Big 5 Sporting Goods Corp (BGFV) 2004 Q4 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Big 5 Sporting Goods fourth-quarter earnings conference call. (OPERATOR INSTRUCTIONS). Our speakers are Chuck Kirk, CFO, and Stephen Miller, Chairman, President and CEO of Big 5 Sporting Goods. At this time, I would like to turn the conference over to Mr. Miller. Please go ahead, sir.

Thank you, operator. Sorry for the delay in getting this call going. We had unexpected complications in our financial printer getting our 8-K on file with the SEC, and this needed to be done before starting the call.

Good afternoon and welcome to our 2004 fiscal fourth-quarter and full-year conference call. Today we will review our financial results for the 14 and 53 weeks ended January 2, 2005, as well as provide outlooks for the 2005 first quarter and full year. And, of course, open it up for questions. Before we do that, Chuck will read the Safe Harbor statement and provide you with some additional information about how we report our results.

Thanks, Steve. Except for statements of historical fact, any remarks that we may make about our future expectations, plans, projections and prospects constitute forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to known and unknown risks and uncertainties that may cause our actual results in future periods to differ materially from forecasted results. These risks and uncertainties include those more fully described in our Form 10-K, our most recently filed Form 10-Q for our third fiscal quarter of 2004, and other filings with the Securities and Exchange Commission. We disclaim any obligation to update these factors or to publicly announce results of any revisions to any of the forward-looking statements made during this call that reflect future events or developments.

We have as you know redeemed our senior notes over the past few years. We also implemented a sales return allowance in the third quarter of fiscal 2004. We will provide the impact of the note redemptions on our earnings and the impact of the implementation of the sales return allowance on our same-store sales since we believe that that will aid comparisons between periods.

I would also like to remind you that because we are a retailer operating on a fiscal four-week, five-week quarterly calendar, every six years we pick up an extra week in our fourth fiscal quarter to true-up our calendar. In fiscal 2004, we picked up this extra week which added approximately 14.2 million or 1.9 percent to fiscal 2004 sales versus fiscal 2003. Finally, all references to quarterly and annual performance relate to our fiscal quarter and fiscal year.

Thank you, Chuck. We have just concluded a great fourth-quarter and full-year fiscal 2004. However, before I discuss these outstanding results, I would like to address our financial restatements which were announced in our press release today.

As spelled out in more detail in the release, during our normal year-end accounting review, we discovered an error in our Accounts Payable as reported in our financial statements. The error occurred when commercial invoices related to letters of credit were not reconciled in a timely basis as required by Big 5's established accounting procedures. This created unmatched credits in Accounts Payable for each of the Company's 2000, 2001, 2002 and 2003 fiscal years which were erroneously assumed to be over-accruals.

These assumed over-accruals were reversed at each year-end and included in net income. This resulted in overstatements of net income in the amount of $500,000 for the year 2000, 1.2 million for 2001, 2.1 million for 2002, and 1.4 million for 2003.

I would like to briefly review the timeline of our discovery of this problem and the actions we have taken to address it. The Company's internal auditing personnel identified a potential issue approximately 2.5 weeks ago during our normal year-end accounting review. We then informed the Audit Committee of our Board of Directors and KPMG, our auditors, about this potential issue, and together with them we worked to confirm the existence of a problem. Once we confirmed that errors had been made we worked with KPMG to quantify the effect of the errors on prior reported financials.

Yesterday with our arms around the effect of our errors on prior reporting financials, Company management and the Audit Committee recommended and our Board of Directors approved the restatement of our financials for fiscal years 2001, 2002 and 2003. Today we disclosed the matter to our stockholders and to the public.

Finally, we have also conducted an internal investigation as to how this problem occurred. Based upon this investigation, we included that this is simply a case where human errors were made within our accounting function. We have made changes and improved our internal controls in this area to ensure that this kind of error is not made again.

I want to emphasize that while this error influenced our guidance for the 2004 fourth quarter and full year by 6 cents, the resulting adjustments to net income had no impact on our sales, including same-store sales; had no impact on our cash flows, and in no way will impact our business going forward. We continue to deliver consistently strong bottom-line results while generating significant free cash flow from operations. Fiscal 2004 was no exception. This was another great year for us.

We maintained strong sales momentum and improved gross profit margins while leveraging expenses. This allowed us to post bottom-line gains of 37.8 percent over our preliminary restated figures for fiscal 2003. Fiscal 2004 results included a 6 cents charge associated with our partial redemption of senior notes, and fiscal 2003 results included a 9 cent debt redemption charge. Our earnings performance for the year exceeded the guidance that we provided you roughly one year ago.

We also successfully grew our store base, (technical difficulty) construction on our new distribution center, and at the same time were able to generate significant cash flow for the business. This positive cash flow enabled us to not only meaningful reduce our debt but also to initiate an annual cash dividend of 28 cents per share with the first quarterly payment being made this past December.

Now commenting more specifically on our fourth quarter beginning with sales. In the 14-week fourth quarter, we rang the register to the tune of 217.6 million, up 13.4 percent from 191.8 million of sales in the 13-week fourth quarter of 2003. On a comparative 13-week basis, our same-store sales increased 2.6 percent for the quarter, including a 0.5 percent negative impact from the effect of the implementation of a sales return allowance in the third quarter of 2004.

The streak continues. This represented our 36th consecutive quarter now nine full years of positive comp store quarterly comparisons.

We achieved a solid performance despite the negative impact of unseasonally warm and dry weather in most of our markets during the weeks preceding Christmas. This challenging weather affected sales in our winter product categories, particularly apparel, which was down on a same-store basis in the low single digits for the quarter. However, this softness was more than offset by our performance in the hard goods category, which was up in the low single digits, and the footwear category, which was up in the mid to high single digit range.

Our sales gains for the quarter were almost entirely the result of increased customer traffic and that our average transaction size was virtually flat. Actually up 2 pennies from a year ago.

Now turning to our margins. Gross profit margins for the fourth quarter were 35.8 percent of sales compared to the preliminarily restated figure of 35.4 percent for the same quarter of the previous year.

We continue to see gains in our product margins during the quarter driven by improvements in our hard goods and footwear categories. We also realized about 10 basis points of leverage in our occupancy costs, which are included in our margins. These margin gains were partially offset by an increase in our distribution center costs, mainly fuel and labor, each costing us roughly 10 basis points. Fuel costs remain high, and while prices eased a bit during the quarter, they were still up considerably from the prior year. Warehouse labor costs also increased 10 basis points as they continue to be impacted by additional workloads in preparation for the transition to our new distribution center.

Moving on to SG&A. We are pleased that for the third consecutive quarter we were able to report improvement in this category. This quarter SG&A expenses decreased 10 basis points to 24.3 percent of sales versus 24.4 percent of sales in the fourth quarter of 2003.

Looking at our bottom line, our solid sales performance combined with overall operating margin improvement and lower interest costs enable us to realize strong earnings for the fourth quarter. Earnings per diluted share increased 37.8 percent to 51 cents, including a 3 cent debt redemption charge versus preliminarily restated earnings per diluted share of 37 cents for the fourth quarter of 2003, which includes a 6 cent debt redemption charge.

Now I would like to comment on our store growth. We opened 11 stores during the fourth quarter, including three each in Arizona, Colorado and California, and one each in New Mexico and Utah. For the year we opened 18 stores, two of which were relocations. This gave us 309 stores at year-end.

In terms of store growth for 2005, we had opened one store to date in Glendale, California, which was a relocation. We expect to complete the year with a net increase of 16 to 20 new stores, and we anticipate that the stores will be well disbursed over our 10 state geographic footprint.

Additionally construction development continues on our new distribution center located in Riverside, California. We have encountered construction delays beyond the norm due to record rains in October of 2004 and this past January. The building shell is now nearly complete, and installation of racking and material handling systems is underway. Our new warehouse management systems are being extensively tested. We believe that we are now on track to have the facility operational in late 2005.

At this time, I will turn the call over to Chuck who will provide more details on our restatement, full-year results, balance sheet highlights and provide earnings guidance for 2005's first quarter and full year.

Thanks, Steve. I just want to take a moment to make sure that everybody understands the impact of the preliminary restatements that Steve discussed and that are explained in detail in our press release. Concerns with our income statement, the error that was discovered resulted in an overstatement of net income in the amount of .5 million for 2000, 1.2 million for 2001, 2.1 million for 2002 and 1.4 million for 2003.

In terms of the balance sheet, this resulted in an understatement of Accounts Payable for the effective periods that totaled 8.8 million by December 28, 2003, and overstatement of stockholders equity for the effected periods totaling 5.2 million by that same date. We also anticipate a refund or credit of approximately 3.2 million attributable to an overpayment of income taxes for the effected periods.

To reiterate, these non-cash adjustments of net income will not have any impact on our previously reported net sales of same-store sales, our previously reported assets including cash, our previously reported cash flows from operating activities, or our compliance with any financial covenants contained in our bank credit agreement.

Now I will highlight our full-year results. For comparison purposes, we are using the preliminary restated historical financial statements. Sales were up 9.7 percent or 7.8 percent on a comparable 52-week basis to 778.9 million for the 53-week fiscal 2004 from 709.7 million for the 52-week fiscal 2003. Same-store sales increased 3.5 percent for fiscal 2004, and that figure includes a 0.4 negative impact from the effect of the implementation of a sales return allowance in the third quarter.

Looking at the bottom line for the year, we were able to report very positive earnings and earnings growth as we have improved operating margins by 50 basis points and significantly lowered our interest costs. Earnings per diluted share increased 37.6 percent to $1.50 for fiscal 2004 versus preliminarily restated earnings per diluted share of $1.09 for the same period in 2003.

The 2004 earnings per diluted share includes a charge of 6 cents per diluted share associated with senior note redemptions in the second and fourth quarters, while 2003 earnings per diluted share includes a similar debt redemption charge of 9 cents per diluted share.

Looking at our balance sheet, inventories were in a sound inventory position at the end of the year. Total chain inventories increased 12.3 million to 191.9 million at January 2, 2005 from 179.6 million at the end of the fourth quarter in 2003. We feel good about our inventory position since as of year-end we were operating 16 more stores than last year.

On a more comparable per store basis, inventories increased only slightly by approximately 1 percent versus December 2003.

Moving on to CapEx. Capital spending totaled 20.8 million for the full fiscal year in 2004. Expenditures primarily were for store-related maintenance and new store expenditures, as well as approximately 8.2 million for a new distribution center.

Our business model continues to allow us to reduce debt. Our total debt levels were 81.3 million at the end of the fourth quarter of 2004. That is down 18.4 million from the 99.7 million of total debt reported at December 28, 2003. We are particularly pleased to have been able to take down our debt levels in this manner, while also spending over 8 million to date on our new distribution center.

In the fourth quarter of 2004, we enhanced our current revolving debt facility in a manner that allowed us to regain the remaining 33.1 million of our term notes. Based on current interest rates, this redemption will result in annualized interest cost savings of approximately 1.1 million or 5 cents per diluted share on an after-tax basis based on current interest rates.

We incurred a onetime after-tax charge of approximately 785,000 or 3 cents per diluted share related to this redemption in the fourth quarter of fiscal 2004. This charge results from a redemption premium on the notes of 1.825 percent and takes into account the write-off of unamortized financing fees and original issue discount.

We continue to generate significant free cash flow, and we see the business doing so through the remainder of 2004 and beyond. We plan to use that cash to continue to reduce debt and to pay our newly instituted quarterly cash dividend to further enhance shareholder value.

Now I would like to spend a few moments on our guidance. We are excited about our overall earnings growth potential for '05. For the first quarter, we are guiding to a low single digit comp store sales increase.

I should point out that we are negatively impacted during this quarter by the move of the Easter holiday from our second quarter last year to our first quarter this year. As a result of this move, we lose the business for that as our stores are closed on Easter, and we believe there will be a shift of our important first-quarter baseball business into the second quarter. This sales performance should in turn lead to earnings in the range of 32 to 35 cents per diluted share for the first quarter.

As far as the full year goes, we are guiding to a same-store sales increase in the low single digit range and earnings of $1.70 to $1.80 per diluted share. This range excludes approximately 9 cents per diluted share associated with costs related to our transition into our new distribution center, and that will be incurred in the back half of 2005.

In terms of CapEx, we anticipate spending about 13 million on new store maintenance CapEx in '05, driven primarily by the addition of 16 to 20 net new stores.

In addition, we now have better visibility of the anticipated total spend for the construction of our distribution center. We now anticipate the total spend for the construction of the new DC at approximately 22.5 million. As mentioned, we spent 8.2 million of our distribution center CapEx during fiscal 2004, and we anticipate spending 14.3 million in fiscal 2005. We expect our new distribution center to be operational late in 2005.

I would just like to back up a minute and say we inadvertently misstated our preliminary restated EPS of 2003. That should be $1.10, not $1.09 as I mentioned, and that, too, included 9 cents senior note debt redemption charge.

But with that then, I would like, operator, to turn the call over to Q&A.

(OPERATOR INSTRUCTIONS). Ralph Jean, Wachovia Securities.

Focusing on the fundamental business, just what is your same-store sales leverage threshold going into '05? I know it was a little higher last year. It should be a little bit lower this year.

Yes, we're looking at really leverage or neutral threshold at that low single digit comp range at about 2 to 3 percent. We feel really good about that.

And then on the gross margin, should we expect a similar level of increase this year on an annual basis as the past year was?

I would be a little conservative in modeling that duplication of last year's performance. We think we may have a little pressure in realizing those gains in the first quarter given the winter conditions and that we are going to be a little more aggressive in trying to move out winter product over the remaining part of the first quarter. That may flatten out our margin gains for the first quarter.

We also still have the pressure from the old DC, the pressure there as it nears capacity. So I would be a little more conservative, although we still see some gain.

Okay. Thank you very much.

Sean McGowan, Harris Nesbitt.

I have a couple of questions, some of which are related to the restatement. I just want to clarify what you just said. Are you saying that the actual '03 number was 1.10 not 1.09, or was it the other way around?

The '03 number was 1.10, not 1.09. (multiple speakers)

It is 1.10 in the press release, and that is correct?

That is correct.

The press release is correct.

A general question on this, how did this not get caught much sooner?

Basically it is just an error was made. Obviously the error never should have occurred. A supervisor did not catch it. The bottom line is we just missed it. We certainly wished that was not the case, but we would much rather be sitting here talking simply about our great results. In any case, there was error that got missed --

Yes, every piece of inventory that we receive runs through that account. There are numerous in seven outs, and honestly it just got missed.

Nothing in the auditor's work would have caught it?

We had clean audits each of these years, and the bottom line we missed it and our auditors missed it.

Okay. Looking at the cost in 2005 of the distribution center when you call out that 9 cent cost, I want to understand this properly. Is that to say that that is 9 cents of expense that you have because of the transition, or is that an expense that will show up again in '06?

It is the cost of the transition primarily.

So it really is proper to look at it separately. It is not just an ongoing higher cost. It is the transition itself that is costing that.

That is true.

Okay and --

Although I should be upfront here, some of that will leg into Q1 of '06 as we continue the transition. We will probably finalize our transition in that Q1.

Okay. So there might still be a couple of pennies there?

Yes.

Okay, last question. Is today the first official mention of a dividend?

No, no. We declared a dividend in October.

Right. So this is just repeating what was said already, right?

Exactly. When we paid our first dividend in December of '04.

Got it. Thank you.

Mitch Kaiser, Piper Jaffray.

Just a couple of questions. I understand the Easter shift, but you also mentioned baseball. Why is that going to be delayed from the first quarter into the second quarter?

Sure. Very simply. One weekend in March is a huge baseball weekend for us, and when Easter falls in March, there is no league. There is really a suspension of league activity. Nobody is having their opening day and ticking off their baseball season certainly the weekend of Easter and oftentimes not the week before or after because lots of families are on vacation.

So this essentially means that some of what would normally be great weekends in baseball in March will be pushed back, and we suspect it will occur -- shift into Q2.

Okay, sounds good. And I think a couple of weeks ago when we were talking you talked about storms helping you out in the mountains and things like that. Does it still seem pretty strong this quarter?

Actually we had a great run of winter business in early January. It has been reasonably warm in most of our markets. The Northwest -- really the two weeks in January was really the only glimmer of true winter that the Northwest as had this entire winter season. We are talking pretty much from November through present, and there has basically been a shutdown of ski resorts throughout the Northwest. So conditions are just -- they are okay in California, but really we have had no spark of new -- the interest in new snow generates.

Brian Nagel, UBS.

A few questions here. First off with respect to the distribution center, on the capital side, the 22.5 million you guys laid out today is higher than what I had estimated previously and I think previously what you guys had communicated. What is causing those capital expenses to be higher now?

A couple of things. One, an increase of inflation of steel is a huge, huge number, and really some add-ons in terms of as we fine-tune the scope of construction. Some of it is making decisions. We are spending some more in lighting, for example. We think it is a good ROI. We are going to get some great electrical savings going forward. Some of it was just items almost like any major construction that wound up costing us more than we anticipated. Sprinkler systems, when we really zeroed in and the requirements of sprinkler systems is a huge number. Pretty much along that line.

On the expense side, the 9 cents, you guys had not previously given an estimate for that. In your own internal planning, is that consistent with what we're thinking, or was there some deviation there as well?

I think it is pretty right on with where we are thinking.

Yes. That was about where we were, and you know we continue to see that.

So now when is the -- this one is clearly on the timing -- the distribution center will be complete you said in the first quarter of 2006?

We will transition into it over the last half of '05 and be operational in Q4 of '05, but continue to do some transitioning work into Q1 of '06. So it will be complete by then.

What facility will you be shipping out of for the holiday season?

What is that?

During the holiday season, what facility will you be shipping product out?

We will be -- actually we will be working out of both -- our plans are to work out of both facilities, and we will be, depending on product category, be shuttling some product from one facility to the other, and moving it on out to our stores. So it will really be a combination of both facilities for the holiday period. You know we have -- I think we've got a very careful plan to avoid any business interruption obviously during the holiday.

Okay. The final question with respect to the restatement today, the results you released are preliminary. When will those be finalized?

Well, we still anticipate filing our 10-K on a timely basis in mid-March. So it would be at that time.

With the K?

Right.

Chris Jones, Oppenheimer.

A couple of questions. First, in terms of your other business category, you mentioned that the winter apparel business was weak. Any comments on the athletic apparel and other categories?

Yes, I mean normal -- I think normal athletic apparel performed fine. We had great strength across most of our hard goods categories with the exception of the winter component of hard goods. Our footwear business, as we mentioned, was really outstanding over the Q4.

Okay. And in terms of your guidance for 2005, if you use that $1.50 number for 2004 and you put in $1.70, that applies something like a 13 percent EPS growth. Has there been change in your outlook for 2005, a little bit more conservative?

You could assume that. Yes, we have taken a conservative view on the year.

Is there anything specific that would be driving that?

Really, just I think we just feel it is prudent in providing guidance to be conservative, and we think we are. We would rather provide guidance that hopefully allows the upside.

John Shanley, Susquehanna Financial Group.

Chuck, I wonder if you can give us a little bit more clarity on the EPS guidance for '05 of $1.70 to $1.80? Does that assume any possible increase costs associated with the Accounts Payable adjustments such as accounting charges from your outside auditor or legal fees or anything else that may be forthcoming in that event?

Well, we accrue a fairly large legal and audit accrual, and we feel we are fully covered in that guidance.

Do you also have insurance for events like this?

Yes.

Out-of-pocket expenses?

Absolutely.

That is great to hear. And then also on the, Steve or Chuck, on the running of the duel DC centers, do you have any indication of how long into fiscal '05 that may be a necessity? And then should we model in that you're going to eliminate one of those -- the older facility somewhere during the course of the year, and that should give you a clear pop in terms of your operating cost structure?

Yes, absolutely. We will be out of the old facility by the end of the first quarter of '06.

So from second quarter on, we basically take that out of our calculation?

Yes, you do.

Okay, super. And then the guidance in terms of the new store openings, that you pay down the note and you're certainly looking like you're going after that $82 million in credit revolver costs. Is there a possibility that you could see an acceleration of your new store opening program again once you start getting your debt-to-equity ratio back into a more normalized level? Could that happen in '05, or are we likely to see that in ongoing years.

John, we never have felt that our store growth model has been constrained by access to capital. We have always grown the business in a manner we feel is appropriate, and that is our plans going forward. You know we are out at 16 to 20 stores. We would hope to be towards the high-end, all said and done, but we are going to just kind of ramp up our growth consistently as we have over the really history of the business.

Okay. That is fair enough. The last question I have is, on the adjustments for the letters of credit that you referred to, does that go back beyond 2000? You gave us the adjusted costs in terms of 2000 through 2003, and was KPMG your auditor for that entire period of time?

Yes, they were, and no, it does not go beyond 2000.

Okay, great. Thanks a lot, guys. Appreciate it.

(OPERATOR INSTRUCTIONS). Reed Anderson, Friedman Billings Ramsey.

Most of my questions have been answered, but just a couple. Any reason to think that the store opening schedule would not be very back-end loaded like it typically is this year?

We believe it will be slightly less back-end loaded, but still back-end loaded.

So a few more in the third quarter maybe than last year?

Yes.

I have learned not to model them evenly over the year.

We can do that, too. So maybe you will open a couple in the first half and the rest in the second half. Put it that way?

Yes.

Okay. And then back to the DC discussion, to the extent that things like labor have been a delevering factor, is that as you get in the new facility and you are more efficient, is that where we would look to pick up maybe 10 or so basis points a year starting in '06 do you think?

Absolutely.

Do you think it could be more than 10 basis points a year?

We have not really quantified it, but there are good opportunities in that area.

Okay, good. I think that pretty much takes care of me. Thanks. Good luck.

Rick Nelson, Stephens.

One more on the restatement. It looks like all of the restatement occurred in the fourth quarter and should not be -- affect the go forward comparison, is that right?

Yes, it is, but it did influence our Q4 guidance by 6 cents. So yes, it will not impact the go forward, but basically you bought 6 cents along the way.

Right. Steve, I'm curious how you are tracking in the first quarter to date relative to that 1 to 3 percent guidance, comp guidance range? I recognize the calendar issues you're going to be facing, but any color on current trends would be helpful.

Trends were off to a positive start for the first quarter, and we feel that we are on track to be clearly within the guidance that we provided understanding that we are going to lose some down the backstretch of the month of the quarter.

What about the outlook for footwear? You achieved pretty good growth there in the fourth quarter. What are your thoughts as we look forward?

We're continuing to experience excellent momentum in our footwear categories and feel we are looking for a very good year there.

Anthony Lebiedzinski, Sidoti & Co..

A couple of questions. I was just wondering if you could just discuss what kind of changes you have made to your internal controls to prevent these problems? Just give it a little bit more color.

Certainly. Obviously it wrests the matter with our Accounts Payable supervisor to ensure that the commercial invoices are reconciled in a timely basis. We did have a change in the supervisory function that contributed to our discovering of the issue. So that check is in place. We set up all sorts of internal procedures to make sure that a number of people are on notice to follow the process of properly clearing letters of credits.

Okay. And in terms of the extra week in the quarter, I think, Chuck, you said what that was in terms of sales. But did you pick up anything on the bottom line because of the extra week?

It is hard to measure, Anthony. January itself, I mean the extra week that falls into January is basically one of our weaker months and sort of a breakeven month. You know minimal impact in terms of bottom-line.

Looking at the D&A expenses, it looks like it took a rather big jump in the fourth quarter relative to the third quarter. Is that just because of the DC, or is there anything else over there?

No. That would just be probably our new stores coming online more than anything. The DC costs have not hit yet. They will not hit until we are up and running.

Any idea where interest expense will be in 2005?

It will be less than in '04. I mean --

How much less?

Several -- you know, if you factor in the debt redemptions we have done this year and about 10 to 15 million of free cash flow, you should get there.

Okay. Do you have any preliminary figures for cash from operations for '04?

Yes, I do. We are at about 37.5 million, 30 range versus 32.7 last year, so we have seen an increase there.

Okay. All right. Thanks.

David Magee, SunTrust Robinson-Humphrey.

Good afternoon. A couple of questions. If you take the midpoint of your 2005 guidance and then you deduct the transition costs for the DC, I guess it is fair to use a number for this year of around $1.65?

Correct.

Is part of the reason why we are having this (inaudible) I guess you had the absence of what you benefited from in the past in terms of the year-end reversal of the accruals? You don't have that in 2005, and is that part of the reason why?

Yes, basically it impacted our guidance 6 cents this year, and it is sort of a go forward number. That is exactly it.

What direction are health care costs expected to go this year?

Well, we already know they are going up. But I think for the first year and several years it is on the lower end of double-digit. It is not in the teens.

Is that less of an improvement, though, than you were expecting for 2005?

Not really in the health care arena. In the worker's comp arena, we were seeing some relief there, and in our '05 costs, it will be not negative leverage by any means.

And then lastly, would you comment on the new store productivity from the class of 2004?

Well, the class of 2004 mostly were open, as we talked, about late in the year, and it is early to comment. So far, so good, but we have little to comment on from that standpoint. We feel very good that our class of '03 completed a positive year in '04 and are trending well as our classes prior to that.

Ian Corydon, B. Riley & Co.

Could you talk about how your inventory position looks for winter apparel and hard goods and if you think you can get down to normal levels by the end of the quarter?

I think we can -- there are two aspects to this. I think basically what we bought for this season, we can hopefully approach a reasonably normal level. A lot obviously has to do with what weather does between now and the end of the quarter.

However, we did take advantage of the, call it opportunistic buying arena. We have bought we think very positively some winter product that we're basically putting away for next year. We think this is part of what we do and will help us jump start the '05/'06 winter season.

Those opportunistic buys, are those primarily in winter hard goods or soft goods?

Both.

Jennifer Malone (ph), Jefferies & Co.

In terms of the high interest debt that you have remaining, how much of that is remaining, and how much do you expect to -- or how much of that is remaining in 2005?

Zero, Jennifer. We took it all in, the remaining 33.1 in Q4 of '04. We did in our revolving credit facility put in a term loan piece that is a little higher. It is at a L plus 350 below versus L plus 125 on our revolver. But we are out of the senior debt arena.

So in terms of debt repayment, it does not look like you're going to be in that arena in '05, is that true?

Well, we will continue to reduce debt with our free cash flow, and we figure in the $10 to $15 million range for '05.

Sean McGowan, Harris Nesbitt.

Under the bell. I want a couple of quickies here. Chuck, will you be making available at any point soon restated balance sheets and income statements for the '03 quarters?

The '03 quarters? It is a Q4 event, so we don't anticipate restating the '03 quarterly P&L. The balance sheets, we are still discussing. Obviously you know the carryforward would impact those.

Right. But when I was looking at, and I have not spent a lot of time on this because I have been on the call, but I am looking at the press release, it looks like the difference between the previous full year and the restated full year is not just what is different about the quarter. Am I missing something?

The difference between -- no, no. But it is cumulative on the balance sheet. I would have to look at that.

Yes, I was thinking on the income statement, but maybe I can look at it more closely and get it off-line.

Steve, can you talk about directions for 2005, new markets that you will be going into? I know there are places where you don't already have a store nearby versus places where you will be filling in?

Yes. Our plans at this time call for all our openings to be within the 10 state footprint that we currently do business in. So we are just really going to continue to develop the territories we are in. We are always doing what generally we've been doing for a long time is sort of looking at contiguous markets, and if there's a great opportunity, we may jump on that. But right now our plans are to open within the 10 states that we're currently doing business in.

But within those states, are there major population centers that you're not near but you will be at the end of 2005?

You know we are in -- I mean we are continuing to build out the Denver market in Colorado. So we've got four or five stores there now and opportunities for more, and so we're looking to develop those areas. But there is no major market that we are looking to penetrate this year.

But Denver was a new market in '04, right?

Right.

So nothing like that where --

We see great growth opportunities within still filling in the markets that we have been developing over the last number of years, and we would anticipate that there are some individual markets within the states we operate that we plan to open. But there is -- if you look at the 10 states we are in, there is no -- I don't know any major cities that were not kind of penetrated in some manner. But a number of cities that we feel we've got great growth opportunities in.

Okay. Thank you.

That will conclude our question-and-answer session. At this time, I would like to turn the conference back over to Steve Miller for any additional or closing remarks.

Well, thank you. We appreciate you all being on the call today, and we look forward to speaking with you in the future. Thank you.

Once again, this will conclude today's conference call. We do appreciate your participation. You may disconnect at this time.