Gaia Inc (GAIA) 2011 Q1 法說會逐字稿

Welcome to the Gaiam first-quarter 2011 financial results conference call. All lines have been placed in a listen-only mode until the question-and-answer session.

(Operator Instructions)

Today's call is being recorded. If you have any objections you may disconnect at this time. I would now like to turn the call over to John Mills of ICR. You may begin.

Thank you. Good afternoon, everyone, and thank you for joining our call today. The following constitutes the Safe Harbor Statement of the Private Securities Litigation Reform Act of 1995. Except for historic information contained herein, the matters discussed on this call are forward-looking statements that involve risk and uncertainties; including, but not limited to, general business conditions, 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.

On the call today representing Gaiam is Mr. Jirka Rysavy, Chairman; Ms. Lynn Powers, CEO; and Mr. Steve Thomas, Chief Financial Officer. Now I would like to turn the call over to the Company's Chairman, Mr. Jirka Rysavy.

Thank you, John. I would like to welcome everybody to our quarterly call. Our revenue for the quarter, which ended March 31 of this year, decreased $7.4 million to $54.8 million. This $7.4 million decrease was attributable to $7.7 million revenue decline resulting from previously disclosed plan to lower our direct television advertising spend. The $7.7 million was actually slightly better than $8 million we expected and announced during the last quarterly call.

The revenue growth in e-commerce, catalog and sold units was mostly offset by the impact of lower than normal in stock levels in our largest business segment customer, which was caused by replenishment delays. Our operating expenses for the quarter decreased $5.4 million, or 270 basis point over the first quarter 2010, mostly due to the reduction of our direct television advertising spend.

The operating loss for the quarter was $1.6 million compared to $0.6 million in the same quarter last year. Cash flow from operation for the quarter improved to $3.2 million, which is $1.1 million improvement over the first quarter 2010. Our cash position improved during the quarter to $31.1 million from $28.8 million, We still have no debt. We have also improved our current ratio to 4.7 from 3.3 at the end of the first quarter 2010.

We expect to see some added benefit in the later half of this year from our growing traction in our digital distribution. We recently signed agreements with Hulu, Joost, and Roxio, adding them to our growing digital distribution network, which already includes companies like Amazon, YouTube, iTunes and Netflix. Also the launch of in-house distribution platform, GaiamTV, later in summer, will further strengthen our digital capability.

In addition to emergence of the digital business, later this year, we also anticipate lower distribution costs resulting from the return of our entertainment portion of our media business at Wal-Mart to direct-to-store fulfillment model in August. Also, our new DVD replication model should yield some margin improvement in the second part of the year. Together we expect the combining specs of all these initiatives resulting in positive performance for the Company in this half of the year, including double digit revenue comps. Now I will turn it over to Steve for the numbers, and then Lynn for operations. Steve?

Thank you, Jirka. For the first quarter of 2011, net revenue was $54.8 million, compared to $62.2 million for the first quarter of 2010. As discussed in our previous earnings call, we planned for our direct response television revenues to decrease $8 million from the same period in the prior year. Net revenue from our business segment of $19.5 million for the first quarter of 2011 was a $3.1 million decrease from the $22.6 million recorded for the same quarter last year, primarily due to lower than normal in-stock levels at our largest retail customer.

Net revenue generated by our direct consumer segment for the first quarter of 2011, decreased $6.7 million to $17.9 million, from $24.6 million for the first quarter of 2010. As expected our direct response television revenues decreased from last year by $7.7 million. This decrease was offset by increases in our catalog and Internet businesses, and compared positively with the first quarter of last year. Lynn will discuss more about our business and direct-to-consumer segment results in just a moment.

Net revenue from our solar segment increased to $17.4 million for the first quarter of 2011, from $15 million for the first quarter last year. For more information about the results of Real Goods Solar, a separate earnings call will be held tomorrow, May 10 at 8.30 AM Pacific time. Gross profit for the first quarter of 2011 was 47.2% of net revenue, compared to 51.8% for the same quarter of 2010. The $7.7 million decrease in direct response television revenues, with high gross margins of approximately 80%, and increased lower margin solar sales, impacted our overall gross margin. Excluding our solar segment, gross profit as a percentage of net revenue was 55.7% during the first quarter of 2011.

Selling and operating expenses for the first quarter of 2011 decreased 18.1% to $24.4 million, from $29.8 million for the first quarter of 2010, reflecting reduced media spend for the direct response television business, optimized variable costs, as well as payroll and infrastructure cost control measures. Corporate G&A expenses remained consistent at $3 million for the first quarters of both 2011 and 2010.

As a percentage of net revenue, total expenses declined 270 basis points to 50% for the first quarter of 2011, from 52.7% for the same quarter last year. Loss from operations was $1.6 million for the quarter, compared to $0.6 million for the same quarter of the previous year. Our net loss was $1 million, or $0.04 per share for the first quarter of 2011, compared to $0.3 million, or $0.01 per share for the first quarter of 2010.

During the first quarter of 2011 we generated cash from operations of $3.2 million. Depreciation, amortization and stock compensation expenses totaled $1.8 million for the first quarter of 2001, compared to $2.4 million for the same quarter last year. Capital expenditures were $600,000 and media rights costs were $400,000. Because of our $3.2 million of positive operating cash flow, we ended the quarter with $31.1 million in cash, up from $28.8 million at December 31. As of March 31, 2011, our balance sheet remains strong and we continue to carry no debt.

Inventory turns for the first quarter of 2011 declined to 3.7 times, from 4.7 times for last year's first quarter. We continue to carry additional inventory to delay the cost pressures we anticipate from increased commodity and currency exchange rates in 2011. Our Days Sales Outstanding for the first quarter of 2011 increased to 71 days, from 62 days in the first quarter of 2010, reflecting higher receivables from large retailer accounts which are on longer pay cycles. Approximately 84% of our receivables in the trade division are comprised of our top 10 customers.

Overall, we are pleased with our collection efforts and our ability to minimize credit risk. We had 23.3 million common shares outstanding as of March 31, 2011. Now I will turn the call over to Lynn to provide more detail on our performance and growth initiatives by reporting segments.

Thanks, Steve. We saw mixed results during the first quarter, with successes in the direct-to-consumer segment tempered by a combination of our previously announced reduction in television advertising spend in our direct response division, and several challenges we experienced with key accounts in the trade segment.

We remain committed to the strategies we outlined in our last call, and in fact saw the positive effects of those strategies in the first quarter results of our direct-to-consumer business. Our core strategies, initiatives and relationships in the business segment were critical in addressing the challenges we faced during the first quarter. As we outlined on our last call, a new more efficient infrastructure, lower direct marketing costs, a repositioning of the catalog business and broadened retail distribution through the addition of the Reebok and Discovery brands, have positioned the Company for growth.

The next step is to continue to build out our digital infrastructure and keep expanding our content library, which remains focused as we prepare for the next generation of media consumers. The redesign of our direct response strategy, which began in late 2010, is another of our investment strategies aimed at long-term profit growth. This effort continued through the first quarter as we seek to enhance synergies with our retail trade distribution through brand and product alignment, to support longer product life cycles and incremental back in profit, including subscription models from this division.

New product rollouts aligned with this strategy, and our corporate branding efforts, are nearing completion of testing in the direct response market. We expect the first of several fitness oriented programs to launch in the coming weeks, with a return to historical revenues in the third quarter. Our operating loss for the Company of $1.6 million in the first quarter, as compared to $0.6 million last year, was disappointing and primary the result of certain legal costs and start-up costs associated with assembling our digital asset management team.

The legal and start-up costs accounted for about $0.01 per share in the loss in Q1, The challenges I mentioned in the business segment, accounted for an additional $0.01 per share loss in Q1. Revenue in the business segment was $19.5 million for the quarter, compared to $22.6 million in Q1 of 2010. There were three primary factors that affected performance of the business segment in this quarter.

First, what started out as a conservative buying trend with our largest customer in late January, turned into a serious inventory shortage during February, March and April. In late March we experienced in stock metrics under 60% on certain categories, which is far below expected historical averages in the mid-90s. We monitor the in-stock trends as they persisted and worked closely with retail management to put an action plan into place, but turnover and key personnel at our retail partner slowed the recovery of store inventory levels.

In recent weeks in-stock trends have improved significantly, and we continue to work with management to insure that buying decisions are closely monitored, assuring a resumption of historical replenishment standards as soon as possible. Second, last fall we were approached by Wal-Mart with a request to participate in the testing of a new third-party aggregated, fulfillment model for the entertainment portion of our media business. Along with other independent content providers, we accommodated this request in late 2010.

The results of this test were underwhelming and had a negative impact on in-store stock levels, sales, and returns in the first quarter. This change ultimately proved to be more costly, as well as less efficient and effective in maintaining our impeccable track record for timely and accurate store level fulfillment. We consulted with Wal-Mart's senior management recently to discuss the poor performance of this initiative, and have since agreed to return to a direct-to-store relationship for our entertainment business, as we maintain with the rest of our Wal-Mart business.

Our transition back to a direct fulfillment arrangement for our entertainment business will be completed by July. As we have discussed often in the past, the bookstore channel is an important nontraditional avenue for Gaiam to reach its retail customer base. Borders' February Chapter 11 bankruptcy filing was the third factor that had an impact on sales and profitability of the business segment during the first quarter.

In expectation of a financial restructuring, we were highly focused on managing our credit risk with Borders. We have a quality history with Borders and expect our partnership to continue, albeit in approximately 200 fewer stores, following its restructuring procedures. We expect per store sales to stabilize this summer, once Borders completes its store closures and reallocation of store level inventories.

Aside from these unusual challenges faced in the business segment during the first quarter, there are a number of recent initiatives that I'm excited to talk to you about today. In early March we launched the first of many new Jillian Michaels Fitness DVD's into retail. Our first title is already the number two fitness title in retail, according to VideoScan, since its release on March 1. We've already sold over 75,000 units of this title into retail, and our next Jillian Michael's title will be released to retail in June.

The success and authenticity of Jillian in the fitness market is unquestioned, and we are excited to explore even more opportunities to develop our partnership with her in the coming months. We also recently just signed a deal with Jillian for the digital rights to these titles. Our strength at retail is anchored by a broad distribution in over 64,000 domestic doors, 14,600 store-within-store presentations, and 5,600 media category management locations.

For example, in late 2010, we completed a 600-store rollout of fitness media and accessories into Best Buy. This was a full store-within-store presentation, and has been very successful in providing Best Buy a new and refreshing offering for its consumers. We also recently secured an expanded rollout of the Reebok brand into Myers stores. This 4-foot, store-within-store rollout is slated to launch in August to 200 Myer locations, and will be in addition to the 8 feet of existing space already occupied by Gaiam product.

Sears is testing a new specialty fitness concept store at 20 locations within its chain of department stores. And our Spry brand has been awarded store-within-store presentation in each of them. This new concept is targeted at the upper end of the fitness continuum. Sears expects to expand this specialty concept to 50 stores by the end of the year.

I'd also like to give you an update on our quickly evolving digital initiatives. Since our last call, several new agreements have been signed with key players in the digital distribution market, including 5 Men, Gravitas Ventures, GuestTek, Joost, Net Frames, and Buk. These agreements will add to our growing network of digital partners that already includes iTunes, Hulu, Amazon Digital, Netflix and others.

Simultaneously we are focused on developing, acquiring and preparing additional digital content for distribution with our fully staffed digital asset management team and in-house production facility. We will launch GaiamTV this summer, with a digital subscription service option to roll out later. GaiamTV will contain all of our content, both internally produced and acquired, and will serve as a content curator for all of our customers. We are uniquely positioned in that we have a very loyal, core customer base through which we will be able to launch this product.

We are pleased with our growth prospects for our retail presence and feel that our strategy to strengthen our distribution through complementary brands, products and content is effective in maintaining our market position in a challenged retail environment. That said, we were faced with a number of unusual challenges this first quarter. As I discussed earlier we have met those challenges head-on and have implemented solutions that will solve each of the issues.

Next I'd like to review our direct-to-consumer segment. Revenue in our direct-to-consumer segment declined by $6.7 million, compared to first quarter last year, primarily resulting from our previously announced reduced media spend and our direct response TV business, which accounted for approximately $7.7 million drop in revenue. We spent much of the quarter in direct response division testing newly created brands and product concepts that are specifically targeted for retail distribution, once the direct's response lifecycle is complete.

These include the Step360, a revolutionary product for step and instability exercises and the Firm Express media package. The Step360 has received great reviews in our professional market focus groups and is the first major product release in balance and step training in the last decade. We have already successfully launched the Step360 into several high-end health club chains, such as Equinox. The Firm Express is a high-intensity DVD series tailored to women derived from our Firm brand, which has a successful track record in both direct response and retail. Early testing results have seen a very positive on this product as well.

After an ambitious initiative carried out over the past year to re-engineer the direct business, we're now beginning to see the results of the steps that were taken to reduce costs and improve profitability. Optimized media spend, circulation and improved efficiency of Internet prospecting, and reduced distribution and inventory costs helped to improve the operating loss in this segment by over $1 million over the first quarter last year.

While the growth in 2011 will come primarily from our business segment, the growth in the back half of 2011 and beyond will also come from our direct-to-consumer segment. We believe in investing in its future prospects and are committed and on our way to achieving profitability in this segment. We will achieve this through the following initiatives. We are opening our flagship retail store in Boulder later this year. We're launching GaiamTV, our in-house, direct-to-consumer digital subscription platform, this summer. Reviewing strategic opportunities to expand product lines and customer lists; and beginning to utilize our retail packaging to highlight our digital content and market the Gaiam brand and story.

Overall, we are focused on maintaining a streamlined cost structure, optimizing product offerings, advertising spend, and catalog circulation, and most importantly, expanding our brand and market share through investments in new product offerings, membership models, and the digital delivery of our extensive media holdings. We believe strongly that the fundamentals of our strategy, sound financial position, and resulting earnings potential, are not reflected in the current market valuation of the Company.

As you may know, Gaiam has recently been the subject of some analyst research reports that express the opinion that our stock is undervalued in the marketplace. And we certainly agree. We are committed to pursuing opportunities to increase shareholder value, which could include continuing to repurchase our stock when we think it is prudent, relative to other options under consideration, such as acquisition. Since early 2007, we've repurchased over 4.8 million, or 20% of outstanding shares of Gaiam stock.

Regardless, we are committed to taking steps that facilitate the likelihood that the market will fully appreciate the value of our stock and the potential of our Company. For example, we continue to focus on increasing our visibility with Wall Street, and Rob Ralph from Phoenix Capital has joined the ranks of analysts covering Gaiam. We will attend the Craig-Hallum Conference June 1 in Minneapolis, followed by several marketing trips. We believe that Gaiam's long-term future is bright, and we are committed to insuring that the market appreciates our vision.

It is our intention and belief that we are well-positioned to achieve these goals, while furthering the mission of the Company to make positive change in the health and well-being of our customers. Thank you. I would now like to open the call up for questions.

Thank you. We will now begin the question-and-answer session. (Operator Instructions) Mark Argento of Craig-Hallum Capital.

Good afternoon. In your remarks toward the end, you had mentioned opening a store, a flagship store. Can you talk a little bit more about your retail strategy and if you could see over time having multiple units?

Obviously we are going to take it slow. We will open our first store this summer and then modify our assortment as we see results from the store. But certainly, with the market capitalization, the results of certain other retailers in our space, we think this could certainly be a hit.

We already have pretty much all of the products in our offering and in the warehouse so there is no addition, almost anything, so it's basically taking a very low risk approach to this, but see how the market respond to it.

Is it going to be more apparel, more media, more fitness? Basically, everything you have got in the catalog, you're going to put in the store? How do we think about what kind of store is it going to be?

Mark, first of all, it won't be everything in the catalog. It'll be all proprietary product. It will certainly include a high percentage of apparel, of fair trade products, and then a full complement of media in the back of the store, including a media bar where people will be able to experience GaiamTV live in store.

Good. Are you using your brand or your brand of something different?

No, it's going to be called Gaiam.

Got you.

And pretty much all the merchandising is Gaiam brand. So gross profit in the store will be very high.

Okay. That is helpful. On the direct side of the business, maybe you could talk a little bit more about the opportunity you see there. You pulled in the reins pretty aggressively and spent a lot of time trying to figure that business out. And now it sounds like you are getting ready to get after it again. Could you give us a little bit of color around some of the different products or the thought behind what you are going to take or bring to market?

Sure. First of all, first quarter we had positive comps in our direct business. We began prospecting again. And we are really shifting the assortment much more towards proprietary product and apparel which has higher margins. And we are seeing some really good results with that so all the changing from third-party product to proprietary product is showing in the results.

And then on the direct response side, I think I really walked you through that. We want to make sure that the product we are doing in direct response has opportunity to go into our business segment and extend that product's lifecycle. We have 2, really pretty exciting, products testing right now on DRTV with the Step360 and the Firm Express. So we will, by third quarter, I think be back into our comping revenue over last year in direct response.

In the situation with your big retail customer, I was very surprised to see it and the shelves were almost bare. Clearly not an issue in terms of demand there, but you think you got that fixed?

Yes. We definitely have it fixed. Hopefully you'll start seeing it on the shelves soon.

Great.

We were very disappointed in that. (multiple speakers)

All right.

This is the first time that's happened.

No, I was surprised because, like I said, it was bare for quite a long time and definitely lost revenue there, but hopefully it continues to sell through well when it's back on the shelves. Thank you, guys.

Robert Ross of Phoenix Partners Group.

Good afternoon. Just a few quick questions. Obviously you guys have done a great job growing up the other distributors and Discovery's content programming, and it seems like you control all the home video rights for their library. I'm curious if you could comment a little on the terms of that deal, how long it goes, and do you have a right of first reversal in terms of renewing the distribution deal that you have with Discovery Communication?

Given the size of their library and what you are trying to do, it seems as though there could be a lot more opportunities there as more and more titles are released. I was a little uncertain in the market as far as what the terms are, and what rights you have, and for how long you have them.

Yes, it is still a relatively new relationship, and it varies, depends on how we get the titles. The deal that we signed with Discovery, like going forward, it's a rare deal and includes the digital. But the titles, because we get some catalogs, would be back from the previous distributors, that it depends on how it is released and how we own the title, but I think it's 5 years from release, right?

Yes, once we release the title, we have 5 years on that title.

So I understand it's 3 years -- if you release the title 2 years from now we have additional 5 years on that. And it is still early process. We are going through all of the catalog that they have because pretty much with the buy-back what we did with other distributors, we have a right to all Discovery programming from history to the next few years. There are a lot of opportunities. We're still processing. We've maybe released so far -- I don't know how many titles, Lynn.

I'm not sure how many we have released so far, but we released like 8 last month.

Right. And you do have a right of first refusal, is that correct, when this term comes up for renewal?

I don't know if it does or not. We have to look. I don't know if we have a right of refusal. I don't think it's, typically, in this industry to have a right of refusal. Typically you have some performance if you hit a ratio, you can do it, but I don't know how they do the structure.

Great. Can you comment a little bit about, if I understand correctly, you guys are currently on the Oprah Winfrey Network. You have some Gaiam programming there, couple of half-hour shows, which is obviously a very big endorsement for the Gaiam brand, and now with the retail store, I can see how quickly things can grow.

Could you comment on how that relationship is going and is there any cost to the Company at all for that or is it free advertising for the brand and endorsement?

The way the deal was structured, it was really free advertising for the brand and an endorsement of the brand. We have run through our 30 episodes at this time and we are working with the network to see if we are going to renew that. We have very positive response on her website on the Gaiam half hour, so we were really pleased with that.

Great. And then two other questions, if I may. Looking at the financials and reading the K, it seems as though the adjusted enterprise value of the Company really doesn't make any sense. I am wondering if you could comment a little bit on the cash value of your NOLs, which seems to be substantial and I don't think a lot of investors are getting that.

And Lynn, to your comments earlier about looking at everything to continue to be highlighting shareholder value, You're too big to be small and too small to be big. And the back of the envelope, it looks like your book value as of the last quarter is over $7.30 and yet your stock is not trading anywhere near that. And I understand the problem with buying back shares makes you less liquid. At the same time there comes a point where it's just so silly because people don't see the value.

It is the best use of your cash. I'm wondering if I'm looking at something wrong or is your book value about at that level, and can you walk through some of those other assets that you have that I think people just don't seem to realize to get to where the stock really is or am I missing something?

You ask a lot of pieces in this question, so I will try to take it in part. First you ask about NOL. NOL, it is about $42 million of what we have on a cash value. NOL as -- let's put it this way, first a little over $30 million of earnings will be not taxed. Then we will have additional $12 million which has some restriction with the time. So that is for Federal.

There is a different thing -- a little bit of different on the State, depends on the State. So we are clearly not currently paying taxes. We are not going to -- we obviously paid for a while. The first $30 million is free. And actually maybe it was the year. It may be a little bit more right now.

The second was about the book value. The due book value is about $7, if you take the goodwill out, and the intangible, that goes lower around $6, and we start to buy stock, you are right, you have the issue, which we are currently struggling, do we keep buying stock back or where is the float?

Our current opinion is if the opportunities are right that it makes sense, because if you basically take our -- just when we taking the cash value of the building investment and the Real Good Solar, and you take it out and you look at enterprise value, it is very [low] multiple. It's hard, even if you can buy some companies right now, maybe 5 times, be trading effectively for less. So it looks like our stock looks like a better value.

That is the kind of questions we are dealing with since 2008, when the small companies obviously getting more penalized unless they get some kind of [hud] market, like a solar -- for example, it was for a full year. But it is much more difficult from that point than it was before, because the trading value dropped in the small companies, especially with small float. But our value, if stock is a good value, then we will buy stock.

Great. And one final question related to that. Obviously you guys have a great track record of building and creating value and doing deal and seeing things. But could you just comment a little bit about what you see in the industry as far as opportunity. It seems like there are a lot of big players that are doing things. We saw the deal with Stars Media and the Weinstein Company, which is people trying to go certain places. And it would seem that at the right valuation, if you could find the right thing, that the best thing for the Company would be some type of transforming transaction, of course only if it was accretive to the Company.

Am I seeing the landscape correctly and are you looking at all this stuff and do you think that something could happen over the next 12 to 18 months or you do think the Company will look exactly as it does now over the next 2 or 3 years in terms of just the basic businesses and what you have?

We look at it very intensely actually for 2 years. The issue was a little bit of a delay in the market as people expected multiples of 2008 and before. And this expectation came up slower, and then reality today as these companies, who mostly have debt, their credit lines are maturing, and they basically don't have cash flow, so they cannot get new line, so the price is getting much, much more reasonable. So that is the reason why we didn't jump and buy our stock early, because it is probably the synergy, what we can get with some of these deals. So it definitely makes sense.

And also, sometimes when you get to negotiating, whenever there's people, we get a restricted -- it would be difficult to buy our stock if it's a transferring transaction. But I think within, what are you saying, 12 to 18 months, I would say we definitely are going to do something.

We have several deals pretty close and we had some for a while, but for right now we could actually have due diligence with several companies, and we're through that so I expect that we would not be saying within 12 to 18 months, whatever timeframe you put out there.

Sure. It's safe to say you wouldn't do a deal that would be diluted to the equity. If you found something that made sense and your stock was trading below book, obviously you'd use cash or something else to finance it. Is that safe to assume, even though increasing the liquidity is important, but only at the right price, I would think.

Yes, it's really a question of how we finance the Company. Obviously it is hard. Some people wanted stock, and we talked about if that has to happen, if you have to issue stock, we can buy that amount of stock on the market. We have enough cash. There are some other opportunities from the holdings we have, how to get the cash. And return on the cash is very low right now, like 20 basis points, 50 basis points, if you are lucky. So dilution on existing cash is not really the issue; it is the question, how we are dealing with the stock of our own Company.

Great. Thank you very much.

Eric Alexander of Stifel Nicholaus.

Thank you for taking my question. I do appreciate it. It definitely looks like on the direct-to-consumer side of the businesses, it looks like things were stronger than expected. I was hoping you could talk to the apparel growth, if that was an outgrowth relative some of the other segments, and with the announcement on the retail store, I would presume that, that would be more heavily tilted towards apparel.

If you could just talk through strategy, where you think ultimately you can take your apparel business from where it is, where it lines up as a percent of DTC, and how the margins look maybe relative from a mixed standpoint, that would be helpful for me.

I think you know there is a big trend in what is called yoga inspired apparel. Not necessarily performance wear, but yoga inspired apparel. We have had very good success in our catalog, so we have expanded our offering. Margins there are certainly better than any of our third-party product, but certainly not as good as our media products. So it's kind of in the middle there. We are working very hard to make sure that we have a competitive edge by the fabrics being either an organic cotton or we have developed a fully recycled performance wear which we will launch this fall and we are very excited about that as well. So it will be part of our strategy in the store but so will our media. So it is not going to be just an apparel store.

Okay.

In the catalog, all the apparel that was tested over the last few months, so even early in the catalog we just didn't bring in the stock, so -- (multiple speakers)

We ran out of apparel that we launched in the spring and summer catalogs, so we are excited about the opportunities for fall.

That is very helpful. And leading onto -- I will stay with the retailer real quick. I don't want to beat this up, but as far as the ramp in productivity. If this is a trend where you guys are going to go to stores 2 and 3 -- and I don't want to get ahead of it -- but just thinking store 1, what kind of ramp and productivity are you estimating or what are your targets and goals as far as that retail store goes, before you level it out to where you want it to be ultimately?

It's a little too early to talk about that. Let's get it open and then we will discuss it on our next call.

Okay. As far as inventory mix, if you could help me out, is it mostly core product as far as increase goes, or is there some other things that maybe you guys were caught with that you didn't want to be? It sounds like it was planned but I just want to make sure I understand appropriately.

Well, it's 2 things. It's definitely our core product. We knew there were price increases coming, so we brought product in early to avoid those price increases. I think we were very smart to do that.

Postponement.

Postponement, price increases. And then the second is, certainly we had inventory because our retail partner did not place replenishment orders in first quarter which caused us to have a little more inventory at the end of the quarter than we expected. But again, it is on our core product that will fit right in to our store-within-store within that retailer.

Last question on acquisition prospects. I know it was spoken to in a previous question. Did you guys have more of a tilt towards media rights or soft goods or is it whatever best fits from a price standpoint, is that where you guys are leaning, if in fact that's a direction you decide to go?

I think right now, particularly in the media side, that the industry is consolidating right now and that always brings some opportunities. We are not real sure exactly how all those opportunities fit, but we are working on this all the time everyday.

So it's like for us, since we own pretty much all of the digital rights for our business, we're getting much more traction on digital than other people can have, so it's positive change for us. So obviously our consumers are not adapting that fast, but now it is more opening with people like Netflix.

So we definitely want to own the rights and have digital rights to it, so that is definitely a big focus for if you go media -- would we actually go, how it's fit, but make sure that we have a good digital mix and potentially expand some of the relationship we might not be into.

Okay. Thank you very much for taking my questions. I appreciate it.

I will now turn the call back over to Mr. Rysavy for closing remarks.

We would like to thank you for being with us and hopefully we will talk to you in the next call. Thank you.

Thank you for participating in today's conference. You may now disconnect.