Franklin Covey Co (FC) 2003 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the FranklinCovey quarter 4 conference call. At this time, all participants are in listen-only mode. My name is Kelly, and I will be your coordinator today. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the program over to your host for today's call, Mr. Richard Putnam. Please proceed.

Thank you, Kelly. Good morning, shareholders and interested parties. I would like to welcome you to the FranklinCovey fourth-quarter and fiscal year-end conference call and webcast. My name is Richard Putnam. I'm Director of Investor Relations for FranklinCovey.

You're currently in a listen-only mode to prevent background noise. We'll give you instructions for asking questions at the end of Mr. Whitman's presentation. You'll need to dial in to the conference call in order to ask questions. That number is 1-888-339-2688.

I would like to introduce those who are going to be participating that are in the room with us and on the call with us -- Mr. Bob Whitman, who is the Chairman and CEO of the company; Bill Bennett, the General Manager of our Organizational Solutions Business Unit; Sarah Merz, our General Manager and President of Consumer Business Unit -- she is joining us from Houston; Scott Nelson (ph), Senior Vice President, Treasurer; and Steve Young, our Chief Financial Officer.

Before I turn the time over to Mr. Young to review the financials and in light of Regulation FD, this presentation is being webcast and can be accessed at the company's website, www.FranklinCovey.com/call.

We would note this presentation does contain forward-looking statements as defined in securities law that are based upon certain assumptions and are subject to certain risks and uncertainties that could cause results to vary from management's current expectations. We would encourage you to become familiar with these risks and uncertainties, which are outlined in our Form 10-K filed with the SEC for the year ended August 31st, 2002, and subsequent 10-Q filings. Copies of all of these filings with the SEC and additional information about FranklinCovey are available on our website at www.FranklinCovey.com.

Some of the numbers we will discuss this morning have not been audited with KPMG, the company's external auditors. We assume no obligation to update the matters discussed in this call. And it is also illegal to record this call without the company's permission. There are a number of slides that we will be reviewing this morning and discussing during the call, and they can be accessed at www.FranklinCovey.com/call.

I would now like to turn the time over to Mr. Young, Chief Financial Officer of FranklinCovey. Mr. Young?

Thank you, Richard. Good morning, everyone. I am pleased to begin this webcast this morning by sharing a few financial highlights and an overview of our financial results.

Referring to page 3 -- we are pleased to report that FranklinCovey, as we expected, has experienced a substantial financial turnaround for the fourth consecutive quarter. Substantial in this case means a $74.9 million reduction of our operating loss during this year. We expect this trend to continue throughout the coming year. We do expect a significant improvement in our operating results again next year.

With $41.9 million of cash on our balance sheet at year end and with improving operating results and with the means to generate additional cash, we also have a strong liquidity position. Additionally, our new strategic direction and offerings are beginning to gain traction. Bob Whitman, Bill Bennett, and Sarah Merz will each talk about the positive direction of our business trends in a few minutes.

First let me say a few words about our quarter and year-end results. If you would please turn to page number 5 or slide number 5, entitled fourth quarter FY 2003 versus FY 2002, you'll see our financial results for the (technical difficulty) quarter of FY 2003 showed year-over-year improvement in almost every category of meaningful financial measure. SG&A expense was reduced $5.9 million in the quarter, even after recording and including a $3.4 million of expense related to store closures.

EBITDA was 13.1 million better than same quarter last year. Our operating loss was $18.1 million better than the same quarter last year. And further down the statement, our net loss was 23.4 million better than the same quarter last year. And our margins did increase.

For the quarter, our sales did, however, still decrease, and we did still show an operating loss. Net sales decreased compared to last year by 9.8 percent overall. This includes the fact that we had six fewer business days in the quarter, which represents about 7 percent fewer business days. And we also had some impact of the stores that were closed in a portion of the fourth quarter this year compared to last year -- both contributing to the 9.8 percent overall decrease. Our operating loss for the fourth quarter, as you can see, was $15.7 million.

So if we could turn the next page to slide number 6, you can see that our financial results for FY 2003 compared to FY 2002, just like the fourth quarter results, showed a substantial improvement in almost every category of meaningful financial measure. SG&A expense for the year was reduced $33.6 million compared to last year. EBITDA was $66.7 million better. Our operating loss was $74.9 million better than last year. Our overall net loss was $55.3 million better than last year. And our margin increased slightly.

Also, as you can see, just like the fourth quarter, net sales did still decrease, and we did still show an operating (technical difficulty) loss. Net sales overall decreased by 7.8 percent for the year. The greatest year-over-year decrease was in our second quarter, which includes Christmas. After adjusting to a consistent number of business days, our smallest decrease was most likely in the fourth quarter. Our fourth quarter and first quarter showed the smallest amount of decrease, and again, our second quarter the largest amount of decrease.

Our operating result, as you can see and can remember last year, was a loss of $122.6 million. So even after a significant and substantial improvement of almost $75 million compared to last year, we still reported a $47.7 million loss for this year. We do expect a much improved operating result for the company again next (technical difficulty)

For the -- the next slide on page 7 just shows in a little more detail what we have been talking about, and that is that we have experienced an improvement in our operating loss each quarter of this year, and that improvement has been substantial.

So I guess the summary would be that just like we have said several times before, our financial result is improving, and to my mind, improving rapidly. And our trend for an improvement next year looks very, very good. So we have made significant improvement. We're not to where we want to be quite yet.

Now to better understand why we continue to be optimistic about our future and additional information, please welcome our CEO, Bob Whitman, to talk about our business trends and issues.

Thanks, Steve. We appreciate all of you being with us today. Slide 8 is just an introductory slide. Slide 9 issue gives you an overview of the things about which Steve has just spoken, the highlights of which are -- in P&L, turnaround has been realized. It's being generated, as you can see, by truly three things -- four things.

One is relative stabilization of revenue -- as Steve noted, we had six fewer business days in the fourth quarter. We also had store closures that contributed to the revenue decline in the fourth quarter. Nevertheless, the trend that we are seeing is the substantial stabilization of revenue, an increase in our gross margins, which we expect will continue this coming year, and a substantial decline in cost, which will also continue to show up throughout all of the quarters of this year. And so we're very certain about that. We have strong liquidity and the means by which to generate additional liquidity.

On slide 10, we feel that we really are finally positioned to win again as an organizational core -- financially, strategically, and organizationally. Financially -- been through the points made there. Strategically, it's important to us -- we'll discuss more later. Our field sales force has been increasing its capability and commitment around the new offerings and value proposition. Our new value proposition has been extremely well-received in the marketplace. We have a number of our clients who are moving from their pilot programs and our new offerings into rollout now. And that's very encouraging, and our sales pipeline significant growing. Nevertheless, we still have a lot of work to do in that new area, and we expect that the results of those efforts will continue to show improvement for the next four or five, six quarters as we gain traction in these.

Organizationally, also -- probably won't spend a lot of time on that today. One of our goals is to become a prime example of what we teach, and how the fact that we implement our own things here together with the improvement of financial results should actually be linked in our clients' minds. And we have applied the internal measurement instrument called xQ -- the execution quotient -- instrument to our own operations. It's something we're selling as part of the new offerings to our clients. And we've had very substantial improvements in the level of focus, accountability, and the ability to work together on common objectives here. And so we believe that will also serve us well -- not only impact in the impact it will have on our operations, but from the example that it reflects for our clients.

I'm going to turn the time now to the new President of our Consumer Business Unit, Sarah Merz, to talk about operating trends in that area.

Thank you, Bob. Greetings from Houston, and I apologize in advance for my voice. I have a cold, so I'm going to come out a little froggy-sounding.

If we look at page 12 -- we in the consumer business unit are cautiously optimistic about how we closed the fiscal year '03 and are starting into '04. If we look first to revenue trends, we saw our retail stores' comparable traffic and conversion rate continue to be lower than last year, but they were in line with our expectations for how they would post. And the Consumer Direct side, which is the combination of our e-commerce and our call center catalog business -- we saw the call center revenues continue to track as expected. And we saw a desirable shift of business from the call center over to the e-commerce side of the house. We have pursued a very overt strategy, (technical difficulty) calls-to-clicks, to drive more of that business over to e-commerce because it is a profitable -- more profitable channel to operate.

In the wholesale business, that continues to grow with significantly higher-than-forecasted sellthrough rates at partners like Target. And we had new pipeline fill in our office superstores. And we'll talk about that a little later in the presentation with more detail. And finally, our government business continues to perform above forecast.

If we look at the trends on the operating margins, on the gross margin side, we see that the gross margin percentage shows continued improvement in all of our product categories except for technology. And our product mix continues to shift to more profitable paper and software categories. The obsolescence continues to be lower than last year, despite the fact that we were very aggressive in filling our stores and our channels with paper products early in this first quarter of '04.

On the SG&A side, we continue to stay at our headcount in the consumer business unit headquarters team (technical difficulty) down 27 percent versus our headcount last year. And as noted earlier, we have closed 24 of our less profitable domestic stores with an additional four in Mexico and six in Canada. Another 10 stores are slated for closure by the end of second quarter '04, and we've begun action on those.

So in summary, our revenue, our gross margin, and EBITDA performed -- we ended the year, and they performed strongly over previous years. And they are all expected to continue to improve throughout the fiscal year '04.

If we move on to the next slide, we've shared with you all some key business trends in the consumer business unit. If we start first on the product side, we see the declines in paper and in handheld devices are slowing -- previous years' declines, and so we're very pleased to see that. We've also seen some very strong growth on the business tote and software side, and that has been supported by a new catalog in sightful design (ph) that we launched this year and partnering efforts with Microsoft and strong marketing on our side to support the software business. And we also have seen increasing attach rates of our technology binders to our handheld devices, which gives us confidence that the handheld device is a stronger part of a planning system.

The financial trends show that the gross margins are improving across nearly all product categories, and that's coming from diligence by the product teams to drive down the product costs. Our obsolescence is down. Our out-of-stocks are occurring less frequently. And our inventory levels are down, falling, and are very closely managed, with the flip side benefit of increasing inventory turns. We have also instituted an open-to-buy discipline to maintain and decrease our inventory levels further.

The operating trends we are seeing is that our retail store staffing and our call center staffing models are improving, and we're doing a better job of staffing to traffic patterns. We have a new, improved scalable e-commerce store and infrastructure, which makes that (ph) channel faster, more stable and has increased functionality. Our marketing programs are continuing to integrate, so we're speaking to the marketplace with one voice. And we've brought our catalog development in-house, and that's performing well above our expectations. So some very positive business trends in the CBU.

If we turn to the next slide, we'd like to share with you the challenges, because we're not without our challenges. But we believe that knowing them is half the battle. Again, if we start on the product side, we have categorized all of our products into four buckets -- what we call A, B, C, and D -- A being the most (technical difficulty) strategic and D being the least strategic. Our goal has been to decrease (technical difficulty) products and to minimize the offering of C products. And that will allow us to free up dollars and resources to focus on the more important A and B products.

We need to further improve our gross margins. And we need to watch our average selling prices, particularly on binders, very closely, because those are a little soft. We continue to face the challenge of price and availability pressure on our technology devices from big box retailers, so that is an area of focus.

On the financial side, we still think we have less-than-acceptable inventory turns in some of our product categories. And, as many other retailers face, we have the continuing challenge of balancing our sales goals with tighter inventory levels.

On the operating side, our retail traffic is still softer than we had hoped. And our retail associates' comfort with selling software is still lower than desired. Our corporate order business is softer, and we are still pursuing an "all products in all stores" approach that has hindered sales and inventory goals. So that is another area of focus. Our call center and EDS (ph) costs, we believe, are still somewhat out of line with our sales volume, and we are conscious of the fact that our supply chain process is somewhat labor-intensive. But knowing these challenges, we have projects in place in '04. And we believe we would address them and improve the position in all these areas.

If we can flip now to the next slide -- this is really just to introduce a series of slides that will follow that show our retail store operating trends. The headlines, though, that we'd like you to take away are that traffic is stabilizing, that our revenue per store customer is stabilizing, that we are seeing an increase in our gross margin percentages, and that our labor costs are decreasing.

So if we flip on to the slide that shows the traffic (technical difficulty) per our FranklinCovey retail store per business day, you can see the results that we posted in fiscal year '02 versus fiscal year '03 quarter by quarter. As Steve Young mentioned earlier in the presentation, it was the second quarter where we saw our largest year-over-year declines. Christmas really didn't come for FranklinCovey in the way that we had hoped. And so during an important part of last year, we did see a very significant drop in traffic in our stores. But you can see that that decrease -- that gap was closing in '03 -- I'm sorry, in the third quarter. And the gap closed, and in fact, we saw an increase in the fourth quarter.

If we move to the next slide, this slide shows our conversion rate, or the percent of customers coming in the store that we make a sale to. The conversion rate is very important, particularly in the early part of the year, where we do capture the vast majority of our sales. And you can see from the three lines that the conversion rates in fiscal year '03 were stronger than the conversion rates in fiscal year '02 at the front of the year, but they did soften up in the back. The top line, we're happy to report, is fiscal year '04, where we are exceeding our '03 conversion rates. So very positive trend for us, and something we focus on in the CBU.

On the next slide, we show the retail store units per transaction. And we're seeing the same kind of trend, where '03 performance beat '02, and '04 performance is beating '03. Units per transaction, or UPT, is something that we focus on, and it is a measure by which we track all of our retail associates' performance.

Moving on to the next slide, we share with you the retail stores' weekly average ticket. And you can see the average ticket is beating '03 (technical difficulty) numbers modestly. And that is being driven and is a direct correlation of the units per transaction.

Moving on to the next slide, we would like to share with you that wholesale has become an increasingly important part of our business, and it does have a very unique strategic role for FranklinCovey. We believe that our wholesale operations can attract new customers to our planning system. And it could potentially provide an alternative distribution channel for us domestically as well as internationally. From an operational standpoint, our revenue will continue to grow as we continue efforts such as the 365 by FranklinCovey private-label line that we have created for Target stores, as we continue to work with OfficeMax, Office Depot, and Staples on partnership agreements and product lines and through our partnering with Mead on the management of the contract stationers. We expect gross margins to improve as we continue our product refinements and creative sourcing of those products. And the SG&A of this channel continues to remain low relative to other FranklinCovey channels.

On a final note, we wanted to share with you that we have continued to focus our efforts on being innovative on the product side. We've launched a series of new products this year. In our paper planning business, we have a partnership agreement with Frommer's and we launch a travel theme planner called Frommer's Favorite Places. We have a planner skewed more toward the female segment called Bloom. We partnered with Conde Nast and launched earlier -- July '03 the New Yorker planner, which has done very, very well for us. And we do have a line -- a Compass wirebound line for those who are seeking a sleeker planner design.

On the software side, we have PlanPlus for Microsoft Outlook 2.0, which had very strong acceptance in '03, and the new version in '04 is tracking well, and just this past week have launched TabletPlanner for Tablet PC 3.0.

As mentioned earlier, we have a whole new line of leather and binder products -- leather binder and business products, and we've listed some of the proprietary products that we launched this past year -- Serendipity, Equestrian -- and we have a partnership agreements with Kenneth Cole on their briefcases. So some terrific work also on the new products side.

And that concludes the update on the consumer business portion of the business. Back to you, Bob.

I'll turn the time over -- thank you, Sarah. I'll now turn the time over to Bill Bennett to talk about the organizational business unit's operations.

Thank you, Bob, and good morning. I would like to spend a few minutes just talking about the trends within the organizational solutions business unit.

For the last few quarters and for as many quarters as we can see into the future, our focus in our units is to attempt to be successful at contacting companies at new and different levels with our new solution and selling that value proposition. We will talk in a minute about our level of success in that, which we're very pleased with.

One trend that that has lent to us, though, is that in this focus on the nature of strategic accounts in the first quarter that has resulted in somewhat lower than traditional on-site bookings and facilitator orders, as our sales force has turned their time to calling on the line leaders and presenting a new value proposition.

We -- in the most recent weeks, the focus is beginning to be reflected. Our xQ pipeline actually for months, and even more so in the last few weeks, has continued to a improve. xQ, if you may remember from previous calls, and as what Bob said earlier, is the execution quotient survey. And this is a good leading indicator of our business in the future with these clients. It's the first step of doing business with us in this new value proposition. And that count of xQ's that we have scheduled, and then behind that, those that are in the hopper as prospects, continues to climb every week.

In addition, in the last few weeks we've seen the on-site bookings start to improve and the facilitator orders improve, both on a daily and a weekly basis. The international revenue from our direct offices is expected to exceed prior year Q1 -- and driven particularly by pretty good performance across the board, but especially in Japan and the UK in proposed outlooks from Q1 for them.

On the licensee side, the organic revenue from licensees is also going to be ahead of prior year as we -- in the last year-and-a-half, we've added several new licensees to the mix, and as these people gain momentum and began to equal or surpass the minimum commitments that they have to us, that is also picking up on our revenue.

The gross margin standpoint -- gross margin in the first quarter is expected to be higher than last year. That benefit primarily comes from two areas -- one is the mix of business as we increase our core training success, and the other is far tighter management of our public programs channel, watching and monitoring more carefully the cost involved in public programs delivery, locations, and other associated cost.

From an SG&A standpoint, we expect to be better than first quarter of last year as well. And, of course, EBITDA, as a result, we're expecting year-over-year improvement -- substantial improvement. In one case, just the benefit of having reduced SG&A from the previous year, having a full quarter of benefit of running with that lower SG&A counts (ph) and an addition that comes from very tight management of replacing open headcounts and other expenses.

Strategically, we tend to watch our progress by keeping track of several categories of clients in our pipeline -- those that are in rollout stage, those in the pilot stage, those that are in a written commitment stage, or prior to that in a verbal commitment stage. You'll see in a slide in a few minutes a little more detail. But those counts are increasing in each of those categories.

If you turn to the next page, you'll see a slide indicating what I was talking about on the booked days. As you can see from the vertical line to the right, for the first part of 2004, our book day count per week on a rolling six-week average has been down, although in most recent weeks has crossed back over and is showing an improvement over last year from the reasons I already indicated.

On the next slide, on the bar chart here, you'll see the breakdown of licensee and direct office revenue. We had a fair amount of revenue that occurred last year from the licensees that came from initial signup revenue. And then as I said earlier, looking at the organic revenue of licensees, we will have a comfortable level of growth from the sheer royalty revenue that comes from these licensees this year compared to last year. On the direct office side, we are expecting a little shy of a 10 percent increase in our direct offices -- as already mentioned, across the board, but mostly from Japan and the UK.

On the next slide, entitled "Key Line Leader Account Opportunities," you can see over the last four checkpoints, including this month, this year, where we have stood in active prospects -- those who have given us what we call verbal LOI or have stated to us that they are committed to move forward; those who are actually in a commitment stage, as indicated by the fact that they have booked an engagement with us; those that achieved what we would call pilot stage or a two-point shot, which means they have committed and are executing on both an xQ survey as well as one other piece of our core content; and finally, those in rollout -- those who have completed a pilot and have made commitments to the next stage of the process in another department or function within their company. And as you can see, those numbers in each of these arenas have steadily increased. Again, we see this as a good leading indicator of the acceptance and future success of our new value proposition in the marketplace. Thank you.

Thanks, Bill. Just in summary, and then we'll go into questions -- as you have seen, there's -- the continued financial improvement has gone on for the fourth consecutive quarter. And we expect that you'll see that for the next four quarters, as well -- you know, continued improvement in quarter-by-quarter results. As I mentioned, and the turnaround is expected to continued strong in the coming quarters. We are expecting, as we said last webcast, that revenues for the year will be in the range of 300 million -- very tight on that 300 million mark. We expect our gross margins to be approximately 58 percent for the year. And we expect our SG&A to be at a level that's approximately $150 million for the year. And so, as you do the math on that, you can see that that would portend a continued improvement quarter by quarter. And being one week from the end of this quarter, we expect we will see that very significant improvement in operating results for the first quarter. Our liquidity position is strong. And we have the means of which to -- you know, both from our operating cash flow in this year, as well as other things to increase that.

And importantly, the new strategic direction offerings are beginning to gain traction. I'll just make one note on that. For those who may be joining for the first time, our principle strategic objective for the company is to deliver such tremendous improvements and real business results to our organizational clients that as a consequence of that, we develop deep, pervasive, ongoing relationships with these clients versus the typical, more transactional kinds of relationships we've had with clients in the past, where they may train a lot of people one year and then not train many the next year. And that these people in these organizations, therefore, become committed to the way -- to our methodologies, tools, and principles -- both in the way they operate their business day-to-day in terms of their teams' work and the way they organize and so forth, as well as the individuals within those businesses.

This is also both a domestic and international strategy. Our international operations are growing, and they will be roughly equivalent in total revenue this year to our domestic operations, as it relates to training and sales. We dramatically increased the both number and strength of our licensees internationally. We now have very good coverage in all of the major industrialized nations. And we have very strong partners in almost all of those.

On the consumer side, its real role in the strategy is to primarily be supportive of the organizational business strategy, so that to the extent we are successful in gaining these deep, pervasive, ongoing relationships, that we're trying to ensure the people who are trained through these organizations remain committed -- usually (ph) to the FranklinCovey planning methodology and other tools -- and that that is the primary role through the business unit. Consequently, we are reducing the number of unit -- retail stores which is more reflective of a pursuit of an actual retailer strategy to drop it back to the number that's really needed to provide great service at high revenues and good margins to our existing customers.

And again, we are encouraged by the earning results, which have now been -- the first-year results. We're ahead in terms of the revenue from the new offerings versus where we thought we would be. We still have a lot to do. And in the coming quarters, that remains the principal focus. As Bill mentioned, the result of this, if we are successful, is that while the sales cycle is longer -- and you're seeing that in some of the decreased bookings in late fourth quarter and early first quarter -- there was kind of a lag as people made that shift toward bigger accounts. At the same point, when we're successful, the revenue coming from an account will be multiples of what it has been in the past. And that's what we're seeing in the early results. And we expect that those revenues will not be as transitory as they have sometimes been in the past.

At this time, I would again thank you for joining us today. And I will now turn -- I will now open the rest of the meeting to a discussion of questions. Richard, I'll turn the time back to you.

We would now like to open this up to questions. Kelly will now give those instructions for asking questions.

Thank you, Sir. (OPERATOR INSTRUCTIONS) At this time there are no questions in queue.

Perhaps maybe what I could do just for a minute then is to raise some questions which I'm sure are in some of your minds. And perhaps you have had them asked or answered. And if this is redundant then you'll make a decision whether not it's interesting to you.

But let me just say that -- looking from the perspective of a shareholder and investor in the company, which I also am -- you know, the questions I think that have come up, and we've tried to address and these general trends are -- how confident are we that we're going to be able to stabilize revenue? We've this multi-year decline in revenues. And of course, the response to that answer in the overall is that we believe we will in fact stabilize revenues this year, despite the fact that we'll be closing, and we have additional store closures and the annualization of closures in the prior year. That will be driven primarily by success on the organizational business unit side, where we expect actual growth internationally and domestically, as well as growth in our third-party retail channels, our office superstore channels, and stabilization both in our consumer direct and on the revenue per store month in our retail. So we really believe that on the revenue line, we're going to be able to stabilize it. And that is assuming there is no improvement in economic conditions. We are for our Christmas trend, even though we're very helpful that in fact what happened generally last year was consumer traffic was down not just for us, but generally. But we expect -- our forecasts are for a very conservative level (ph), even for last year. But we're hopeful that there will be some good things happening to us. We also have a number of very large organizational accounts that we're working on, which if we're successful in bringing those in, could further accelerate revenue growth the other way. And so we're feeling good about the prospect of stabilizing revenue.

We've had a lot of attention paid to our costs -- both in SG&A and in those affecting cost of sales. Reflected in our numbers and the forecast I just gave you of a total SG&A in the $150 million range for this year reflects roughly $100 million of operating costs that have been taken out that flows through the income statement from our high-point run rate in 2001. But it doesn't reflect fully all the costs that have been taken out of the products side, you know, things that run through cost of sales. And that is really what is behind a significant portion of the improvement in gross margin -- these other costs have been taken out of our manufacturing operations.

So at this point, we're feeling good about our ability to stay on top of costs, take them out. And we're feeling very good about our cost targets for this year -- because we're controlling capital spending and we are investing money in the things that really matter, and we don't feel like we're holding back on that at all -- nevertheless, our total capital spending being around $5 million compared with our depreciation, which is multiples of that, obviously portends -- has good implications for the future in that the depreciation charges will continue to come down. We have a schedule of that, and of course, that's pretty well known. But at some point, if you're only spending 5 million a year, eventually your depreciation expenses will tend to trend toward that level. And so the resulting improvements in operations have been reflected in the quarters. And, as I say, should be -- we expect very strongly they will continue in the upcoming quarters.

From a liquidity standpoint, some have asked, what are you going to do with the cash you have got? And as you -- if you have a gross margin of a 173 million range, and SG&A in the 150 million range, obviously, there would be positive operating cash flow when (ph) you're only spending $5 million on capital expenditures. Even after dividends, there would be positive cash flow generated. What are you going to do with your excess cash flow?

And again, to this date, we wanted to make sure that the turnaround was stable, that it was something we could count on, that we could become confident of our ability to predict the business and deliver on that and (technical difficulty) making sure that our revenue is stabilized. As that confidence grows -- which I believe that it will be reflected in our first quarter results, we're hopeful, in the second quarter results -- that will then give us opportunities for using excess cash and capital that we would then have for doing things such as discussing what we should be doing with our preferred stock, whether there might be opportunities for repurchasing some of our common stock, and any other of the wide range of potential capital (technical difficulty) transactions.

So I understand we do have a couple of questions, perhaps, that have come up here as I provided this overview. But those are the main issues as we see them. And so, for us, our focus is on major accounts, trying to make sure that we do in fact make the kind of impact on these accounts that will allow us to generate the kind of relationships and revenues from them that we anticipate, to make sure our operations continue to be tight, and keep our costs down, our gross margins going up, and that we keep our best people, and keep them excited about moving forward.

Okay, I understand there are questions. So let's go ahead with those now.

Zach Liget (ph).

This is Zach Liget at Financial Group. Actually, just addressed one of my questions, which is the capital structure. You know, we're kind of concerned that you've got that 10 percent preferred (ph), I think, like everyone else is, and the impact on cash out there. So I guess I just want to confirm that you're probably not going to do any more clarification on that until second quarter? Is that kind of the timetable you're thinking --?

That's right -- thanks very much. We want to make sure we get through the Christmas period and are still feeling -- because that's a significant period for us on our consumer business. But when we get through that December, early January period, I think we'll be in a position to determine where we are with regard (technical difficulty) to our cash balances, how we're feeling about the consumer business having gotten through that period, and then be in a position to really address this.

And one other quick one on the operational side. As you guys rev up the wholesaling strategy, are you worried about or have you seen evidence of cannibalization, I guess, of the retail channel? And do you expect that to be a problem going forward?

That's a great question. We have not seen -- although -- because we're just new in this strategy, obviously that remains one of the big questions for us. And we are doing a number -- taking a number of research steps to try to understand for sure who it is that's being attracted to these third-party retail channels and office superstores and understand the extent to which it may be cannibalizing sales from our existing stores.

What we believe is this -- and we've actually been doing this wholesaling for a couple of years now. What we believe is that I'm sure there's at least one person who used to shop at our store who is now shopping at Staples for our product instead. But in general, what we believe is that these are new customers for us. The fact that most of these office superstore chains have actually moved out one of our other previous competitors and put us in their place, and that these tend to be small businesses and individuals who -- more small businesses than anything that shop in many of these outlets. We do not have a heavy organizational focus on the small businesses. So we think to some significant extent, this will all be real growth and not cannibalistic.

To the extent it is cannibalistic -- with the reduction of our store base, we believe we'll have about the right number of stores to handle what we need in our major organizational clients, and that they really do value the kind of customer service and attention which we give at that retail level. Because we will be in a very, very substantial number outlets this year, I guess we will see -- we will know by the end of this year how big an impact it had.

But I think we're feeling right now from everything that we can see and from the traffic in our other consumer channels that it's really having little or no affect on the traffic in our existing stores. And so we're believing at this point that it's almost all incremental.

Okay, and then as far as the store reduction goes, through second quarter you're looking at another ten. Is that going to leave you with the rest of your stores being profitable? Can we assume that? Or are there -- going from there, are you expecting to reduce further?

I think from that standpoint, at the store level, we will expect that all of our stores will be profitable at that point. And so the reduction of stores right now has been almost entirely eliminating not only unprofitable -- because we didn't have that many that didn't contribute something -- but when you really look at all the overhead and other things associated with it, you could argue that some of those were not profitable. But there were also others where we had a store maybe even just two miles from another store, and where we could just -- without losing many customers, if any, we were able to consolidate it.

But I think any store reduction from this point would really be a determination that our tracking of how well we've done when we close a store moving people to another one -- that there are opportunities for increases in profitability. But you can't assume that at that level, at least for our projections, that all of our stores would be profitable. Not all will be profitable to the levels we would like. And so I think the prospect of additional consolidations in store locations where we have multiple locations, getting it down to fewer where we think we can retain customers -- that would occur. But it's not just because they're unprofitable, per se.

Bizhay Fubermanian (ph).

Yes, congratulations on the improvement. The question I had was could you explain your commitments to the preferred shareholders, please?

Yes, the comment is just -- Since I think there has been a concern -- obviously, we're paying out dividends to the preferred stock at 10 percent -- that's on a pretax basis. We were very happy for the capital when we got it. But now, obviously, it's concerned -- and we have appreciated, frankly, the continued support of the preferred through this difficult time. And, of course, they have the right -- we do not have redemption rights, nor did they have call rights. And so any discussion with those -- with the holders of the preferred, as we've said in prior meetings, would just depend on their willingness to have the discussions.

But as we build up additional capital, the preferred shareholders are also significant common shareholders. And so we believe that at least when we're in a position where we have the capital necessary to have those discussions, it's a discussion we at least ought to try to have -- is to see, you know, is there -- what are the best uses of our additional cash? Is there some scenario under which we could repurchase a portion of the preferred? Is there something we could do, perhaps in combination with something we might do on the common side?

And so really, we're not announcing any plans to date. But I was just trying to address the fact that we are aware of the concerns of shareholders. At the same time, we don't really have any rights other than just to pay them the dividends every quarter. But we will, we believe, soon have the resources necessary to at least have discussions with them and common shareholders about various alternatives that might be attractive to both.

Are there any further questions?

There are no further questions, sir.

At this time, we just thank you for your attendance this morning and for your continued support. And we look forward to talking to you again -- if not before then, by mid-January, when we report on our first quarter and give you a heads-up on how Christmas went. So thank you very much.

Ladies and gentlemen, that concludes your conference. You may now disconnect. Have a good day.