Sleep Number Corp (SNBR) 2010 Q3 法說會逐字稿

Welcome to Select Comfort's third quarter 2010 earnings conference call. All lines have been placed in a listen-only mode until the question-and-answer session. Today's call is being recorded. If anyone has any objections, you may disconnect at this time.

I would like to introduce Mr. Mark Kimball, General Counsel. Sir, you may begin.

Thank you, Shandra. Good afternoon and welcome to the Select Comfort Corporation's third quarter 2010 earnings conference call. Thank you all for joining us.

I'm Mark Kimball, Senior Vice President and General Counsel. With me on the call today are Bill McLaughlin, our President and Chief Executive Officer; Jim Raabe, our Senior Vice President and Chief Financial Officer; and Hunter Saklad, our Vice President of Finance.

In a moment I'll turn the call over to Bill. Following our prepared remarks, we'll open the call to your questions. Please be advised that this telephone conference is being recorded, and will be available by telephone replay. It also will be archived on our website at SelectComfort.com. Please also refer to the details set forth in our news release to access the replay on our website.

Please also refer to our news release for a reconciliation of certain non-GAAP measures included in the release, or that may be discussed in this call. The primary purpose of this call is to discuss results of the fiscal year just ended. However, our commentary and response to your questions may include certain forward-looking statements.

These forward looking statements are subject to a number of risks and uncertainties outlined in our earnings release and discussed in some detail in our annual report on Form 10-K and other periodic filings with the SEC, and the Company's actual future results may vary materially.

I will now turn the call over to Bill for his comments.

Thanks, Mark. Good afternoon, and thank you for joining us to discuss Select Comfort's third quarter performance and long-term outlook.

As we shared with you in our news release, Select Comfort's third quarter was solid on all financial measures, top line, profit and cash, and our confidence in the long-term prospects of our business and Company continues to build as we deliver sustained performance. My remarks today will concentrate on our preparation to sustain growth by enhancing our unique core advantages in brand, distribution and product, and Jim will focus on the third quarter and then balance of the year outlook.

Before looking ahead, I wanted to begin by emphasizing a couple of points from the third quarter. First, is consistency of profit performance. Profit has now improved seven consecutive quarters despite a challenging environment. Second, is sustained revenue growth. This past quarter was important, as we lapped last year's period of economic recovery, and achieved absolute sales growth of 9% and top line growth of 16%. And third, is continued value creation. In addition to top line growth, Select Comfort is expanding its operating margin and growing cash, which further accelerates the Company's value creation opportunities.

The third quarter not only marked an important transition in Select Comfort's performance, but also it was a time when we advanced our focus on longer-term strategies and priorities. As many of you know, our primary focus last year was to stabilize the business. Facing uncertain environment and a need to rebuild the balance sheet, we focused on our core basics. At the same time, we concentrated to on better distinguishing our core points of difference and advantage in the market place. These efforts have positioned the Company well for long-term growth.

Some of our significant advances include the repositioning of our product line to emphasize value. We have now renamed our nine bed models, which are presented across three families of good, better and best, and prices are featured in promotions that emphasize entry price points below $1,000, and values are clear to trade up through the line. Our goal and opportunity is to demonstrate the affordability and value of the Sleep Number Bed to an increased number of consumers.

Another significant step was unifying our brand across key consumer touch points. An important example of this effort is our store marquees. After strategic investment, nearly all store marquees now feature the Sleep Number brand, having converted from the Select Comfort name, in order to take full advantage of the Sleep Number advertising.

Since early 2009, we have also successfully rationalized distribution on a market-by-market basis across the country. We have closed 85 company stores and withdrawn from 740 specialty bedding stores. This has resulted in an increase in average sales per store of 27% to $1.25 million on a trailing 12-month basis, and this puts well on our way towards attaining our historic high of $1.5 million per store average, and then we'll go beyond.

We also have more effective -- we have also more effectively leveraged our advertising, with one common campaign across the majority of our direct response and branded creative, including promotional advertising. This combination of a strong creative, and the benefits from a singularly-focused brand, have enabled us to grow same-store sales by 24% year-to-date on 14% greater media spend. This is in line with the strongest media productivity that we've earned in the past ten years.

And we continue to improve employee engagement; our Company's engagement scores have exceeded 70%, with more than 90% participation in the past two surveys, well above our historic measures and external norms. Motivated and empowered employees are critical to satisfy customers.

All of these advances in our fundamentals, plus our consistent operating performance in a challenging environment, are positioning us well for the future, and have allowed us to improve our net debt position by approximately $150 million since early last year. So we're building on this strong foundation and we're moving to the next phase of our Company's development. Allocating greater organizational time and resources to the initiatives that will further enhance our unique core advantages.

These efforts, however, are not all about doing more. They're not necessarily about more distribution channels or more stores or more products, but rather they're focused on significant evolutionary advancements to our core. To use the analogy of a ten-speed bicycle, we're moving from the safe and easier second gear to the more powerful fourth gear, with much more to learn and improve before advancing into the even more powerful higher gears.

Our general philosophy has been not to discuss specifics about our strategy until they have been demonstrated and proven in the market; however, we give you a sense and understanding of our direction. We are looking at specific initiatives in three areas, all with one common purpose, to cost-effectively increase consumer awareness and consideration of Sleep Number Beds and Bedding.

First, we are evolving our market efforts to place greater emphasis on where to find the Sleep Number Bed. Our research shows that over time, consumers have become aware of the Sleep Number brand, and generally understand how the product is different from other mattresses; however, when they're in the market, they don't always know where to find it.

The solution that we're developing includes marketing messages to both highlight our unique product benefits and our unique store experience, which includes the impact of finding your sleep number. We intend to test and learn from our advanced creative, as well as increase and further optimize our media spend, to drive greater awareness and growth.

Second, we are piloting stores outside of malls, to reach those consumers who don't frequent malls, or don't consider malls when mattress shopping. This initiative also gives us flexibility in market development. As part of this effort, we opened a couple of non-mall stores in the past quarter, and will open a few more in the fourth quarter. Our disciplined approach includes strategic site selection, and an updated store design tailored to non-mall locations. Several of these stores will be replacing nearby mall locations, so we'll gain important insights into their relative traffic and sales potential. Again, this initiative is important for flexibility in market development, and if successful, could help us reach new customers to accelerate sales at an equal or lower cost.

Finally, we're beginning to increase investment in product development. Over the coming years, we'll seek to introduce products that both reinforce our brand positioning of personalized comfort, and deliver incremental revenue. We'll provide more information about this initiative as products are developed and ready for us to share.

Our common objective is to increase consumer awareness and consideration of the Sleep Number brand, and we're confident that once consumers visit our stores and try our beds, that conversion and customer satisfaction will follow. Again, our ultimate goal is to increase our share of the premium segment of our industry.

And, as you would expect, increasing our market share over time would give -- would have a dramatic impact on our overall Company performance. One point share gain will translate into a 70% increase in our revenue, and would carry a 20% to 25% profit flow-through, and even greater cash leverage.

Our go forward strategy is aggressive, yet appropriately disciplined. We have intend to have proven and refined growth initiatives in place by the time economy strengthens, so that we can shift to an even higher gear without compromising our commitment to sustaining our strong balance sheet. During the fourth quarter we will remain focused on continued strong execution, especially during the important Holiday selling season. We also continue to develop these new initiatives for accelerated growth and continued margin expansion.

Now, let me turn the call over to Jim to discuss the third quarter and our outlook for the balance of the year.

Thanks, Bill.

When we spoke in July we were cautious about the consumer, having seen some week-to-week variations in June and July sales. Improvements in consumer trends and solid execution by our sales marketing team, led to a strong August and September. While we've seen positive sales growth throughout the year, we continue to see periods of consumer strength and weakness, serving as a reminder of the uneven nature of the recovery as we head into the Holiday shopping season.

Sales in the third quarter were 9% higher than very strong third quarter a year ago. Sales in our Company-owned channels, which excludes the impact of the discontinuation of our retail partner program last year, increased 11% on mattress unit growth of 10%. Same store sales increased 16%, partially offset by a net decline in store count, and a somewhat lower growth rate in our direct and eCommerce channels. Our mattress sales mix has remained fairly consistent year-over-year and quarter-to-quarter.

In addition, gains in bedding collection sales have been a source of strength, and we've also had success increasing penetration of our adjustable foundations, following the introduction of a lower price point model early in the third quarter. All in all, third quarter sales were a little better than the expectations we outlined in July.

On the profit side, our operating margins improved to 10.5% compared to 8.1% last year, and net income increased 52% to $10.5 million. The year-over-year results are a bit difficult to compare, because of one-time charges last year and incremental investments in incentive compensation this year, all of which should even out on a go-forward basis. Most importantly, we've demonstrated that 10% plus margins are achievable on third quarter volumes.

On a sequential basis, we were pleased with our ability to generate incremental margins on increases in sales volume. Comparing second quarter to third quarter, sales increased approximately $21 million, or 15%, which is a relatively normal seasonal change in historical terms. While operating profits grew by $6.8 million, representing a 32% profit flow-through on incremental sales. On a year-over-year basis, our gross margin rate declined 90 basis points to 62.5%; while lower than a year ago, this rate is in line with the second quarter and year-to-date, as well as in line with our expectations looking forward.

Selling and marketing expenses were 42.6% of sales, 220 basis points better than a year ago. Marking costs were 17.6% of sales, 63 basis points higher than a year ago, while selling expenses were 25.1% of sales, 275 basis points better than last year. Both selling and marketing costs include incremental growth investments that we noted during our second quarter call, and the year-over-year improvements reflect better per store sales productivity.

G&A expenses were 8.9% of sales, 90 basis points higher than a year ago. G&A continues to track a bit higher than our expected run rate, due to incentive compensation that was higher than last year, but in line with performance, as well as the incremental longer-term investments we referred to on last quarter's call.

The business continues to generate significant cash, with EBITDA in the quarter totaling $21.4 million, compared to $17.6 million last year. On a 12-month trailing basis, EBITDA totalled $65.5 million. Our cash totaled $82 million at the end of the quarter, $40 million more than at the end of the second quarter. The increase was due to positive EBITDA, favorable working capital contributions from normal seasonality, and some timing-related items. While we've lowered our full year CapEx forecast to approximately $8 million, we expect the third quarter period in cash is likely to be the high point for the year.

As noted in our news release, we are increasing our full year guidance to between $0.52 and $0.55 per share. This increase reflects our performance year-to-date, along with our expectations for the balance of the year. While the fourth quarter is always difficult to predict because of the limited visibility to consumer sentiment during the key Holiday shopping periods that begin in November, we are basing our fourth quarter sales outlook of mid to high-single digit same store growth on sales trends through third quarter, resulting in expectations for fourth quarter earnings per share of between $0.08 and $0.11 per share. Fourth quarter EPS will be based on a share count that's roughly 10% higher than a year ago.

In summary, we're very pleased with our third quarter results, and are excited about our longer-term potential. We're confident that we are making the right investments for the near and long term to allow us to continue to improve our year-over-year performance.

Now I'd like to turn the call over to Bill for final remarks.

Thanks, Jim.

I'd like to wrap up by congratulating the Select Comfort team for a very important third quarter. We consistently advanced our performance despite an uneven market, taking advantage of opportunities as presented, as well as working hard and smart through periods of softness. We sustained growth while lapping a stronger period a quarter ago, and we are realizing the continued efforts to control expenses and preserve cash, giving us more financial flexibility and greater value-creation opportunities.

These past few years the fourth quarter has been a difficult one to predict, with many external influences. Our agenda will be to continue to execute the proven programs of the past year, with seasonal emphasis on giving meaningful gifts of sleep and personal comfort. We're also excited to advance our agenda in marketing, distribution and product. We look forward to a cleaner comparisons after this final quarter of prior-year changes to the distribution base and share count.

Select Comfort is dedicated to improving people's lives by improving their sleep, through individualized sleep experiences that only we can deliver, and to raising people's expectations beyond the one-size-fits-all solutions that others offer. By doing this, we will drive profitable growth and increase market share, and we believe this is an important time to look ahead at the Company's opportunities and value potential.

We want to thank you for your attention, and [Shandra], we would now like to open the call for questions.

Thank you. We will now begin the question-and-answer session.

(Operator Instructions)

Our first question for today comes from John Bough of Stifel Nicolaus, your line is open.

Okay. That was a challenge. Congratulations on the EBIT performance and the cash generation. I guess if you could help me, first, what is the normal seasonality, not that there's anything normal anymore, between Q3 and Q4?

Normally, as you indicated fourth quarter is -- or excuse me -- third quarter is one of the highest quarters along with the first quarter. The fourth quarter is a little bit lower than the third quarter, and then the second quarter is the lowest seasonal point. But as a percentage of total sales for the full year, fourth quarter is a couple points, 2 or 3 points below what third quarter is.

Okay. Great. You made the comment, I think it was you, Jim, that you're basing your high-single comp guidance for Q4 based on what you had seen in the September quarter. I assume that also includes what you've seen in the first two, three weeks here of October as well, correct?

Yes, I mean obviously there's not a lot of -- a lot to go on yet in October, but, yes.

Okay, and is that like the APU was flat; did I hear mattress units in dollars were very close 10% and 11%; is that right?

Yes, that is correct.

Okay. And how do we think about these pilot stores, stores in general, you can talk about store count as well, I was under the impression that you were going to close more stores in the fourth quarter than it looks like, sort of like a comment there. And then how you are reviewing these pilot stores, and what that may mean to store openings in 2011 and beyond? Thank you.

I'll let Jim talk about total stores, but the way to think about these non-mall stores is we are using them more as a learning experience at this point. We do think there's an opportunity to expand the awareness and consideration that customers have by getting outside of malls, getting into more high-visibility, high-traffic areas. But we expect them to perform equal to or better than our current store base, so I would look at them as a one-for-one substitution as we go forward.

And again, our intent is still to optimize markets, rebalancing stores, not a lot of store additions on a net basis; but going forward, once proven, then we will start to add in a more controlled play. You want to talk about the fourth quarter?

Yes, John, so the store count, you are right, fewer store closings in Q4 than we talked about earlier, but it was really just a timing -- you know, what we didn't close in Q4, we're going to end up closing in Q1. So we will -- early in Q1, we'll get down towards 380 stores, and then we'll be building back over the course of the year. So by the end of 2011 we would expect to be back at, you know, kind of year store count, end of 2010 store count or a little bit higher.

Our next question today is from Brad Thomas of Keybanc Capital Markets. Your line is open, sir.

Thanks, good afternoon Bill, good afternoon, Jim.

Let's see, I want to follow up, Jim, on some of the comments that you had made about spending during the quarter. You know, I remember last quarter you guys kind of talked about, you know, June and July sales being a little bit softer. Have your trends tended to kind of mimic what we've seen out of the ISPA data? How was Labor Day, and as we think about spending during the Holiday period, do you think the Holidays really, you know, constitute that sort of time of need and value that historically had been the times that we've really seen stronger mattress sales during the year?

No, I don't know if I would necessarily say it mimics the ISPA data. What I would say is what we've seen is that it continues to be a very value-oriented customer. As a result of that, you know, during traditional market share periods or mattress-buying periods, there's much more activity both in traffic and conversion, and during those kind of off-sale periods, you know, things fall back a little bit from a traffic standpoint. We've seen that pattern very consistently throughout the year, and I think in hindsight we kind of look at June and July, that that was a little bit of what we were seeing there, was a kind of between-Holidays period and was a little bit softer, and once we got back towards Labor Day it picked up pretty well.

Brad, just one point of clarification on kind of the strength of the Holiday season. You know, in fact from an ISPA or industry standpoint, fourth quarter is relatively low. But for Select Comfort, it's always been relatively high, as Jim shared earlier, and that's primarily because of our store presence in the malls and our activities taking advantage of that traffic.

That's great. Thanks, Bill. Just to follow up on the marketing opportunity, it does seem like you guys have a nice opportunity to shift more of your spend online, and target things like more local spend, especially from an Internet standpoint. Could you talk a little bit more about where you are in that process, and how quickly it could be rolled out and potentially have an impact?

I think you're exactly right in terms of identifying our opportunity, both on the local search-type basis as well as taking advantage of our customers' high satisfaction levels and engaging the whole social side. You know, admittedly we probably got started on this a year or so later because of the distractions that we had about a year ago, but we've aggressively been moving in the area. We've got -- our agency has now been involved for about six months, so we're actively in the testing and learning, and we are kind of rolling and testing as we speak.

Okay. And then, Jim, just in terms of housekeeping items, on the CapEx, any color you could provide behind the lower guidance? I mean, obviously you guys kind of bumped it up last quarter, anything -- any details you can provide there?

It's more a timing issue than it is anything else. But I think in the middle of the year we saw the opportunity to, you know, start doing some of this testing on some of the stores and some of the things that we were seeing, and we started down that path. It's just larger part of that spend is going to roll into early 2011.

Okay. And then as a follow up to that, last quarter you all had outlined approximately $3 million in incremental spend for the back half of this year; where are we on that, and will any of that spend be pushed off to 2011?

Shouldn't be any of that that gets pushed off into 2011. The majority of it did get spent in the third quarter. There is still some of it that will get spent in the fourth quarter.

Perfect. Thanks so much, and congratulations again.

Our next question is from Mark Rupe of Longbow Research. Your line is open.

Good quarter. A couple questions on the non-mall locations. Just out of curiosity, how many do you have today?

Under really the official program, we've got two that were opened in the last -- in the third quarter, and we'll have about four more in this quarter.

Okay. So the new kind of strategy on the off-mall will obviously be evaluated differently than kind of the lifestyle centers of maybe five years ago, when you opened some of those?

Yes.

Okay. As we look -- as we look at 2011 then you started kind of the rebalancing of the store base; should we assume that a lot of the openings in 2011 will be off-mall?

I think it will be a mix, a balance between there. We're still taking advantage -- it depend on a market-by-market basis. If there's solid mall locations, then we look there; but if there are solid non-mall, we'll be going in that direction, and it looks like it could be a balance - a mix of both.

I think we talked about the fact that earlier about -- I think you're right about there's a lineup, a fair amount of where we're closing and opening. Some of the rebalancing is about a little bit bigger trade areas, but it's also about doing a little bit better job on site selection to make sure we're really finding the locations with the right target markets, and in some cases those will be malls and some cases those will be off-mall.

Okay. As it relates to the off-mall, do you have a sense if there's going to be a different, you know, difference in the kind of the areas where the strategy might work better than other areas? You know, maybe density-related.

I think it's too early at this point.

The other part I was going to just share with you, Mark, was basically the cost structure is pretty similar.

Okay. And then just lastly, I know you don't want to go too deep on kind of the product pipeline for next year, but in terms of kind of magnitude relative to past kind of refreshes or product launches, any kind of sense of what the expectation might be?

Not at this point, Mark. I mean, for us the key, key drivers of growth in the short term are the marketing effectiveness in the store and distribution. The product has a couple of opportunities to it; one is to actually help with the marketing and all by emphasizing the unique individualization and benefits of the product, and we enhance that, and that becomes marketable then. The second is getting into more incremental programs. But as I said, we're really just starting to ramp up of the investment, so there's going to be lead time on real significant product news.

Thank you. Good luck.

Thank you.

Our next question is from Budd Bugatch of Raymond James, your line is open.

Hi, guys, good evening. This is Chad pinch hitting for Budd. Congratulations as well on another great quarter. A couple of questions, the last year Q3 gross margin was unusually high; could you remind us of why that was?

I think there were a few areas we had some cost advantage, including we were still coming off of lower prices, or I should say our contracted adjustment prices had not been fully reflected, and some of that's kind of been adjusted now since that period. There were also a few timing-related items, none of which were real significant, but there were some kind of reasons why, you know, some of those one-time items did drive some of -- a little bit better gross margin last year.

And the important thing is we're -- you know, we've been consistently running in this kind of mid-62 range now for all of 2010, and you know that's the rate we feel comfortable looking at going forward.

Okay. And now with input costs seemingly kind of going the other way, are you seeing any pressure, and how do you see those playing out over the next couple of quarters?

You know, there's been a little bit of pressure, but I would say it's more on the fringes, you know, more within the normal range of variability that you might see. Obviously, we're always targeting cost opportunities and productivity gains to offset those, so I think that we feel, you know, feel comfortable that we can manage those costs, you know, outside of a real strong spike in oil costs or energy costs.

Okay. And the G&A expense did come in a little higher than we were modeling, and I know you mentioned higher incentive comp given the better performance; can you give us a flavor of, you know, maybe what the right run rate should be in Q4?

Yes, I think, you know, more in that, you know, $12 million, $12.5 million is more in line with what we think is a more normal run rate.

And do -- what type of increase would you expect in terms of media spend in Q4?

You know, we're trying to manage that media spend more variable to sales in that, you know, 11.5% to 12% range. So it's more a factor of sales number, so, you know, there's -- obviously, we would anticipate an increase, but it should be in line with sales.

Okay. And, you know, you talked about some of the working capital management items, and we noticed a pretty significant increase in payables; how do we think about modeling those going forward?

You know, there were a few timing items in there. I think payables in particular were in the, you know, mid-40s this quarter, and normally they've been running in high $37 million, $38 million, $39 million, and I would think it's more in those terms going forward.

Okay. Maybe last question, you shared with us some thoughts on your comps for Q4. How are you guys, you know, based on what you're hearing from customers, what you're seeing in the economy, how are you guys thinking about industry growth and your potential for comp store increases next year?

Well, you know, I think next year is one of mixed results -- it's still uneven. We're not necessarily looking at a major recovery, but we're not looking at a double dip either. And we believe that if the industry is flat to up a few percentage points than the premium segment, we'll be up a little higher than that. So that's kind of the way we're starting to think about next year. The one good thing about our business is also, though, that, you know, with the just-in-time manufacturing and all, we can be pretty responsive to wherever the industry goes.

This is the one item I would add, is obviously we expect to be able to grow our market share in the relevant market segment. But I think Bill outlines, you know, a fairly cautious outlook but with growth next year.

Terrific. Well, thanks guys for taking my questions, and good luck in Q4.

(Operator Instructions)

Our next question is from Tony Gikas of Piper Jaffray, your line is open.

All right. Thank you. Good afternoon, guys. I was just curious as to the -- you know, what you feel the gross margin potential could be over the course of, you know, the next fiscal year? Also if you could comment on operating margin potential, and then just how would you characterize, you know, manufacturing capacity right now relative to the current, you know, run rate?

I'd say gross margin, Tony, as Jim said, we think that in this kind of mid-62 range is -- business pretty consistently, that we are comfortable there, and I would see that going forward; obviously, it depends on some ingredient costs and all, but we think that through our vertically-integrated system, we can find flexibility to maintain that kind of margin structure.

Operating margin, as we've said, we believe can be in that low double digits over time, and that's what we're striving for, is to get that into that 10%, 12% range, and then we'll look beyond that.

Then in terms of capacity, you know, when we did our restructuring a couple of years ago, we were very careful to preserve the infrastructure. So we can increase capacity without significant CapEx, primarily shifting labor, with adding shifts of labor; so we feel like from a capacity standpoint, grow significantly without adding any CapEx.

What would it take to, you know, grow the gross margin another 50 to 100 basis points over the next few years?

Well, there's a series -- I mean, some of the product work that we're doing could get us in that direction, but -- and don't -- you shouldn't take what we've said is that we're satisfied with it or not looking to improve it further, but from a planning standpoint that's the range that we feel comfortable at right now.

Okay. Then just last question, I'm sorry if you said this on the call, average price points, are they trending a little bit higher or do you expect them to trend a little bit higher in calendar 2011?

I wouldn't ever think so. We haven't seen any significant shift in the mix, and I don't think we've seen any trends that would indicate that we should expect to see shifts in the mix.

I think the other thing, just as kind of a reminder is, you know, we're focused on both the entry level and stepping people up, and I think we've done a pretty good job stepping people up; but we also, with the price points that we have, feel like there's significant opportunity for people at the entry level to just be aware of the product and buy the product. So we're kind of working both ends of the scale, and all in all we expect it to remain fairly stable.

If you don't mind, can I just ask, what's the most difficult price point right now that you're seeing?

You know, Tony, our mix, you know, we have the good, better, best, and our mix has been about 30%, 50%, 20%, pretty consistently since we restructured the line last year. I would also say, I mean, our process is basically one to get people into the store and then let the sales professional find the right price point. So I don't know that I would necessarily characterize any price point as really being difficult.

Okay. Great job, guys. Good luck. Thanks.

Our next question is from John Bough of Stifel Nicolaus, your line is open.

Thank you. That's awesome. Thank you very much. Bill, any discussions at a Board level on the cash? You know, how much will you let pile up, when do you do something, and what would you do? Thank you.

First of all, John, it's a treat to even get that question. It's been a while. Seriously, we have been talking about it a bit, but it's pretty clear that our first priority, building from the learning from the past, is to make sure we've got a sufficient cash balance for our unique business model, and we feel like we've got some further building to do to achieve that.

But then as we approach the position of more flexibility, our first priority is to invest in the business, and you know, given what we've gone through, we think there's some catch up work to do in terms of stores, products, systems, with the same [disappointments] that we have had. But we believe we should be able to meet those investment needs of the business, and still continue to improve our cash position. And in time I look forward to sitting down and considering with the Board other opportunities to reward the shareholders, but for now that priority is on just profitable growth in the business.

Any, I mean, you've scrapped SAP, correct, and I can't remember but I believe that that investment is more or less gone, or not salvageable; is that something or something similar to that in the systems area that you're thinking you're going to need some cash for?

Well, in some -- well, the systems are suited well for the Company at the size we are and the complexity; now that we've simplified the Company significantly, the systems are doing well. They are going to have to be upgraded over time just for one voice -- one look at the customer, and some other things like international down the road, and all the rest of that. But we believe we can work that on a very different approach, on a more incremental basis, with a four or five-year road map of IT investments.

Great. Thank you.

We have no further questions. I'll turn it over to Mr. Mark Kimble.

If there are no further questions, we will conclude the call at this time. We thank you all very much for joining us. We look forward to reporting to you again following year end. Thank you.

Thank you for participating in today's conference, you may disconnect at this time.