Gaia Inc (GAIA) 2003 Q4 法說會逐字稿

Welcome to the Gaiam fourth quarter earnings release conference. All lines will be in a listen-only mode until the formal question-and-answer session. At that time instructions will be given. At the request of Gaiam, today's conference is being recorded. If you have objections you may disconnect at this time. I would like to introduce Mr. Jirka Rysavy, Chairman and Chief Executive Officer of Gaiam; Ms. Lynn Powers, President; and Ms. Janet Mathews, Chief Financial Officer.

Thank you. Good afternoon, everyone, and welcome to Gaiam's fiscal year 2003 earnings conference call. First, for the legalities.

The following constitutes a Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. Except for the historical information contained herein, the matters discussed in this call are forward-looking statements that 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 does not undertake any obligation to update forward-looking statements.

I would now like to turn the call over to Jirka Rysavy, Chairman and Chief Executive Officer.

Hello, and welcome to our quarterly update which will cover our results for the fiscal year and fourth quarter which ended on December 31st of 2003.

Our first quarter results were generally in line with the expected, except for lower sales in December, especially our catalogs. For the quarter, Gaiam reported sales of 35.1 million, which is a 5.7 percent decline from 37.3 million last year. Net income for the fourth quarter was 341,000, or 2 cents per share, compared to 2.3 million, or 16 cents in 2002. For the full year, Gaiam reported sales of 102 million, which is (indiscernible) percent decline from 111.4 for the same time in 2002 -- same period in 2002, a net loss of 972,000, or 7 cents a share, which compared to 5.4 million income, or 38 cents per share in the fiscal year 2002.

On a more positive note, for fiscal year 2003 Gaiam generated 3.7 million contribution from its operation, which was a surprise increase from 1 million in 2002. In 2003, Gaiam also generated free cash flow. Gaiam ended the year with 8.4 million in cash, which is a slight increase from the previous quarter, had no doubt (indiscernible) availability on a $15 million credit line. (indiscernible) depreciation amortization for the year was 3.2 million. The negative internal growth rate decreased to 14 percent in the last quarter and turned positive in this quarter. We are on track for internal growth rate to be between 5 to 10 percent for this quarter and 10-plus for the year, with the gross margin remaining around 52 percent.

As of today, we have finished a system consolidation and transfer of all the support for all our accounts to our Ohio distribution facility. Some accounts, such as Target, which (indiscernible) did not one to take risk on holiday volume, were transferred in January, which (indiscernible) still effect on the first quarter profitability.

Now I will pass it to Janet. She will give you some details on the numbers. And then Lynn for the business overview. Janet?

Thank you, Jirka. Let me provide some additional details.

For the fourth quarter sales were 35.1 million, representing a decline of 5.7 percent from prior year sales of 37.3 million. The decrease in revenue was primarily due to lower sales in our business segment, where we experienced continued weakness in sales to mall-based stores and made the decision to scale back sales to department stores. Gross margin for the fourth quarter was 50.3 percent, down from 52 percent for the year. This is primarily attributable to lower sales in our catalog division. We expect our 2004 gross margin to be approximately 52 percent for the year.

In the fourth quarter 2003, selling and operating expense decreased to 15.2 million from 16.1 million in the fourth quarter of 2002. General and administrative expense decreased to 2.4 million in the fourth quarter of 2003 as compared to 2.7 million in the comparable 2002 period. Total operating expenses decreased to 17.6 million for the fourth quarter of 2003, as compared to 18.8 million during the fourth quarter of 2002. As a percentage of sales, total operating expenses were 50 percent in the fourth quarter of 2003, as compared to 50.4 percent in 2002, the decrease resulting from cost-saving measures enacted earlier in the year. Operating margin in the fourth quarter was a positive .3 percent compared to a positive 9.8 percent in the prior year. For the fourth quarter, net income was 340,000, or 2 cents per share, compared to a net profit of 2.3 million, or 16 cents per share in 2002.

Our business segment accounted for 17.7 million in revenue and a negative contribution of 159,000 during the fourth quarter of 2003, while the direct to consumer segment generated 17.4 million in revenue and contributed 250,000 in operating income. For the year, our business segment accounted for 51.5 million in revenue at a negative contribution of 1.9 million, while the direct to consumer segment had 50.5 million in revenue and contributed 594,000 in operating income.

For the year ended December 31st, 2003, sales decreased to 102 million compared to 111.4 million during the same period in 2002. Operating contribution was a negative 1.3 million in 2003 compared to a positive 8.8 million in 2002. For 2003, the net loss was 972,000, or 7 cents per share, compared to net income of 5.4 million, or 38 cents per share in 2002. Cash generated by operations for 2003 increased to 3.7 million compared to 1 million in 2002. Gaiam ended the year with 8.4 million in cash, no debt, and an unused credit line of $15 million.

Trade accounts receivable totaled 17.8 million at December 31st, 2003. DSO improved to an average of 59 days for the year as compared to an average of 60 days in 2002. Inventory at the end of 2003 totaled 16.6 million, an increase of 1.8 million over the 14.8 million in inventory at December 31st, 2002. 1.7 million of this increase was associated with the consolidation of Leisure Systems International, a U.K.-based distributor of wellness products in which we acquired a 15.1 percent interest in January 2003. Inventory turns of 3 times was virtually unchanged from 2002.

Before turning it over to Lynn, I would like to announce our schedule for our next earnings call. The first quarter earnings will be announced on Thursday, May 6, at 4:30 PM Eastern time, or 2:30 p.m. Mountain time. Lynn?

Thanks, Janet. 2003 was a difficult year for Gaiam, with a sales decline of 8.4 percent for the year and 5.7 percent for fourth quarter. The majority of the decline was in our business segment, primarily with sales to retailers. Early in 2003, we communicated this trend and have utilized this time for transition and consolidation, which I will discuss later.

Our sales to retailers declined 34 percent, or 19 million for the year. The majority of the decline was in three areas -- distributors declined 11.8 million, Discovery Store, 4.2 million, and department stores 1.6 million. We also discontinued our distribution agreement with our audio supplier that accounted for 2 million in revenue in 2002. We expect to launch our own audio line in late 2004.

A portion of the decline in business with distributors was due to the exclusion of our Healing Arts branded accessories and the Fitness Palette in Costco for holiday. Additionally, we made the decision in 2003 to take Bed, Bath and Beyond direct. The transition of that move required us to take back inventory from our distributor and reset the floor for Bed, Bath and Beyond. We believe that impact is behind us and should provide positive comps with this account in the future. We feel that we have worked through the returns issues with our distributors, and we are closely monitoring their sales and inventory levels to prevent this problem in the future.

As noted in previous quarters, we have experienced a decline in business with the Discovery Channel stores. This is attributed to their decision to pursue private-label products on a large-scale basis, as well as their store closures. We have determined that our best strategy is to work with them on unique products for their account. We are currently taking some of our better catalog products and testing them in their stores. Under this strategy, we will continue to work with Discovery on the placement of new products; however, we do not expect significant business from them going forward. The decline in business with the Discovery Channel stores represents a 4.2 million decline in net revenue from prior year.

In the latter half of 2003, we began to see an increase in business. Two of our largest channels, mass merchants and bookstores, had positive comps for the second half of the year. Our largest retail account continues to be Target. Target sales remained strong, with a 17 percent increase in 2003 and a 33 percent increase in the fourth quarter. We have continued to partner with Target on special promotions, including a fourth quarter placement in the cart wall section of all 1280 stores, special custom red yoga mats, and exclusive product rollouts. The promotions have been very successful and have helped solidify our position as an important vendor for Target.

This past Monday, we were recognized by Target's senior management at a special luncheon as a vendor of the year. Based on our sales performance, Target is planning to expand the Gaiam presence in their Fall 2004 planogram reset for an additional 8 feet of space, which will triple our current space. As a part of the expansion, they will be adding our media to the sporting goods department of all stores. Our kid's products will be relocated to a special kid's fitness section outside of the 12 feet of space in the new reset. We are excited about our partnership with Target and our ability to increase out retail presence with them in Fall '04. Target accounted for 10.7 percent of our business in '03. In addition to Target, we experienced positive growth in the remainder of the mass merchant channel. In Q3, we expanded our media presence in Wal-Mart, achieving 52 percent comps from 2002 in that account.

Our bookstore channel had the largest increase for 2003. In third quarter, we rolled out full stores and store presentations in the 550 Barnes and Noble's bookstores. This new account contributed 3 million to net revenues in 2003. It's a very exciting step as it represents greater retail presence for us among mainstream consumers. The results of the rollout have been positive and we continue to see consistent replenishment orders. In the third quarter we participated in a 50-store test with Borders, where we increased our presence to the full lifestyle presentation. The results from the test were very positive and we anticipate Borders to move forward with expanded lifestyle presentations beginning in second quarter '04.

For 2003 the sporting goods channel was down approximately 1.1 million from 2002. The decrease in this channel can be attributed to our lack of penetration into the post-merger Sports Authority. We saw a decline in Sports Authority of 1.2 million for the year. So adjusted for that Sports Authority number, the channel was up slightly in 2003.

During third quarter '03, we established a premier Gaiam lifestyle presentation at the Galyan's location in Broomfield, Colorado. Reactions to the space and the presentation were very positive. Based on our work at Galyan's, other sporting good chains are working with us to set up lifestyle shops in their stores. Dick's Sporting Goods, who is currently our largest sporting goods customer, had 8 percent comps for '03, and is looking to us to provide them with the premier presentation in all 140 of their stores. We expect this rollout to occur in second quarter '04.

As discussed on previous calls, we feel there is an opportunity for our products in the traditional grocery channel under the Healing Arts brand. During third quarter of '03, we launched the Optimal Wellness Healing Arts brand into 68 Kings Supers grocery stores, a division of Kroger. Results from the launch have been positive, and we are currently working with their Western division brands to expand the program.

In support of penetrating and growing the grocery channel with our Healing Arts brand, we have hired a national sales manager for grocery and natural foods. His experience includes over 12 years in the grocery industry. We are also looking into additional broker and distributor relationships to support this channel of business.

Based on market feedback, we are changing our strategy for the placement of the organic soft goods, including clothing and home products. In the past, we planned to launch our sales efforts in the traditional department store channel. Now, we believe that high-end department stores, specialty retailers, and a more grass-roots approach will produce stronger results. We believe our mission for this line can be better served by placing the products where we have the ability to make a stronger connection with consumers by educating them to the benefits of organic. In March, we are launching our bedding and bath products in 33 Marshall Fields Homes Stores. We think they're an ideal partner for this launch, as they are consistently looking for new and innovative products and ideas.

Our media products continue to receive national recognition. Our media won an additional 7 Tully (ph) Awards, bring our total to 22, and have been recognized by the International New York Film Festival. Our new children's products were the recipients of several Parents' Choice Awards in 2003, recognizing new products that help kids grow imaginatively, physically and mentally. And today we received acknowledgment that our new children's media titles were recognized by the Coalition for Quality Children's Media and awarded Kid's First media awards. We've once been selected to be in the Oscar bag. This year we are offering the Oscar presenters organic spa products that have been developed to take to retail in late 2004.

To leverage off our book publishing, we've created a new line of products that refer to as multimedia kits. The kits are a combination of book, DVD and CD. These products are currently placed with Waldenbooks, Barnes & Nobles, and our Canadian distributor. We're looking forward to monitoring the results of these new products and expanding the line. In response to consumer and retailer demand, the media market is moving away from VHS and into DVD. We have begun working with our retailers to develop strategies for the conversion to DVD. We have been working on our library and have transitioned all of our bestsellers to DVD. We expect the retail market to be fully transition by the end of '04.

We're pleased with our stores and store presentations climbing to over 3650 doors, or 13 percent of our 30,000 North American doors. Stores and store concepts gives us great branding and exposure, and is proven to offer retailers increased sales per square foot. Expanding into the larger lifestyle shop concept that we tested in Galyan's and Sports Chalet (ph) will be a focus for 2004.

Our direct segment experienced flat revenue for the year on a total of 15 million catalogs circulated in '03. We did not accurately predict the sales jump for several of our proprietary products during holiday, causing our fill rate to drop below 90 percent for the fourth quarter, down from 95 percent last year. We could not get back in stock prior to the holiday, resulting in some lost sales for the quarter. We have forecasted sales for these products going forward, and do not see the fill rate as an issue after first quarter '04. Our proprietary products increased from 26 percent of our direct sales in '02 to 28 percent in '03, resulting in a margin increase to 64.4 in '03 from 64.0 in '02. We saw an improvement in fourth quarter for our average order size, which was $112 this year versus $100 last year. Our average order size ended the year at $106, up from $98 in '02.

We entered into a new contract with our catalog printer that is effective beginning in '04. Based on new negotiated rates, we expect to see a significant cost savings related to printing catalogs. In February '04, we held a summit meeting with all of our significant direct vendors at an off-site location in Broomfield. It is our intention that with increased communication, we can develop more effective and efficient processes for our catalog business.

Our website continues to perform well. Revenues were 11.9 million in '03, which is consistent with '02. Margin was strong at 65.4 percent. During '03, we restructured the division and reduced costs to improve profitability. We saw some (indiscernible) improvements in our Web marketing campaigns. We achieved a 48 percent growth in our affiliate program and a 39 percent growth for search engines. E-mail campaigns declined 27 percent since '02. We believe this is mostly due to increased spam filters, and we are continuing to look for innovative ways to increase revenues while monitoring costs in our Internet business.

We implemented a Gaiam valued customer program in '03. This recognition program was designed for our top direct customers. To date, the program has been a large success. We continue to look for ways to expand and enhance the program. The next scheduled event will revolve around a promotion for Earth Day. Our renewable energy division, Gaiam Energy Tech, experienced a good year, with over 8 million in revenue and a 34 percent margin, becoming one of the top five sellers of residential solar in California.

We spent time and energy this year in restructuring our business to focus on profitability by business unit and by retail account. We reduced expenses, consolidated operations, and set new key initiatives for expansion in '04. We ended the year with over 61 of our total sales in proprietary products, which is slightly above last year. We're excited about our new product opportunities in soft goods and spa, and of course, upcoming new media releases. We will continue to focus on sales by channel, store within store penetration, product differentiation, operational efficiencies, and inventory and AR management during 2004.

It is our mission to educate consumers on the benefits of organic and mind/body health, giving them stronger reasons to buy Gaiam products. We see 2004 as a return to growth year for us, and are excited about the opportunities, especially with our third quarter three-fold expansion in Target.

So operator, can you open it for questions?

(OPERATOR INSTRUCTIONS). Carole Buyers, RBC Capital Markets.

You've outlined a number of initiatives for 2004, and I really wanted to hone in on the greatest opportunities. With what retailers and what products do you see growth coming from in 2004? That's my first question.

Obviously, Target will be our largest growth opportunity at retail with the expansion of triple our space from 2003. And that opportunity should happen in late third quarter. I would say our next opportunity would be with the Borders stores in-store expansion, which should happen in late 2002, and then our continued expansion with our Healing Arts brand into grocery.

Have you identified or obtained any additional accounts outside of Kroger?

We are in testing in Safeway right now.

Okay. And then, Jirka mentioned something about Target earlier in his initial comments. What did he say? Something like they are scaling back inventory?

No, no. We transferred -- we did not want to take the chance of transferring all of our fulfillment during fourth quarter of Target, so we are in the process of doing all of our fulfillment transfer on Target to our Cincinnati distribution center.

We had to many orders with the cart wall that was there (indiscernible) the front of the year, we didn't want to take that risk because it was such an important thing. So we're glad we didn't, because we get vendor of the year and get a tripling space for our largest account. So it was, I think, decision we're glad we didn't (indiscernible) we tried to put everything in the year, it was difficult with the volume.

What products specifically are you tripling the space with? I know you mentioned yoga kits.

The kid's products, certainly all of our accessory products and media products.

The media is probably most important, because we can increase meaningfully the talents of media titles, and they carry the best margin.

And then, specifically, what are considered to be spa products?

We're doing some wellness products. It's everything from organic towels and robes to relaxation kits, meditation.

Is this, are these the products that are going to be -- mentioned that you were testing this -- where were you testing the spa products?

Right now the spa products we've put into the Oscar bags, but some of those products will be in Marshall Fields' 33 doors. We're shipping right now; they should be set up by the end of march for.

So it sounds like -- are you taking your natural home, and kind of retooling it to be more on the wellness side?

We're just adding wellness products to it. Still the natural home is what will be in Marshall Fields.

Okay.

We actually -- one of the things that I would add to the importance, even might probably not have an impact on revenues, but probably will on the costs -- we felt like because we have such a presence in stores like Target, we need to really beef up our grass-roots. So we are planning to spend a lot of (indiscernible) the year to strive to get back to professionals, the specialty store, the studios, which doesn't have that much impact on revenue, but build the brands. And by eliminating the brands to the upper stores and taking it away from the (indiscernible), we feel to really get the brand out there we need to focus on the specialty stores and the grass-root marketing. Because we would otherwise take too much risk (indiscernible) these people at Target being so big. So even (indiscernible) not big revenue upside this year for sure; (indiscernible) it is really important in the future of our brands. So it's kind of a new initiative that's going to be big, and going to have some costs associated.

Two more questions and then I will open it up. Specifically, where have you lost doors, and what percentage of your revenues are going to come from Target in 2004? Is it going to stay about the same or be a greater portion?

Let me first tackle the question on doors. Certainly the Sports Authority, although we are still in Sports Authority stores with media, we are not in there in a large presence anymore. And then we have really pulled out of most of the department stores. As I said earlier, we really analyzed our business by business unit, and by account for profitability. And we've determined that mainstream department stores are not the best match for us. So those are the doors like JC Penney's -- we won't be in there any longer.

We will try to pretty much -- especially the clothing line goes to the grass-roots, because it is an impossible to carry on both sides. And when we kind of launch, get a feedback from the street from our customers, it was really kind of obvious that we should protect the small accounts and keep the brand out there.

When it comes to percent of business for Target for the future, since we just found out on Monday about the increase in space, we really have not forecasted what that means to our business for the last half of the year. Once we have worked with them and we have a better projection, I can give you that number.

Ms. Laura Richardson, Adams Harkness.

Kind of following on the last line of discussion on forecasting in Target. If there was guidance in the press release or in the call so far, I missed it. So maybe we could discuss that, or at least how you all feel about the numbers that are out there for you from Carole and me?

That's the question?

Guidance that is the question.

I didn't know if you (indiscernible)

I'll just let you do that one, and then follow up with some other questions.

As Lynn said, the Target is the difficult one, because we really don't want to be too specific on that because we just got it, obviously -- tripling our space there. That can be meaningful. But overall -- for analysts out there -- and there was another guy from Florida, I heard we got like 10 cents. We basically don't want to be too specific until we see the amounts of real savings from the elimination of third party distribution, because that is a big thing (indiscernible) just finishing it. So we would like to see the actual dollars (indiscernible) flow, which we'll probably do in a month or two. But we generally think that what analysts have out there is in the ballpark. And we said that our internal growth for the year should return to 10-plus, with GP remaining about 52, which was this year. We said that some accounts transferred, like the Target, to Ohio. What's happening now was the impact for SKU. And so if you take all the analysts out there, (indiscernible) we see between 10 and 20 cents, we believe that is kind of a big spread. But it's out there. And we definitely think it will be better than 10. But based on our last year performance, we want to actually (indiscernible) deliver the results. However, the gains we've -- expanding our store in-store presence in several retailers, especially like tripling Target, definitely have upsides. That's especially in first half of the year. From now to like end of the second Q, we want to spend the time and money for putting these grass-roots, so we are going to really approach the professionals (indiscernible) separate departments to kind of sell the professionals. Which we will discount heavily to try to get our brands to kind of (indiscernible) decision-maker and people who recommend the products. We will try to approach studios and specialty stores, and that has always (indiscernible) cost have also kind of obviously a risk of bad receivables. But we think it is important for us to do to counterbalance the positive news from Target, so we don't just start to depend on a few big accounts. (indiscernible) we don't want company to go there. So we have good momentum, but we're going to use it to build it, because I think we had a bad last year and we kind of really started to rebound from it. And we have a lot of good news, so we try to kind of build it and don't just kind of depend on large few accounts because we (indiscernible) in the past. (indiscernible) those people one day (indiscernible) last, then you're in trouble. So (multiple speakers) to use the dollars from it and build it up. So pretty much all the analysts said that all our earnings will come from second part of the year, which we all agree. Pretty much all our earnings would come in third and fourth quarter.

Okay. I can follow up with about 10 questions just on that. So if Target -- does that mean like all the new product in the Target is going to ship in the third quarter, and it will be third quarter revenue for you? Or is it more of a process that starts in the third quarter and will continue into the fourth?

It starts in the third and, obviously, will continue into fourth quarter.

We have to still work which kind of products and how we're going to work it out. It's just kind of happened (indiscernible) this award in the (multiple speakers). We expected that because we performed well for Target that we're going to have an increase, but not close what we potentially might have (multiple speakers) until it happens -- sometimes you have negative things to counteract it, so we just try to remain cautious from where we are right now and we were last year. But it's definitely a lot of good news (indiscernible) could come from it.

In terms of everything you did with the sales force last year, does this mean you need to reorganize a little differently to service these grass-roots customers and Target more heavily, and not service the department stores, not service the Discovery Channel so much?

Actually, I think that organizing by channel, we are starting to see those payoffs now. We will take some resources that were originally planned for the department stores and Discovery Channel and reallocate those resources into this grass-roots marketing. We don't see it as being a huge increase in what we're doing, just a reallocation of those resources.

Generally the sales force will also start -- it takes about a year when you hire the people to -- (indiscernible) start to contribute. So that should start to kick out after the second quarter, because we pretty much -- (indiscernible) the year when we start to add them. So we kind of see that second part of the year we should be back and having all this kind of carrying cost as we restructure behind us. We definitely do not plan another restructuring.

(indiscernible) more like reorganization.

Just reallocation of (multiple speakers)

Not like the kind of restructuring you had last --

No. In fact, what we did is paying off now.

The grass-roots cost us more in kind of managing the small accounts, and taking a receivable risk. And it's not that you have actually salespeople necessarily have to call on all of those. It's more you discount heavy for those professionals because you want them to actually wear that stuff.

It doesn't look -- the composition of your account base is going to be real different at the end of '04 than it was at the end of '03, and that (indiscernible) different than '02.

No, it won't be, in revenue base.

I've never heard you before say that any customer was more than 10 percent of revenue. Is that because nobody was more than 10 percent of revenue before?

That's correct.

So Discovery was never even 10 percent?

It never was 5 -- maybe it was around 5, but never was close.

Okay. I think Carole asked, but I'm not sure I heard the answer -- Target, could they be 30 percent of revenue next year?

No. No, they could be 30, but we want to make sure that we build other things around it. And we also want to be cautious on that part, but they can grow significantly. 10 percent is over 10 million, so there's a lot. The drops -- because the expense structure is there, (indiscernible) drop through it's very significant. Because there is no additional cost structure to those others.

Interesting. But you don't need to add more people to service Target?

That is correct.

Okay.

We spent resources (indiscernible) for last year to get the Target where we want to have it, because it was our focus. Because they only want (indiscernible) big department store who gets our experienced economy to model. They actually started to call (indiscernible) customers guests, as we kind of believe should be done. So they are really kind of getting the model as we believe the retailers should be having if they want to be lifestyle. So it was important for us to really be good in that account, because we believe they're the leader from the big retail stores in the space where we want to be.

Interesting. (indiscernible) you think because sales and earnings will be better in the second half, do you think there will be any quarters where you will lose money in the first half?

We see that some of the (indiscernible) have the losses for the first couple of quarters, and I would say (indiscernible) especially it depends when we kind of see the real savings through the moving the Target, but can still impact the couple of quarters. So you might see a couple of pennies in the first, or in the second is our slowest one (multiple speakers) can happen, but it would be -- clearly, cost would kind of be gone after that. So we don't really see having losses. But you might see something in the first and second quarter, yes. (multiple speakers) it will, but it could.

What's that? You didn't say will, but could?

Yes. Because we basically think some of the customers -- we don't know yet what it's going to be, but to be conservative I would kind of say that it's likely.

What costs are you thinking of? Because I have in my head we had a lot of cost savings that you implement middle of last year that would benefit, you know, starting in the fourth quarter this year or fourth quarter '03, and then into '04.

Just kind of -- we don't want to say anything different, because until we see actually the earnings going through -- and it was a decision for us when we move the Target and a few of the big ones, because it's costing us like 125,000 a month just from some (indiscernible) distributors, especially (indiscernible) a double. So you're talking almost a penny a month from having double shipping. So that cab definitely can have an impact. Because we kind of said last time we expect the first and second (indiscernible) quarter (indiscernible) around breakeven. So this (indiscernible) of course can happen, it depends how the revenue looks at March and how the first quarter is. But I would not say for sure we would not have it, especially with the grass-roots. If we start the grass-roots process, we can (indiscernible) enhance the earnings, but we really don't want to because we want to have it done before we hit the Target heavy.

The last numbers question, then I'm going to ask something more fun. When you said, Jirka, (indiscernible) internal growth approaching 5 to 10 percent by the end of the year?

(indiscernible) the 5 to 10 percent in this quarter, and after that, 10-plus.

So every quarter in '04 you think it will be 10-plus?

Yes.

Okay. Thanks. And then --

I was talking about it -- the year as a total. But remembering the budget, I think it is pretty much running every quarter above 10, yes.

Are you counting Target as internal growth?

It would be, but the Target when we did our budget wasn't really calculated, because we just received that news a couple of days ago.

Okay. That's fair. The more fun question is -- Lynn, when you were talking about some out of stocks and proprietary catalog product, what were those products that were so popular?

Some of our new organic sheet programs and organic nightwear. We were surprised at the response, the very positive response we had on those new programs. We had a little bit of catchup to do, but we are certainly glad that they sold better than anticipated.

Yes. And is that the stuff that's going to go into Marshall Fields?

Yes it is.

I guess it's good to have a good relationship with that whole company.

I agree. They are a great company to work with.

But other than Marshall Fields, you're not dealing with department stores anymore?

No.

Okay. Thanks. I will let someone else ask some questions.

Dan Moorfield (ph).

Thanks very much, Jirka and Lynn. In connection with the consumer direct sales, given they are making up 10 percent of your revenues, you referred to the customer loyalty programs -- what is that specifically?

It's really hard for us to hear the question. Can you repeat that?

In reference to the consumer direct sales and Internet-based sales, given they're becoming up to 10 percent of revenues, I think Lynn mentioned something on a customer loyalty program? What is that specifically?

It's identifying who our best customers are and having more contact with those customers. As an example, we sent an advance catalog to our top 500 customers, and the response rate on sending them the catalogs in advance of other customers was triple what it was with people from that same segment segment. It's just more contact with them and creating more of a loyalty program with them.

Are these customers going for media or are they tending towards the other, you know, home appliance products?

They're our best customers overall, not by any particular category.

Right. What kind of gross profit percentage are we seeing from these customers compared with the catalog companies, the catalog customers rather?

We don't look at a gross profit by customer, only by channel.

(indiscernible) a little more gross profit than (indiscernible), because there's more media but smaller average order. Because the media, (indiscernible) people just place media is typically better GAAP but smaller orders.

Looking at the yoga market specifically, and yoga mats, one of your bigger lines -- that's because such a commodity item, and a lot of competition in that area compared to 12 months ago. How much of (technical difficulty) in that line, if any?

It's our best margin product still, one of the good ones. We don't take any really beating yet on the margin. Even if we have to reduce the price, there's definitely room on that line.

And on the volume, Jirka?

I don't know the volume.

It's continuing to grow.

Continuing to grow, okay.

We had it coming (indiscernible) talk about that, because --

We've taken it from just a commodity business to more of a fashion business, adding colors and prints and textures. And the response to all of the newness has been excellent. It's one of the areas where Target is going to have its largest expansion.

You mentioned something about a custom matt for Target? What is that specifically?

Custom colors.

Uh-huh.

You're done with the question? Hello?

I'm sorry, you're breaking up. Yes, that is it from me. Thank you.

Carole Buyers.

Just one more follow-up question on the guidance for '04. Are you comfortable with the '04 earnings guidance that's out there today?

I don't think we want to kind of -- we kind of said on the guidance as much we would want to say there. We would kind of -- the spread analysis is pretty big, but we (indiscernible) say they're all within 10 and 20 cents, and that's kind of in a range. I think we want to (indiscernible) from specific comments on earnings.

Zach Ligat (ph), Financial Investment Management Group.

Just one question on the fourth quarter and then a couple looking forward. On the fourth quarter, can you share maybe any internal analysis on why December was weaker than plan? Was it general competition -- I don't know. Anything that you could -- a little more color you could add on the weak December?

It mostly came from catalog, and big chunk was our (indiscernible) we, as Lynn said, did not predict well some products, so we were out of stock. So it was -- we took a hit on our (indiscernible).

Looking forward -- I missed the earlier part of the call. Did you mention anything about the international front, if there is anything there to be excited about, either with revenue opportunities or product sourcing?

Certainly in regards to product sourcing, we are in the process of doing everything on a full package basis, which we anticipate can improve our product cost going forward. And certainly when you get the kind of orders that we anticipate coming from the Target expansion, we should get larger quantities in a particular product -- we, again, can improve product cost based on that. As far as additional revenue opportunities, we hope to be launching all of our additional Gaiam products in the U.K. with our acquisition of Leisure Systems International, and also to start setting up Gaiam's store within store concept shops in the U.K. So we see both of those as revenue opportunities in 2004.

Great. And lastly, just as far as new products in the pipeline '04 -- is it mainly going to be extensions of existing products, or do you have anything new that maybe you can share with us on the call that you're really excited about that's going to come out maybe second half?

We are approaching our product launch strategy in two ways -- first, (indiscernible) line extending on current products and adding fashion, like I talked about on the mats, tight to make it a more fashionable business. And then second is the launch of the soft goods, and we're very excited about the 33-store test in Marshall Fields for our home line products. I expect to see it set up at least by the first week of April. So we're anxious to see what happens there. And finally, launching our own audio line in third or fourth quarter of '04.

Eva Martin (ph), BDP.

I'm just wondering about your kid's products in Target. How successful has that line become? I know you're getting more shelf space, but does that mean it has been a real successful line?

Target just marketed those products for the first time last week, and the rate of sale on them tripled with their first marketing attempts. Target believes very strongly in this category going forward, and that is why they are giving it additional shelf space. We're certainly pleased that they were our exclusive partner for the launch, and Borders has picked them up going forward; they were exclusively for Target through march, and then Borders is picking them up for March delivery. So we will see how they go also in a bookseller environment.

Great. And are you also launching the kid's line into other merchants other than Borders and Target?

We are in the process. But again, we had an exclusive with Target through March. So we are just now showing it to additional retailers.

I see. And as far as the trend in exercise is going -- as far as yoga, Pilates, and general exercise products -- which would you say is up-trending the most and which one is down-trending?

Certainly Pilates right now is the largest growth category for us, and we've seen that for a couple of quarters. Yoga is maintaining its importance, but certainly Pilates is growing faster.

I see. And what new products are you coming up with in the Pilates/yoga realm?

We really like to keep specific product launches kind of undercover at this point in time. We don't like to announce our product launches until they're out.

Okay. And as far as -- what is, in terms of exercise products and alternative energy or clothing, your fitness books and media -- considering all those aspects, what is generating the most profit? Is it the exercise products or your clothing? You were mentioning you're getting more into fashion. Or would it be your media?

Our media products have by far the highest gross margin and contribute the most to the bottom line.

Okay. And what would you say in those categories is the most up-trending?

In the category of media?

No. Like of your exercise products, alternative energy, clothing -- all your lines basically, all your channels.

Of significant revenue growth for '04, we expect media to probably be the largest. As far as percent up-trending, I'm would say the soft goods, because they're such a small portion of our business today.

You mentioned the media. Are you saying that that would be the most up-trending because you're going to start your own line? In third quarter do you think that's what will bring in --

No, no. That's on audio products now, because of the expansion of the media in all Target stores. That's why I believe that we'll have the largest volume increase in media.

I see. And then you mentioned that you had a gift bag for the Oscars? What was it? A spa item?

It's kind of a spa experience. It's an organic cotton robe, towel, and relaxation music.

Okay. So you're bringing that into BB&B?

Into --

Sorry. Bed, Bath and Beyond.

No, that is going into Marshall Fields.

Oh, Marshall Fields. Okay. And you're also in Bed, Bath and Beyond -- correct?

Yes, but not with those products.

I see. How did you get into the Oscar gift baskets?

Every year they solicit people to apply products, and then they choose what they feel are the best from a quality and presentation standpoint. For the last three years we have been selected to be in the bags.

Gary Giblin, CL King.

Are you going into all the new Wild Oats and any Henry stores, as they now are starting a store expansion program?

Yes. We're currently in Wild Oats, and we are working with a distributor to continue to expand in the Wild Oats chain.

Okay. So you would expect that as every store opens you would have the same base that you normally have in a Wild Oats, right?

I would assume so, but I can't guarantee on any individual store.

We don't call on Wild Oats directly, so (indiscernible) the distributor process. It is not a big account.

Okay. I mean, is there an opportunity at Henry's, or is that just a different --

Overall, Wild Oats is not going to be anywhere in the top 25 accounts.

Okay. And given the switch in distributors, where it seems like United is gaining some share with some (indiscernible) Tree of Life, does that open up any new opportunities for you?

For us it's really not really that important part. We do work a lot with Whole Foods, but Wild Oats are not a big account. And we really kind of try to kind of build the grass-roots right now.

And was there any material extent to which your fourth quarter results were adversely impacted by the Southern California supermarket strike?

No.

It wasn't --

The food -- food is very, very small business for us. Any of the food we (indiscernible) having some tests, but overall that's still very low impact.

Thanks, and good luck as you roll out your new programs in '04.

Thank you.

(OPERATOR INSTRUCTIONS). Ronald Sugarman (ph).

Can you break out exercise videos as a percent of your overall business and tell us about the growth numbers in the exercise video segment?

No, we don't -- actually we don't have it, not that we would (indiscernible) break it, but we don't know the numbers. Would that would be even -- like exercise -- would yoga be exercise?

Yes. I mean -- DVD and VHS, generally. Can you break it out that way?

We don't follow it that way, so it's --

van you comment on your relationship with Yoga Journal Magazine? Is that continuing, and how many new exercise videos will be out in 2004?

We don't have any relationship business-wise with Yoga Journal for a few years. We might advertise in the magazine, but there is not really -- years ago we used to produce some of the (indiscernible), but didn't feel that really contributed anything to our (indiscernible) additional royalties. So we discontinued it a while ago.

Are you -- your relationship with Rodney Yee (ph) -- can you comment on that?

Rodney is our, probably, biggest sales. We have a good relationship, a long contract, with exclusives after that. What is the specific question?

I was just curious if there was a long contract with him?

Yes.

Raj Kamar (ph).

I just had quick questions about your organic line and your soft goods. You had mentioned that you're going for a ground grass-roots campaign for that. Is that like are you changing your distribution channels by business segment? Is that what you're trying to do? Because you also mentioned something about going direct, not going through your distributors and stuff like that. Is that like you are changing the channels based on the business segment? Is that what you are doing?

Grass-roots is servicing the professional market -- studios, special stores -- and that is what we're talking about.

And our soft goods launch is primarily in specialty stores with the exception of the Marshall Fields launch in March. We're right now at a tradeshow for apparel, and we've had some great response to our new apparel line in the specialty store trade.

I see. But are you going to stay with your distributors right now, or are you trying to cut them out? Is there a plan to do anything like that?

No. We are not going to do any additional changes what we already did.

I see. What about trying to sell directly more to your customers? I guess that is your grass-roots campaign, but is that only for a certain segment of your products or for all your products?

50 percent of our business is selling directly to end user.

I see. That's where your biggest margins are I guess?

That is correct.

I see. I just will switch over to -- you were talking about Target. I am just wondering, Wal-Mart -- is that a big account for you at all? I didn't even hear that in the conference at all.

We sell Wal-Mart only media.

I see. Are there any more titles being penetrated into Wal-Mart?

We had about a 50 percent increase in Wal-Mart in sales.

Again, it's only media.

I see. I see.

We don't sell them anything else. That is not our plan.

It looks like Wal-Mart is a pretty small plan. In your future plans you don't seem to have Wal-Mart in a big way at all.

We will continue to sell Wal-Mart media, and we continue to present to them on a quarterly basis the new releases.

I see. What about any -- you were also talking about retailers, and generally you're saying that normally retailers don't seem to be adding up much to your profit margin. So you are going to just stay away from them it seems like -- is that right?

I don't understand what he's saying. Retailers (indiscernible) half of our business.

I see. Okay. I think that's about it. Thank you very much for your time.

At this time there are no further questions.

Okay. So we would like to thank everybody, and we would hopefully talk to you on May 6 at 2:30 Mountain time. Thank you.