RH (RH) 2002 Q3 法說會逐字稿

Good day. All sites are now on the conference line. If you need assistance today, please press the star and zero on your touchtone phone. I'll now turn it over to your host, Kevin Shahan, Chief Financial Officer for Restoration Hardware. Please go ahead, sir.

Good afternoon, and thanks for joining Restoration Hardware's Third Quarter Conference Call. With me today on the call are Gary Friedman, our President and CEO; Stephen Gordon, the Company's Founder and Chairman; and Tom Bazzone, our Chief Operating Officer. I'll be starting the call off with comments regarding forward-looking statements.

This conference will contain forward-looking statements that involve known and unknown risks. These forward-looking statements include, without limitation, financial guidance of statements concerning or relating to implications of the Company's financial results for the third quarter ended November 2, 2002 and the periods thereafter. Statements relating to the Company's repositioning of merchandising strategies and other statements containing words such as believe, anticipates, estimates, expects, may, intends, and words of similar import are statements of management's opinion, and particular guidance offered or commented on by the Company represents a point-in-time estimate made by management of the Company. We caution you that such guidance and other forward-looking statements are just projections, and that actual results may differ materially from those of the guidance or other forward-looking statements.

Important factors that could cause such differences include, among others, those factors detailed in the Company's filings with the Securities and Exchange Commission, including its recent filings on Forms 10-K, 10-Q and 8-K, including, but not limited to, those described on the Company's Form 10-Q for the second quarter of fiscal 2002 and management's discussion and analysis of financial condition or results of operation.

With that, I'll turn the call over to Gary.

Thank you, Kevin.

Good afternoon, everyone. I'll start by providing the color on the current quarter and our repositioning efforts, and then turn the call back over to Kevin to review our financial results.

Clearly, the numbers this quarter demonstrate that our strategy to reposition the Restoration Hardware brands and return the Company to profitability is working. Our comparable store sales increase of 14.8 percent was among the best in the industry, despite a difficult economic environment.

Merchandise margins increased a full 700 basis points in the third quarter versus last year. This is a result of shifting the mix to a greater percentage of textiles and increasing the amount of product we are now sourcing direct from international vendors. We are now sourcing approximately 48 percent of our products direct, versus 18 percent in fiscal year 2000.

The performance of our new and expanded core businesses are gaining momentum each month, as customers begin to think of Restoration Hardware as a destination for hardware, bath ware, furniture, lighting, textiles, accessories and unique discovery items.

Our positioning as a premium brand offering timeless classic style to the 40- to 60-year-olds aging baby boomers is unique in the marketplace, and we believe it provides the foundation for an enduring concept.

Our direct business grew 66 percent this past quarter. Our strategy is to continue the use of catalog as our primary advertising vehicle, driving traffic to our stores and website, while improving its profitability as a standalone business unit. Our average order was again in excess of $200 for the quarter, a 48-percent increase over the last year. We continue to believe we can grow the direct business aggressively for the next several years. We are also in the process of developing an online bridal and gift registry program that we will launch in the spring of 2003.

We are encouraged by the early response of our holiday offer. Our stores, catalogs and website are merchandised with compelling holiday assortments reflecting Restoration Hardware's authentic American point of view. We've centered our assortments around family traditions, such as tree decorating, game night, entertaining and unique holiday stocking stuffers, with a bit of nostalgia, which we believe reflects the current trends in the country.

I've been in this business for over 25 years, and I can honestly say this is the most powerful and festive store set I've ever been involved with. If you haven't been by one of our stores recently, I'd encourage you to stop by and let us know what you think.

Given the fact that this will be a compressed holiday season due to Thanksgiving falling a week later this year, we expect business to shift from November to December. Our store teams have detailed game plans as they relate to hiring, training, service and line management and are prepared to process a significant increase in transactions throughout the peak weeks of the season.

Our bicoastal distribution centers, coupled with the implementation of our between-the-weekends distribution strategy, gives us the ability to replenish 80 percent of our stores in three days and 100 percent of our stores in five days. That means that anything sold on a Sunday will be replenished before the next weekend. This capability will be critical during the shortened holiday season.

Finally, to add a little spice to the holiday season, Restoration Hardware made its television debut last weekend in New York, Chicago and Washington, DC, with Restoration Home for the Holidays, a one-hour nationally syndicated show shot in Northern California and England, focusing on family tradition, seasonal decorating, entertainment and gift giving. The show will air in over 100 major U.S. markets during November and December. The one-hour special is hosted by Restoration Hardware's Chairman and Founder, Stephen Gordon, and is sponsored by Domaine Chandon and American Express. You can visit our website for broadcast times in each market.

In summary, our new strategy is working. Early indications on holiday are positive, and we have great confidence that we will return Restoration Hardware to profitability this year.

I will now turn the call back over to Kevin.

Thanks Gary.

For the third quarter, we reported a loss of 2.4 million, or eight cents, versus a loss of 8.7 million, or 36 cents, for the third quarter a year ago, a 72-percent improvement. Third quarter sales were up 20 percent to 90.7 million. Comparable store sales are up 14.8 percent, and the direct channel, which includes both catalog and Internet, increased 66 percent from last year's levels.

Gross profit as a percent of sales was 29.8 percent, compared to 18.1 percent in the same period last year and 22.9 percent two years ago in the third quarter of fiscal 2000. The improvement in gross profit was due to a 700-basis-point improvement of merchandise margins, the leveraging of fixed occupancy costs, and improved productivity in our distribution centers. These margin improvements were partially offset by margin pressure caused by an introductory offer of 10 percent off initial purchases on our recently introduced private label credit card.

Selling, general and administrative expenses as a percent of sales were 33.1 percent in the third quarter, versus last year's 34.7 percent as a result of leveraging across all categories of SG&A expense.

Operating loss for the quarter was 3 million, versus a 12.5 million operating loss a year ago and a 6.8 million loss two years ago in fiscal 2000.

We experienced our first positive EBITDA performance in any quarter, except for fourth quarter, since fiscal 1999. Our third quarter EBITDA was 1 million, versus an EBITDA loss last year of 7.9 million and an EBITDA loss of 3 million in the third quarter of fiscal 2000.

Moving on to the balance sheet, inventory ended the third quarter at 127.5 million, an increase of 20 percent, versus inventory of 105.9 million at the end of the third quarter a year ago. This increase is in line with the 20-percent third quarter sales increase and the Company's fourth quarter sales expectations. We expect to end the year with inventory levels of approximately 85 to 87 million, 35 percent to 40 percent higher than the unusually depressed levels at the end of last year but flat to the 85 million inventory level at the end of fiscal 2000.

In evaluating the productivity of our inventory, we have seen a 70-percent increase over last year in inventory yield. Compared to two years ago, this measure increased 28 percent. Gross profit comps from the third quarter this year increased 88 percent versus a year ago and 50 percent versus two years ago. We ended the third quarter with 49.2 million of bank debt versus 15.7 – 15.7 million greater than a year ago. Accounts payable and accrued expenses at the end of the third quarter were 56.6 million, versus 54.7 million last year. The increased debt was due to the increase in our inventory levels.

Based on our current projections, we expect to be debt-free at year-end and through the end of first quarter next year. On the basis of our current trends, we are forecasting total sales for the fourth quarter to be up 12 to 14 percent over last year. We are forecasting comp store sales in the mid to high single digits in the nine-week November/December holiday period and in the high single to low double-digit range for the entire quarter. For the fourth quarter, we are comfortable with our previous earnings per share guidance of 41 to 42 cents based on a share count of approximately 37.4 million shares, compared to a 45-cent loss in the fourth quarter of last year.

Now, I'll open the call up for questions.

At this time, if you would like to ask a question, you may register your phone line by pressing the one on your touchtone phone. If your question is already answered, you may withdraw it by pressing the pound key. Once again, if you would like to ask a question, please press the one on your touchtone phone. Please stand by just one moment while we queue up our first participant.

We go first to [Janet Klopinger][ph] from [JJK Research][ph]. Please go ahead.

Hi, Gary. Hi, Kevin.

Hi, Janet.

How are you?

Good.

Congratulations on a good quarter. Gary, I wondered if you'd take a minute to talk about the holiday period and talk about some of the categories that you will – that you're looking to for strength and about the margins that you see in these categories, particularly versus last year?

Sure. You know, obviously, Restoration Hardware's had a history of strength around the accessories, and particularly, the discovery items, which we will -- continue to be a big focus this year. If you go into our stores today, I think you'll see a, you know, a great assortment of holiday stocking stuffers and unique gift items merchandised around the cash [wrap] and also find unique items throughout the store that, I think, are distinctive in the marketplace and have a unique Restoration Hardware point of view. On top of that, you know, we've got a very powerful assortment of holiday decorating ideas, you know, particularly, tree decoratings and tree skirts and stocking holders, etcetera, etcetera, as well as – as well as a big focus in entertaining throughout the store. So, you know, I think it's – you know, if you go to our stores today, you know, we're chock-full of gifts, we're – we have a big emphasis on holiday items and entertaining, and I think those will continue to propel the business as we – as we get into the December period and, you know, based on a foundation of strong performance across our core businesses.

And the margins associated, are they better than they were last year?

Yeah, all the margins are better than they were last year. Initial mark-ups and sourcing is – you know, has been greatly improved.

And the marketing or advertising program associated with those products?

The catalog is really the key advertising vehicle, as I mentioned, and, you know, we have significant increases in catalog circulation versus a year ago, you know, and I think, you know, our in-store marketing and presentation is significantly improved.

Thanks very much.

Sure.

Our next question is from [Skip Berenz][ph] from North American Capital – or, North American Management, excuse me. Please go ahead.

Could you tell us what the dock strike may be doing and where you are in inventorying the stores?

You know, the dock strike has, you know, I think impacted us probably in a similar way to most retailers. You know, we had some goods that were backed up several weeks at – you know, at the ports. We took a proactive approach and actually brought some goods in early, so we were able to set our holiday set on time, you know, the first week of November, and now we're kind of, you know, working through the backlog, but we're pretty close to being caught up.

If I can ask a second question, where are you in the game plan, you know, relative to plan for linens, bedding and bath?

Really, right on plan. You know, we had some – you know, some of the categories performing over our expectations. There's, you know, one or two that are performing under our expectations, but in a total, as a percent to our total revenues, the textile category's exactly where we planned it.

Excellent. Thanks.

Great.

Our next question is from [Andy Graves][ph] from [Comp USA Point][ph]. Please go ahead.

Hi there. Congratulations again. I wonder if the two of you could help clarify some of the confusion regarding the better sales you had last quarter and the seemingly lower margins at the same time. I wonder if you could sort of detail how much of that came from the credit card with the 10-percent discount, how much was due to sort of IMU, if that was significant, and how much was from more aggressive markdowns. Thanks.

You mean – Andy, I just want to try to get a clarity on the question – the margin improvement or the --?

Oh, sure.

Wait. I'm not sure what the question is.

Well, versus the initial expectations for revenues and the initial expectations for earnings per share –

Right.

-- you came in several million dollars higher in revenues and a couple cents lower in earnings.

Right.

You know, some of this is immaterial, but it is somewhat interesting to try to gauge how much of that differential was due to a one-time sort of issue, such as the credit card, and how much might have been because of markdowns or IMU changes.

Right, sure. Well, if you take a look at the impact on the credit card, you know, during the – on the quarter versus, you know, what our initial expectations, we initially tested four stores with the credit card, and, you know, our initial reads on it were, you know, somewhere between 10 percent of our revenues we're going to shift to the card. When we initially launched the program, we saw – and that was in September – we saw 30 percent of our sales being driven by the credit card, or, you know, not necessarily being driven, but being purchased on the card. That – and at the 10 percent off. So that created margin pressure that we didn't anticipate, and if you – you know, if you really look at what our shortfall is, you can basically attribute almost all of the shortfall to the margin impact that we had from, you know, the greater-than-expected purchases on that card.

Have you seen -- as we move into the holiday season, say, in the last three or four weeks, have you seen that percentage on the private label credit card drop, and, thus, that pressure from that additional 10-percent discount starting to go away?

Yeah, we absolutely have. It's dropped back down now to the – about the 15- to 18-percent range depending on what week we're looking at it. You know, if you go into our stores today, you probably notice we're not as aggressive with signs all over. You know, our initial contest of – you know, at our – at the sales associate level is now off, and we've kind of directed the stores to not just suggest the card at the cash register. You know, a lot of our sales initially we were noticing, you know, we launched [indiscernible] the contest, someone would walk up to the counter with $600 of drapes. They never had a, you know – they were never – knew about the credit card. They were ready to buy the stuff at full price, yet we were saying, "Gees, would you like 10 percent off today if you sign up for our credit card?" That's probably not a, you know, a great tradeoff for us. So we've stopped being as aggressive, and I think in many cases, you know, at least from our point of view, we don't know what the sales lift on the card was. Our comps were basically trending relatively close to what our comps were trending after we launched the card. We've got a pretty high demographic customer, and, you know, we think a lot of people trade it off for the discount. So, you know, we've not seen our comps fall off as we've pulled back on the marketing of the card.

Right. And not that there's that many expectations out there from the street for total revenues for January, but it does appear as – that your guidance is for about a little over 160 million in revenues, which is a nice uptick from current expectations.

I –

If I'm reading that properly.

Well, our guidance on fourth quarter was actually 160 – or around 160 to 161 million.

Okay, perfect. Just to be clear on that. Thank you.

Right. Great. Thanks, Andy.

Okay, please stand by one second while we queue up our next participant. Okay, please continue to stand by while we queue up our next participant. Okay, please continue to stand by while we queue up our next participant. I apologize for the delay. Please continue to stand by while we queue up our next participant.

Okay, our next question comes from [Mike Napoletana][ph] from [JMP Securities][ph]. Please go ahead.

Yeah, just had a question with respect to SG&A being a little bit higher than your previous guidance. Maybe you could talk a little bit about what was the – I guess what were the drivers? And looking in the stores, it looks like you're adding additional sales people to kind of cover the short and compressed sales timeframe, and just talk about what your expectation is in the fourth quarter relative to the guidance you've previously given.

Yeah, I think, you know, if you look at the guidance we previously gave at the beginning of the year, you know, that was at the very front end of the launch of our new strategy, and, you know, were our best estimates at the time because we wanted to give some ranges, as opposed to having people put out their own numbers on the company. So, you know, these are – all these numbers will continue to be fine-tuned as we move forward, but, you know, from a total SG&A point of view, I think we just seeing a fine-tuning of our numbers as we go, and we'll get better from a guidance perspective now that we've got, you know, a clearer view of how our business is performing.

And do you have an estimate on the textiles as a percentage of your total revenues?

Yeah, we do. We're not disclosing that information at this point for competitive reasons.

All right. Thanks.

Okay. Thank you.

Our next question comes from [Michael Weissberg][ph] from [ING][ph]. Please go ahead, sir.

Hi, everyone.

Hi, Michael.

A couple things. Just to clarify, Kevin, the 161 – 161 million, that was the prior guidance, not the current guidance?

That was the guidance we gave back last May when we released from third quarter [indiscernible].

Right. Got it. What was the – what do you expect – or, Kevin – the cash position to be and debt position at the year-end?

At the end of the year, we expect to be entirely debt-free, and we expect that that will continue through at least the end of the first quarter.

Okay. So you'll be debt free and not have to start building up until second quarter next year?

Right.

Great. Is – how many – how many more mailings will there be, if any, in the catalog fourth quarter?

Well, we will have our holiday Wit and Wisdom books dropped in the store areas the last week of November, and then there'll be another small drop the second week of December.

Okay. So what does that mean, Gary, in terms of –

[Indiscernible].

-- number of mailings this year versus last?

Yeah, there's also a January drop, I'm sorry, left out. Those are the last two drops of the holiday season, and then you'll see us have a January drop in the beginning of January.

Okay. And, again, what would you guess the mailings in terms of – number of mailings will be this year versus last in the fourth quarter?

What's the --

The percentage increase of – because this catalogs mailed. When you say mailed, I just –

Yes, exactly.

About a 38-percent increase in total catalogs mailed in the fourth quarter this year over a year ago.

Plus 38 percent?

Yes.

Great. And so obviously the yield was going up because I presume the revenue growth will be reasonably in excess of that in the fourth quarter in the catalog business?

Actually, that's not right. You have a little tougher comparison in the first three quarters.

I'm sorry, what – the catalog growth – you're saying the catalog growth versus the circulation growth?

Well, no, and it was – should the catalog growth year to year in the fourth quarter be in excess of that 38 percent?

Well, we expected – for the direct business as a whole, we expected to see sales increases in that in a similar range in Q4.

I see. I see. Great. And then what's happening in the rug area in terms of the hand-knotted rugs? I'm sorry, you knew I'd ask that.

You have no idea. Before the call started, I said, "Okay, someone's going to ask me about the rugs." You know, the rug business continues to be one of the soft spots in our textile strategy. The hand-knotted rugs are only in probably 20, 30 stores, and we have actually cancelled many of our orders in the hand-knotted rugs, you know, until we get a better arm -- arms-around, you know, what is the right rug strategy. So, you know, we're working on that as we speak, and we'll have more news, you know, later.

Okay.

But it's not – you know, it's not a significant risk to, you know, the overall business model.

Oh, okay. So that's the one category you really feel you have to re-look at?

Yeah, that's – I mean that's the worst of the textile strategy out of the box.

Now, what did you really say before the meeting? You probably said some expletive will probably ask about the hand-knotted rugs, right?

No, no, no. I said, "I guarantee you someone's going to ask me about the record player and the rugs."

That's great. Is the TV show – is that – that will be on cable channels, I presume, only?

No, no. It's been syndicated mostly on major networks, played in New York, Chicago and DC on ABC, and I believe it is mostly ABC, NBC and Fox.

Oh, really?

Yes.

Yeah, that's quite a – that's great. All right. Thanks a lot. Good job.

What'd you think? We're going to be on channel like 800?

Well, I didn't know. I mean I couldn't –

[Indiscernible]

-- I knew it was going to be an infomercial when I read the press release. I can't believe you got people to sponsor this. This is great.

Yeah.

[Indiscernible]. All right. Thanks a lot.

Thanks, Mike.

Our next question's from [Sara Alamo][ph] from Buckingham Research. Please go ahead.

Actually, it's [Lee Backus][ph] from Buckingham. Can you hear me?

Hi, Lee.

Yeah, hi, Gary. What do you expect the gift and seasonal part of your business to be in Q4 as a percentage of sales?

Yeah, we don't really give those information – that information – level of detail information out, Lee.

Okay. A little bit more on the TV program. I haven't seen any advertising in your stores or marketing in the stores for the TV program. Are you planning on doing that?

This is Stephen. To the best of my knowledge, the stores do have easel signs and counter signs speaking to the television show, and, of course, all the sales associates are equipped with the air times in their particular market. Additionally, our website has an icon on the home page that speaks to the show and the ability to click on and find the air times in each market.

Okay. Also, Gary, have you had any thoughts on changing your plans for closing stores based upon performance?

We've had a few stores, yes, really out or perform, you know, our expectations, that, you know, there's one or two that have out or performed our expectations that were on our closing list that we're probably going to take off, but we still look to probably have, you know, anywhere between three to six stores that over the next two years we will – we will probably – we will probably transition out of.

Okay. And how many openings next year? Any change there?

Next year, we're looking somewhere between, you know, two to five.

Okay.

You know, we haven't finalized our real estate strategy for next year yet.

Great. Thanks a lot.

Okay.

Our next question comes from [John Caldenbaugh][ph] from [Freebridge Capital][ph]. Please go ahead, sir.

Yes, quickly, a couple questions here on catalog circulations. How is your circulation shaping up this year, trade area versus non-trade area?

Well, we have a much greater percentage of books being mailed to the trade areas. As you know, historically, the Company did not mail many books into the trade areas. Now, we're using the catalog as the primary advertising vehicle. We've shifted, you know, some of the – some of the expense and some of the spending we used to do on print into funding more catalogs, and I believe in the fourth quarter, we're probably somewhere around 60-percent trade area circulation.

Okay. So what's the percentage of increase in catalog circulation this year?

Well, we went over that for the fourth quarter. It's 38 percent. I don't know, Kevin, if you've got that specific –

Yeah.

You've got the entire year numbers?

For the year, it looks like 46 percent.

Forty-six percent in total.

So 46 percent. Okay. You mentioned in your press release the comps guidance for Q4, and you mentioned that November and December would have a lower comp than the quarter as a whole. Is that correct?

That's true.

If I remember correctly, on the second quarter call, you suggested that the comps were tougher in January because you brought out all the liquidated merchandise last January. Can you give us some more color there?

Yeah, that was from the year before. The year before, the Company was up against a very big number because there was a major sale in, I think, in 2000. So 2001, we had very tough comparisons. In January, I ran down – you know, it was down in comps, I think, in the teens, or around 20. And we were up for the November/December period last year, about five points – excuse me, 6.9 comp, I think, in the combined November/December holiday selling period. So this year, we've, you know, moderated our expectations for November and December, but fully we have big up side in January, particularly because – you know, a few reasons. One, we have all the core businesses in place that we didn't have last January, and that will continue, you know, through February, March and into the beginning of April when we launched our textile strategy and expanded core businesses. And so, you know, we feel relatively bullish about what the January numbers look like. At the same time, we're taking a conservative view in November/December. You know, many of us here think that, you know, it's good to be conservative in the current economic environment but believe we may have up side to that number.

Right. Is there a cost – what is the cost of your teaser rate, your 9.9-percent credit card teaser rate to you? And I'm assuming that hits your SG&A line.

I'm sorry. Well, right now, on our credit card, we have a 21-percent interest rate. You're talking about the financing plan?

Yeah, is there – is there a teaser rate associated with that?

No, no.

No?

No.

Okay, okay. And, finally, could you comment on the shift maybe in payment method versus potential for incremental sales in your credit card?

Yeah, you know, I wish we had a crystal ball and knew that, but we – you know, we really just don't know.

Right. Okay. Did you – are you going to attempt to track that going forward? Or is that something that just – it's almost impossible to capture?

Well, it – yeah, I think – you know, it's hard to know if they were going – if they were going to make a payment another way or if it's an incremental sale. But, you know, the real benefit, I think, of this – of the credit card plan long term is, hopefully, we're going to be able to know who our best customers are and market more specifically to those customers, you know, have loyalty programs, have better relationship with those customers, etcetera.

Right. And you said that 30 percent of your sales volume initially was off the credit card?

Yes, when we launched the program.

And those numbers are coming down, you're suggesting?

They're down in the 15- to 18-percent range today.

Okay. Okay. Well, thank you.

Thank you.

And our next question comes from [Andrew Kerns][ph] from [Clifford Capital][ph]. Please go ahead.

Hi, guys. Could you talk about your liquidity position right now, I guess, the capacity on a credit facility, and then what that will look like next quarter?

Today we have adequate liquidity on our line. You know, we've received all of our holiday goods, and our liquidity only gets better day by day, week by week, from here, and we will end the year debt-free and will remain debt-free through the first quarter and probably through a good part of the second quarter.

Okay. What are your capital needs looking like for next year?

We haven't detailed that or communicated that out yet. We wanted to, you know, make sure we – you know, we understood what our fourth quarter numbers are going to be before we make too many commitments. We've only at this point made a commitment to two new stores next year. One actually is a remodel and expansion, and then one additional new store. Based on our fourth quarter results, our November/December results, we may – you know, we'll determine how much capital we'll spend next year.

Okay, I guess maybe another way to look at it, what was your – I guess, what was your debt position or on the facility this time, or, excuse me, January last year?

I'm sorry, what's that?

What was your cash and – what was your net debt or cash and debt position in January?

Well, you know, I mean all of that's available in our Q or K, but, you know, that's -- we were debt-free at the end of last year, and I think we – you know, we had somewhere around 15 or 20 million in cash, and we – and, you know, and we had capital expenditures in the first two quarters based on our remodel program at our stores. We spent approximately, you know, 12 to 14 million.

Okay.

So it's a very, very different situation. Coming out of last year, you know, we were going into a period of heavy capital spending based on remodeling all of our stores, building a new website, redesigning our catalog. Coming out of this year, we're going to be in relatively similar cash shape and balance sheet shape but without the capital spending requirements that we had last year. So, you know, our balance sheet is going to be -- you know, throughout next year, will be greatly improved.

Okay. Do you have idea of sort of a target operational, I guess, guidance on margins looking ahead for next year?

We haven't released those yet. You know, we've said generally in the first 12 months of our repositioning, which was, you know, kind of second quarter through second quarter of next year, that we thought we could make 2 to 3 percent in the first 12 months and then, you know, 3 to 5 percent in the year following, the 12 months following, and 6 to 7 percent in the year following that. And that's, you know, as specific as we're going to get today. Again, once we – once we get through this fourth quarter, we'll have a much better sense of what the whole model looks like, and we'll be able to give more specific guidance.

Okay. I guess – and, finally, just trying to get a confidence interval on guidance for this quarter, given the history of not meeting guidance, how are things shaping up so far in the quarter? And it sounds like it's heavily December loaded, but are things on track so far, I guess, with the guidance you gave?

Well, I guess, you know, the history of not meeting guidance, we've only had two quarters that we've given guidance on. One we've made, and one we missed by, you know, two cents. So we have a high level of confidence in the fourth quarter.

Okay.

Yeah, there hasn't been any guidance on the street on this Company in the prior year before that.

Okay. Thanks very much.

Yeah, thank you.

And our next question is from [Jennifer Lehmurs][ph] from [Lehmurs Equity Research][ph]. Please go ahead.

Hi, thanks. To bring us back to Q3, can you talk about the lighting sale, how that went for you? I noticed you extended it for a week?

We had a terrific fall lighting sale. The reason we extended it for a week is because we wanted to match up the calendar to the year before. You know, the initial thoughts were, maybe we should shorten it by a week versus the year before. As we got into the business, I mean our lighting sale was very successful. We had the inventory, and so we said, "Let's just match last year's sale dates."

All right. Great. And can you just tell me, what's the – what are you budgeting for advertising this year, print advertising and the TV show?

Oh, for the TV show?

Yeah, anything [indiscernible] – advertising separate from catalog?

You know, that's probably a good question to call Kevin offline about, you know – and I don't know if we have those numbers for the year right in front of us. But the television show is really not an impact to the Company; it cost the Company somewhere around $100,000.

The non-catalog advertising expense for the year is somewhere between a million and a million-and-a-half.

Okay, great. And then just noticing on the balance sheet that the shareholder loan no longer shows up. Can you explain what happened there? Was there a cash payment made or a stock --?

Sure. Yeah, that was – that was a loan made to me. This is Gary Friedman. That was a loan made to me when I joined the Company that allowed me to purchase Company stock. So I, you know, I invested $2 million of cash of my own money, and the Company made a $2 million loan to me to buy stock, so I had roughly a $4 million investment. I think I was paying 8.5-percent interest on that loan, and I think last quarter – you know, last quarter, I paid the loan off.

So that's cash – you made a cash payment?

I made a cash payment, yes.

Okay, great. And can you break out prepaid expenses for me and also tell me what's in your other long-term asset line?

Yeah, it's – as Kevin [indiscernible] breakouts again. You might – you know, if -- you might, if you have detailed model questions, you may want to give Kevin a call offline because we've got about 50 people on the call, so, you know, rather –

Yeah, I'm just trying to get a sense of is this catalogs?

A small part of it's catalog. There's prepaid rent and other, you know, a whole assortment of prepaids across there.

Thank you.

Okay. Thank you. Why don't we take one more question, Operator.

Okay, please stand by for our next Q&A -- or next questioner.

Yeah, this – and we'll take just one more question if there is one.

Okay, our next question is from [Lawrence Cam][ph] from [Sonic Capital]. Please go ahead.

Hi, guys. You just said that you didn't miss guidance for one out of the two times that you've given it, but as I recall, you missed the revenue guidance on one and you missed the earnings guidance on the second, so I don't think it's accurate to say that you didn't miss guidance.

Well, I guess we're [trying to] focus on the earnings guidance.

Okay, well, I mean – what –

What's your point?

I'm just wondering because, given your history, how can you be sure that you won't have a situation like you have been in past years where your inventory is so high that – and you're not able to sell off into the Christmas season, so you end up in a liquidation mode afterwards?

I'm – do you want to repeat that question?

Yeah, your inventory has exploded, and so I was wondering what confidence you have that you cannot fall into that situation where you had in past years where it's tough to liquidate them?

Yeah. Incidentally, who do you work for?

Sonic Capital.

Sonic Capital. Okay, for one, our inventory's exploded -- our inventory was up 20 percent, our sales are up 20 percent. So, you know, I’m not sure what your terminology refers to. And, you know, this is a new management team that's launched an entirely new strategy here. We gave guidance at the beginning of the strategy for the first two – you know, for the first 12 months of the year. We made earnings guidance in the first quarter. We missed earnings guidance in the second quarter by two cents. We're confident about the fourth quarter, and we're confident about next year's first quarter. So I’m not sure what point you're trying to make or what position you have in our stock, but, you know, I think we're done answering the question.

Operator?

We have no further questions at this time, sir.

Okay. Well, thank you, everyone, for your interest, and thank you for listening, and we'll talk to you next quarter.