<PAGE>
 
                                                                   EXHIBIT 10.18

                         EMPLOYMENT SEVERANCE AGREEMENT
                                        

      This Severance Agreement (the "Agreement") is made and entered into
effective as of November 1, 1996 (the "Effective Date"), by and between Dennis
Daugherty (the "Executive") and Cost Plus, Inc. (the "Company").


                                    RECITALS
                                    --------


      A.  The Board believes the Company should provide the Executive with
certain severance benefits should the Executive's employment with the Company
terminate under certain circumstances, such benefits to provide the Executive
with enhanced financial security and sufficient incentive and encouragement to
remain with the Company.

      B.  Certain capitalized terms used in the Agreement are defined in Section
5 below.


                                   AGREEMENT


      In consideration of the mutual covenants herein contained, and in
consideration of the continuing employment of Executive by the Company, the
parties agree as follows:

      1.  Duties and Scope of Employment. The Company shall employ the Executive
          ------------------------------
in the position of Executive Vice President of Operations with such duties,
responsibilities and compensation as in effect as of the Effective Date. The
Board and the Chief Executive Officer of the Company (the "CEO") shall have the
right to revise such responsibilities and compensation from time to time as the
Board or the CEO may deem necessary or appropriate. If any such revision
constitutes "Involuntary Termination" as defined in Section 5(c) of this
Agreement, the Executive shall be entitled to benefits upon such Involuntary
Termination as provided under this Agreement.

      2.  At-Will Employment. The Company and the Executive acknowledge that the
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Executive's employment is and shall continue to be at-will, as defined under
applicable law. If the Executive's employment terminates for any reason, the
Executive shall not be entitled to any payments, benefits, damages, awards or
compensation other than as provided by this Agreement, or as may otherwise be
available in accordance with the Company's established employee plans and
practices or in accordance with other agreements between the Company and the
Executive. This Agreement shall remain in effect until the earlier of (i) the
date that all obligations of the parties hereunder have been satisfied or (ii)
the date upon which this Agreement terminates by consent of the parties hereto.
<PAGE>
 
      3.  Severance Benefits.
          ------------------

          (a) Benefits upon Termination. If the Executive's employment
              -------------------------
terminates as a result of Involuntary Termination other than Cause prior to
September 1, 1998 and the Executive signs a Release of Claims, then the Company
shall pay Executive's Base Compensation to the Executive until August 31, 1998
with each monthly installment payable on the last day of such month. Executive
shall not be entitled to receive any payments if Executive's employment
terminates as a result of Executive's voluntary resignation.

          (b) Stock Options; Bonus. Executive shall not be entitled to receive
              --------------------
any unvested stock options or partial bonus payments for an incomplete bonus
plan year.

          (c) Miscellaneous. In addition, (i) the Company shall pay the
              -------------
Executive any unpaid base salary due for periods prior to the Termination Date;
(ii) the Company shall pay the Executive all of the Executive's accrued and
unused vacation through the Termination Date; and (iii) following submission of
proper expense reports by the Executive, the Company shall reimburse the
Executive for all expenses reasonably and necessarily incurred by the Executive
in connection with the business of the Company prior to termination. These
payments shall be made promptly upon termination and within the period of time
mandated by applicable law.

      4.  Non-Solicitation. In consideration for the mutual agreements as set
          ----------------
forth herein, Executive agrees that Executive shall not, at any time, within
twelve (12) months following termination of Executive's employment with the
Company for any reason, directly or indirectly solicit the employment or other
services of any individual who at that time shall be or within the prior twelve
(12) months shall have been an employee of the Company.

      5.  Definition of Terms. The following terms referred to in this Agreement
          -------------------
shall have the following meanings:

          (a) Base Compensation. "Base Compensation" shall mean Executive's
              -----------------
monthly base salary for services performed based on the average base salary for
the six (6) months prior to the Termination Date.

          (b) Cause. "Cause," unless otherwise defined in the Agreement
              -----
evidencing a particular Option, means an Eligible Individual's (i) intentional
failure to perform reasonably assigned duties, (ii) dishonesty or willful
misconduct in the performance of duties, (iii) engaging in a transaction in
connection with the performance of duties to the Company or any of its
Subsidiaries thereof which transaction is adverse to the interests of the
Company or any of its Subsidiaries and which is engaged in for personal profit
or (iv) willful violation of any law, rule or regulation in connection with the
performance of duties (other than traffic violations or similar offenses).

                                      -2-
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           (c) Involuntary Termination. "Involuntary Termination" shall mean:
               -----------------------

                 (i) termination of Executive's employment with the Company for
any reason other than Cause;

                 (ii) a material reduction in Executive's salary, other than any
such reduction which is part of, and generally consistent with, a general
reduction of officer salaries;

                 (iii)  a material reduction by the Company in the kind or level
of employee benefits (other than salary and bonus) to which Executive is
entitled immediately prior to such reduction with the result that Executive's
overall benefits package (other than salary and bonus) is substantially reduced
(other than any such reduction applicable to officers of the Company generally);

                 (iv) any material breach by the Company of any material
provision of this Agreement which continues uncured for 30 days following notice
thereof,

provided that none of the foregoing shall constitute Involuntary Termination to
the extent Executive has agreed thereto.

          (d) Release of Claims. "Release of Claims" shall mean a waiver by
              -----------------
Executive, in a form satisfactory to the Company, of all employment related
obligations of and claims and causes of action against the Company.



          (e) Termination Date. "Termination Date" shall mean the date on which
              ----------------
an event which would constitute Involuntary Termination occurs, or the later of
(i) the date on which a notice of termination is given, or (ii) the date (which
shall not be more than thirty (30) days after the giving of such notice)
specified in such notice.



      6.  Confidentiality. Executive acknowledges that during the course of
          ---------------
Executive's employment, Executive will have produced and/or have access to
confidential information, records, notebooks, data, formula, specifications,
trade secrets, customer lists and secret inventions, and processes of the
Company and its affiliated companies. Therefore, during or subsequent to
Executive's employment by the Company, Executive agrees to hold in confidence
and not directly or indirectly to disclose or use or copy or make lists of any
such information, except to the extent authorized by the Company in writing. All
records, files, drawings, documents, equipment, and the like, or copies thereof,
relating to the Company's business, or the business of an affiliated company,
which Executive shall prepare, or use, or come into contact with, shall be and
remain the sole property of the Company, or of an affiliated company, and shall
not be removed from the Company's or the affiliated company's premises without
its written consent, and shall be promptly returned to the Company upon
termination of employment with the Company.

                                      -3-
<PAGE>
 
      7.  Successors.
          ----------

          (a) Company's Successors. Any successor to the Company (whether direct
              --------------------
or indirect and whether by purchase, lease, merger, consolidation, liquidation
or otherwise) to all or substantially all of the Company's business and/or
assets shall assume the obligations under this Agreement and agree expressly to
perform the obligations under this Agreement in the same manner and to the same
extent as the Company would be required to perform such obligations in the
absence of a succession. For all purposes under this Agreement, the term
"Company" shall include any successor to the Company's business and/or assets
which executes and delivers the assumption agreement pursuant to this subsection
(a) or which becomes bound by the terms of this Agreement by operation of law.

          (b) Executive's Successors. The terms of this Agreement and all rights
              ----------------------
of the Executive hereunder shall inure to the benefit of, and be enforceable by,
the Executive's personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees.

      8.  Notice.
          ------

          (a) General. Notices and all other communications contemplated by this
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Agreement shall be in writing and shall be deemed to have been duly given when
personally delivered or when mailed by U.S. registered or certified mail, return
receipt requested and postage prepaid. In the case of the Executive, mailed
notices shall be addressed to Executive at the home address which Executive most
recently communicated to the Company in writing. In the case of the Company,
mailed notices shall be addressed to its corporate headquarters, and all notices
shall be directed to the attention of its CEO.

          (b) Notice of Termination. Any termination by the Company for Cause or
              ---------------------
by the Executive as a result of a voluntary resignation or an Involuntary
Termination shall be communicated by a notice of termination to the other party
hereto given in accordance with Section 8(a) of this Agreement. Such notice
shall indicate the specific termination provision in this Agreement relied upon,
shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination under the provision so indicated, and shall
specify the termination date (which shall be not more than 30 days after the
giving of such notice). The failure by the Executive to include in the notice
any fact or circumstance which contributes to a showing of Involuntary
Termination shall not waive any right of the Executive hereunder or preclude the
Executive from asserting such fact or circumstance in enforcing Executive's
rights hereunder.

      9.   Miscellaneous Provisions.
           ------------------------  

          (a) No Duty to Mitigate. The Executive shall not be required to
              -------------------
mitigate the amount of any payment contemplated by this Agreement, nor shall any
such payment be reduced by any earnings that the Executive may receive from any
other source.

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          (b) Waiver. No provision of this Agreement shall be modified, waived
              ------
or discharged unless the modification, waiver or discharge is agreed to in
writing and signed by the Executive and by an authorized officer of the Company
(other than the Executive). No waiver by either party of any breach of, or of
compliance with, any condition or provision of this Agreement by the other party
shall be considered a waiver of any other condition or provision or of the same
condition or provision at another time.

          (c) Whole Agreement. No agreements, representations or understandings
              ---------------
(whether oral or written and whether express or implied) which are not expressly
set forth in this Agreement have been made or entered into by either party with
respect to the subject matter hereof.

          (d) Severance Provisions in Other Agreements. The Executive
              ----------------------------------------
acknowledges and agrees that the severance provisions set forth in this
Agreement shall supersede any such provisions in any employment agreement
entered into between the Executive and the Company.

          (e) Choice of Law. The validity, interpretation, construction and
              -------------
performance of this Agreement shall be governed by the laws of the State of
California.

          (f) Severability. The invalidity or unenforceability of any provision
              ------------
or provisions of this Agreement shall not affect the validity or enforceability
of any other provision hereof, which shall remain in full force and effect.

          (g) No Assignment of Benefits. The rights of any person to payments or
              -------------------------
benefits under this Agreement shall not be made subject to option or assignment,
either by voluntary or involuntary assignment or by operation of law, including
(without limitation) bankruptcy, garnishment, attachment or other creditor's
process, and any action in violation of this subsection shall be void.

          (h) Employment Taxes. All payments made pursuant to this Agreement
              ----------------
will be subject to withholding of applicable income and employment taxes.

          (i) Assignment by Company. The Company may assign its rights under
              ---------------------
this Agreement to an affiliate, and an affiliate may assign its rights under
this Agreement to another affiliate of the Company or to the Company; provided,
however, that no assignment shall be made if the net worth of the assignee is
less than the net worth of the Company at the time of assignment. In the case of
any such assignment, the term "Company" when used in a section of this Agreement
shall mean the corporation that actually employs the Executive.

          (j) Counterparts. This Agreement may be executed in counterparts, each
              ------------  
of which shall be deemed an original, but all of which together will constitute
one and the same instrument.

                                      -5-
<PAGE>
 
          IN WITNESS WHEREOF, each of the parties has executed this Agreement,
in the case of the Company by its duly authorized officer, as of the day and
year first above written.


COMPANY:                        COST PLUS, INC.

                                /s/ Ralph D. Dillon
                                ___________________________________
                                By

                                Chairman/CEO         
                                ___________________________________
                                Title

                                /s/ Dennis R. Daugherty            
Executive:                      ___________________________________
                                DENNIS DAUGHERTY

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