RH (RH) 2006 Q3 法說會逐字稿

Welcome to today's teleconference.

[OPERATOR INSTRUCTIONS]

I will now turn the program over to Chris Newman.

Thank you.

Good afternoon, everyone, and welcome to Restoration Hardware's third quarter 2006 earnings conference call. I would like to remind you that the call is being recorded and will be available for replay via webcast on our website at www.restorationhardware.com under Company Information, Investor Relations, Event Calendar or by dialing in at (800)283-4595. Leading our call today is Gary Friedman, the Company's Chairman, President, and Chief Executive Officer, Ken Dunaj, the Company's Chief Operating Officer is also on the call. At the end of our remarks, we'll open the call up to questions.

But before we begin, let me address a few preliminary items starting with some brief remarks regarding forward-looking statements. Certain statements and information on this call will contain forward-looking statements within the meaning of the Federal Private Securities Litigation Reform Act of 1995. These statements are based on management's current expectations and are subject to certain assumptions, risks, uncertainties and changes in circumstances. Actual results or performance may vary materially from those expressed or implied in such statements.

These statements will include without limitation statements concerning or relating to implications of the Company's revenues, sales, and financial results for the third quarter of fiscal 2006, statements concerning guidance for the fourth quarter and full year of fiscal 2006, statements relating to the Company's anticipated revenue comparable to our sales, direct-to-customer sales, and earnings per share for future periods, statements concerning the anticipated benefits of certain growth opportunities for the Company, statements regarding the launch of future category extensions and the implementation of new order systems and other statements containing words such as believes, anticipates, estimates, expects, may, intends and words of similar imports.

Important factors that could cause differences are contained in the Company's filings with the Securities and Exchange Commission including the MNDA section and our most recently filed form 10-Q and form 10-K and our release posted on the Company's website regarding our results for the third quarter of fiscal 2006. Any guidance we offer represents a point-in-time estimate. We expressly disclaim any obligation to revise or update any guidance or other forward-looking statements to reflect events or circumstances that may arise after the date of this call.

And now, let me turn the call over to Gary.

Thank you, Chris, good afternoon.

We are pleased to report another quarter of solid progress at Restoration Hardware. Total Company revenues increased 22% reflecting our ability to gain market share and improve profitability despite a difficult home furnishings environment.

During the quarter, comparable store sales increased 3.9% and direct-to-customer revenue increased to better than expected 58% as we continued to pursue our direct center growth strategy. Customer response to our promotional events showed the greater mix of special price versus full price selling during the quarter. This resulted in higher than planned revenues and lower than planned product margins. While the mix of business varied from our plans, we were still able to achieve our earnings guidance for the quarter.

We launched two important initiatives during the third quarter. First, we continued to extend our brand by introducing our second category extension, The Restoration Hardware Gift Catalog. In addition, we launched a new fashion brand, Brocade Homes. While still early in their developments, we are pleased with the initial response to both catalogs.

Operationally we continue to make progress against our key initiatives. We are now live with order terminals in all of our stores. The order terminals have significantly reduced the time to place an order and allow our associates to have access to inventory availability without placing a phone call. Additionally, we have implemented the initial phase of our new warehouse management system. This first step allows us to systematically aggregate orders and improve both order accuracy and visibility to our customers.

Looking forward, we are encouraged by our early holiday trend and are forecasting comparable store sales to increase in the high single digits and direct-to-customer revenues increase 50 to 60% in the fourth quarter. In the first quarter of next year, we will be introducing our third category extension The Restoration Hardware Bed and Bath Catalog. We believe this assortment expansion will further establish Restoration Hardware as the authority in the strategically important classification.

Also in the first half of next year we will implement a new order management in our retail stores and call center and will install the next phase of our warehouse management system in our Furniture DCs. These initiatives should further improve both productivity and shipping efficiencies as well as enhance our customer experience.

In closing, we are optimistic about our holiday strategy and remain enthusiastic about the long-term growth potential of our Company. Before I turn the call over to Chris, I would like to thank all the members of team Resto for their contributions to our progress and a special thanks to all our team members in our stores across the country who will be bringing our strategy to life during this important holiday season.

Thank you. Chris.

Thanks, Gary.

This afternoon I'll take you through our financial performance for the third quarter of 2006 and provide guidance on our expectations for the fourth quarter and full year of fiscal 2006. At the end of my comments, we'll open the call up for questions.

As Gary indicated, we were pleased with our third quarter performance, particularly in light of our results relative to the overall retail home furnishing sector. Third quarter net revenue was up to 22% to 157.1 million versus 128.4 million in the third quarter last year. Loss from operations inclusive of 900,000 in costs associated with the adoption of 123 R was 3.7 million an improvement in operating results of 2.2 million over last year.

Operating margins expanded 220 basis points in the third quarter driven by 250 basis points of SG&A leverage. Net income was a loss of $0.15 per share, inclusive of $0.02 per share attributable to the adoption of 123 R. Net loss for the same quarter last year was $0.11 per share including a tax benefit of $0.08 per share and not including any cost associated with the adoption of 123 R.

EBITDA for the third quarter of fiscal 2006 was 1.8 million as compared to a negative 1.5 million in the same period in fiscal 2005. Excluding the noncash charge of $900,000 for 123 R, EBITDA would be 2.7 million in the third quarter, an improvement of 4.2 million against the same period last year.

For the year-to-date period, results are equally strong. Third quarter year-to-date net revenue of 470 million was up 20% to last year. Third quarter year-to-date loss from operations was 5.1 million, inclusive of 2.4 million of costs associated with the adoption of 123 R and $600,000 related to the second quarter 2006 stock-based compensation charge. Last year's third quarter year-to-date loss from operations was 13.4 million.

Net income for the third quarter year-to-date was a loss of $0.27 per share, inclusive of $0.06 per share of costs associated with the adoption of the 123 R and $0.02 per share for the stock-based compensation charge taken in the second quarter. Because of the valuation allowance established against the Company's US net-deferred tax assets, the Company recorded only minimal taxes in the year-to-date period.

In 2005 loss per share for the third quarter year-to-date was $0.28 per share, but included a tax benefit of $0.19 per share. EBITDA for the year-to-date period of fiscal 2006 was $11 million. Excluding the noncash charges for 123 R and the second quarter 2006 stock-based compensation charge, EBITDA improved 13.2 million against the same period last year. Importantly, the Company has had positive EBITDA each of the first three quarters of 2006.

The outstanding balance in our line of credit at the end of the quarter was 111 million, up from 80 million at the same time last year. The increase in borrowing levels reflects the increase in inventory up 54 million or 33% from the same period last year. Increases in inventory levels were driven in support of our sales growth and holiday strategy. Merchandise inventories were 218 million at the end of the third quarter. Finally, weighted average shares outstanding were 38.3 million for the quarter and 38.0 million year-to-date.

Looking at the total Company results in more detail, gross margin in the third quarter was 53.8 million, a growth of 21% versus the third quarter of the prior year. This was the result of a 22% increase in revenue, coupled with a 30 basis point erosion in gross margin rate which was 34.3% of revenue, compared to 34.6% in the same period last year. The reduction in gross margin at the Company level was due to lower product margins that resulted from a higher than planned mix of promotional selling. Decreases in product margins were offset by supply chain leverage and occupancy leverage.

SG&A expenses for the Company was 57.5 million in the third quarter of 2006 or 36.7% of net revenue compared with 50.3 million or 39.2% in the prior year's third quarter. The primary driver of the decrease in SG&A costs is a percentage of net revenue was the level of revenue growth, significant leverage of catalog amortization, and leverage of store payroll. This leverage was somewhat offset by the expense associated with the adoption of 123 R of 40 basis points and the investment spending in our new brand and our supply chain and systems infrastructure of 90 basis points.

Now to segment results. In the retail segment, revenues increased by 8% for the quarter as we experienced a 3.9% increase in comparable store sales versus a 2.1% decline last year. The balance of growth in retail sales is due primarily to the additional outlet stores year over year. Retail comps were driven by an increase in average retail dollars per transaction of 11%, combined with the decrease in total retail transactions of approximately 7%.

For the third quarter of fiscal 2006, our retail segment realized a $7.4 million four-wall contribution or a 7.4% contribution margin as stated as a percent of segment revenue. This compares with a $7.6 million contribution and an 8.3% contribution margin for the third quarter of the prior year. The change in contribution margin for the retail segment was driven by gross margin rate erosion offset by SG&A leverage and by the increased mix of outlet business in the segment. Segment gross margin for retail declined by 300 basis points as a result of lower product margins somewhat offset by supply chain leverage.

The margin decline was driven by a higher than planned mix of promotional selling. SG&A expense for the segment leveraged by 210 basis points due to store payroll productivity and advertising leverage. In the third quarter of 2006 there were eight outlet stores and we did not open any new outlet stores. Revenue for our eight outlets was $7 million in the third quarter up 3.1 million from last year's revenue which included five outlets at the end of the quarter. The outlet stores have been designed to liquidate returns, damaged or discontinued goods.

While this revenue has been reflected in the retail segment, it is not considered in the calculation of our comp store sales.

Now turning to the direct-to-customer segment which includes sales from both the catalog and internet. Revenue was up 58% to 57 million on top of a 27% increase in last year's third quarter. Circulation in catalogs distributed during the third quarter was up 15% with pages circulated up 8%. The higher growth in catalog circulation was driven by our category extension, The Restoration Hardware Outdoor Catalog. Sales growth during the quarter was influenced by both the third quarter and second quarter catalog drops.

The web accounted for 46% of the direct-to-customer segment's revenue in the quarter. Profit in the direct-to-customer segment was up significantly to 7.6 million in the third quarter, a 13.3% contribution margin. This profit compares to 2.7 million in profit and a 7.4% contribution margin last year. The expansion of contribution margin rate in the direct-to-customer segment was driven by both gross margin expansion and SG&A leverage.

Gross margin for the direct-to-customer segment improved by 40 basis points due to supply chain leverage partially offset by lower product margins. SG&A expense in the direct-to-customer segment leveraged by 550 basis points due to the higher than expected revenue growth and improved catalog productivity.

Turning now to guidance for the fourth quarter of 2006. For the fourth quarter, which has an extra week this year, we expect total revenue growth of 24% to 28%. The extra week will add approximately six points to the quarter's overall Company growth rate. Comparable store sales growth is anticipated to be in the high single digits. We expect fourth quarter direct-to-customer revenue to increase by 50% to 60%. The extra week will add approximately nine points to quarters direct segment growth rate.

We expect our operating income to be between $16.5 and $20.5 million, which includes the estimated impact of 123 R of approximately $900,000 and up to 2.5 million in expense for the Company's bonus accrual. Last year's operating income which did not include expense for 123 R or bonus accrual was 14.4 million. Interest expense for the fourth quarter is expected to be approximately 2 million, and we anticipate recognizing between 400,000 and 600,000 of income tax expense in the quarter.

We expect fourth quarter 2006 results to be in the range of profit of $0.34 to $0.44 per share with a diluted share count of 41 million. The impact of 123 R is anticipated to be $0.02 per share in the quarter. And the impact of the bonus program is expected to be up to $0.06 per share. Last year our fourth quarter EPS was a loss of $0.52 per share but included recording a valuation allowance against the Company's deferred tax assets of $0.74 per share.

Inventory growth is projected at 15 to 20% for the year consistent with revenue growth and driven in support of our business growth and our previously announced category extensions that will occur in the first quarter of fiscal 2007.

Thank you for your interest in Restoration Hardware.

Now, I'd like to open the call up to questions.

[OPERATOR INSTRUCTIONS]

We will take our first question from the site of Kristine Koerber from, excuse me, from JMP Securities. Go ahead.

Hi. Couple of questions. First of all, Gary, can you talk about the promotional activity that took place during the third quarter and how the -- your annual sales events wen, ie., the lighting sales events?

Sure. You know, we basically have the same promotional cadence that we've had in last year and previous years' quarters with the famous fall lighting sale and our upholstery event in the same quarter.

I guess the other comment I would make is that we are clearly operating in a more difficult environment the requires to react in a more promotional manner to gain market share and maximize earnings. So, I don't know if that answers your question, Christine.

Okay. Was there additional promotional activity going on outside of the lighting and upholstered furniture categories?

There's always promotional activity happening. Every quarter, as we react to product selling and exit dates on certain categories and so on and so forth. So, nothing in particular outside of the main events. And what I'd say slightly higher than normal promotional activity.

Okay, with that said, I guess, what gives you the confidence in high single digit comp for Q4 especially in light of the challenging environment?

Well, as I mentioned, our early business trends and our holiday strategy that we have in place gives us confidence today as we -- obviously there's very important weeks going forward. But as we see our business today and we've got the month of November behind us, we feel good about the numbers we're guiding to today.

Okay.

And then lastly, can you give us some idea what the extra week does to the bottom line, is it about $0.02?

The extra week, the margin is pretty consistent with the fourth quarter overall margin.

Thank you.

Sure.

Our next question comes from the site of Rex Henderson from Raymond James Associates. Go ahead.

Good afternoon. Couple of questions.

Again, to follow up on the margin question, can you quantify how much the -- I guess it was a mix shift towards more sale priced items rather than regular priced, how much that affected merchandise margins in the quarter?

Rex, there's -- we can't quantify that for you, it was the predominant change in the merchandise margin rate. The only other thing that I would add is remember that we are lapping the change in our assortment that we made last year, so the margin expansion that we saw in the first half of this year wasn't something that we anticipated seeing in the third or the fourth quarter, so the basis of comparison to the prior year did take a step function change in the third quarter relative to what we'd seen leading up to that point.

Okay. Secondly, was that merchandise margin impact, was that the result entirely of a mix shift towards more sale goods and less regular priced goods or was it more deeper discounts on the sale goods?

The majority of the impact was a mix shift. As we marketed, I think, our events better and more aggressively, we probably -- we probably built share around some of the promotional categories.

Secondly, the big improvement in the direct consumer, was that the -- was that from your regular catalogs and your sale events or was that more from the -- what impact can you measure in terms of the new catalogs and the Brocade Home catalog?

Brocade is a very, very small part of the quarter, so I'd say that's almost not measurable to the total -- to the total quarter. Really, you have to look at -- the growth really comes from across all the catalogs we mailed in the quarter the core book.

All right. Finally, I wanted to get on a little bit to the -- some of the operational improvements you're working on right now.

You said you installed a piece of warehouse system that allows you to aggregate orders a little more effectively. Can you tell me a little bit about that? What does that allow you to do? Are you still using manual labor to aggregate these orders and ship them or has this automated the entire process? Can you give us a little bit of color on exactly what's happening when you receive and order now versus what was happening before?

Rex, this is Ken. What the system has allowed us to do is really have visibility to multiple piece orders and allows us to aggregate those together so that we ship them all at one time.

In the past, we've had to manually try to hunt and look for all the different pieces to be able to make sure we have a customer's order together. The system gives us the visibility for that.

Is the system picking the pieces for it as well or do you still have to go and manually pick the pieces and aggregate them?

We still have to manually pick them.

I think everybody's picking couches manually.

Once we can automate that, we'll really leverage things.

Okay. In non-furniture orders, have you always been able to package orders together?

Within our catalog operations, we have, yes.

Okay. All right. Well, that's helpful. Thank you very much.

Thank you.

Our next question comes from the site of Laura Champine from Morgan Keegan. Go ahead.

Hi. We've noticed better SG&A leverage than we expected. I think there's been a lot of commentary already on this call in the promotional environment, but do you think that in Q4 you can continue to leverage SG&A expense relative to the year ago period?

I would anticipate that we will continue to leverage SG&A. Probably not at the level that we did in the third quarter. A lot of what growth leverage in the third quarter was driven by the significant growth that we had in the direct business. And we talked a little bit about our circulation growth. We had some pretty decent productivity in the quarter that I don't know that I would count on repeating in the fourth.

And similarly, would you count on growth margin deleverage in the fourth quarter just because it looked to us like the promotional environment is not getting any easier.

We are anticipating that there's not a significant improvement in the fourth quarter.

Got it. Thank you very much.

Sure.

Your next call comes from the site of Laura Richardson from BB&T. Go ahead.

Thanks. Hi, everybody.

Hi Laura.

Can you talk at all about the sales by category in Q3 and I guess I'm particularly interested in what you have to say about furniture given what everyone else has said is going on in that business and some of the textiles, any other category detail you can provide would be great. And then I have another question or two.

For competitive reasons, we decided not to give specific category performance data as we go forward.

Okay. Is it fair to ask if it's like -- the category performance was consistent with last quarter, whatever it was?

The category performance is going to change from quarter to quarter as different categories, more important to different seasons. We decide to focus on certain categories from a merchandising and marketing perspective.

Okay, that's fair.

And then in the fourth quarter guidance, I mean, it's a fairly big range. What are the variables that would get to you $0.34 versus $0.44?

What we basically did is we -- you'll see that the earnings number that we're guiding to for the full year is essentially no different than it was before we went into the third quarter.

And we feel very confident about the plans that we have for holiday, but it is, as you know, our biggest quarter of the year. And so we felt it appropriate, given the difficulty in the environment, the promotional questions that are out there and the size of the bet we were making to basically keep our full year guidance at about the same range. That's why the range is where it is on the fourth quarter.

Okay. Thank you.

Your next question comes from the site of Janet Kloppenburg from JJK Research. Go ahead.

Hi, everybody.

Janet.

Hi congratulations on a good quarter.

Gary, can you talk a little bit about the environment and if the promotional activities cited was specific to certain categories, which you may not want to mention, but is it across the spectrum of business or are there certain sort of, I would say soft home categories that you might be seeing it in.

And if you're anticipating that that continues into the fourth quarter.

Chris, if you could just give us some specifics on the inventory levels, perhaps, what your level of markdown inventory looks like last year and how you think it will look at the end of the fourth quarter as well?

I guess what I'm pointing to there is you're using pretty significant comp increase and with the earnings range being what it is, it's making me think that you're probably going to liquidate a lot of product as you go through the quarter. Just depends on what level of margin you liquidate it at. Do you follow me?

Yes, I follow you.

Okay, thanks.

Sure. I would say, Janet, just to I think our goal here is to maximize earnings within the quarter. We're anticipating the need to be flexible to drive the top line and to leverage the bottom line.

Right, I understand.

We're giving ourselves room.

Some room.

And anticipate that we're going to have to be flexible and possibly more aggressive to hit the numbers.

Okay.

In regards to your question about the economy and the environment, we look at, we think the numbers being reported, whether it be home sales, interest rates, refinancing and the overall performance of their home retailers clearly point to a slowdown. We believe our job whether we're operating in a tailwind or driving into a headwind is to outmerchandise the competition and to gain profitable market share.

I would anticipate a similar environment in Q4 today until any of us see any bigger trends that would tell us otherwise.

On that note then, maybe Chris could talk about your inventory levels and the specifics of the markdown levels and also how you might manage inventory levels in this environment going forward.

This year as you're seeing, our strategy has been to improve our in-stocks for the beginning of each selling season. To accomplish that, we basically moved up receipts by a few weeks, which creates this timing difference versus a year ago when you look at just the quarterly ending balance.

This timing difference will get cycled out by the end of the year as we're projecting our inventories to be in the 15 to 20% range which is essentially in line with our sales growth rate. We don't have a material differential in terms of level of markdown inventory yea on year.

So we're not concerned frankly.

I'd just say this has been a hard one for everybody to kind of grasp all year. But if you take receipts from one quarter and shift them backwards, shift them back by a couple of weeks, to land those receipts earlier, you're going to basically end every quarter with a higher inventory balance. But if you look at it over the course of a year, we're not buying any more inventory.

So really, you have to look at the year-end number to see what's the year-end number year-over-year? Year-end number is up 15 to 20%. What that means is if you're looking at a quarter that's up 37%, we're not ending the year up 30% or 37%, so we're just shifting receipts a few weeks earlier in each of the quarters to be better in stock for major catalog drops and for floor sets.

And then that kind of neutralizes the real number you got to look at is the year-end number. It's a year-end number in line with our sales growth rates. And we believe it will be.

Okay. And then, Gary, one last question. I think you said that the early reads on the gift catalog were encouraging. I think there will be a second drop or maybe there's been a second drop.

Maybe you could talk a little bit about some of the strength of that catalog, where you're seeing the strength and you know, maybe contrast it to last year's.

Yes. Well the gift catalog is -- we didn't have it last year, so it's a brand-new catalog. The initial mailing was a small mailing. This second drop, which is in-home today, we would expect it to be home any time from this weekend to the next couple of days -- or this last weekend or the next couple of days, is our biggest drop.

So we haven't had a chance to really see the biggest drop yet, Janet. But we would say based on the first initial drop we were pleased with the performance.

Last year you included a lot of gifts in your Restoration catalog. I'm wondering if you could talk maybe about some categories that are performing well versus last year.

Again, for competitive reasons, we would rather not comment on specifically on categories.

Okay. Thanks very much and good luck.

Thanks, Janet

Our next question comes from the site of Crystal Lanigan of D.A. Davidson. Go ahead.

Good afternoon, everyone.

Hey, Crystal.

I guess the first question, Chris, it looks like deferred revenue, you did finally anniversary that big increase, and did it come in about the level that you guys had expected it? It does sound like you had a little bit better performance as far as the lighting sales and upholstery sales. I'm wondering if you wound up with a little more deferred revenue than you planned.

I think our revenue deferral was in-line with what we thought, and we did see that we cycled through, just as we anticipated we would in the third quarter.

Going forward, we've got better forecasting and predictive methods to stay on top of this number. It should be a fairly consistent percentage of revenue, depending on how things change with mix and the mix of direct versus retail. But we shouldn't see the step function increases unless we have some other dramatic assortment shift.

Okay, all right. And then just looking at the lighting sale versus last year, as far as in stock levels and overall performances, it appeared at least from being in the stores that it was executed much better than last year.

Do you have any commentary you'd like to make? I know your'e trying to give us less competitive information. But overall it looked in general like it was a vast improvement over last year?

We're glad you felt that way.

Okay.

And then also, Friends and Family, I guess that goes in line with the shift in the data being a couple of days longer as you talk about need to be a little bit more competitive in a ramped up promotional environment. Was that part of the reason you shifted your Friends and Family date?

That is not the reason at all from Friends and Family, we moved up the event and extended the days to improve our ability to process our customers' orders efficiently and be able to offer delivery of in-stock furniture by Christmas. So that was really our intent there.

You know, we had traditionally held the event two weeks later and was held on a Sunday and Monday. And it was difficult for stores to process all the transactions and our call centers to process all the transactions. So we moved it up and extended it so we could process it and be a better experience for our customers and also give ourselves the ability to offer in-stock furniture with availability by Christmas.

That's very helpful. I don't think you've told us Q4 circulation plans for the catalog.

I don't believe we have.

Is that as much as I'm going to get on that?

Yes. I mean, you've seen where we've guided our revenue.

All right.

This doesn't come without any kind of page change.

Okay, fair enough.

Just a couple more questions. I think you had said on the last call not to expect any more store outlet openings this year. Is that the case?

That's still the case, yes.

Okay. Great. And then the '06 bonus accrual, is that about where you had planned it for the year or is it a little bit higher than what you had originally expected?

Yes, I -- it's in the range of what we would have expected, is what I would say. Our bonus plan has a lot of variables that go against it, but it's in the range of what we would have anticipated.

Okay.

And then just finally, Gary, in looking at the macro environment again, is your demographic, at least the restoration to hardware demographic, do you feel that consumer is a little more insulated than some of the hardline retailers out there perhaps struggling a little bit more? It would seem that the higher household discretionary income might make you a little bit of a safer haven than some of the other people that have reported more recent weakness.

God, I wouldn't profess to be an expert in that area. So I think when you have the right goods and service your business does well, when you have the wrong goods and service, you're not executing well, your business doesn't do well.

Whether you're looking at apparel or home or any category, there's people that are performing, people that are not performing. We spent a lot less time looking at the environment and a lot more time looking at our business by category, by product, by item and try to make the best investments we can each season and try to outmerchandise and outmarket the competitive set.

Whether our comps would have been three points higher in a better environment or not or whether we're more insulated than others, I'm not sure I'm an expert in that area.

Okay, great, thanks very much. And have a good holiday season.

Thank you.

Our next question comes from the site of Rob Wilson from Tiburon Research Group. Go ahead.

Yes. Thanks for taking my call. Could you go back and give us the merchandise or product margin or by channel, Chris?

Merchandise or product margin by channel? I don't think we've disclosed that historically, Rob.

You used to.

Well, sorry.

Okay.

Was that when you were here, Rob?

It was in your first quarter 10-Q. It disappeared from the second quarter 10-Q. I didn't know if you planned on disclosing that going forward.

I guess not. I'll go to my next question.

No comment right now.

The SG&A leverage that you discussed in the direct-to-customer channel, did you say that that was 550 basis points?

Yes.

Okay, that seems like a high level of leverage. Can you help us -- give us some more details how you achieved that?

Sure. It's predominantly in catalog amortization. There's also -- there's payroll that's associated with the direct business that should be relatively fixed inside. Those are the two big chunks, but catalog amortization and the productivity we saw in the mailings for the quarter was really what drove the number.

But this is a quarter in which you unveiled your Brocade Home catalog. I'm just wondering was that highly successful? Did that drive some of the productivity?

Very small percentage of sales, Rob. Wouldn't be material to the numbers.

Okay. The tax rate for '07 that we should think about, Chris, what should we be putting in our models there?

I would assume about a 40% rate.

And finally the outlet sales, typically you have disclosed that on your conference call. Could you provide that number for us.

I think it was in my script. I think it was 7.1 million, I believe.

Okay. And -- appreciate that.

And maybe just go back to the product margin. Could you maybe give us directionally, was it -- did you have lower margins directionally in the retail channel verses the direct channel? Was a degree of decline greater in one channel versus another?

The product margin was down in both channels. I think directionally it was fairly consistent in each channel. So not a material difference in either of the channels. The retail may be influenced as a segment because of the mix of outlets within the segment. But if you'd look at the core, not real different.

I think that's a good point, Rob, when you look at our threat sales and our external reporting combined with our retail business, so that the retail segment in an externally reported fashion is taking some of the markdowns for direct.

Okay. That's very helpful information on product margin. I appreciate you taking my call.

Thanks, Rob.

It appears that we have no further questions at this time. I will now turn the program back over to our moderators for closing remarks.

Thank you for your interest in the Company and we look forward to talking to you in the first -- at the end of the year. Have a great holiday, everyone. Bye-bye.

This does conclude today's teleconference. You may disconnect at any time. Thank you, and have a great day.