Brand House Collective Inc (TBHC) 2003 Q1 法說會逐字稿

Good day everyone and welcome to the Kirkland's, Inc. Conference Call. Today's call is being recorded. At this time, for opening remarks and introduction, I would like to turn the call over to Trip Sullivan. Please go ahead sir.

Thank you. Good morning and welcome to the Kirkland's, Inc. conference call. To review the company's results for the first quarter of fiscal 2003. On the call this morning will be Robert Alderson, President and Chief Executive Officer and Reynolds Fualkner, Executive Vice President and Chief Financial Officer. The results as well as merits of the accessibility of this conference call on a listen-only basis over the internet released yesterday afternoon and a press release has been covered by the financial media.

Except for historical information discussed during this conference call, the statements made by the company management are forward-looking and may pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks and uncertainties, which may cause Kirkland's actual results in future periods to differ materially from forecasted results. Those risks and uncertainties are more fully described in Kirkland's filings with the Securities and Exchange Commission including the Company's annual report on Form 10-K filed on May 1, 2003.

For fiscal 2002, Kirkland's has reported net income and earnings per diluted share in accordance with the generally accepted accounting principles and additionally on a pro forma basis to exclude certain affects of the Company's July 2002 initial public offering. For description of the pro forma adjustments, please refer to the "Reconciliation of Pro Forma Information" that was included in yesterday's press release. With that said, I will turn the call over to you, Robert.

Thank you Trip and thanks to everyone for joining us on the call today. We are pleased to report Kirkland's sales and earnings results for the first quarter of fiscal 2003. I'll attempt to give you some insight into the factors that affected our business during the first quarter and I'll also share some observations about current business trends and our outlook for the rest of 2003. Rayne Fualkner will provide additional commentary on first quarter results as well as earnings guidance for Q2 issued in yesterday's press release.

For the first quarter, earnings came in at 6 cents per diluted share, a penny above our previously issued guidance. As previously announced, comp store sales for the quarter increased 5.1% following a comp increase of 18% for the first quarter of 2002. In a rather lackluster retail sales environment and against a tough year-over-year comparison, we were pleased to review solid sales and good earnings for Q1.

Several merchandise categories made significantly contributions for the first quarter sales increase. Categories experiencing the largest percentage of increases included house wares, textiles, accent furniture, and candles. We continued to distinguish ourselves in these categories through innovative product development and partnering with our vendors. Our main stay wall décor category also continued very strong performance. During the quarter, our stores also held successful events which featured core Kirkland's merchandise categories such as framed art, mirrors, and floral garden.

Our first quarter sales generally were characterized by higher unit sales volume and lower average retail prices. This trend can be attributed partially to the sales shift by customers from some higher ticket category like lamps, to lower ticket categories such as candles. In addition, the average retail price trend was impacted by our more aggressive and normal mark down strategy, especially during the latter part of the quarter. As the quarter progressed, we found that we needed to sharpen our pricing on a number of items in order to drive sales. The result was a comp sales increase somewhat higher than originally anticipated offset by slightly lower gross margin percentage.

We made excellent progress on our new store development activity during the first quarter. We began fiscal 2003 with 249 stores. During Q1, as scheduled, we opened eight new stores, and closed six stores leaving us with 251 stores in operation as of May 3, 2003. Our real estate team is nearing completion of our leasing activity for 2003. We remain on target to open a total of 38 to 40 stores this year. We anticipate a total of 8 to 10 closings which will result in a net gain of 30 stores or 12% growth in the store base for fiscal 2003.

All but one of the first quarter new stores opened in the month of April. So it is still a bit premature to draw many conclusions on the new store performance thus far; however, early signs are encouraging. I'll have more to say about the progress about our real estate effort a bit later in the call. At this point, I would like to ask Rennie to take you through the first quarter financial statements that were included in press release, and to add some commentary on our second quarter outlook.

Thank you, Robert. Good morning everybody. Beginning with the income statement that we included with the press release, I want to highlight some of the important aspects of our first quarter results. Net sales increased to 11% and comparable store sales increased 5.1% for the quarter. As Robert mentioned, sales increases throughout the quarter were driven by unit volume as opposed to price. Lower priced goods such as candles and house wares were most popular with customers and markdowns were more important sales catalyst than they were in the first quarter of 2002.

Gross margin for the first quarter decreased to 32.1% of sales from 33.6% in the first quarter of 2002. Gross margin percentage was about 20 basis points below our internal plan, but gross margin dollars were slightly above plan.

Operating expenses were higher than prior year as a percentage of sales, but consistent with our expectations. One item that contributed to the increase in operating expenses was insurance cost including our Directors and Officers insurance premium, which rose significantly after we went public last summer. In addition, in the first quarter, we completed our transition to a new Fijitsu (ph) cash register platform in all of our stores. This move resulted in a write-down of the former cash register hardware. Although the operating line interest expense was minimal, a strong cash flow enabled the company to borrow less than we had planned. Lower borrowing rates also helped to keep interest expense low for the quarter. Our effective tax rate for the quarter was 39.5% giving us diluted earnings per share for the first quarter of 6 cents, 1 cent above the guidance that we issued in March.

Turning to the balance sheet, the company ended the quarter in excellent shape. Total inventories at May 3, 2003, were $40.8m versus $39.5m at February 1, 2003 and $36.8m at May 4, 2002, the end of 2002's first quarter. Several observations about our inventory position. First, you may recall that at year-end, our total inventories were approximately 17% of our prior year levels. Our sales performance during the first quarter helped us to close that gap to the (inaudible) at quarter-end, our total inventories were at approximately 11% of our prior year levels on an increase in the store base of approximately 6%.

Next point, if you look at actual on-hand inventories in our stores on a personal basis, we were carrying approximately $120,000 of inventory of cost in the average store at May 3, 2003 versus $115,000 at May 4, 2002, a modest increase of 4%. Importantly, our inventory turnover for the quarter was equal to the first quarter of 2002. A third point, is that we continue to have very fresh current inventories. As of May 3, 2003, approximately 96% of our inventory was less than 6 months old. The other observation that I'd make on the balance sheet is to draw your attention to the use of our revolver. We entered fiscal 2003 with no debt, and $4m in cash.

At the end of first quarter, we had borrowed $11m under our credit line, approximately $2m less than our original plan. The majority of the revolver draw funded our final fiscal 2002 tax payment in April 2003. We still anticipate financing all of our activities in fiscal 2003 with cash flow from operations and incremental borrowings under our revolving credit line.

The final topic that I would like to cover with you is our guidance for second quarter and our updated guidance for fiscal 2003. For the second quarter, we expect earnings per share of 7 to 9 cents based on flat to slightly positive comparable store sales and gross margins below prior year levels. Our pro forma earnings per share for the second quarter of 2002 was 14 cents, was likely to substantial gross margin benefit and operating expense leverage from a 16.7% comp increase during that quarter.

Our second quarter estimates reflect a cautious outlook on sales and gross margin as we continue to face an uncertain economy and challenging sales comparison. As noted in the press release, this current quarter is the last in a stream of five consecutive quarters where we have faced double-digit cost sales comparisons. It goes without saying that we are committed to producing the best performance we can in the second quarter. However, from our perspective the most important objective for second quarter is to ensure that we finish the quarter in a strong position from merchandise and inventory standpoint.

Over the last six to eight weeks, we have not been as satisfied with our performance in certain categories as with others. In part, this situation is due to extraordinary category sales comparisons, versus last year's first quarter. As an example, three of our key categories lamps, garden, and decorative accessories had comp increases in the first quarter of 2002 ranging from 25% to 50%. In some cases, we're already addressing certain situations where we feel like we need to clear out of some product that is not working as well as we had anticipated. This is the case with some with our lamp SKUs, for example.

These actions will affect near-term margin, but will position us nicely for the second half of the year. We also continue to allocate open-to-buy dollars into areas where we see significant upside in the months ahead. As a result of our conservative near-term outlook, we are broadening our range of earnings guidance for the year. Our range of estimated earnings per share for fiscal 2003 is now $1.15 to $1.20 per share, which implies 13-18% growth over last year's pro forma EPS of $1.2. We still are expecting full year 2003 comp sales increases in the 3% to 4% range.

We've always recognized that the second half of 2003 provides us with our best opportunity for sales and earnings increases. We still believe that is the case and we have not lowered our expectations for second half performance. We still expect to earn more than $1 per share in the second half, versus 78 cents in EPS for the second half of 2002.

I'll now turn it back to Robert for some additional comments on our growth plans and also some final remarks.

Thanks Rayne. As we wrap up, I want to be sure to communicate how positive we continue to be about our prospects for prudently and successfully expanding Kirkland's concept across the country. Our new roadside team has made huge progress during the first four months of this fiscal year in identifying good properties within a cluster of Kirkland's customers and negotiating financially productive deals within those properties.

Kirkland's continues to be viewed as a very desirable tenant and a strong traffic generator, both by landlords and other retailers. Good real estate opportunities remain plentiful, both in regional malls and in off-mall venues. Chain clothing, such as Eddie Bauer suggests additional availability of prime spaces in our size range in regional and several regional malls. We had a very strong response last week at the National ICSC Real Estate Leasing Convention in Las Vegas with more than 130 meetings with the premier mall and strip lifestyle developers. We still foresee our new store class to 2003 being a healthy mix of approximately 65% regional mall locations and 35% off-mall.

We're encouraged about the mix of opportunities we're seeing across different regions of the country as well as fill-in locations in our four states. Beyond the process of actually leasing and building stores, I'm very pleased with the response and level of achievement of our enhanced management team across merchandising, visual, operations information systems and distribution as it executes and supports our acceleration and growth.

I want to give you a kind of a statistical update of where we are right now as far as the 2003 real estate class is concerned. With a target of 38-40 new stores to open, we have opened 8 new stores as of today, have another 10 leases signed, and 11 under active negotiation. As of this afternoon, when we have our post ICSC real estate meeting, I fully expect that we will have approved all of our 2003 deals. We are also committed on approximately 25% of our 2004 deals already, which is a tremendous improvement from last year when we were gearing up at the beginning of an IPO and a very encouraging sign of our growth opportunity for next year. Of our first 8 stores now opened, four are in that South-East Texas and Mid Atlantic area, one in the Mid West, three in the North East, and three are non-mall. All of that is consistent with the plan that we set last year and announced to you on our previous conference call. That concludes our prepared remarks. Operator, we now are ready to take questions.

Thank you. The question and answer session will be conducted electronically. If you would like to ask a question please do so by pressing "star" key followed by the digit "1" on your telephone keypad. If you are a speakerphone, please be sure your mute function is turned off to allow your signal to reach our equipment. Once again, press "star" "1" for question. We will go first to David Magee with SunTrust Robinson Humphrey.

Yes. Hi. Good morning.

Hello.

A couple of questions. One is can you talk about sales by region which you have seen, you know, that might be different throughout the country.

Okay. Yes sure David. I really think that we have not seen a tremendous amount of variability across the country. If you look inside the first quarter there were couple of weather-related things that for temporary periods of time affected certain areas of the country. Back in February we had the, you know, the late winter weather, the ice and the snow that effected particularly along the Eastern seaboard -- in the Carolina and Virginia we had a number of stores closed for multiple days and I think probably effected the overall comp -- probably one point in the month of February.

And so during that period for example you had the Florida and Texas region doing a good bit better than the East. Likewise with the severe weather and recently the tornadoes across Kansas, Arkansas, Missouri, Tennessee that had temporary effect, but really other than those discrete events David, not a notable amount of variability across the country.

Okay and then secondly can you talk a bit more in detail of what's happening at the SG&A line. Looking at the fourth quarter, it looked like it was the dollars were almost flat year-to-year, and then in the first quarter they were up about 13% -- I am sorry 15%. Can you talk about what's kind of driving up the cost of business that you might expect of next couple of quarters there?

Well, I think that really as we planned it, we were pretty much right on top of plan. There will be couple of items that I mentioned in the call, the insurance cost that we mentioned before and then we had the situation where we have placed the registers and took about $175,000 of a write-down for our old NCR (ph) equipment, but that's kind of a really sort of an immaterial event. What's driving the cost David, I think, it's kind of typical stuff in the stores--payroll and occupancy are the biggest items, but those are all kind of, in a range of what we expect and in corporate really payroll continues to be the same, but as we grow we are trying to be intelligent about how we add personnel.

But that will be a cost increaser over the year. But in terms of how first quarter stacked up against expectation, I would say it was right on it.

So, we should expect, may be a similar dollar increase over the next couple of quarters.

I would say yes with one qualifier, and that is as you get into third quarter, you will actually start to experience more of a rise in the store base because through this point of the year the openings have largely been matched almost one-to-one by the closings we had early in the year. So with the store base rising as you already seen an underlying rise in expenses, but you should likewise see a rise on the top line.

Thank you.

Thank you.

Take your next question from Peter Benedict with CIBC.

Hi guys. I was wondering if you could comment all with more in detail on the gross margin outlook given the plans you have for the second quarter. Where do you see it kind of flushing out there and is the target for the full year still kind of a flattish gross margin. And then secondly, on the inventory, where do you think you -- where do you want to end up kind of at the end of the second quarter as you headed to the back half of the year. Thanks.

Let us see gross margin first. I think that based on the large comp here that we had in Q2 last year we have always sort of expected second quarter gross margin to be a little bit down. Clearly from the comments we have made in the past we were taking to make sure that we continue to maintain a reasonable sales rate. We see some additional pressure on that. You know, that pressure, Peter, could be, you know, if we thought the quarter was going to be, you know, 50 to 100 basis points below last year if might end up being more like a couple hundred basis points below last year.

Okay. Good and on the inventory -- targeted inventory levels for the balance of the year?

Targeted inventory levels for the balance of the year; I think that we are pretty much right on top of our plans. At store level, 120,000 versus 115,000 and about $40m to $41m on total company. I think from this point on, Peter, you’ll start to see this late May. So in about another month, you will start to see start kind of a typical seasonal ramp both in terms of total inventories as well as per store inventories. So I think it is just kind of a typical seasonality curve from hear on now. On peaking out total inventory, let's see Peter, total inventories will be at peak, I am going to estimate about $53m to $55m.

Okay. Great, thanks a lot.

: Okay. Thanks.

We will go next to John Lawrence with Morgan Keegan.

Yeah, good morning guys.

Hi John.

Rennie, would you talk a little bit about when you look at the situation in some of those categories that were really strong last year, how far along are you on that sort of clearance of some of those categories? I mean were they --- obviously it slows down as the comps slows but -- from last year. Can you talk about that a little bit?

John, it's Robert. We’ve been addressing -- for example, Rennie mentioned lamps, we’ve been addressing that for about two weeks now and that is very much in progress and we will continue to play through that as our big sales starts fairly shortly and plays out in through the month of July. We will also deal with that category and other categories during the second event that we will layer in July. That will be supportive of big sales and supportive of our activity to drive sales and also rationalize our inventories as we prepare for the second half of the year.

And are there just as many opportunities on the promotion schedule in the second quarter to move that merchandise as there was in the first quarter?

Absolutely, in fact more.

More in the second quarter.

Right.

And just last question. If you compare this sort of announcement cautiously on the second quarter, to the cautious outlook on the fourth quarter right at the beginning of December, how would those two statements differ?

I am not sure I understand that question John.

I guess the question is when you gave cautious expectations at the first of December regarding the fourth quarter regarding traffic, etc. Is this basically the same type of cautious guidance that we saw then?

I guess I will take a crack at that. Rob may have some thoughts too.

I guess what -- how are things different today on this announcement than they were then?

Well, I think -- and the first thing that occurs to me that there is a huge difference from sitting in May and sitting in November.

Right.

And I think that clearly -- I mean we are certainly saying -- I mean I would like to be sitting here saying 10-12 cents, but we are not. We think that we are up against very large comps and we are doing our best to comp against that. I feel like we will be able to maintain a sales rate that we want to but it is going to cost us little margin to get there.

But I think that the biggest difference to me is that we are sitting in May and November. What I mean by that is when you are in May and you are trying to produce the best sales and earnings you can, that is certainly what you are trying to do in November and December. But the difference is the huge part of it was always in the forefront of our mind in May and June, is also making sure you are absolutely prepared to execute in the second half. So this is really where you make your hay. So we have right in front of us our biggest clearance event of the year big sale which is our semiannual June-July.

We always do it January obviously after Christmas and then we do it in June and July again. So -- yeah, I mean that’s the biggest difference to me as we have got a lot of ability to look at in front of us and move the chess pieces around and make sure we are in good shape to really bring it home in the back half. When you are sitting in November, your cards are kind of down. I mean you are kind of there.

You are 30 days from Christmas day and you're just kind of -- you are just going to dig in and impart as best as you can. And here I think, we have got a lot more latitude to kind of move the chess pieces around and sure, we maximize our dollars today, but equally important make sure inventories are in position to really do well against the software comparisons in second half.

Great, thanks.

We'll go next to Robin Murchison with Jefferies & Company.

Hi, good morning. When you look at the second quarter promotional counter; obviously, we have the big sale. Can you just give us -- and I have seen -- I saw the ad actually couple of weeks ago for the -- I think it was a lamp clearance event, which obviously is what you are talking about today. Can you just go through the second quarter May, June, July programs that you are going to have?

May be it is only those two, maybe there is a little bit more and clearly the big sale -- the differentiation is going to be that the big sales encompasses many categories whereas in first quarter we were very clearly category specific by the month. So, can you address the second quarter overall promotional schedule is the question.

Yeah, Robin, we will be happy to. The basic cadence of the second quarter courses that we began with the lamp event and that event has been in progress. It actually started off early about the second -- during the second week, at the end of the second week of May; has done reasonably well. We also do program sidewalk sale promotions in those properties that do those as part of their marketing calendar, and we are happy to participate in those and their very nice clearance events for us.

As we move into the month of June, we'll take -- a big sale will actually began. We are going to move that up a little bit this years. We are actually going to start it a week earlier than we normally do. So we'll get the benefit of those markdowns and also have that merchandise that we always bring in for big sale at full margin that is promotional, that is the driver of that business and brings people into the store. It will be out there, it is in place, it is ready to go, and so we think we do have the capability of doing that.

We'll probably follow that -- actually we will follow that in early in July with a new event that we haven’t done in the past which is -- we are going it call a home sale and it is going to really focus on our core categories with, we think, some exciting merchandise and also some very nice prices for our customers. And then I think as we get into this last part of July, we'll take a look at the whole quarter and what we have been able to accomplish and if we need to do something else to continue to drive the sales, we will.

Okay, that’s very helpful. Thanks. Also, just sort of looking out after you get through this quarter and these clearance events, are there any changes or any new trends in terms of home decor that might look like -- not new categories, but new twist on your category -- in your category?

Well, I think one of the things that we are most excited about is that we expect some of our new garden programs to be in the stores in the August-September timeframe and beyond. We have some very strong New York programs that we were very excited about. Those will again hit the stores in the August-September timeframe.

We'll also have a new frame program that will be in the stores. It is very promotional and that will be in there about the same timeframe; and all of that will be driving third quarter business and we'll follow of course into early fourth quarter. A seasonal buildup will begin in store this year. We'll actually begin to see particularly in the Midwest which is our strongest seasonal area -- we'll begin to see that in August of this year and we'll begin to get a read on how that’s doing.

So we have a number of things. We are continuing to lay out new programs into our lamp group that of the accessories. The Kirkland's story, Robin, has always been to move out of things when they are proliferated all over the marketplace and to begin to bring new things to bear; and that's exactly what we're doing right now. So, we're going to be very selfish on that in the gift business as we go into the late third quarter and into the fourth quarter of the year.

Okay. Great, thank you very much.

Thank you.

We'll take our next question from Brent Rystrom with Piper Jaffray.

Hi, just a few quick questions. Could you give us an update on how the non-mall real estate is going?

Sure, Rayne has some numbers on that.

Yes, sure. I will make a comment just on kind of sales trend and then Robert can talk about it as it's related to kind of outlook for new stores. In terms of the sales trends in the first quarter, our non-mall units actually comp'd above our mall units. Whenever we say that we always follow that with saying that you know it's still a relatively small portion of the mix, but we're still very encouraged about what we're seeing in non-mall properties, in terms of overall business trends in relation to the malls.

Having said that, I feel pretty good about the mall business as well. But as Robert said, you know, we are seeing a lot of good opportunities in these regional malls and also off-mall and we continue to look aggressively for these off-mall properties. I think what -- did you already mention maybe 35% or so within this class will be off-mall.

That's right and as the class is beginning to shape up, I think we are very pleased about the way that's happening. You know, there -- the -- some of the mall properties are very strong properties, and they are anchor points for a region of sales and clusters of customers, and they're going to remain strong for a very long time, and we continue to have invitations to be in those very good properties. And we're also working on the very best of the off-mall properties right now.

And a quick follow-on to that then. Of the 251 stores that we now have, how many are non-mall?

I've got the answer right here somewhere. I think its 20.

20, okay. And then a couple of other quick questions. You may have given this; I apologize if you did. If you did, have you given the openings by quarter?

No, but I can give you some guidance on that there Brent. We opened 8 in the first quarter. We kind of see, about, another 8 or so in the second quarter. So, that's kind of right on what we had indicated, that about 40% of the class in the first half and the remainder in the back half. As you know, we will not open many stores in the fourth quarter because we always have them opened before Thanksgiving. But if you're looking for number maybe you go 8, 8, you know, Q1 eight, Q2 eight, you know, maybe 4-6 in that first period of the fourth quarter and all of the rest in Q3.

Alright, and then there's a quick follow-on to that. The remaining 2 to 4 closings to get to the 8 to 10 closings, I would assume will be in January?

Yes, probably you're looking at maybe probably two that are going to be right at yearend and maybe another one towards the end of this quarter. We have actually closed eight; we've closed two since the beginning of this quarter, hence bringing year-to-date to 8. So, in case I was confusing, 8 to date, another one towards the end of this quarter, and a potential for as many as 2 right at yearend.

Alright, and then two quick final questions. In the earlier question about the events in the 2Q, Robert is there a change in the timing, I know you mentioned that one of them moving up a little bit of a weaker, kind of the margin actually moving up by a week. Are any of these events new relative to the last year or changed any significantly?

Well of course the timing of the big sale, Brent, and then also layering in a little bit more -- really a new event, a home sale that we'll have full collateral and we still look forward and …

So that is truly a new event. It --?

Yes, it is. It came with something that we will have brand new for this year.

Final question. Any visibility of any particular issues as related to sourcing products from Asia, particularly in regards to SARS?

So far nothing that has affected availability of products for us. The -- you are aware of that the industry is not traveling quite as much, but you know if we don't go to China...

I was going to say, if I recall, correctly you would more often go to California or some place -?

Absolutely, we deal with domestically based importers and we're going to more shows now, that our -- you know, national events, and we are doing things to adjust within our group in order to getting fund of all of the products that we feel like we may be getting fund of, but so far we haven't seen unavailability of the goods related to that yet.

Alright, thank you very much.

Thank you.

And just a reminder, if you do have a question please press the "star" "1" on your telephone key pad. We'll go next to Patrick Fanansey (ph.) with Fidelity Investment.

Hey guys, how's it going?

Good morning, Patrick.

What do you see competitively Bombay I think has been going a bit better recently? I am not sure how much overlap you have with them, but have you seen anything different competitively today?

Well, I think, you know, not significant or not anything that we feel like is affecting our business. Bombay is doing better and they are really a friendly competitor; that's what I feel to be next quarter or two than any property -- their resurgence, I think, is commensurate with new things we are doing in the store with merchandise and very complementary with us.

You know we are doing the very different price points between the two stores. I think all others are dealing with a -- and of course they are dealing obviously in very low base numbers for the prior year, so we would expect with the resurgence that has some bright numbers. I think we are dealing with consumer which is still very cautious. We have hopefully some better news on the horizon with the tax deal being signed, Iraqi war, at least the active part of it behind us, hopefully a better outlook as we go into the second half of the year ago that will help all our retailers.

Thank you.

We'll go next to Michael Mccormett (ph.) with Gilder, Gagnon, Howe.

Hi, good morning.

Hi.

If you could just kind of frame a reference on the comment. It sounds to me that you knew about the extraordinary large comps comparison in certain merchandize categories that you are up again and may be over inventory in those areas to try to compensate for the difficulty and then those didn't sell through. Is that a fair characterization or I'm missing some there?

I think you really have look category by category. I think that is probably not a fair generalization; that may be the case a little bit in the category like lamps, but I think really, the way we approach from a planning standpoint looking at these comps in the second quarter is, as you are look at, you plan it by category, you plan it down the skew, you try to find where you can best anniversary those dollars. In some cases you feel like you can anniversary those dollars in the same category.

An example there would be the lamps. I think we got a harder time anniversarying those prior year lamp dollars then we had anticipated. Translation, probably do at least some inventories that needs to be addressed in that category and as Robert said, we are trying to do that for certain SKUs. However, in some cases you feel like you got other harder categories where you will out of the (inaudible) growth in the bad dollars and in attempt to anniversary prior year dollars.

An example there might be where we allocated more often to bad dollars and some interesting trends we saw in candles and in house wares. Our hope with some of those dollars would may be replaced a little bit of a more modest commitment than we made in the first quarter and the second quarter to garden. You know that's worked sort of, but may be not to the extent that we had planned. Translation there -- we like our inventory in candles; we like our inventory in house wares, good strong business that we are driving those inventories and we are evaluating our inventories in garden to make sure that maybe we didn't go too far the other direction and may be missed some opportunities in that category.

So, it really is a category by category itself in the trans see how you can debt anniversary the dollars and I think that was the comment was made earlier about the difference between Q2 and Q4. You know, we look at every category, every sub class, every item, you know, every week, if not everyday. So sitting in May, we have a tremendous amount of information to react to, to position for the second half.

And the other thing to remember is that, you know these are everyday category. These aren't like, you know, a seasonal category where if you are sitting in November and you got a lot of product in seasonal, you have kind of got a well very real obsolescence factor that's inside 30 or 40 days. Still these are everyday categories that we are known for; the customers shop us for and so whether inventories at a particular time are a little bit on the higher side or little bit on the lower side, our ability to react and react quickly and affect business in about a 30 to 45 day timeframe is pretty significant.

Okay. My next question is can you kind of characterize -- you might have said it earlier on the call and I may have missed it, what the foot traffic trends have being kind of over the last couple of quarters versus [not necessarily] comp, but foot traffic trends and what kind of assumptions are you making for foot traffic and, you know, kind of economic recovery in the second half to assume that you can do these type of numbers?

Well, we don't have the ability, Michael, yet to -- we will install traffic counters in our stores this year, it should be end of August. So we don't have a baseline yet to actually do that as some retailers do. Anecdotally, traffic has been, spotty in some cases, recently good in others. I would characterize it a much more careful consumer. I think we are still doing a pretty good job. I think, we have some transaction numbers that suggests that our transactions are up, but our average retails are down.

That's in part due to markdown activity. It's a little bit of mixed bag and I don't think there is a discernible trend that says nobody is shopping. We are doing some big numbers. The numbers in some cases are not quite as good as they need to be to deal with our comp increases that we saw early last year.

And then in kind of going into the remainder of the year, as you positioned your inventory appropriately, what kind of assumptions are you making for the traffic--average ticket and so forth? Is there anything resulted built in that assumes that the economy could drop into the scenario or are you kind of taking it more staid view?

I think -- I will take that one. I think that the short answer is I really don't think we are building in a big recovery scenario. We talked some about our quarterly comp comparison. This almost equaled the use what we look at it on a year basis, excuse me, on a first half-second half basis. First half of 2002, we were 17; the second half 2003, we were 3.

So, you know, when we talk about retaining our guidance of 3-4 comps for the full year, we really don't think we are calling out anything extraordinary in terms of the consumer recovery. We look at the second half as an opportunity. We continue to believe that if you look inside that comp guidance of 3 to 4 for the year, which is far going to be roughly that, fourish or so for the second half. When we look inside that we continue to think it will be largely unit and transaction driven, certainly through the third quarter of the year.

Michael, as I look that in the second half, I think the comparisons are easier and that's nice and we certainly take into account, but what gives me a great deal of encouragement and confidence is that I think we have some -- a great plan for the second half and especially the -- dealing with our Christmas business and the product which supports that, you know, I think it is going to be very pleasing our consumers. And we have great opportunity there and I think we will be -- and will execute that very nicely this year. So, I think there is opportunity in the backside which is not just traffic and overall macro condition effected, if I can say it that way.

Great. Thank you very much.

Thank you.

We will take our next question from John Lawrence from Morgan Keegan.

Yes Roberts, just a follow-up on the real estate side, I mean obviously you are different company today at the convention this year than you were last year. Can you give us a little bit more of a flavor of is it concessions developer fees, what advantages do you think you have with the developers now than you did say a year ago?

John, I think the major advantages, I would say are that the deals are improving -- are beginning to improve. I think we are doing a better job with capturing tenant allowance. I think we are doing a little bit better job paring down our occupancy cost. And I think the spaces are improving. The non-mall opportunities provide us with some nice leverage with the mall guys. And they have to keep their properties full too and we do represent a very strong lease and very strong traffic generator. So I think that overall, just better deals and better opportunities and the ability to fit into all regions of the country in all formats certainly works nicely in our favor.

And on that point I assume as deals improved that can change the calendar and you can move things from one location to another?

Well, if I am understanding the question I think we definitely -- and tell me if I am misinterpreting the question, but we definitely I think have our inner mode (ph) based on our balance sheet and our stated growth objectives to be seen a whole lot more opportunities than we were a year ago and it is nice to have that choice. So yes, we definitely try to, based on the fact that we kind of got of trigger on 38 to 40 stores, we definitely in a whole want the best 38 to 40 and we are seeing many many more than that to get down to our number.

So yes, there has been some moving around and some properties we thought we were going to and now we’ve got a better opportunity elsewhere. Quite honestly for 2003, we are kind of down to the final strokes. Robert alluded of that and we are going pretty much have 2003 wrapped up here in the next few weeks, but then what you just described -- again if I am interpreting it correctly, will definitely be the case for 2004. Look at -- whatever, look at 3, 4, 5, 6 or 7 deals for every one you do.

And I think the constituency and the quality of our 2003 store group improved dramatically over the last 90 days.

All right, thanks guys.

Better opportunities became available. Thank you, John.

Again"star" "1" for questions. We will go to Arnold Brief with Goldsmith & Harris.

If I hear you right, at this point you are trying to clear out some merchandize and that’s going to leave a little bit in open and buy going in the second half with a little change in mix going into some product lines that are doing a little bit better. Does that -- assuming I read you right; does that have any impact in and of itself to the change in mix on your gross margins as you look into the second half of the year?

And then sort of related to that question, could you sort of walk us through your markdown philosophy decision-making process? When do you decide to start marking down, that is the first markdown the big one or do you sort of ease into it a little bit? Is it 30 days? Is it 60 days? Could you get us into that whole process a little bit in terms of having thoroughly describing how you go about it?

Sure, Arnold. I will give a quick answer on the mix and then Robert will do with the markdown philosophy. On the mix, short answer is really, no. Our category gross margins are relatively consistent one to the other. If there can be moderate differences, but not worth talking about really in the spirit of a shift.

Now what we did allude to and I think what could potentially continue to be the case a little bit is that at some of these lower-priced categories continued to be really the hotter categories in terms of where consumers are buying right now and were interesting trends exist. That could create this situation where you are not getting your sales so much from the price, you are getting it more from the unit. But on a GM percent kind of question, do not anticipate a big effect because of mix.

On the markdown philosophy, very simply, we do that on an item basis where we monitor items, we are looking at those weekly. If an item is not producing as we believe it should or in combination with that we have replacement or similar items coming in as a secondary program. We will go ahead and mark that down. We are very aggressive with the first markdown. We hope by the second mark down we are up. That’s a departure that we -- older philosophy that we had and then we have been in this now for two years and it’s been very effective.

And at the risk of kind of beating a dead horse a little bit, I think that we are so much farther down the road in terms of I think not only our philosophy on markdowns, but our execution of that and that’s really a merchandising question as well as a stores and a visual question, and an analytical questions. We have come so far with some of the systems investments we've made and the information our people are getting, and I think that we are just much more intense and to a certain extend kind of ruthless on that than we use to be; and we think that is the key to maintaining freshness in front of our customers every single day. Also for skew control we have done a terrific job with improving skews over the last 18 to 24 months. And we are actually down in skews versus in the first quarter this year versus last year which is a nice place to be.

Can I ask one more another question?

Sure.

You indicated a couple of times you look at -- something to destination store? And I was in your store in New York and it just seems to me that -- correct me if I am wrong because probably I am, but it just seems to me more of an impulse store. People walking by, see the stuff, your merchandise mix is really quite different than most of the malls in the store. It seems somewhat gift oriented and somewhat different than most of the stores and it seems to me not a place to necessary we'd go to because of the specific need but just having walking past and then entering interesting looking places is a little different, I need some gifts. And then you do something home decor or picture or something. You don’t see yourself more as an impulse gift kind of thing as opposed to destination store?

Well, I would honestly say that you and I might have a totally different reaction to the store than would our typical shopper and our typical shoppers are female customer; and she sees the store, I am sure, from time-to-time on an impulse basis -- she is walking by and she walks in but, where our stores become known in the customer base, they are very much destination stores.

And the female shopper enjoys being there; our store is set up to play into that treasure hunt environment that customer enjoys. We have great prices for the customers. Many of them return to our stores on a weekly or more than once per week basis and you would probably not be attracted there except on impulse, but I would suggest that with the flow of new products that comes in, our female customer is right there with us.

Thank you.

Thank you.

That does conclude our question and answer session. I will turn the conference back over to you, Mr. Alderson, for any additional comment.

We appreciate very much everybody being on the conference today and we will look forward to talking with you on the next call. Thanks.

This does conclude today's conference. You may now disconnect.