the particular store site and whether it is located in a new or existing market.

Net Interest Expense Interest expense, which includes interest on capital leases and interest expense on the Company’s revolving line of credit, net of interest income earned on Company investments, was $822,000 in the first quarter of fiscal 2004 and $684,000 in the first quarter of fiscal 2003. The increase in net interest expense is primarily due to decreased interest income compared to the same period last year.

Income Taxes The Company’s effective tax rate was 38.0% in the first quarter of fiscal 2004 and 37.0% for the first quarter of fiscal 2003. The increase in the effective tax rate was due to the diminishing impact of certain employment and capital investment tax credits. The Company expects its effective tax rate to be 38.0% for the remainder of the year.

Factors That May Affect Future Results

The Company’s continued success depends, in part, upon its ability to increase sales at existing locations, to open new stores and to operate stores on a profitable basis. There can be no assurance that the Company’s existing strategies and store expansion program will result in a continuation of revenue and profit growth. Future economic and industry trends that could potentially impact revenue and profitability are difficult to predict.

The Company’s future performance is subject to risks and uncertainties that include, without limitation, a general deterioration in economic trends, ongoing competitive pressures in the retail industry, obtaining acceptable store locations, timely introduction and customer acceptance of the Company’s merchandise offering, litigation, claims, and assessments against the Company, the Company’s ability to efficiently source and distribute products, the Company’s ability to realize expected operational and cost efficiencies from its distribution centers, the Company’s ability to successfully extend its geographic reach into new markets, unseasonable weather trends, significant increases in the cost of fuel or utility services, changes in the level of consumer spending on, or preferences for, home-related merchandise, fluctuations in the value of the U.S. dollar against foreign currencies, changes in accounting rules and regulations, the Company’s ability to attract and retain the retail talent necessary to execute its strategies, international conflicts and political strife and the effects on the flow or price of merchandise from overseas, terrorist attacks and our nation’s response thereto and the Company’s ability to implement and integrate various new systems and technologies. In addition, the Company’s corporate headquarters, one of its distribution centers and a significant number of its stores are located in California; therefore, a downturn in the California economy or a major natural disaster could significantly affect the Company’s operating results and financial condition.

If the Company fails to maintain adequate internal controls, its ability to provide accurate financial reports could be impaired,

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which could cause the Company’s share price to decrease substantially. The Company is continuously evaluating and working to improve its internal controls. Effective internal controls are necessary for the Company to provide reliable financial reports and effectively prevent fraud. The Company’s evaluation of internal controls may conclude that enhancements, modifications or changes to internal controls are necessary to satisfy the requirements of the Sarbanes-Oxley Act of 2002. Any failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm the Company’s operating results or cause its failure to meet financial reporting obligations.

On March 31, 2004, the Financial Accounting Standards Board (FASB) issued an Exposure Draft, “Share-Based Payment: an amendment of FASB statements No. 123 and 95,” which would require a company to recognize as expense the fair value of stock options and other stock-based compensation to employees beginning in 2005 and subsequent reporting periods. If the Company elects or is required to record an expense for its stock-based compensation plans using the fair value method as described in the Exposure Draft, the Company could have significant and ongoing accounting charges, which could significantly reduce its net income.

The Company’s business is highly seasonal, reflecting the general pattern associated with the retail industry of peak sales and earnings during the fourth quarter (Holiday) selling season. Due to the importance of the Holiday selling season, the fourth quarter of each fiscal year has historically contributed, and the Company expects it will continue to contribute, a disproportionate percentage of the Company’s net sales and most of its net income for the entire fiscal year. Any factors negatively affecting the Company during the Holiday selling season in any year, including unfavorable economic conditions, could have a material adverse effect on the Company’s financial condition and results of operations. In addition, the Company makes decisions regarding merchandise well in advance of the season in which it will be sold. Significant deviations from projected demand for products could have a material adverse effect on the Company’s financial condition and results of operations, either by lost sales due to insufficient inventory or lost gross margin due to the need to mark down excess inventory.

Liquidity and Capital Resources

The Company’s primary uses for cash are to fund operating expenses, inventory requirements and new store expansion. In fiscal 2004 and 2005, the Company’s purchase and expansion of its Virginia distribution center will also be a significant use of cash. Historically, the Company has financed its operations primarily from internally generated funds and seasonal borrowings under a revolving credit facility. The Company believes that the combination of its cash and cash equivalents, short-term investments, internally generated funds and available borrowings will be sufficient to finance its working capital, new store expansion and distribution center project requirements for at least the next twelve months.

Virginia Distribution Center In May 2004, the Company completed the $26.5 million purchase of its existing 500,000 square foot Virginia distribution center, which it had previously held under a capital lease. The Company financed $20 million of the purchase through a new 10 year fully amortizing commercial real estate loan, which bears interest at LIBOR plus 0.9% and matures in June 2014. The Company also entered into an interest rate swap agreement to effectively fix the interest rate on this note at 4.82%.

In order to meet its future growth requirements, the Company also plans to begin construction on a 500,000 square foot expansion to the existing Virginia distribution center. The added capacity is anticipated to come online in the first half of fiscal 2005. The Company estimates that it will spend approximately $24 million to $25 million on the expansion project, with approximately $21 million being spent in this fiscal year and the remainder being spent in fiscal 2005. The timing of such payments may vary substantially from these estimates due to inclement weather, construction delays or other factors, most of which are likely to be outside of management’s control. The Company intends to fund the majority of the expansion project through a new $20 million interest only revolving line of credit that matures on November 14, 2005, and the remaining amount will be financed through internally generated funds.

Upon completion of construction, the revolving line of credit will be retired, with up to $20 million converting to a new 10 year fully amortizing commercial real estate loan. This note will bear interest at LIBOR plus 0.9%. The company has entered into an interest rate swap agreement to effectively fix the interest rate on the first $18 million of this note at 6.65%.

Historical Performance Net cash used by operating activities totaled $39.9 million for the first quarter of fiscal 2004, an increase of $22.3 million from the first quarter of fiscal 2003. The increase in net cash used by operations was primarily due to

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a decrease in accounts payable and an increase in merchandise inventories. Accounts Payable generated a net cash outflow of $24.1 million for the first quarter this year compared to $6.8 million last year. The increase was primarily due to a change in the payment process related to foreign vendors to ensure a smooth flow of inventory and the automation of the payment process for certain beverage vendors to allow for the recovery of significant cash deposits. Inventory purchases were higher this year primarily due to the addition of 31 net new stores compared to a year ago. The increase in net cash used by operating activities was partially offset by higher net income adjusted for non-cash depreciation and amortization, and an increase in other liabilities, primarily deferred taxes and unredeemed gift cards.

Net cash provided by investing activities totaled $3.1 million in the first quarter of fiscal 2004 compared to net cash used of $3.7 million in the first quarter of fiscal 2003, an increase of $6.8 million. The increase resulted primarily from the maturity of $8.0 million in short-term investments partially offset by an increase in capital expenditures. The increase in capital expenditures resulted primarily from opening two more stores in the first quarter of fiscal 2004 compared to the same period last year. The Company estimates that total fiscal 2004 capital expenditures will approximate $76.0 million, including $26.5 million to purchase the Virginia distribution center and $21.0 million to be spent on the Virginia distribution center expansion project this year.

Net cash used by financing activities was $987,000 in the first quarter of fiscal 2004, which included $7.7 million used to repurchase 200,500 shares of the Company’s common stock, offset by proceeds of $7.1 million from the issuance of common stock in connection with the Company’s stock option and employee stock purchase plans.

The Company has an unsecured revolving line of credit agreement with a group of banks that expires on June 1, 2005. The agreement allows for cash borrowings and letters of credit up to $30.0 million from January through June of each year, increasing to $75.0 million from July through December of each year to coincide with Holiday borrowing needs. Interest is paid quarterly in arrears on base rate loans and at each interest period applicable to IBOR loans (30, 60 and 90 days) based on the Company’s election of the bank’s reference rate or IBOR plus 1.125% from June 2, 2003 to June 1, 2004 and increasing to IBOR plus 1.25% from June 2, 2004 to June 1, 2005. The agreement requires a 30-day “clean-up period” where outstanding credit advances, as defined in the agreement, must be zero for not less than 30 consecutive days during the period from January 1, 2005 through March 31, 2005. The Company is subject to a minimum consolidated tangible net worth requirement, and annual capital expenditures are limited under the agreement. In the case of a continuing event of default, the lenders under the agreement may eliminate their commitments to make credit available, declare due all unpaid principal amounts outstanding, and require cash collateral for any letter of credit obligations. At each of the balance sheet dates, the Company complied with the loan covenant requirements. At May 1, 2004, the Company had no outstanding borrowings under its line of credit agreement and had $13.5 million outstanding under its letters of credit.

Available Information

The Company’s Internet web-site address is http://www.worldmarket.com. The Company makes available through its Internet web-site, free of charge, its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Definitive Proxy Statement and Section 16 filings and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after such materials are electronically filed with, or furnished to, the SEC.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

There are no material changes to our market risk as disclosed in the Company’s report on Form 10-K filed for the fiscal year ended January 31, 2004.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures. The Company’s management evaluated, with the participation of its Chief Executive Officer and Chief Financial Officer, the effectiveness of its disclosure controls and procedures as of the end of the period covered by this quarterly report on Form 10-Q. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective to ensure that information the Company is required to disclose in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

Changes in Internal Control over Financial Reporting. There was no change in the Company’s internal control over financial reporting that occurred during the period covered by this quarterly report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II. OTHER INFORMATION

ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES

Stock Repurchase Program

The following table sets forth the share repurchase activity for the first quarter ended May 1, 2004:

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

On February 5, 2004, the Company filed a current report on Form 8-K dated February 5, 2004, reporting under Item 12 a press release regarding the Company’s fourth quarter and fiscal year sales and same store sales data in which it also revised earnings guidance for the fourth quarter and fiscal year.

On March 18, 2004, the Company filed a current report on Form 8-K dated March 18, 2004, reporting under Item 12 a press release regarding the Company’s fourth quarter and fiscal 2003 sales and earnings data in which it also provided initial guidance for fiscal 2004 and reported on its share repurchase program.

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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INDEX TO EXHIBITS

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