Gaia Inc (GAIA) 2003 Q2 法說會逐字稿

Good afternoon and thank you for standing by. Welcome to the Gaiam second-quarter earnings release conference call. All lines will be in listen only mode until the formal question-and-answer session. At that time instructions will be given. At the request of Gaiam, today's call is being recorded. If you have any objections you may disconnect at this time. I'd like to introduce the speakers for today's call: Ms. Lynn Powers, President, Mr. Jirka Rysavy, Chairman and Chief Executive Officer of Gaiam. Also Miss Janet Mathews, Chief Financial Officer. Ms. Mathews, you may begin.

Thank you. Good afternoon, everyone, and welcome to Gaiam Inc.'s second quarter 2003 earnings conference call. First the legalities. The following constitutes a Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. Except for these historical information contained herein the matters discussed in this call are forward-looking statements and involve risks and uncertainties including, but not limited to, general business conditions, the integration of acquisitions, the timely development of new businesses, the impact of competition and other risks detailed from time to time in the company's SEC reports. The company doesn't undertake any obligation to update forward-looking statements.

I would now like to turn the call over to Jirka Rysavy, Chairman and CEO.

Welcome to our formal update, covering today our results for the second Q which ended on June 30. As we expected and told you last time, it was a difficult quarter. (indiscernible) reported sales of 20.4 million just 15 percent down from 24.1 which we reported on second Q last year. Revenue drop costs mainly in our retailer channel. We also experienced a loss -- a net loss of 760,000 or five cents per share compared to earnings of million or seven cents a share during to second Q '02. For the six months sales were 43.7 million compares to 48.4 in the first six months 2, '02. Last for six months was 1.1 (ph) million or eight cents compared with earnings 1.8 million or 12 cents last year for the first half. The five cents lost in the quarter which is on the highside of the guidance we gave you the last conference call but includes all the severances and all implementation costs associated expenses and which we undertook second-quarter and this is not only paid but accrued, which means that some people still don't have a (indiscernible) so those will all be accrued in the second-quarter. As well as all the costs associated with the expanded sales force.

Based on activity pickup and retail accounts we see currently, we estimate sales will increase about 20 percent in the next quarter -- in the third quarter -- from the current one which should combine with the savings we will see from our cost reduction which is still partial in third quarter but still already put us in the black.

For the end of the six months, we ended up with 8.4 million which is slightly up from the cash what we have in the first Q and we did generate 1.5 million in operating cash flow in the first six months compared to use of cash of 4.6 in first six months of last year. But obviously though this is a shift to positive operating cash flow, we are disappointed with results especially with the negative (indiscernible) which was 25 points, mainly in our regional channel.

We have undertaken new sales (indiscernible), new product development and (indiscernible) reductions (indiscernible) we talked last time the company has doubled its sales force headed new categories for distribution to retailers to make up for some of the negative. And we consolidated our operation into our Colorado headquarters and we restructured our management and reduced labor force. And we are in process consolidating our distribution of operation into one centralized facility in Ohio, which we expect to be finalized by October.

The cost savings after deducting the increased cost for our sales force, we anticipate to be the net impact of to be between 2.5 million and 3.5 million contribution annually. The benefit of this expense and action we expect to see in the third quarter to start but we see all of it in the beginning of next year.

As a part of Gaiam structure, Janet Mathews -- our VP of Business Development for last couple of years -- returning to her previous role as CFO and along with Eva (indiscernible) VP of sales, they were promoted to executive officer. Evalin (ph) joined Gaiam last year after heading U.S. leasing sales for a long time and for last few years was CEO of (indiscernible) which is a division of media company. So I would like to welcome Janet on the call and before Lynn gives you her business review, Janet will provide you some additional on financials. Janet.

Thank you. Now let me provide some additional details. For the second quarter, sales were $20.4 million representing the decline of 15 percent from prior year sales of 24.1 million. The decrease of revenue was primarily due to lower sales in our retailer channel where we experienced a weakness in our sales to department stores, distributors and (indiscernible) specialty stores.

Growth margin of 53.1 percent for the second-quarter 2003 declined from 58.9 percent in the previous year. This is primarily attributable to increased sales contribution from our lower margin divisions and from margin contraction in our retailer channels, due to product shift to accessories.

Operating expenses decreased to 11.8 million for the second-quarter of 2003 as compared to 12.5 million during the comparable period in 2002. As a percentage of sales, operating expenses were 58 percent in the second-quarter of 2003, compared to 52 percent in 2002 -- the increase resulting from a lower sales base.

Operating margin was a negative 4.9 percent compared to a positive 6.9 percent in the prior year. During the second-quarter net loss was 760,000 or five cents per share compared to a net profit of $1 million or seven cents per share in 2002. For the six months ended June 30, 2003, sales decreased to 43.7 million compared to 48.4 million during the same period in 2002.

Operating margin was a negative 1.4 million in 2003 compared to a positive 2.9 million in 2002. For the six-month period in 2003, the net loss was 1.1 million or eight cents per share compared to net income of 1.7 million or 12 cents per share in 2002. At June 30, 2003, we had 8.4 million in cash, no debt and an unused credit line of $15 million. Cash generated by operations for the six-month ended June 30th, 2003 was 1.5 million compared to the use of funds in 2002 of 4.6 million.

Trade accounts receivable totaled 13.9 million at June 30th, 2003, a reduction of 10.2 million from December 31st, 2002. DSO improved to 65 days for the quarter down from 70 days through the second quarter of 2002. Inventory at the end of the second quarter of 2003 totaled 16 million -- an increase of 1.3 million over the 14.5 million in inventory at December 31st, 2002. This increase is primarily a result of the consolidation of Leisure Systems International, a UK-based distributor of wellness products in which we acquired a 50.1 percent interest in January 2003.

Without the 1.3 million in (indiscernible) inventory, domestic inventory was down from the end of the year and terms improved to 3.2 turns and 2.8 turns in the prior period.

Before turning this over to Lynn for the business review I'd like to announce our schedule for our next earnings call.

Third-quarter earnings call will be held on Wednesday, October 29th, at 4:30 PM Eastern time or 2:30 PM Mountain Time. Now over to Lynn for the business overview.

While the Company's results for second quarter was within the guidance provided on our last conference call we are disappointed in the results and continue to work on the operational and strategic shifts to further facilitate improvements in our revenues and bottom line. Our business segment has been a challenge this year with sales to retailers behind last year by approximately 40 percent. We grew this segment of business from 11 million to 60 million in just four years.

For comparison's sake, during first-half 2002, our comps (ph) were over 50 percent. This segment has suffered from a general decline in retail sales as well as a drop in volume in several key accounts. Our major decline in comps was in three areas. Our distributor channel dropped by over $2 million -- approximately 500,000 is attributable to our decision to remove the Gaiam brand from Kohls. This decision was made in third Q last year so it should not affect the comps beyond this quarter. Approximately 1 million is attributable to our decision to take Bed Bath and Beyond direct, as our distributor for this account moves through his current inventory level during this quarter.

Over 1/2 million is from media return from (indiscernible).

As is consistent with the overall retail environment, our single largest percent decline is in specialty and department store business or mall based retailers. Sales for the Discovery Store were down $1 million in second quarter which is up from a 1.5 million decline in first Q. We do not expect -- or we DO expect this decline to continue through fourth-quarter. However, at an improved rate.

We anticipate approximately $0.5 million dollar decline of quarter going forward for the balance of this year.

We're also experiencing a decline in the audio product line that we market under the distribution agreement for a third party. This line accounted for approximately 800,000 decline in sales in second quarter. Audio products contributed 1.2 million in sales in the last half of 2002. We anticipate this business to remain soft.

This line does not contribute to our profitability and the distribution agreement currently expires at the end of this year.

Our mass merchant channel was up 2 percent for the quarter and is up 9.2 percent for the year. This channel is dominated by Target where our business is up 5 percent for the year on top of the load in last year. Target is pleased with our business and our comps with them this year. We have several initiatives in place to continue to grow this portion of our business in second half, including media tests in the sporting goods department of Target, additional media titles scheduled for Target Sept. resets and an exclusive kids fitness launch for third quarter.

Gaiam's has developed media content and products designed to provide children with fun exercise programs and games intended to develop their mind and body. We are continuing to expand our Target relationship into new items and categories.

Also included in our mass merchants channel is Wal-Mart where our business is up over 100 percent but the selection is limited to media.

Our sporting good channels comps are improving from down 40 percent in first Q to down 15 percent in second Q. The entire decline in this channel can be attributed to a decline in the sports authority business as it continues to work through its merger with Gard Sports. We expect to see orders for third Q as the plans for the merger are complete and personnel going forward are now in place.

We're very excited about opening REI as a new account in this channel in second quarter. We believe this will be a great account for us and we're already beginning to receive reorders from them. This month, we're bringing on additional manufacturers' reps to further penetrate the sporting good channel. The bookstore channel dropped 300K due to the load end from Borders last year first and second quarter.

We believe this channel has a lot of opportunity going forward as our 14 stores store within store test with Barnes & Noble during second quarter proved to be very successful and we are in the process of working with them on the plans to roll out the test to all stores in the last half of this year.

We worked with our accounts during the first two quarters of this year to stock leveling, resetting their floors and getting our new product out to market. We believe we will complete with this project by the end of third-quarter. Our new product has started to reorder, our switch to DVD is beginning to improve our media business and our sales organization by channel is starting to pay off.

In Q1, we developed new sales goals and initiatives that we felt provided a strategic framework to address differentiation by retail channel and product category expansion within our trade channels. Although results for the second quarter were not yet up to our expectations we strongly believe those goals and initiatives are beginning to work in third-quarter and they should pay off for fourth quarter.

Our proprietary products constituted over 60 percent of our business, again, in second quarter. We're continuing to add new products in Mind Body fitness especially in the Pilates franchise, new health and wellness information, children's health and fitness products, and natural home products.

We also have recently established a product assortment for our Healing Arts brand. We recognized an opportunity for a second tier brand to address the needs of a grocery and drug store market. This brand allows us to offer products at lower retails while maintaining our high quality standards. We will supplement our accessory and media products with health and well-being products that appeal to this market.

We're currently working with Krogers King Supers division to launch our Healing Arts initiatives in 70 stores in third-quarter this year. We (indiscernible) studies on naming and product selection for this channel and believe we have a large opportunity for growth in the future, based on a positive response to our test this year.

In 2002, in our direct to consumer segment we dropped circulation by 14 percent in order to focus on our business segment. We're now refocusing on our direct business. We have increased circulation for the fourth-quarter, revised the format for a Living Arts catalog that will produce lower costs and bring efficiencies and are continuing to add proprietary products including more organic cotton bedding and clothing.

Our direct business fared better in second quarter with catalogs up slightly on flat circulation. However our Internet business is down around 500,000 due to a sweepstakes and catalog event that were not anniversaried from last year.

Our move to the Microsoft platform in fourth-quarter of last year is continuing to improve performance on the Web site. We expect to see reductions in operating and maintenance costs in third-quarter this year.

Our operating statistics in our direct segment remain strong with a field rate of 93 percent and an average order size of $110. Our renewable energy division launched a residential program for Northern California residents in fourth-quarter last year. From the success in the program and 13 percent comps this quarter, we're expanding the residential program to Southern California in third-quarter.

As noted previously, this program allows for strong branding opportunities, as well as new revenue streams. We're in the process of implementing a new warehouse management system and expect to be complete by the end of October. This system will allow us to move all distribution to our Cincinnati facility, achieving third party fulfillment cost savings and internal efficiencies. We recognized a decline in our comps and remain focused on the sales and product strategies that we have outlined during our conference call to improve our sales during the back half of the year.

We continue to identify additional cost savings measures that will help to improve our operating profits. As stated in the previous call, we have implemented or are in the process of implementing cost saving measures that will result in reduced operating calls by 2.5 to $3.5 million by the end of the year.

Now back to Jirka to close.

I think I'll just open it for questions. Operator, please.

At this time we're ready for the formal question and answer session. If you would like to ask a question, you may press star 1 on your touchtone phone. You will be announced prior to asking your question. To withdraw your question, you may press star 2. (CALLER INSTRUCTIONS) Carole Buyers with RBC Capital Markets.

Just a number of questions. First I was wondering, Janet, can you break down the revenue for retail vs. direct?

Direct revenue for the quarter was 10,000,445 B2B revenue was 9.9 million.

And what about profitability by those divisions?

The direct to consumer was profitable $144,000 contribution. There was a $1.1 million loss in the business to business channels.

And then you mentioned there was a onetime cost associated with restructuring could you give us what were the costs and were they primarily in the retail or direct channel?

They were across both, having to do with personal cuts that were taken here. They amounted to approximately a penny to a penny and a half in the quarter.

And when you look at the revenue breakdown, Lynn, you mentioned the mass books (indiscernible) specialty department store, sporting goods and distributors channel, just to put that in better perspective, what's the breakdown as far as a percentage of revenues that they comprise? Like what is the mass market comprised of your retail channel or your B2B or your (indiscernible) book specialty department? Do you happen to have those numbers?

Carole, I don't have those numbers right now. Our largest -- right now our largest channel is the mass merchant channel.

Can you follow-up on this call --

Can I follow-up with you?

Sure. Of course, (indiscernible) I'll come back.

Laura Richardson with Adams Harkness and Hill.

Question I ask almost every quarter could you specify the selling vs. the G&A expense?

For the second quarter selling and operating was 9.5 million, G&A was 2.3 million.

Is the onetime in both of those lines?

It is in both of those lines.

(indiscernible) break it down by line.

I don't have that right now Laura -- I can follow-up on that.

Yes, it's like -- from the dollars you're looking about 300 and the most of them will be operating.

That would be correct -- most of it would be in the (indiscernible) selling and operating MR.

Okay I guess I'm intrigued by the comments about the business sounding a little better going into third-quarter. Is it new product driving the sales direct third-quarter or more new salespeople, more effectively selling some of the more mature product or what's the composition of what you're selling for Q3?

Laura it is a combination -- I think it's first: product differentiation by channel strategy where we hire the new salespeople and they're differentiating the product by channel. That's helping. We also have launched several new products that are performing very well and we're starting to receive reorders on those products.

Are the health solutions among those new products, Lynn?

Health solutions are among the new products. We've had orders on four out of the eight products on that. But it's primarily in the Pilates franchise out there on Mine Body Fitness that we're getting really strong reorders.

And, Laura, I think (indiscernible) much double the sales (indiscernible) biggest impact of next first quarter and also they are all on commissions now. So it was really -- we cannot get them into the business by default coming from direct-mail and build it (indiscernible) 11 million to 60 million in 4 years. Sales force was not reorganized that way because we bought this little company and expanded it but it's a major overhaul first quarter and probably also even it's hard to qualify (indiscernible) to sales in first, especially, second order because you get salespeople and (indiscernible) commission structure account of (indiscernible) understand they kind of want to wait because they want to make sure that they get a percentage and it's hard to quantify it and get to where it was actually also contributed to the down side in second Q and selling but so I think that will be probable way the most positive impact you're going to see and we pretty much pay for all the expense from the other (indiscernible) pretty much came from our operating (indiscernible) and so I think as a percentage business are biggest (indiscernible) and also we start to see new account activity for fourth-quarter which I think will have biggest lift because we looking we already have some accounts and we don't know yet if we will ship it in rollout third and fourth so it's hard to predict but we expect to get in there.

Ask you to elaborate a little more on how the sales force is structured by (indiscernible) product I mean, sounds like it's a brand for grocery and drug?

That's correct.

Any other type of retailer?

No. That's it for now.

And then -- is Gaiam in all the other types of retailers?

Gaiam is in all the other channels of retail and certainly on all media. We are launching in first quarter a lifestyle collection that's more focused on soft goods. For upscale.

You mean department stores.

Yes.

Is that going to be called Gaiam still?

Lifestyle Collection -- yes. We'll be testing some for fourth-quarter in stores like Bloomingdale but I would like to say the launch is first quarter.

Okay and what's I (indiscernible) question about one specific count. What's going on in the Discovery Channel Store -- I mean I used to see, it was almost like the Gaiam store a year or two ago when you walk-in and front and center was mostly Gaiam products and they always had your newest stuff before anybody else. I see more new stuff in Borders than I do in Discovery and they're not giving you such good positioning there. I mean what's going on there besides them not seeming to highlight you the same way?

The Discovery Channel Store has brought in a new president a couple of years ago and her mandate was to take it more private-label to brand the Discovery Channel. So that has been the mandate of the stores and I think we're still probably the largest brand in their besides the telescopes that's a non-Discovery store brand.

So they're trying to do more singular to their TV brand.

That's correct.

I saw a Gaiam like knock off -- it was a bumpy balance ball for lack of a better term in there under their brand.

Yes and as you can see, they're going more towards private-label.

Do you know if they're planning to do more in your category than just the couple of SKUs private-label.

At this point in time, as long as Gaiam's doing it they don't have any reason to want to private-label and that's been their comment to us. If it's a product we're not doing they may test doing it under private-label.

Would you ever consider doing private-label for them?

No -- we turned that down.

We had several offers like that but we felt that we don't want to get there with the brand and (indiscernible) last time we had several offers which (indiscernible) attractive from private-label to cobranding to promoting, copromoting with some other companies which is kind of attractive if your numbers down. But we felt long-term, it's not going to be beneficial for us and we clearly believe that the position and company was more important than getting getting extra 2,3 cents to the quarter and we pretty much turned all of them down.

We still don't sell our mailing list which was probably the biggest contribution if you would want to have it but we still made a decision we would not do that and assuming our -- to the guidance we see right now (indiscernible) 3rd Q we would not consider doing it if the economy be really bad and we cannot do that and might look at it again but based on what we see currently I don't think there would be any reason it would hurt us next year. And there's a lot of actually people start to look at it (indiscernible) New York Times article about a week ago. And there are several big magazines right now start to talk about this new coming area and we really don't want to kind of lower our brand, lessen our brand by going there. So no private-label, no cobranding -- none of that.

Okay thanks -- I'll let someone else ask a few questions and then I may get back to you.

Carole Buyers of RBC Capital Markets.

Just quickly on the guidance. Jirka, you just said that this third-quarter should be sequentially up but year-over-year that implies a flat quarter. Looking at 2003 for example, what's your comfort level with the consensus that's out there? I think it's about 18 cents?

Well, we provided the guidance last time so we don't have to change what we said. We kind of try to be more specific in the 3rd Q and the main thing, there were two things that were happening for us. First we finished in this consolidation into the Cincinnati facility assuming goes well -- we expect probably saving up to $1 million annually there and also we have right now big rollout from 1 account with $2 million plus which is like can be 4,5 five cents to bottom line to one of the quarters so we don't have (technical difficulty) now but into the third-quarter we plan to provide complete guidance on the rest of the year and the next year because we think all these things will be behind us and we will have better things so at this point we don't want change what we said last time, short of that we (indiscernible) specific on 3rd Q. and we expect that to be.

You talked a little bit about what you're doing with the direct channel. Lynn, can you repeat that, what were you doing with the catalogs for fourth-quarter versus last year?

We're increasing circulation, we're in the process of finalizing those numbers right now. In fact, by the end of this week we need to have those numbers finalized. So we're increasing circulation, we're changing the size of the Living Arts catalogue which will give us some cost efficiency. And we're continuing to add more proprietary products for margin.

We already had it so we have the results so it was not that we anticipated. We know it's actually giving us a savings for the test so we are just going to increase circulation of that.

And when you said the size am I to assume that you're going to make the catalogue smaller.

It's just the format, Carole, it is not really the number of pages or number of circulation, it is a format to make it consistent with the other titles that we have.

So we can all print it at one printer. Before it was a different kind of (indiscernible) rough format product as we brought it from California so we kind of do it then we go to (indiscernible) consolidated and goes to printer (indiscernible) and that's some savings from that.

The catalogs, actually, they were even slightly up in this quarter so they're doing definitely much better. For the last two years pretty much the catalogue because of (indiscernible) post office increases was really bad, which kind of clean up lot of the overcirculation in the market and right now when the retail actually difficult this year the catalogue kind of picked up. So it's an advantage being multichannel, you have some of (indiscernible) goes right.

So we have more focus this year, obviously, on the catalogs and also shifting the buying even (indiscernible) catalogs the percentage of internet orders from the catalogue kind of increasing. However the direct-mail sometimes is a little challenging because the spam filters.

Just elaborate on two other points I think Lynn, you were talking about, pulling the sales force (ph) was somewhere in the magnitude of 5 to 10? Is that -- ?

Yes.

So about 5 to 10 -- when you look at the product category just to elaborate there is it really better packaging on the current categories and then the soft good launch and (indiscernible)

It's the kids launch.

The lifestyle launch.

Yes the lifestyle launch and the children's launch.

And that will happen when?

That's happening Q3.

Oh, Q3.

Q3 exclusively a target. And the Healing Arts brand launches on a 70 store test in Kings (indiscernible) in Q3.

In Q3 as well, you said.

Yes that's correct.

And the soft goods launch -- is it more a test or full on launch?

Full on launch for first-quarter -- we are testing in a few key accounts in fourth-quarter such as Bloomingdales. Carole, when we said 3rd Q. it's end of the 3rd Q. so no much impact on the third-quarter.

So are we going to see the Healing Arts brand outside the supermarket channels?

You might see it in drug. We haven't called on them yet.

Certain mass. I think we see it in Target, I mean -- sorry, in Kmart.

We have no plans to go to Kmart at this point in time -- we might try it with Wal-Mart.

(MULTIPLE SPEAKERS) That's correct.

And then one more thing this audio program that you talked about for $1.2 million? Is that (indiscernible) and CDs?

Yes.

It was something we get into testing it because we have our music line was doing actually decent but so we started to distribute a few titles for 3rd party distribution agreement but overall music as you know kind of went down. And so the line is never profitable for us and so give us some revenues but no bottom line actually contributed some losses so that agreement (indiscernible) expired end of the year unless we (indiscernible) different agreements (indiscernible) talk about will give us, allow us to be profitable we would not continue that.

So the (indiscernible) excuse me, these distribution agreements that you are talking about.

Only one.

Two million dollars retail sales. Are you basically going away from distribution and just going direct for everything?

We are pretty much direct right now except the places where we cannot go. We're -- like Wal-Mart it's too small to be direct.

Wal-Mart, Costco, Sam's -- those will stay with distributors as well as independent accounts.

Distributors for those.

Rick Stands with (indiscernible).

The question I had was you mentioned that your Pilates franchise was selling really strong. And I wanted to ask do you see a contraction in the Yoga products market, like the part of the yoga lifecycle? Are sales uptrending, downtrending in comparison with the Pilates because it seems like so many of your products are focused on yoga?

The yoga category is pretty flat right now -- Pilates is the area that is certainly increasing.

It's dwindling means for us. What's really happening on the market, yoga reached (indiscernible) you have to still increase and people use but get the preparation because right now after the years we (indiscernible) popular so right now you can take a Internet course for two day and instructor and yoga is becoming kind of fitness. We are moving from real yoga and why the number of people increases (indiscernible) kind of what we market because we're not going to just do yoga for dummies, it's a title that is doing really well right now. So for us kind of (indiscernible) flat category right now.

Right within that category of yoga, do you notice difference in the flatness of your yoga in the educational tools vs. the yoga props like the mat and the bags and that kind of thing?

Mats and bags are still continuing to do pretty well.

The media is the educational side of (indiscernible).

What we have (indiscernible) when we have average buyer guy has about six titles so people continue to do the routines what they do (indiscernible) market, it's more downmarket. So people will kind of buy yoga for dummies and there are certain titles that will do well like our same kind of established franchises. But, overall, we still are producing new titles but will see it going like a flat media release schedule.

One other question I have was I noticed going to the Whole Foods stores a smaller presence with a Gaiam display? Is there a problem in that relationship?

No, not at all -- in fact, we've just done quite a few large resets with Whole Foods. So if anything we see that as an increasing franchise over the years.

Perhaps it is my local -- (MULTIPLE SPEAKERS)

-- some local stores when we started with Whole Foods because when we started with them, they had a place in the store what used to be called "People" and they basically gave us that space but it wasn't really great space but it was relatively large but typically large places and one area was kind of closed and really worked for us well so we reset everything in lines so you might not see that kind of close space but sales per foot is much better is in line because we cannot have to fill that space because they had it empty but it was a really good position for (indiscernible) them effectively so (indiscernible) and we actually work on some service like they want us to take more than 10,000 sq. ft. so we don't (indiscernible).

I understand and just one last question. What's this -- what is the current status of the sexual harassment lawsuit that Rodney Hugh (ph) was facing last year?

We have no idea. It doesn't involve us. Sure -- we didn't see any impact of it whatsoever -- I am not sure -- did we have a lawsuit? (MULTIPLE SPEAKERS) Everything was settled.

There was an article last year ago, had nothing to do with us and didn't impact any sales -- he's actually still best-selling title.

Thank you very much.

Laura Richardson with Adams Harkness and Hill.

I've just got a couple more miscellaneous questions. How much of your third and fourth quarter revenue is already booked at this point?

We don't book that much upfront. We have some orders like we have big orders which we need to kind of figure out because it involves branding and stuff that can still ship in a third if you have to push in a fourth it's about 2 million. But we pretty much ship the orders as we receive them. That is our strength but we don't really have backlog like -- (MULTIPLE SPEAKERS)

Okay, that's not why you never talk about bookings or backlog

No. That's not our business model (ph).

We try to ship it in a few days because the duplicate media you can do it in 24 hours, 48 hours, but as we get more stuff from abroad, we would kind of obviously liked to have that but we also try to basically as we are penetrating the new stores we get a lot of the places because we can ship quicker. Which is kind of hurt you on downside and help you in upside. So for us if it's going to be better things you can book it quicker, however if it's (indiscernible) you have no backlog so it goes both ways but we really don't have backlog.

Okay so where, where do you get a sense of revenues left 20 percent-ish in Q3 from Q2.

We might already -- if we right now are at the end of the second quarter (indiscernible) third-quarter see you came kind of see from what for that, see that far. In the third quarter we wouldn't know yet exactly August September but we kind of know August.

Okay.

And Laura, we also work closely with our accounts and we work with them to forecast so we make sure that we meet their inventory needs.

And then when -- did you say that the kids launch is in the third quarter in Target?

That's correct -- it won't show up on their shelves until October.

Are they going to promote it for you in any way?

Yes, the will. In their circulars.

So is it going to be priced similarly to your current merchandise?

Yes.

And then actually I was wondering about the gross margin in this quarter was not the best you guys have ever had. Is that -- were the returns you talked about a factor in there or talk about or was pricing price concessions a factor in there?

There was a couple of factors. First, the larger contribution from some of the lower margin division like our renewables divisions and, second, is a shift to our sales of accessories which carry a lower margin in our media sales so they just contribute a larger portion of our sales.

In fourth Q when it's strong catalog, catalog would 60 percent plus margin. Same with Internet about between 63 and 65 GP so if you have a shift that's why end of the year you have higher better margin because catalog is high (indiscernible) business overall obviously higher contribution. If you have a lower especially like midyear quarters the catalog is not circulated and heavy and that's what shifts the margin so the divisions like the renewable and have a bigger percentage.

So for the kids launch is there going to be new media in there or is it just new to Target -- some of the stuff you've already got in production?

Laura, the kids launch is really all-new. We certainly have a couple of kids' titles right now, but we produced two new children's titles and 3 new children's accessory kits -- we call the Fun Fitness Kits. And those are exclusive. The kids are exclusively for Target and the media will be for all channels.

(indiscernible) I am still confused on timing so it's going to launch in the fourth quarter or be in Target stores in October which is in your fourth quarter? Does that mean it's a revenue to you in the third-quarter or in the fourth quarter?

Should be revenue to us in the third-quarter and be on their shelves for fourth.

Assuming it was shipped on time.

Okay. Right right.

That's why I mentioned 2 million when we know we're shipping but we don't know when yet. Therefore (indiscernible) still kind of (indiscernible) know all these resets because a lot of retailers work closely with so we expect the third Q we would know all those so we can provide (indiscernible) very good guidance going forward.

Okay and (indiscernible) farther ahead than you want to look now but what I have in my model now for fourth quarter is quite a big jump in revenue. Is that realistic or should we be more conservative for the fourth quarter?

I really don't know what you have there right now. But we don't have to be specific for fourth quarter right now but we will provide guidance in third-quarter.

Just for the record, Jirka, it is 45 million now and hopefully Carole is similar to me -- because --

We will provide a guidance at the end of the third-quarter but it appears pretty high. We expect to have a good quarter but I'm not sure we will get those kinds of numbers. (indiscernible)

That is what I am speaking to and when you say profitable in third-quarter did you have a specific number in mind, like a few cents or -- ?

The reason I don't want to be specific is that $2 million order is 4, 5 cents so it's hard to say where is and we might ship proportionally, we might ship 100,000. So can be I will say we'll be better, they'll be positive --I don't really want to go beyond that because we don't know what we ship -- we want to stay on that level. We want to (indiscernible).

Does Target have more control over when they want that inventory than you have when you want to ship it to them?

Yes.

That's how it works these days.

Yep. (indiscernible) fast.

And is it going to all stores? This new kid stuff.

Yes it is, it's going to be in their circular.

Laura, if you want to be conservative just plan positive but not much. Better is better but be positive anyway you want to put the numbers there so stay low there.

(indiscernible) Mr. Sams, your line is open. Gary Goodwin with C.L. King.

If you addressed this at the very beginning I might have missed it, I got on late but what's the thinking behind the CFO change? In other words what do you intend to accomplish that you weren't accomplishing in the CFO (indiscernible) before?

Well we basically came back. We had Janet was our CFO for a while including our IPO and going but about two years ago, we kind of thought we will expand the function to investor relations -- what I used to do. And we brought Yudi in but in the scope of cost and pretty much he came from investment banking and so we kind of felt we (indiscernible) going to need that load of expenses and so we combined a business development title because we won't do that much. We were -- two years ago, we were planning to expand more in Europe which we don't want to do right now. We want to stay in the UK where we are really planning to do more (indiscernible) expansion and felt we didn't needed both positions (indiscernible) but Janet has a much stronger accounting background.

Okay, that makes a lot of sense. Thank you.

(CALLER INSTRUCTIONS).

Okay, if there are no more questions, I'd like to thank everybody and we will talk to you on October 29. Thank you very much.

(CONFERENCE CALL CONCLUDED)