Big 5 Sporting Goods Corp (BGFV) 2007 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Big 5 Sporting Goods First Quarter 2007 Earnings Conference Call. Today's call is being recorded. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. (Operator Instructions).

With us from the company, we have Steve Miller, President and Chief Executive Officer and Barry Emerson, Chief Financial Officer. At this time, I'd like to turn the program over to Mr. Miller. Please go ahead, sir.

Thank you. Good afternoon, everyone, and welcome to our fiscal 2007 first-quarter conference call. Today we will review our financial results for the first quarter of 2007 and provide general updates on our business as well as provide guidance. At the end of our remarks, we will, 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 may 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 and current periods to differ materially from forecasted results. These risks and uncertainties include those more fully described in our annual report on Form 10-K for fiscal 2006 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.

Thanks, Barry. We are pleased to have begun our fiscal year with solid first quarter results. We increased same store sales, significantly improved product and gross margins, and leveraged selling and administrative expenses. Our business continued to generate healthy cash and we delivered meaningful earnings growth for the quarter.

Now to provide first quarter highlights. For the quarter, we rang the register to the tune of $217 million, up 4.7% from sales of $207.2 million in the first quarter of 2006. Our same store sales increased 1% for the first quarter. This was our 45th consecutive quarter of positive quarterly comp store growth and came against a 5.3% comp store performance in the first quarter last year.

Our sales gains were driven by a modest increase in both customer traffic and average transaction size. Each of our three major merchandise categories, footwear, hard goods, and apparel, also comp'ed positively during the quarter within in a relatively tight range. If you are keeping score, footwear was our strongest performing category, up in the low single digits, followed by apparel and hard goods, both of which were positive but up less than 1%.

Each of these categories and our overall comp store performance were impacted by lower sales of winter-related products than last year as weather comparisons for the quarter were, on the whole, unfavorable. However, although our winter business was down for the quarter, the timing of our winter sales this year versus last year greatly benefited product margins which improved approximately 80 basis points over the prior year. This is because winter sales comparisons were very strong at the start of the quarter when the margins were highest and then declined over the middle and particularly the end of the quarter.

Recall that last year, our markets had a blast of winter weather late in the first quarter which drove late season winter product sales at discounted prices. Our margin performance this year also benefited from positive gains in many of our individual product categories.

Barry will talk to our gross margin and expenses in a moment. Before he does that, I will provide you with a brief update on our distribution center and store openings. We continue to be very pleased with the productivity and efficiency at our new distribution center. Productivity levels allowed us mid-way through the first quarter to transition from a six day weekly operation to a five day operation.

This change will result in labor savings in various operational and administrative at the DC as well as significantly reduce wear and tear on our equipment as our conveyors are now running for fewer hours per week. We will also benefit from reduced energy and utilities costs.

During the first quarter, we opened stores in The Dallas, Oregon, and Denver, Colorado, and we relocated our West Covina, California store. We also closed our Monterey, California store in preparation for its relocation during the second quarter. We expect to open four new stores during the second quarter including our new Monterey location. We continue to anticipate opening approximately 20 net new stores during fiscal 2007.

At this time, I will turn the call over to Barry who will provide more information about the quarter as well as speak to our balance sheet, our capital expenditures, and our cash flows.

Thanks, Steve. Our gross profit margin for the first quarter improved to 36.0% of sales from 35.4% of sales for the first quarter of 2006. This improvement was driven primarily by the 80 basis point increase in product selling margins that Steve discussed, and a $2.2 million decrease in distribution center costs due to additional costs incurred in the first quarter of last year related to completing our transition to a new facility. These favorable impacts were partially offset by a $2.4 million decrease in distribution center costs capitalized into inventory compared to the same period last year.

Our selling and administrative expenses as a percentage of net sales were 27.6% in the first quarter of 2007 versus 27.7% in the first quarter of the prior year. Audit and legal fees decreased $1.3 million from the prior year due to additional expense incurred in the prior year to complete the Company's internal control and financial statement audits.

Also, efficiencies created by our new distribution center allowed us to leverage store related expenses for the quarter. These benefits were partially offset by a $1.1 million increase in advertising costs, primarily to support sales and store growth.

Depreciation and amortization expense decreased $0.2 million for the first quarter of 2007 primarily due to a [technical difficulty] depreciation expense in the prior year associated with operating two distribution centers during the first quarter of last year, partially offset by an increase in store count.

Interest expense for the first quarter decreased by $0.4 million, primarily reflecting lower average debt levels compared to last year, partially offset by slightly higher interest rates.

Looking at our bottom-line, net income for the first quarter increased to $7.6 million or $0.33 per diluted share from net income in the first quarter of 2006 of $5.9 million or $0.26 per diluted share.

Now turning to our balance sheet. Total chain inventories amounted to $233.5 million at the end of the fiscal 2007 first quarter, up $6.3 million from $227.2 million at the end of the fiscal 2006 first quarter. Excluding capitalized costs, our inventories on a per store basis were down approximately 2% from last year. We believe our inventory is well positioned to support our sales growth.

Looking at our capital spending, CapEx, excluding non-cash acquisitions, totaled $2.2 million for the first quarter of fiscal 2007, primarily reflecting expenditures for our new stores, store remodeling, and distribution center. We expect capital expenditures for the remaining three quarters of the fiscal 2007, excluding non-cash acquisitions, to range from $15 million to $16 million, primarily to fund the opening of approximately 19 additional new stores, store related remodeling, distribution center and corporate office improvements, and computer hardware and software purchases.

We generated cash from operations of $16.6 million for the fiscal 2007 first quarter compared to $11.0 million for the first quarter of 2006. The Company has consistently generated healthy free cash flow and we look for that to continue. We evaluate the best use of our free cash flow on an ongoing basis, including, for example, paying shareholder dividends, reducing debt or repurchasing the Company's common stock.

Our total short and long-term debt at the end of the first quarter was $67.5 million, down $23.6 million from $91.1 million at the end of the first quarter of fiscal 2006. We were able to meaningfully reduce our overall debt levels despite opening 18 new stores and funding $8.2 million in shareholder dividends and $1.3 million in hare repurchases since the end of the first quarter of fiscal 2006.

Now I would like to turn the call back to Steve.

Thank you, Barry. Before Barry discusses guidance, I would like to provide some information about our second quarter sales trends to date. Sales for the first two weeks of the quarter were positive and essentially in line with our internal expectations.

Sales for the past few weeks, since mid-April, have been below our internal plan. Now, in that we moved a promotional [inaudible] out of April and into May, we anticipated that sales would be down for this period. However, we did not anticipate they would be down as much as they have been. We're continuing to evaluate the factors that may be contributing to this.

Evaluating our recent sales trends is somewhat challenging due to the shift of promotional activity that I just mentioned as well as the calendar shift of the Easter holiday, which was a week earlier this year than last year. Ideally, we would have had a couple more weeks before providing guidance to observe our trends in order to analyze what we were just experiencing is a short term blip or something more significant.

What I can tell you is that we feel very good about our merchandise and promotional plan for the back half of the second quarter which contains the important Memorial Day and Father's Day holidays as well as pre-Fourth of July sales. That being said, we think it is prudent that the second quarter guidance we are providing at this time reflects the recent softness in our sales.

With that, I will let Barry provide the specifics on our guidance.

Given the recent softness in sales that Steve discussed, we expect to realize same-store sales growth in the flat to low single digit range for the second quarter of fiscal 2007 and earnings per diluted share in the range of $0.25 to $0.33.

Compared to the prior year, second quarter earnings guidance reflects lower distribution center expenses of approximately $400,000 offset by a reduction in inventory cost capitalization of approximately $900,000 and higher administrative expenses to support our financial reporting initiatives.

Because the current softness is in our sales has only developed over the past few weeks, we are continuing to evaluate possible contributing factors and we are not in a position at this time to change our assumptions about the third and fourth quarter sales. For that reason, we continue to expect normal sales growth over the back half of the year which should result in full-year same store sales growth in the low single digit range and earnings per diluted share in the range of $1.47 to $1.57.

Operator, I think we are now ready to turn the call back to you for q-and-a.

Thank you. (Operator Instructions).

Our first question comes from [David Magee], [Centra, Roberts and Humphrey.]

Good afternoon.

Hi David.

Just a question on the recent softness. Can you talk a little bit more about the categories that are seeing the softness or anything different geographically that you're seeing?

It's pretty current to try dissect to that degree. I think given the shifts in our advertising, current trends in individual categories to speak of them, could be misleading because they can change quickly depending on how we're driving the product.

I think understanding your efforts to try and drill down a little bit, I mean, maybe to provide a little more color. I mean, we don't see any categories that are running way soft. I think it's more under what we would call a general dullness of business. I think if anything, if we try and look at it, I think our golf business is a little softer than we'd like to see it. Our basketball backboard business has been soft. I suspect one could try to correlate that to fewer houses, the housing starts and all that. We cannot get ourselves there yet. There could be something there, but to me, it's way early.

We're also in the process of transitioning our basketball backboard assortments to what we think is enhanced product offerings and maybe we're losing something in the transition. Our baseball business has been a little lackluster.

On the other hand, we have got areas in fitness, and camping and fishing, soccer, roller shoes that are performing positively. It's more just a general softness in our overall sales over the last few weeks.

Does your guidance for the second quarter make the assumption that you're going to become more promotional to insure a certain sales level?

Well, our guidance in the second quarter, I mean again, the back half of the second quarter is far more meaningful than the few weeks, the period of the few weeks of softness that we have been experiencing. We do believe that we have very strong merchandise and promotion plan that's firmly in place and we're believing strongly that it will hopefully drive business positively for the remainder of the quarter.

And David, the actually numbers that are in the guidance for the second quarter are very constant and very consistent with the advertising spending we had last year in the second quarter.

At this point in time, we've made no adjustments to our ad spend over the back half of the quarter. As a matter of practice, we review our ad spend on a weekly basis and we will certainly continue to do that for the remainder of the quarter.

Right. Well, good luck with that. Thanks, Guys.

And our next question will come from Brian Nagel with UBS.

Hi, good afternoon.

Hi, Brian.

I just wanted to ask about the recent sales weakness. Maybe if you can help us understand this, just talk a little more specifically in terms of magnitude of how -- to what degree sales weakened over the past two weeks. And then, you gave the Comp guidance from zero to two for the quarter. What type of pick up does that assume from current levels over the balance of the second quarter?

Again, we think -- we anticipated that the last couple weeks, because of shifts of advertising, we firmly anticipated we'd be down. I think the variations and from our anticipation are relatively small but meaningful when understanding that a few percent obviously impacts our bottom line.

We're assuming that our guidance assumes some -- arguably feel softness that we're experiencing continues. We feel we're well positioned to combat this softness, as we've mentioned, with a strong promotional calendar in the back half of the quarter.

Okay. And the second question I have, also with respect to second quarter guidance. You talk about the extra administrative costs. I don't think we got -- if you could maybe help us understand how much that is and then what does it relate to?

Brian, this is Barry. The administrative costs, of course, last year we added considerably to our, certainly our accounting department from an internal controls standpoint and financial reporting standpoint. So we added those individuals throughout the year and in fact, hired some people even in the fourth quarter. So I think what you're seeing from an administrative standpoint is these people are now on board for the full year or they're on board and we're feeling the effect in the first quarter of the fully loaded head count for accounting as well as other administrative positions. But I think the largest segment is in the accounting area.

In terms of magnitude, the corporate salaries, for example, in the second quarter of last year, were about 1.5 or so percent of sales. They're up maybe 10 to 20 basis points from that.

It sounds to me like this is going to be more of an issue for the second quarter than it was in the first quarter. Is that correct?

Yeah. We still hire people. It was an effect -- certainly it was an effect on the first quarter as well. In the second quarter, we typically get -- our merit increases kick in and so on. So you will have a little bit of an up tick in the second quarter. That's just for corporate overhead but also for everybody else.

Okay. Okay, thank you.

Sure.

And we'll move on next to Reed Anderson with D.A. Davidson.

Good afternoon. Just curious. Last year in the second quarter -- I'm sorry, last year in the second quarter, do you recall a 2-9 comp or something like that? Was that a fairly even quarter from a comp standpoint or was it more front-end loaded in April? Just kind of getting the send of what the comparison might have been.

It was reasonably even. It was a little streaky over the course of the quarter and again weather patterns and summer weeks and early summers influenced some of the weeks but not dramatic. I think we were positive for all three months or periods of the quarter.

And then in terms of -- competitively, would there be anything that you would think -- is there any competitive thought going into this? Feeling like there is more competitive pressure in your markets today? Or is more just you feel like it's just a general weakening?

Certainly nothing over the last several weeks competitively that would, we think, relate to the general softness, no.

That's what I figured. And the last question, just kind of generic, but I mean to guide down to a fairly wide range, but you still feel pretty good about the year. What kind of gives you that sense? Is a lot of it just due to the fact that you've got the confidence for that, that you feel like you've got a lot on the margin both in the DC side and the merchandise to make up for that or is it something else?

Reed, we've only experienced the sales softness that we discussed for the past three weeks or so.

Okay.

We're continuing to evaluate the sales trends to determine what factors might be affecting them and we do not know if the softness is a short term blip or it's the start of something more significant, because we're reporting our second quarter guidance now, we felt it was prudent that the reasons to be discussed and reflected in our guidance for the second quarter. But we believe it's much too premature to make any changes to our assumptions about sales in the back half of the year.

Makes total sense. And then lastly, did -- you still feel comfortable that over the next several years, you can get back to the profitability you saw a few years ago. No reason to think that would change.

That is right. No reason to think that that would change.

Absolutely not.

That's great. Thanks very much. Good luck.

Thanks.

And our next question comes from Nancy Hoch with JP Morgan. Please go ahead.

Great, thank you. Good afternoon.

Hi Nancy.

Just one clarification. Steve, you mentioned in response to an earlier question that you're expecting advertising costs in Q2 to be fairly similar with the prior year. Is it fair to assume then that build in Q1 is kind of a one time event?

Yeah. Advertising costs will up over a year ago. We did not leverage our ad spend in Q1. The Q1 growth was -- there is some element in Q2 which is to support the store growth and to support some element of inflation. The impact of the Eater shift affected our ad spend to some degree in Q1 and we're also reasonably aggressive in Q1 given that we were up against some very strong comp numbers and the extraordinary winter business that we realized last March.

Okay great. And then as far as the administrative expenses, are you at a point now where your corporate head count is stabilizing or are you seeing areas where you're planning on investing later this year?

Nancy, we're always going to have normal head count additions but clearly what occurred in last year, to fully staff the accounting group, that's been done now and I'm very pleased with where we're at with the additions and would not see anywhere near the additions that we've had going forward.

Okay great. And then Barry, I thought that we were done with the inventory cost capitalization comparison. Can you walk us through how we should be thinking about the rest of the year?

Sure. The inventory cost cap, my favorite subject. Our inventory cost capitalization -- I'm going to really take you through this a little bit and try and talk about the full year compared to last year, 'cause I think you really need to understand it.

Our inventory cost capitalization for the 2006 full year was a benefit of about $3 million and we are expecting cost capitalization for 2007 to be a charge of just under $1 million. Therefore, year over year, we're expecting an unfavorable variance of about $4 million dollars.

As we transitioned to our new DC during the second half of 2005 and the first quarter of 2006, our costs pools increased, resulting in an increased benefit of inventory cost cap for the first quarter and to a lesser degree, the second quarter of 2006.

As our cost pools began to stabilize, following the Q1 2006 completion of the DC transition, the benefit of inventory cost capitalization for the third and fourth quarters of 2006 was much, much lower.

Comparing the impact of the difference in inventory cost capitalization between years as you asked, the largest effect clearly was felt in Q1 of 2007 with a negative variance of over $2 million.

We expect the negative comparisons to the prior year for inventory cost capitalization to continue each quarter during 2007 although becoming progressively smaller. The negative comparison of inventory cost capitalization for the second quarter of 2007 to the same period last year is expected to be approximately $900,000.

Okay great. So then it's just another million in the back half?

That's right.

Okay. And then one other question on cash. You saw some nice improvement in your cash flow in the first quarter. I did not see [inaudible] bought back any shares in Q1 and you didn't boost the dividend this year. Can you remind us of what you priorities for cash use are at this stage?

Yeah, Nancy. The management and the board evaluate the best use of cash on an on-going basis and we certainly look at market conditions at the time. We look at interest rates. We look at the price of our stock and we make decisions based on market conditions.

We're going to continue to do that just like we have. Having said that, I do also expect to be able to pay down additional debt this year. Our debt is down about $9 million in the [technical difficulty] quarter here. But certainly it is key for us to keep an eye on market conditions for both the stock buy back as well as the dividend.

Nancy, we did buy 700 shares ending the first quarter and that was really a function of a plan that we put in place that was price sensitive. It triggered it at some point when the stock fell, as I recall, below $24 and that was the extent of the buy back.

Is that a 10b5-1 plan?

Yes it was.

What's the total authorization on that plan?

The total authorization is $15 million and we've got $13.7 million remaining under the authorization.

Okay great, thank you.

Let me clarify that. That's total authorization, Nancy.

Okay.

Not just that plan.

We put a plan in place for this period.

Okay great, thanks.

Our next question comes from Mitch Kaiser with Piper Jaffray.

I was hoping you could talk -- Barry, I missed it. I just want to make sure I'm clear here. You said flat to low single digits sales growth? Or was that comp growth?

Comp.

Comp growth.

Okay, that's what I thought. I thought you said sales growth. Lower DCs is going to be $400,000 in Q2. Cost capitalization is going to be $900,000 negative and admin is going to be how much?

Well, the negative admin in the second quarter is approximately 20 basis points or so, Mitch.

Okay. That sounds good. And I know a lot of people are trying to get at what's going on in the last three weeks. Gas prices have risen fairly dramatically. Could one hypothesize that that might be impacting what's going on?

I guess one could certainly hypothesize that. Whether it's the gas prices, housing, weather variations, calendar shifts -- I think it's just real early in our way of thinking to make a call. If there is something that is occurring in the macro environment that is affecting our sales, we feel -- the advantage there from the standpoint in our model is one that we don't just open the door and hope wind blows customers in.

We drive our business very aggressively. We're advertising 52 weeks a year, fresh offerings of products. We're working hard to ensure that we're creating compelling value for our customers. To us, it's just early to call whether it's the gas prices. Certainly gas prices have been rising for a period of time but maybe there is some cumulative impact that is affecting our customers.

Okay. And then shift in advertising. Could you just be a little more specific about that? Because I though you were on ad pretty much every weekend. So is that something different then that you were doing?

No, we run an ad, a major ad 52 weeks a year in all of our markets. We supplement that with additional advertising many of the other weeks of the year. It could be 25 to 30 weeks a year with distribution in many of our markets, adjusting circulation. That's a normal part of advertising cadence.

Okay. So that's where we estimate the discrepancy between --

Exactly.

That's fair. Okay, sounds good. Thank you.

You're welcome.

[Bill Dezellem] with [Tieton Capital Management]. Please go ahead with your question.

I would like to circle back to the promotional event that moved. Would you please discuss what that event was that moved and when it moved to, and maybe in the same vain, how many promotional events are you anticipating here in the second quarter and does that compare to the second quarter of last year?

We're not going to get overly detailed in terms of our promotion calendar. We, as I just mentioned, we run advertisements in all our markets 52 weeks a year. An event -- we're running, we call it an event, I mean called a circular or a promotion.

We obviously get more aggressive with our advertising during peak holiday seasons, Christmas, Memorial Day, Fourth of July, Father's Day. But we drive the business year round. The shift -- we shifted an ad out of the last week of April. Again, some of this is a result of what I will call a domino effect from the calendar shift of the Easter holiday that affected our timing of ads.

We also -- part of the reason for this shift out of April, is during the last week of April, we held a major sales training event that we hold every two years where we bring in -- this year we brought over 2,000 of our associates to the Long Beach Convention Center. Our vendors come in and put on an extensive training program for them. And because we did not want to run an extra curricular ad, why a number of our employees were offsite, we chose to move this ad from the last week of April into early May.

That's helpful. And that was the one promotional event that you were referring to that shifted, just that one that was supposed to be in the last week of April to the first part of May here?

That is true.

Okay, thank you. And then changing topics entirely, what is the dollar benefit that you anticipate from moving the distribution center from six work days down to the five work days?

I am not sure that I can quantify that number. It is still a work in progress as we develop the benefits from this shifting. We're clearly in a position to reduce certain overhead by operating our distribution center fewer hours.

I think quantifying utility and energy savings, I just don't have enough information to go there, yet.

Thank you.

We'll move now to Rick Nelson with Stephens.

Hello. Steve, you mentioned the promotional plan is in place and it's more aggressive in the back half of the quarter. But did it contemplate the recent sales [technical difficulty] or that was not the case?

We put in place, prior to this, the recent sales weakness as we always do. We take -- work hard to enhance the timing, distribution of our ads. We are always tweaking and enhancing whether it's our distribution page counts and so forth.

So we think we put in this year a very strong plan for the back half. We manage this, ultimately manage our advertising on a weekly basis. Final decisions as a matter of practice for issues regarding circulation of our ads are typically not made until a few weeks prior to an ad break and sometime with shorter than that.

We're obviously going to watch the situation very carefully.

How do you respond to more pages, more items, bigger price counts, frequency?

Again, it's looking at -- you try to come up with an optimal pricing strategy to drive business and gross, ultimately in our minds, our gross profit dollars. But I mean circulation and frequency is again, we have number of ads to develop and what ultimately the circulation numbers are for those ads is a call that we manage on a weekly basis.

How about California? Are those stores performing any differently than other markets like Texas, for example?

As a whole, all our markets, I mean we're in a number of markets. They don't all perform the same but in terms of the recent softness, we don't trace that to any individual market.

Thank you.

Thanks, Rick.

And our next question comes from Sujata Shekar, CIBC World Markets.

Yes hello, this is Sujata.

Hi Sujata.

I had a question on the second quarter sales contribution. You mentioned that the back half of the quarter is more important with all the holidays. So what percentage of the quarter is sales specifically generated in May and June versus April?

That's information that we just don't give the specifics of; suffice it to say that our volume levels are significantly higher from really the weeks from Memorial -- pre-Memorial Day through Father's Day and into the weeks preceding the Fourth of July that fall into the second quarter.

We're not going to get more specific than that.

Okay. But it's fair to say that it's not one third for each month through the quarter, right?

Yes, it is.

It is. We are on a 13-week calendar so you've got 4-4-5, okay? So there is a longer -- the last month of the quarter is higher weighted of course.

Okay. And then this one promotional ad that was moved from April to May. Has it run already or when will it run in May?

It's really running this week, the end of this week, impacting sales. Yesterday, today, and through the weekend.

Is that super sale ad circular that I saw a couple days ago?

Super sale ads -- I don't think that's it.

Okay. Do you see any impact of that yet or you have to wait 'till the weekend for that?

We see impact from our ads the day they break.

Okay. Okay, that's all I have. Thank you.

Thanks.

You're welcome.

And we'll go next to Jeff Sonnek with FBR.

Steve, you commented earlier going back to this DC producitivy and enhancement and going from the six to five day work week. Are the hours worked the same? And is this really a function of the employees' want of a different work week and now they're kind of up to speed and you guys feel comfortable doing that? Or is this kind of a cost containment initiative on your part?

What we essentially changed for our -- for the vast majority of our associates at the distribution center, we changed the basic work week from four ten-hour days to five eight-hour days. We went from operating the facility over six days, Monday through Saturday, to five days. Essentially because our levels of productivity are so good in this DC, we were able to very comfortably handle our order filling process and receiving process within the five days.

So what it really means is that we're in and operating the DC significantly fewer hours over the course of the week. That means we have more order fillers at any given point in time now. Receiving associates in the distribution center at any given time does not necessarily mean that we have fewer people, given this shift change, fewer people -- where we're able to -- the saving are more in the administrative overhead in areas of supervision and other administrative posts.

Great. And then Barry, just more of a housekeeping question. It looks like D and A has been a little lumpy over the past year and a half or so, kind of tracking around 2% of sales. Can you just help us think about how that plays out the rest of the year? Does it kind of stick around 1.9% until the fourth quarter and then see a bump?

Yeah Jeff. We had a -- we indicated kind of the variance from last year because we had the two distribution centers. We [technically difficulty] our D and A in the first quarter was $4.2 million. That's going to trend up slightly, pretty constant in the second quarter and then just trend up slightly after that for the balance of the year.

Okay, so nothing like what we have seen in the last two years?

No, not at all, not with the new distribution center that we've had last year.

Okay.

Any further questions, sir?

No, that's all. Thank you.

We'll move now to Michael Baker with Deutsche Bank.

Hi guys. So a couple, real quick here. One just simply, short term, the sales [inaudible], more ticket or traffic? Just curious. And then bigger picture question. It looks like most the -- you had very healthy operating margin gain here again this quarter, particularly on the gross margin line. But if I heard you right, a lot of that came earlier in the quarter on the product margins.

I guess my question is looking ahead, what are some of the margin drivers we can look forward to? Is there reason to believe that your operating margins can get certainly back north of 7% and perhaps 8% over time and what are the drivers to think about to get there? Thanks.

Barry, I guess I'll take the first question. In terms of traffic or ticket, honestly given the recent shift in advertising, I think it's difficult for us to quantify. I think if anything, I think it'll sort out more in a week or two. But I think our data may be suggest that it's a slight slowdown in traffic more so than lower ticket. But really don't think we have enough data to speak on a two or three week trend.

Okay, thanks.

Michael, on your second question, yeah. Gross margins improves in Q1 of course benefiting the higher 80 basis points of product margin upside that we talked about. The gross margins that we're experiencing today reflect the higher overall DC expenses resulting from operating the larger distribution center.

The impact of the lower DC costs for Q1, because of the facility transition costs in the prior year was offset by lower inventory cost capitalization benefit also versus last year as we cycle through the DC transition. So there really wasn't much of an effect. The lower cost from last year was offset by a lower benefit this year.

We think that we're going to be able to significantly leverage these DC costs over the long term, which would certainly help margins. When will we be able to get back to the historical operating margin levels will certainly depend on, largely on, our future sales and product margins.

But we'd expect a return to the historical operating margin level over the next two to three years or so.

Okay, so it sounds like then a lot of these distribution center cost improvements are being masked by this $4 million swing in the capitalize in cost that you're talking about. Without that, we'd see some of the DC improvement costs. Next year, when you don't have that swing, that's where you might see some of the DC costs. Is that a fair way to articulate it?

That is a good way to say it.

Great. Thank you.

Thanks, Michael.

We'll go next to Mitch Kaiser with Piper Jaffray.

I'm sorry. Barry, what would you expect interest expense to be for the year?

Well Mitch, it certainly was down significantly in the first quarter and we're expecting a pretty significant reduction in our overall debt levels for the year as well. The overall interest number, again, it is really dependent on what we do with our free cash flow. If we spend it paying down debt, it's going to drive the interest down considerably. If we use it to buy back stock, it's a trade-off.

So I kind of hesitate to give you an answer to that. Our model contemplates roughly a -- about a 20 basis point or so reduction in interest expense from the prior year.

Okay, sounds good. And in the guidance, are you assuming some share reduction in purchase then, too?

I just can't comment on that now, Mitch.

Okay. All right, thank you.

Thanks.

Anthony Lebiedzinski with Sidoti and Company. Please go ahead.

Good afternoon. As far as comp sales by month, I was wondering if you could discuss how that turned out in the first quarter?

In the first quarter. Well, we don't speak specifically in terms of comp sales by month, only say -- I mean, some of our sales transfers in the first quarter, to some degree, followed the impact of the weather variations which were quite extreme this year from last year, meaning that the start of the quarter, we had some very, very strong winter business that softened in the mid part of the quarter and was very, very weak in the, comparison-wise, our winter business in March. In March, we were -- there were other product categories that we were able to offset the weakness.

And also, I was wondering if you could comment as far as when was the last time you had three straight weeks of negative comp sales?

Again, I don't know that to say three straight weeks of negative comp sales would be a correct characterization of what happened given that we shifted a promotional event and the impact of the Easter shift and all that. We've had a few weeks of sales that are arguably weaker than what our internal plans were.

That being said, we've been doing this for a long time. Certainly during our 45 consecutive [technical difficulty] of positive sales. Many of the quarters had aberrations at some point in time. We're certainly not panicked over this situation, just feel that here we are in a period of time when we're providing guidance for the second quarter and I think given the softness, we think it's proper to be prudent in our outlook.

And so during the past ten years that you've had a couple weeks here and there that you've had some negative comps, and yet for the full quarter were able to able to turn that into positive comp. Is that a fair assessment?

More than a couple times. This is something that certainly happens. We're not -- it's not always a steady, consistent pattern of sales for us. It never has been.

Okay, well thanks so much.

You're welcome.

(Operator Instructions).

We go now to James [Lovelles] with Wedbush Morgan.

Hi guys. Just one quick question. Wondering if the Q1 [technical difficulty] rate is indicative of what the full year rate should be?

Yes it is.

Thanks.

Sure.

Any further questions, sir?

No.

At this time gentlemen, we have no further questions standing by on our question roster. I'd like to turn the program back to you for any additional or closing comments.

Great. Well, we thank you very much for your interest and certainly look forward to speaking with you again soon. Thank you again for joining us today.

Thank you everyone for your participation on today's conference call. You may disconnect at this time.