Big 5 Sporting Goods Corp (BGFV) 2005 Q3 法說會逐字稿

Thank you for standing by, everyone. Welcome to today's Big 5 Sporting Goods third quarter earnings conference call.

Just a quick reminder, this conference is being recorded. Also, at this time, all participants are in a listen-only mode. We will have a Q&A session and instructions will be given at that time.

Joining us on today's call is Mr. Steve Miller, Chairman and CEO and Mr. Barry Emerson, Senior Vice President and CFO.

Now at this time I'd like to turn the call over to Mr. Steve Miller. Please go ahead, sir.

Thank you. Good afternoon, everyone, and welcome to our fiscal 2005 third quarter conference call.

Today, we will review our financial results for the third quarter of 2005, provide fourth quarter and full-year guidance, as well as an update on our store openings and our new distribution center and of course, open it up for questions.

I will now turn the call over to Barry to read our Safe Harbor statement.

Thanks, Steve.

Except for statements of historical fact, any remarks that we make about our future expectations, plans 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 involve 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 for fiscal 2004, our most recently filed Form 10-Q for our second quarter of fiscal 2005 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.

As a reminder, earlier this year we restated our prior reported financial statements for fiscal 2002, 2003, and the first three quarters of 2004. As a result, the fiscal 2004 figures discussed during this call reflect the restated figures for that period.

Because our fiscal year period shifted from a 53-week fiscal year in 2004 to a 52-week fiscal year in 2005, each of our quarterly periods in 2005 began a week later than the same quarterly period in 2004. As a result, comparability between the fiscal 2005 quarters and the fiscal 2004 quarters is challenging.

For this reason, we will provide our actual and guidance same store sales on a comparative calendar day to calendar day basis.

Finally, we will discuss our earnings guidance for the 2005 fiscal year, both in accordance with Generally Accepted Accounting Principles, GAAP, and on a basis that excludes charges for expensed related to the restatement and charges for expenses associated with the transition to our new distribution center.

We use the adjusted reporting to internally evaluate our operating performance without regard to certain financial effects of the restatement and the transition to the new DC and we believe this presentation will provide investors with additional insights into our operating results. A reconciliation of the GAAP and non-GAAP presentation of our guidance is included in today's press release, which can be found by going to our Web site, www.big5sportinggoods.com and clicking on the Investor Relations link.

Thank you, Barry.

During the third quarter we celebrated our 50th year in business at Big 5 Sporting Goods.

We enjoyed solid sales trends during the quarter, trends that I might add, have continued into the fourth quarter. However, our bottom line performance for the quarter was out of sync with our top line performance.

Several factors contributed to this disparity, primarily the significant impact of the calendar shift from the 53-week 2004 to the 52-week 2005, the costs associated with our transition to a new distribution center, and the impact of and costs associated with our restatement of prior period financial statements. We will speak to more of these issues over the course of the call.

Now, on to the numbers beginning with sales.

In the third quarter, we range the register to the tune of $206.8 million, up 4.5% from restated sales of $198.0 million in the third quarter of 20004. Our same store sales increased 3.8% for the third quarter on a calendar day to calendar day basis versus the comparable 13-week period last year.

This represented our 39th consecutive quarter of positive comp store quarterly comparisons. We have enjoyed improving sales trends throughout the year, as a reminder, we were up 1.8% in the first quarter and 2.6% in the second quarter in the calendar day to calendar day basis.

Our sales trends were consistent throughout the third quarter with July, August and September results all within a tight range of each other. Weather was generally cooperative during the quarter, which benefited sales of summer-related product.

Apparel was our strongest performing category, comp in the high single digits followed by hard goods in the mid single digits, while footwear was basically flat for the quarter. We experienced increases in both customer traffic and our average transaction size for the quarter.

Now, thus far I've been talking about sales comparisons in a calendar day to calendar day basis, which we think is the most informative way to view sales numbers. However, our earnings results are reported on a fiscal quarter basis, which normally lines up very closely on a calendar day to calendar day basis, but not this year.

As explained in our Safe Harbor Statement, fiscal 2005 is a 52-week year and fiscal 2004 was a 53-week year, and as a result our fiscal quarters are offset by a week. This one-week offset was very significant in our third quarter earnings result, and here's why.

Our fiscal 2004 third quarter began on June 26th and ended on September 26th and thus included the week of business leading into the fourth of July holiday. Our fiscal 2005 third quarter began on July 4th and ended on October 2nd and did not include the week of business leading up to the fourth of July.

Losing the high volume week of sales prior to July 4th and replacing it with a week of relatively low volume of sales at the end of September, beginning of October, cost us approximately 5 million in sales for the third quarter. This resulted in a fiscal same store comparison of 1.2% as compared to the calendar day comparison of 3.8% and cost our bottom line for the third fiscal quarter roughly a nickel per share.

Having said that, I will now speak to our margins, SG&A, and our bottom line, all on a fiscal period basis.

Gross profit margin for the third quarter was 35.6% of sales compared to 35.7% of sales for the third quarter of 2004. Our point of sale margins improved 20 basis points versus the same quarter last year.

Like our sales trends, our point of sale margin trends have improved over each quarter this year.

Gross margins were materially impacted by an increase of $2.3 million, or 100 basis points in distribution center costs, primarily associated with a transition to our new DC, as well as increased trucking expenses reflecting higher gasoline prices. This impact was partially offset by the benefit of an increase of $1.4 million, or 70 basis points in cost capitalized into inventory.

Our SG&A expenses increased to 27.9% of sales from 26.3% of sales in the third quarter of 2004. This increase reflected $1.9 million, or 70 basis points of expenses related to the restatement.

Store-related expenses increased by $2.9 million, or 70 basis points during the third quarter, attributable mainly to an increase in store count and higher labor and benefit costs.

One other unusually item effecting results in the third quarter was our recording of $1.8 million in proceeds from the settlement of a claim related to the required relocation of one of our stores following the filing of an eminent domain action by a city redevelopment agency. Of this amount, $1.4 million was recorded as other income and 0.4 million was used to offset expenses incurred, primarily legal fees.

Looking at our bottom line, net income during the third quarter was $7.2 million, $0.32 per diluted share versus restated net income in the third quarter of 2004 of 8.5 million, or $0.37 per diluted share.

At this time, I will turn the call over to Barry, who will briefly review our nine-month results and speak to our balance sheet, our capital expenditures, our cash flows and provide guidance.

Thanks, Steve.

Briefly reviewing the nine-month results, sales have risen 5.4% for the 2005 year-to-date period to 595.1 million from 564.6 million during the first nine months of 2004. Same store sales increased 2.8% for the first nine months of 2005 versus the same 39-week calendar period in fiscal 2004.

On a fiscal quarter basis, same store sales increased 2.2% during the first three quarters versus the first three quarters of fiscal 2004.

Looking at income for the nine-month period, earnings per diluted share were $0.87 for the first nine months of 2005 versus earnings per share of $1.06 for the same period in 2004.

Results for the first nine months of fiscal 2005 include charges of approximately $0.06 per diluted share for expenses directly attributable to the Company's transition to its new distribution center, and $0.10 per dilute shared for legal, audit and other expenses related to the Company's restatement of prior period financial statements. Results for the first nine months of fiscal 2004 include a $0.02 debt redemption charge.

Turning to our balance sheet, we believe our inventories at the end of the third quarter were well-positioned. Total chain inventories amounted to 229.2 million at the end of the third quarter, up 31.8 million from 197.4 million at the end of the third quarter of 2004.

Our inventory levels year-over-year were up a little more than usual due to several factors. First, this year's third quarter ended a week later on the calendar and therefore reflected more of the favorable buildup in inventory for the holidays.

Second, we had an increase in cost capitalized into inventory of over 3 million this year, and, third, a slowdown at Southern California shipping ports during 2004 third quarter effected our inventory levels at the end of that period.

We feel our inventory balances are appropriate, given that we are operating 16 more stores at the end of the third quarter of 2005 compared to the end of the prior year period.

Looking at our capital spending, Cap Ex totaled 7.2 million for the third quarter and 25.8 million for the first nine months of 2005. This reflects year-to-date capital expenditures of 18 million for our new distribution center in Riverside, California, which has now been substantially completed.

On our last call, we indicated that we expected our total spend for the new DC to be approximately 23.3 million. This did not include roughly 3 million in leases that we had anticipated entering into for new DC equipment such as forklifts, extendible conveyers and the like.

We have since decided to purchase rather than lease this new equipment. As a result, this brings the total cash outlay for our new DC to 26.7 million.

The balance of our capital expenditures for the first nine months was primarily for store-related remodeling and new store openings. We expect capital expenditures for the fourth quarter of this year to range from 4 to 6 million, mainly for normal store maintenance and new store openings.

The Company anticipates opening 15 net new stores for 2005, of which ten stores are expected to be open during the fourth quarter.

We registered positive cash flow from operations of 15.3 million for the first three quarters of 2005. The Company has historically generated healthy free cash flow and we expect that to continue.

We plan to use the cash to benefit the Company and our stockholders, for example, by reducing debt and paying our quarterly cash dividend.

Our total debt of 100.1 million at the end of this year's third quarter, was down 5.5 million from 105.6 million as of the end of the third quarter of 2004. This debt reduction was accomplished on top of the funding of 24.7 million for our new distribution center and 6.4 million in shareholder dividends.

Now, I'll spend a few moments on our fourth quarter and full-year guidance. Please remember that fiscal 2004 was a 53-week year, with the fourth quarter having 14 weeks, while fiscal 2005 is a 52-week year with the fourth quarter having only 13 weeks.

The fourth quarter sales guidance we are providing is on a 13-week calendar day to calendar day basis and the full-year sales guidance is provided on a 52-week calendar day to calendar day basis. With that said, we expect to realize same-store sales growth in the low to mid single-digit range for this year's fourth quarter versus the same 13-week calendar day to calendar day period last year.

We expect these sales will result in earnings per share in the range of 40 to $0.44, including an anticipated charge of approximately 6 to $0.07 per diluted share for expenses directly attributable to the transition to our new distribution center.

For the 2005 full-year, we expect to realize same store sales growth in the low single-digit range, again on a calendar day to calendar day basis. We expect these sales will result in earnings per diluted share for the 2005 fiscal year in the range of $1.27 to $1.31, including charges of approximately 12 to $0.13 per diluted share for expenses directly attributable to the transition to our new distribution center and $0.10 per diluted share for legal, audit and other expenses related to the restatement of our prior period financial statements.

Excluding those charges, we expect full-year 2005 earnings per diluted share to be in the range of $1.49 to $1.54.

Now, I'll turn it back over to Steve to speak about our distribution center construction, new store openings and to provide some flavor on our fourth quarter to date.

Thanks, Barry.

We opened four new stores, one each in Washington, Nevada, California and Colorado during the fiscal 2005 third quarter. We closed one store in Long Beach, California during the third quarter. That store had essentially been replaced by another Long Beach store that we opened at the end of 2004.

During the fourth quarter to date, we have opened four additional stores, two in California and one each in Colorado and Utah. This brings us to 318 stores as we speak today.

We anticipate opening six additional stores over the next four weeks, two in California, two in Arizona, and one each in Oregon and Washington. This will give us a total of 15 net new stores for fiscal 2005, and will result in a year-end store count of 324 stores.

We believe our store growth in 2006 will be closer to 20 net new store openings.

Additionally, the transition to our new distribution center in Riverside, California is proceeding positively, indeed ahead of plan. A move of this magnitude is obviously an enormous task.

Our number one priority has been and will continue to be not to disrupt the flow of product into our stores. Our team has been doing a phenomenal job in this regard, as evidenced by our very positive sales performance.

Construction on the new DC is complete with the exception of a truck wash and fuel island. We began receiving product at the new facility two months ago and as of today, we are receiving between 40% and 50% of our incoming merchandise at the new facility.

During early October 2005, we began shipping product from our new distribution center and systematically transferring inventory from our existing DC to our new facility. We continue to anticipate that this transition will be completed and we will be 100% operational at our new DC during the first quarter of 2006.

In order to ensure that we complete this transition without disruption, we have had to devote significant labor resources to this task, including a large amount of overtime by our hourly employees. As a result, the move is costing us a little more than we previously anticipated, but we believe the benefit of servicing our stores so well during the transition will justify the expense.

One major component of the transition cost has been the fact that we are paying rent and now operating costs at two distribution facilities. In that our lease for the existing Fontana facility expires during the first quarter of 2006, we expect all costs related to that facility to go away following the first quarter.

We are very excited about the long-term benefits that we expect to receive throughout our business from the new DC. Primarily, we will have more space and an extensive conveyer system that will greatly enhance product flow through our distribution center. We believe this will result in significant labor efficiencies at the DC.

With this move, we will also realize labor efficiencies at the store level, in that product will arrive at our stores with price stickers preattached. Not only will this save labor at our stores, but this will also enable product to reach our store shelves more quickly.

This new DC should serve our needs comfortably for the next eight to ten-plus years.

Before we open it up for questions and I get the question on this, I want to update you on our fourth quarter to date. It's nice to be able to report that we are off to a very positive start to the quarter.

In October, we enjoyed our strongest comp store period of the year. The positive trends have continued through the first week and a half of November.

We love the trends, but needless to say, the back half of the fourth quarter is a whole lot more significant than the front half.

In summary, this has been a very eventful and at times frustrating year for us. Throughout 2005, our core business has remained very strong, as evidenced by our healthy store level contributions, driven by increasing same store sales and point of sale margins.

Our reported fiscal results for this year have been complicated by unusually expenses relating largely to our distribution center transition and to our restatement, as well as the calendar shift issues that we have discussed. We look forward to moving away from these accounting issues, calendar shifts and unusually expenses that have effected our reporting results during 2005 and to returning to the relatively simple story that has distinguished us over our 50 years in business.

We are excited to be off to such a strong start during the fourth quarter. We certainly feel we are well prepared for the important holiday season and we look forward to a strong finish to the year and continuing our record of growth into 2006 and beyond.

With that, I'd like to turn the call back to the Operator for Q&A.

Thank you very much, sir. [OPERATOR INSTRUCTIONS]

We'll take the first question from Mitch Kaiser of Piper Jaffray.

Hi, guys. I was wondering, how much do you anticipate the calendar shift to cost you in terms of EPS in the fourth quarter? Is that roughly a nickel?

No. In the fourth quarter it should be relatively neutral to EPS, given, it's 13 weeks against 14 weeks, but the week that drops off is essentially a low volume week at the start of the quarter a year ago, and will not have significant EPS impact in the fourth quarter.

So that would have been the first week of October that you're getting it it's not the last week of December.

And then just in terms of flavor for gross margins and SG&A expenses for the fourth quarter, just directionally, I was wondering if you could comment on this?

Yes, Mitch. This is Barry Emerson.

We expect to continue to see a ramp-up in our point of sale margins here in the fourth quarter, but that's going to largely be offset by continued costs related to this DC transition. So the gross margin expectation in the fourth quarter would be pretty consistent with what we did in the third quarter.

Okay.

In terms of the SG&A rate, I would see that declining a little bit from the rate that we had in the third quarter, primarily because of just the ramp-up in the revenues here.

Okay. But on a year-over-year basis, that's good SG&A expenses are going to be going up.

On a year-over-year basis, actually we expect the G&A rate to tail down just a little bit.

Okay. I've got you. Thank you. Good luck.

Thank you.

Moving on, we'll next go to Jason West of Deutsche Bank.

Hi, thanks a lot.

I was wondering if you guys could talk a little bit about the SG&A line? It seems like year-to-date, especially in the current quarter, that it's been a bit higher than we expected. I mean if you exclude the legal costs and the DC expenses, your operating margins are still down quite a bit and it seems like most of that's coming on the SG&A and it seems a little surprising, especially considering the strong comps that you're doing, and so I wonder if you could talk a little bit about if there's anything unusual going in SG&A, are there any DC costs or anything that you're not excluding? Just a little color there.

Yes, sure, Jason. You pinpointed it.

Certainly the largest element is the restatement and that's barely impacting our SG&A line. We are also experiencing creeping expenses in certain other areas, and we're addressing those. I mean we're feeling pain on some of our, the administrative support that we have that's helping with our restatement.

Again, what we've reported here in terms of the EPS effect really are the direct costs and we've gone to pains to highlight that as being directly attributable to the restatement. There are, you know, quite a bit of indirect related costs that's effecting us as well over time for support people, on the restatement, considerable.

We're also being impacted a little by some rent escalations as we redo some of the rents of our older stores. We had some pretty sweetheart rents and those are effecting us a little bit.

We've also got, again, associated with the restatement, we've got some recruiting costs and things like that that are impacting us. But we think that as we go forward, get this restatement behind us, that we're going get back to a normalized level on the SG&A side.

Additionally, I don't think one should minimize the impact of the calendar shift as to how it relates to your perception of the SG&A expenses. If we, if you put back $5 million effectively into sales or take it out of last year's results, the numbers get a lot better.

But in the second quarter, the SG&A was up quite a bit there as well and the operating margin was down and I would think that the shift would have helped you quite a bit in the second quarter. But it didn't seem to anyway. I was sort of looking at more sort of year-to-date.

Again, in second quarter, we had other issues in terms of workers comp comparisons with the prior year. Unfortunately, it's a muddy picture given all the issues of the year and the accounting changes, calendar shifts and the unusual expenses.

Right, right. Okay.

If I could ask one more, just on the sales line. Year-to-date it looks like total sales are up about 5.5% or so. With comps up about 3% and square footage up about 5 or 6%, just wondering, wouldn't that sales number be a little bit higher? Is there something going on with new store productivity or am I missing something there?

Well, I think you're missing that the comps as reported fiscal year up 2.2%, and, again, that calendar shift is, I think, a piece of what you're missing.

Okay. So I just thought that net year-to-date it should have washed out, though, because you got the July 4th in the second quarter.

Yes, but we're still shifting. I mean there's still a shift in the weeks, which as opposed to speaking to the July 4th, the week that is offset, we basically have this year including the last week of the first third quarter, which is one of our softest weeks of the year, end of September, first of October, and offset by the week from right after Christmas over New Year's in '03, '04 that is a very strong sales week, and that's why the comp store sales on a fiscal basis is 2.2% whereas on a calendar basis for nine months it's 2.8%. So we basically lost the benefit of a pretty powerful week.

Okay. All right. Thanks a lot.

You're welcome.

We'll next move to David Magee with SunTrust Robinson Humphrey.

Yes, hi. Good afternoon. Just a couple of questions, if I could.

Number one, what do you anticipate with regard to transition costs next year?

DC transition costs?

Yes, uh-huh.

Probably $0.02, first quarter only impact.

Okay. So about $0.02.

Then also, just some learning curve, kind of as we bring this thing up, David, as we indicated, the rent on the old facility terminates here at the tail end of the first quarter, so we expect the expenses in the first quarter and then certainly to tail off for the balance of the year.

Okay. And what's happening on the health cost side of things? Are you seeing better numbers there?

We're seeing not in a sense better numbers. We're seeing a slowdown in the ramp-up of costs of the health and welfare.

It's still an issue that we're, that's hurting us in terms of we're not able to leverage it at our sales rates. And something that we'll continue to try to look at and address going forward.

Is there a reason why we should be optimistic regarding next year in that area as being a year which that cost may come down?

Again, I don't know that that cost can come down. We're hopeful of being able to keep it at a more flat rate in terms of a percent of sales.

Were you surprised to see footwear being flat in addition to comps in the quarter?

I'm sorry. I missed the question.

Were you surprised to see footwear flat in terms of same store sales during the quarter?

I suppose slightly surprised. I mean we knew we were comping up against some very powerful promotions that we had in our product base the prior year.

That being said, it seems like perhaps we experienced a bit of the softness that many have spoken to regarding back-to-school sales. That being said, our shoe business has picked up steam in the fourth quarter and is performing very positively as we speak.

And then lastly, do you have a Cap Ex number yet for next year?

No, David, we don't.

Okay. Thanks a lot.

We'll next take a question from Rick Nelson with Stephens.

Hi, guys, it's Paul for Rick. Rick's in New York right now.

Question on the fuel cost escalation that's in your inventory cost of goods sold. Assuming fuel came down a little, you've got, I think you said 160 days inventory approximately. You really wouldn't see any benefit until maybe end of first quarter, second quarter next year, is that fair?

Repeat the question for me, Paul, would you?

If the fuel costs that we've seen in the third quarter are, assuming that fuel reverses itself a little and the costs actually come down, because you have 160 days inventory in your DC, I think you mentioned last call, you wouldn't start to see any benefit from that for approximately six months, is that fair?

Yes, that's actually a good way to look at it. Yes, I mean we are capitalizing costs related to our warehouse and certainly that's an important element but it's not, we're not, it's not a dollar for dollar capitalization.

On our DC, we're actually applying a utilization factor to our new DC so that we're not over capitalizing costs. So I think you're right, but it won't be dollar for dollar.

Okay. Thank you.

Back to the footwear question, is there any other reason that footwear would be soft, like did you have all the brands you wanted to have? Were you in stock?

Some of the people we were talking to in the marketplace say footwear's been pretty strong. Is there any unusual reason that would have been down just for the third quarter?

Well, it was flat, flat for the third quarter, and I would say no unusual reason, just, as we said, just comping against some strong promotions that we didn't replicate this year for the year-to-date, the footwear business is very positive and current trends are very positive.

Okay. And then in the legal and audit department for Q4, the $1.27 to $1.31 GAAP, that doesn't include any special legal and audit extra costs that we should be pulling out of there, or--

You know, Paul, we've got, what we've done, unfortunately, is since we've been focused so hard on this restatement, we have fallen behind on our Sarbanes-Oxley compliance which was scheduled to be over two and a half quarters, and so we're pushing real hard to address all of that in the fourth quarter. So we're still going have considerable costs in the fourth quarter related to audit and SOX and so on, but they're not formally classified as restatement related.

Okay. But there are some one-time kind of charges in the fourth?

Yes, yes. I mean I would say that it's, well I don't know if I'd use one-time, but I would use it's been accelerated and classified all in one quarter, unfortunately.

Right, okay. And then obviously the 1.27 to 1.31 includes those $0.09 of gains in the third, is that correct?

Right. $0.09 of gains in the third.

You talked about the gain, the one-time gain for the store relocation settlement.

Yes, it's all-in. It's all-in.

Okay. Thank you very much.

Sure.

We'll next move to Sean McGowan with Harris Nesbitt.

Hi, guys. A couple of questions.

First, is there anything you can tell us at this point about how 2006 would lay out, you know, on the calendars, anything weird going on there, any shifts that would effect the outlook for '06?

No, I think from a calendar basis, we'll be happy to say it's 52-week against 52-weeks, so I don't sense that there's any calendar issues. We obviously have the completion of our DC move in the first quarter and beyond that, things ought to begin to get back to normal, which we'll be thrilled with.

So July 4th would be in the same quarter next year as it is this year?

July 4th will be, yes, it seems like July 4th without having a calendar in front of me--

Probably after July 3rd next year. I just wanted to make sure there wasn't some shift that happens again.

I mean quite honestly I don't have a calendar in front of me. Easter may or may not shift. I don't know that.

I'll just-- another question, then. Regarding the store count, don't I recall that at the last conference call you were expecting to open 16 stores for the year, is that right, and if so, what happened?

I think we said 15 to 17 in our last conference call, and what happened is two stores that we were scrambling to get open didn't make it and are going to roll into next year.

Okay. Would that, if you had a certain plan in mind for 2006, would this effect that plan? I mean would you now have those two stores plus what you originally expected to have in '06, or not?

Arguably these will be plus for '06, but we're not quite as fine-tuned to how they preslice the number, but the fact that we'll have these stores rolling over will get us a head start to our target in '06, yes.

Open early in '06?

We should be a little earlier in terms of our ramp-up of stores in '06, absolutely.

I just meant these two particular stores will open early in '06, then?

I can't speak to, on one of them. We just have a construction issue where the landlord is moving very, very, very slowly and a bit out of our control. The store will come aboard. We wished it was open, but when it will open, I can't speak to precisely.

Okay. A final question. As you look now back with most of the work done on the distribution center and excluding the fact that you decided to purchase some things instead of leasing them, did the total cost of opening the center exceed what your estimate was by a lot?

Well, not our, I mean our estimate maybe from day one when we first mentioned an estimate, which was just rather preliminary, but in terms of where we thought we would have been for the last six, nine months or a year, I think we came in reasonably on target.

Okay. All right. Thank you.

We'll next take a question from Anthony Lebiedzinski with Sidoti & Company.

Good afternoon. Couple questions.

You mentioned that apparel was pretty strong up, comps were up in the high single digits. Any reason that you think that that occurred and whether or not that has carried over into Q4 so far?

Well, I think it occurred because of line product assortments combined with weather that was positive and just nice summer weather, so we had nice sales of summer-related apparel. Frankly, it hasn't carried over into Q4 because in Q4, although our performance trends are extremely strong, we've, we had cooler winter weather, an earlier start to winter last year. So apparel sales and winter-related apparel sales have softened more than compensated for by strong performance in other categories.

Like footwear, right, you had mentioned earlier?

Footwear, footwear and hard goods.

Okay.

Hard to watch our, you know, take too much stock in how our performance by category necessarily is in any given quarter.

Now, with respect to the SarbOx costs that you'll start to accrue here in Q4, any idea of the impact that you'll have here?

Yes, Anthony, I mean the overall costs, you know, that we would anticipate incurring and I haven't isolated I guess SOX independently, but our overall legal and audit costs, we expect that to be probably in the range of about 1.6 million to 1.7 million or so. So just, just about even with what we had in the third quarter, something like that.

Mm-hmm. Okay. And I think you had mentioned earlier about the '05 Cap Ex being a little bit higher than you had projected. So what is the total Cap Ex budget now for '05, if you could just tell us?

Yes, we're at about 26 million to date and we're looking at another 4 or 5 in the fourth quarter.

Okay. And for '06, you had mentioned that you haven't set a budget yet for next year, but other than the 20 new stores that you're planning next year and regular maintenance, Cap Ex, is there anything else that we should think of in terms of capital expenditures?

Nothing that, nothing really out of the ordinary. I think we're looking at the new remodel, the maintenance and the new stores and so on, and our Cap Ex typically has run roughly 11 to $13 million a year for those kinds of items, and then you might, we might have some MIS equipment, et cetera to add on top of that.

Okay.

No major projects.

Okay. And lastly, given that your stock is pretty much near its 52-week low, has the Board of Directors thought about a share buy back at this point here?

There's been conversation, and we're certainly prepared to act and could in an expeditious manner if we chose to do so.

Okay. Thank you.

We'll next take a question from Adam Wise with Chilton Investment Company.

Hi, good afternoon.

Hi.

The two items that were a boost to income this quarter, should we treat those as more of a recovery of past costs or are those one-time benefits?

Well, the one, which was the Glendale or our store, eminent domain, was, it's really, for the most part a trade for loss of future earnings, given that the store was a loss of goodwill, I guess is the way to think of it.

And Adam, we've looked at that particular one and our store that this relates to is, you know, the revenues for that store are actually down fairly dramatically from what the original store did a year ago, and so clearly our results are being impacted from a sales and profit standpoint because of that relocation.

Now, we're not reflecting any of that, that's basically just running through results because what we've done is classified the 1.4 million in other income, kind of below the operating line, and the only thing that we've included above the operating line is the $400,000 in legal costs, et cetera, that we incurred related to this claim.

And how about the other item, the revised inventory cost capitalization?

Yes, the inventory cost cap is kind of a normal item that we used to record that only on an annual basis in December and with the restatement, we're now recording that adjustment on a quarterly basis, and that's, you know, the increase in that cost cap, if you think about it, we're seeing an increase in the cost of our distribution center and the whole idea here is as those costs go up, you would capitalize some of those costs as an offset and put those costs in inventory.

So it's not just like it's a one-time benefit. I mean what we're really doing is offsetting otherwise higher costs by putting some of that into the inventory in accordance with GAAP. So that's not a one-time item. These are going to continue on a quarter-to-quarter basis.

Next year when you only have one DC, are you going to sort of experience a reversal there?

It's an interesting question and we're considering that. It really, we'd like to think that with the higher costs this year, as we mature and this new DC comes online, that we would have lower costs, and we don't know for sure, but it could easily be the scenario.

Just trying to get a sense of how to look at the year because you talk about your guidance, 1.49 to 1.54 excluding some expenses, but you don't also exclude these two items in the third quarter. So is that how you look at the year?

Well, we're not going to include the effect, yes, that's, I mean you can argue that you can exclude the Glendale, but I guess I can argue that we're really experiencing and have experienced for the whole year the negative effect of having to move that facility.

On the inventory cost capitalization line, that's really a normal part of our business. It's going to continue on a quarter-to-quarter basis and so it's something that will ebb and flow depending on the cost pool and depending on the level of our inventory.

Very good. Okay. Those are my questions. Thank you.

You're welcome.

We'll next move to Jennifer [Malone] with Jefferies & Company.

Thank you. I was just wondering if you can get past all of the issues and additional costs you face during 2005, is it reasonable to assume that in 2006, you can get back to about the 9.4, 9.5% operating margin rate you averaged in '02, '03, and '04, aside from the first quarter additional distribution center costs?

We haven't provided the guidance for '05, so it may be premature to, for '06, to answer that. I see no reason that as we get away from and put the issues of '05 behind us that we would not return to our historical bottom line performance and continue to grow the bottom line moving forward.

Our store contribution line is healthy and growing this year, and I think when we remove all the noise of '05, the numbers will speak very positively.

Maybe looking at it in another way, in 2006, do you expect additional costs related to the restatement to continue, or do you think that they will smooth out or disappear?

Well, we clearly think that the restatement costs themselves will disappear. Now, we're clearly going to have to add additional resources and so on to our accounting department to make sure that we're, you know, we're doing everything we need to be doing so that this doesn't happen again.

But, again, the Company's fundamental business model has not changed. It's been disrupted clearly in 2005, but with the, in all the Cap Ex behind us on the DC, hopefully some efficiencies coming out of that new DC, the restatement behind us, again, hopefully, I mean we don't expect that the financial model to have changed dramatically at all.

Okay. Thank you.

We'll next take a question from Chris Vezio with Susquehanna Group.

Good afternoon, gentlemen. I just have a couple questions.

I guess first, I was wondering maybe if you can look at maybe the extra week in the fourth quarter of last year and possibly what that contributed to your sales for the fourth quarter of last year. Was it roughly, I'm just kind of going back from memory, roughly about 15 million or somewhere thereabouts?

We don't have that, have that in front of us, but I think that sounds, 14, 15 million may sound reasonable.

Chris, if you just take this year's sales divided by the number of, the number of weeks, you get on an average, you get about 14 to 15 million. So that's ball park.

Okay. And then on the gross margin, I think someone had asked a question about just kind of looking at the gross margin line for the fourth quarter, and you had indicated that you see some improvement in the merchandise margin in the fourth quarter. I think you saw some improvement in third quarter as well. Is there anything else baked into the gross margin line that would offset that improvement outside of the transition to the new distribution center? In other words, excluding that?

I don't believe so.

Okay. And then on the SG&A line, going off a previous question, you had mentioned that you could see an opportunity to get some leverage on the SG&A line during the fourth quarter. Is that, I mean I think in the fourth quarter of last year saw some nice leverage I guess due in part to the fact that you had the extra week.

When you talk about leverage, are you throwing in that extra week from last year, or if we strip it out, is there still the opportunity for leverage on a like-like basis in the fourth quarter?

Chris, do you have another question while I go ahead and quickly calculate that?

Sure. And I guess just on the October numbers, certainly encouraging to see the improvement. I was just wondering maybe if you could walk through during the fourth quarter of last year, was there any measurable difference between October, November, December in terms of comp performance in the year-ago period? Or is it pretty flat, pretty even?

No, it's-- October was a strong period for us, so we're pleased these were comping against strong performance a year ago and we softened a little bit, as I recall, in the middle of the quarter, and the start of the holiday season, and then came on pretty strong toward the back half of the period.

Okay. And then on new store leases, I think you had made a comment about some of the renewals that you're doing for new stores, some of the costs coming a little bit higher year-over-year, relative to prior lease agreements. When you look at new store contracts and leases, are they coming in somewhat higher as well than what you would expect?

Well, I'm not sure about we would expect. I mean we are seeing, there is a, I guess a creeping of occupancy costs associated with our new stores.

Okay. And then that's pretty much it for me. If you have I guess the answer to the question regarding the SG&A line, that would be very helpful.

Chris, you've got, when you say the leverage, we've clearly got, not only do we have the leverage on the, I mean I think you are kind of looking, I mean if we're looking at it as a percent, I think you get the same answer. We've got the extra benefit of the 14, the 14 weeks on the revenue side and we got the benefit on the 14 weeks, and we got the costs on the 14 weeks, and so I think if we're doing this on a percent basis, we are experiencing some leverage for the fourth quarter.

I think maybe the way to look at it is maybe we improve a little bit because we are knocking out the, a below average week in the fourth quarter because the week that falls out of the fourth quarter is basically in October, September, October week, which logically would be a below average week, obviously when you factor in the December weeks and the volume of the December, so on a percent of sales basis, we probably benefit a fraction.

Okay. All right. Thank you very much. Appreciate it.

Sure.

We'll now take a question from Jason West with Deutsche Bank.

Hi, guys. Thanks. I had a couple quick follow-ups.

Just one on the inventory cost capitalization benefit this year, or this third quarter versus last year, I'm assuming that flows through gross margin?

Yes it does.

Okay. And then separately, on D&A, can you give us a sense what your annual run rate is on D&A once we get the DC up and running, or is this quarter, since the DC is pretty much up and running, is this fully reflecting that in the D&A now?

Jason, it's actually not. I mean we only had, we started depreciating the new DC really only in September and so you still have some, we don't have a full effect in the third quarter and so I, and we really haven't done a detailed analysis of the effect of the D&A for next year.

What would be the depreciable life on that facility?

Ten years.

Ten years, okay. And then last one, I think you mentioned you're going to be adding some resources to the accounting department. It was my understanding you guys had already done that earlier this year, so can you explain a little bit what's going on there?

Sure. Well, we don't, we haven't added, the only person added, frankly, has been myself, and we've actually lost a few people out of the accounting department. So right now we're actually running well below where we were from a head count standpoint at the beginning of the year.

Now, we've supplemented that with the external consultants who are experienced with SEC reporting and CPAs and things like that and then we've brought on some temporary help, but we are actively seeking some qualified people, you know, to bring on staff at the senior accounting level and in fact, have hired one individual who is going to start later this month.

Okay. Great. Thanks a lot.

Sure.

That is all the time we have for questions. At this time, I'd like to turn it back to Mr. Steve Miller.

All right. Well, we certainly thank everyone for their interest, wish everyone a very happy and healthy holiday season and look forward to speaking to you soon. Thank you.

That does conclude this conference call. Thank you all for joining us and have a wonderful day.