Brand House Collective Inc (TBHC) 2003 Q3 法說會逐字稿

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

Good morning and welcome to this Kirkland's Inc. conference call to review the Company's results for the third quarter of fiscal 2003. On the call this morning will be Robert Alderson, President and Chief Executive Officer, and Rennie Faulkner, Executive Vice President and Chief Financial Officer. The results as well as notice of the accessibility of this conference call on a listen-only basis over the Internet were released yesterday afternoon in a press release that's 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 made 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 generally accepted accounting principle or GAAP. And additionally on a non-GAAP basis to exclude certain effects of the Company's July 2002 initial public offering. For fiscal 2003, Kirkland's has supplemented its GAAP presentation with results that exclude the impact of a onetime lease termination charge taken during the third quarter of 2003. For a description of these adjustments, please refer to the reconciliation of non-GAAP financial measures that was included in yesterday's press release. With that, I will turn the call over to you, Robert.

Thank you, Tripp. Good morning, everyone. Thank you for joining us. Today, I will begin by sharing our final results for the third quarter, and I will also provide an update of our new store development activities and our ongoing distribution center project. Rennie will make some additional remarks on the third-quarter numbers, and will also comment on the fourth quarter guidance that we issued yesterday afternoon.

For the third quarter, earnings before the three cent per share charge related to the termination of our existing warehouse leases came in at 10 cents per diluted share, one cent above the revised guidance that we issued on November 6. Due to rounding effects, actually reported earnings were 6 cents per diluted share. As previously announced, comp store sales for the quarter increased 2.7 percent following a comp increase of 9.2 percent for the third quarter 2002. Total sales rose 12.2 percent as we ended the quarter with 34 more stores in operation than at the end of third quarter 2002. The sales increase was primarily the result of higher unit volume but we are also encouraged by improvement in our average retail selling price during the quarter. Our performance also is good on the gross margin line. The significant markdown activity we have undertaken in the second quarter enabled us to enter the third quarter with an excellent inventory position. As a result, merchandise margin improved versus prior year, and our recorded gross margin was equal to prior year and ahead of previous expectations. Expense control also remained solid during the period.

The primary merchandise categories that drove our third-quarter business were wall decor, candles, textiles and other gift-related categories. We also were pleased with the performance of our holiday category. As we discussed on our last quarter's call, we altered our approach to the holiday category somewhat this year, and our strategy was successful in the third quarter. Specifically, we allocated fewer dollars to the category than we did in 2002, and reduced the number of holiday skews in an attempt to present an attractive holiday merchandise assortment without the effect of crowding out sales of our home-decor merchandise. We also closed the holiday merchandise in our stores more gradually during the quarter as opposed to prior years, when we may have had a distinctively Christmas look on the sales floor as early as September 1.

The third quarter was our busiest of the year in terms of new store opening activity. We opened 21 new stores during the quarter including 17 in the month of October. We ended the quarter with 279 stores operating in 34 states. During the first three weeks of November, we completed our new store construction for 2003 by opening an additional three stores, bringing the final new store tally to 42 for the year. For the year-to-date period, we've also closed nine stores and we expect to close another two stores before the end of the fiscal year. We therefore expect to end fiscal 2003 with 280 stores in operation, a net increase of 31 stores since the end of fiscal 2002, or a 12 percent increase in the store base.

With the Kirkland's new store class of 2003 now complete, I would like to share a few statistics on the stores. Of the 42 new stores, 25 were in traditional models while 17 are located in a variety of off-mall venues. We entered into five new states, Delaware, Massachusetts, Utah, Nevada and Minnesota. It's a very diverse class as far as geography and market size. With so many stores having opened in just the last 60 days, we cannot reasonably draw firm conclusions on the financial performance of this class of stores. However, as a whole, the group has produced sales consistent with our stated expectation of 80 to 85 percent of comparable store sales volume. Two other key financial measures for new stores, occupancy costs and construction costs, have also been consistent with our stated new store model.

A final comment on real estate. With the beginning of fiscal 2004 only about eight weeks away, we're making steady progress on leasing the new store class of 2004. Our goal is to expand that store base by at least 40 stores net of closings during fiscal 2004, which we currently estimate will consist of 50 to 55 new stores and 10 to 15 closings. We expect that the class of 2004 will include a mix of traditional mall venues and off-mall locations. As we gain more experience leasing and operating in off-mall venues, we continue to believe that this strategy will be an important component of our future growth in fiscal 2004 and beyond.

Another important initiative for us is the construction of our new distribution center that we announced back in August. The construction of the building is on schedule, and we still expect turnover of the building in the first quarter of 2004, with operations to commence in the second quarter. Other key elements of the move to the new distribution center include the implementation of new warehouse management system, as well as the installation of material-handling equipment to facilitate more efficient and stable operations in the DC. These portions of the project are also proceeding according to plan.

At this point, I would like to ask Rennie to take you through the third-quarter financial statements that were included in the press release and provide some commentary on our fourth-quarter outlook.

Thank you, Robert. Good morning, everybody. I will begin with a review of the consolidated income statement for the 13 weeks ended November 1, 2003.

Net sales increased 12.2 percent, and comparable store sales increased 2.7 percent for the quarter. Total sales growth for the period was aided by the contributions of 18 new stores that had opened prior to the beginning of Q3, as well as sales from the 21 additional new stores that opened during the quarter. As Robert mentioned earlier, these third quarter openings mostly occurred in the final four weeks of the quarter. Comp sales gains were driven in both by increases in unit volume as well as an increase in our average retail selling price. Gross margin for the third quarter was equal to the prior year gross margin at 33.0 percent of sales. This performance represented sequential improvement of 330 basis points from the second quarter, and was largely the result of the improved quality and level of inventories throughout the period. Expressed as a percentage of sales, the occupancy and distribution components of gross margin declined slightly, while freight costs rose slightly during the quarter. Operating expenses came in at 27 percent of sales, 20 basis point higher than prior year. For the most part, we did a solid job of managing expenses during the quarter, especially in the all-important area of payroll costs. However, we did experience some expense increases resulting from the heightened level of new store openings during the period. Within the operating expense section of the income statement, you'll notice a lease termination charge of $1.1 million for the third quarter. No such charge existed in the prior-year period. As we previously communicated, this charge represents the net effect of costs that we will incur when we terminate the leases in our three existing distribution facilities and relocate to our new leased distribution center. We expect the new DC to be fully operational during the second quarter of fiscal 2004.

Interest expense for the quarter was consistent with plan and below prior year. For the prior-year period, the interest-expense section of income statement includes a $325,000 charge, or a penny per share after-tax related, to the early extinguishment of long-term debt. When we retired this data approximately a year ago, the transaction was recorded as an extraordinary item below the net income line. Since that time, the accounting standards have changed, and we are now required to include this charge as a component of interest expense. The effective tax rate for the quarter was 39.5 percent. And then coming down to the bottom line, income for the third quarter, before the onetime lease termination charge, was $1.9 million or 10 cents per diluted share compared with net income of 1.2 million or 6 cents per diluted share for the third quarter of 2002. The 10 cent EPS number is a penny above the revised guidance that we issued at the time of our third-quarter sales release. Reported earnings per diluted share for the third quarter of 2003, net of the onetime charge, was 6 cents.

If you will turn with me to the balance sheet, you'll see that we ended the quarter in good financial shape, and with inventory levels just slightly below where we had expected them to be at quarter end. Total inventories at November 1, 2003 were $52.7 million versus $39.5 million at February 1, 2003, and 53.4 million at November 2nd, 2002. On a total-company basis, this is a year-over-year decrease of 1 percent compared to a 14 percent increase in the store base.

Our stores entered the quarter well-stocked, but not overstocked, and as the press release suggested, we believe there are two important benefits to being in this position. First, we are positioned well to capture sales, as the pace of business accelerates throughout the month of December. Second, this strategy should facilitate our goal of capturing those sales while also maintaining healthy merchandise margins through the balance of this quarter. As of quarter-end, our revolver balance stood at $13.1 million. We have now begun the seasonal paydown of this revolving credit line, and we expect to be at a zero revolver balance with cash balances of $18 to $20 million at fiscal year-end.

In yesterday's release, we issued sales and earnings guidance for the fourth quarter. Our current expectation is for earnings per share of 81 to 86 cents, which would represent growth of 14 to 21 percent over the 79 cents per share that we produced in the fourth quarter of 2002. We expect for comparable store sales to be roughly flat compared to last year's fourth quarter. Gross margin is anticipated to be modestly higher than prior year. As a result of this fourth-quarter outlook, we have made a slight revision from our previously issued guidance of $1.02 to $1.07 in earnings per share for fiscal 2003. We now are estimating $1 to $1.05 in earnings for the full year. We were certainly hopeful that the business momentum we were creating in the third quarter will continue into the fourth quarter. Thus far, the slower sales trend at the end of the third quarter has continued. Accordingly, we are adopting a cautious outlook while still believing that we're well-positioned to deliver strong earnings growth compared to the prior year. Now I will turn it back to Robert for some closing remarks.

Judging from the comments over the last several days of several other retailers, I don't think Kirkland's is the only company that started the season somewhat below expectation. However, I would emphasize this is not uncharted territory for us. Each holiday season, and this is our 36th, seems to have its own set of challenges and opportunities. Our stores are well prepared with what we believe to be the right amount of great merchandise at great prices. And our people are challenged to and excited about taking care of our customers, and we are looking for a strong finish to 2003. That concludes our prepared remarks. Operator, we are now ready to take questions.

(OPERATOR INSTRUCTIONS). Rob Wilson at Tiburon (ph) Research.

Could you talk about transactions?

Sure.

You guys talk about units and you talk about price points. Are you willing to discuss transactions with us?

It's pretty much the same trend as units, Rob. We tend to use unit volume and transaction somewhat interchangeably. Items per transaction do not tend to move that much. So to use third quarter as a reference point, which I assume you are talking about, when I talk about a mix of unit volume and average retail increases, transactions were up in single units.

Can you talk about occupancy? There seems to be some deleveraging in occupancy. Maybe speak more to that?

Sure. I think that we have commented before that we have been encouraged by our progress in terms of occupancy costs on the new store side, in particular. In negotiating attractive deals for us, both in malls and off-mall venues. And I think that you probably saw a little bit of the benefit of good new store occupancy in the results for the quarter. Really beyond that, because new stores are still a relatively small percentage of the base, I just think you have a situation where our occupancy costs are in a good range, and even at a 2.7 comp, sometimes we are able to leverage that.

Occupancy did not deleverage in Q3?

Occupancy did not -- you are talking about going to wrong way?

Yes, deleverage.

It did not go the wrong way in Q3, and I think we said that. A modest improvement in the occupancy ratio.

My apologies. Merchandise margins, you said those improved. Are you willing to tell us by how many basis points? You guys generally break this out in your Quarters -- sometimes you do.

I think the changes were not dramatic within margin, Rob, slightly up on merchandise margin. So just slightly, I would rather not just give a number.

I understand. And one final question, you had stated previously your EBIT goal, operating margin goal was 11 percent, your EBITDA goal was 13 percent. How soon do you get there and how do you do it?

Well, obviously, those goals, we have expressed as targets that we want to get to over the next couple of years. We are going to have to evaluate when we get through 2003. We still think for a variety of reasons that those are achievable goals. We think there are things we can do to operate our supply chain more efficiently. We think there are things we can do on the merchandising side to continue to push sales and margin there. We are encouraged by our new store initiatives, and the economics of the new stores and the contribution they can make. So there are number of things. But sitting here in December, Rob, it's tough to really start talking precisely about charting a territory towards an 11 percent EBIT margin. I think that is something we will be ready to talk about once we get through Q4.

Adam Sindler with Morgan Keegan.

Could you remind us how much of the mix would you say is actual gifts for Christmas versus more of the sort of Christmas accessories that you tried to scale down on this year?

I will answer part of that, then you might want to chime in. Typically, Adam what we refer to as holiday -- that is our holiday category -- that typically represents about 20 to 25 percent of the business in the fourth quarter. And that number, in terms of the decor, is pretty consistent; we expect that to be pretty consistent with previous years. The mix of giftables (ph), and Robert may want to comment on this, is a little bit harder to get your arm around, because it gets down to what is a gift and what is not a gift. The decor answer is consistent with prior year. And Robert may have a comment on the gifts.

It's a little difficult to definitively characterize what is a gift and what is not in Kirkland's. But year-over-year, you can kind of expect the Christmas seasonal component of our business to be about 10 percent on an annual basis. If you look at the mix at this time of year, about 30 percent of what is in our store would be termed, or within that umbrella, of gift giftables, I think would be a pretty fair estimate.

How dependent are Q4 results on pre-Christmas sales as opposed to sales in January? How much -- does January account for the fourth quarter? Historically?

Let's put it this way, in December, it is far and away the most important month of the quarter. December is number one, and I would say November and January are lesser months. So to do well in the fourth quarter, we need to have a good December. Having said that, and maybe you are kind of alluding to this, January has also assumed more importance probably over the last five years than it had previously. People go out pretty aggressively shopping for things for their home and for themselves with Christmas money or whatever in January. January is a customary clearance month. So ladies flock to the malls frequently in January looking for good clearance buys. So I do not want to minimize the month of January, but December is number one out of the three.

The sales trends that you mentioned that have slowed over the first few weeks of November and into December, would that -- and then the sales guidance going forward -- is that more due to the fact that your trying to maintain gross margins and that you would rather maintain margins as opposed to discount like you did last year -- to try and hit a sales target? And secondly, is it lower traffic or people are just waiting to see if discounting occurs, in your opinion?

I don't think you ever know exactly what the customer is doing. I think there has been a bit of traffic element in what we have seen, at least in the last part of November and the first few days of December. That is very, very difficult to gauge. I think, as we have said every season, has its own opportunities and challenges. And whereas in another year, we might have had more inventory than we wanted and were prepared to markdown sooner. I think we see the opportunity this year to -- that we are correctly positioned, and we will get our sales, as we track down toward Christmas. We have about three weeks left.

Last question, can we get a timeline on the DC conversion. I guess specifically, how you plan to scale out down three and convert over to just the one facility? Will all three be closed at one time or will you scale out of each individually?

It will actually happen a little bit sequentially. It's something that we have got kind of staged right now; some of it depends on exactly how we conduct our merchandise flow in first several months of the year. There are different, distinct functions that take place inside the three existing buildings. But it would be probably sequentially with what we hope to be the final exit sort of in the early part of the second quarter.

Let me add one thing quickly here, picking up on the question you had a minute ago. And amplifying on Robert's comment, I think part of your question gets to the heart of what our strategy is right now. And I think that the strategy, to a certain extent, always should be, from a financial standpoint, to maximize the gross margin dollars that you are producing. The mix of sales and percent margins, it kind of is what it is. But the game is to maximize the margin dollars that ultimately fall to the bottom line. I think in scenarios in the past where we have been a little bit heavy on inventory, I think part of what we're saying is you kind of limit your options a little bit. If you're heavy on inventory, if you take that to an extreme if you're really heavy, then you can talk all day about wanting to maximize gross margin dollars, but the bottom line is, you can't leave the season with a bunch of stuff that's obsolete. So you have to markdown. You don't have a choice, and so that ties your hands. What we believe is the case this year is we are not in that situation. We do not want people to interpret our comments strictly that we are going to protect margin at all costs. That is really not what we are saying. What we are saying is, we think we have got a little more flexibility and maybe can afford a little more patience than perhaps some companies might if they were in a heavier inventory position, or that we would be if we were in a heavier inventory position. And as a result, I think we don't want to come out counting an aggressive comp number, because quite honestly, we may allow the sales to drift a bit if we are happy producing the dollars that we need to make the quarter.

That's exactly what I was trying to gauge. You would rather have some of that flow into January per se than try to discount ahead of the actual holiday?

There's one component of our business that becomes worth a lot less on December 25th, that's Christmas. There is a whole lot of other things in our store that don't.

As you stated, you have cut back on that holiday decor this year?

We have. And I think like I said, in a range, we still expect that category to produce 20 plus percent of the fourth quarter sales, a little bit lower than prior year's, but not dramatically so. The real point is that -- and we've got extremely experienced merchants who have been doing this for a long time. We just need to watch sales every day, continue to have our strategies unfold on both a proactive and reactive basis as we see things happening out there. And our objective is to deliver the numbers we mentioned in the release yesterday.

Peter Benedict with CIBC World Markets.

Two questions, you mentioned in the press release that the promotional environment was getting heavy. Can you expand on that? Give us a little more detail on what you're seeing. When we look to '04 with the store openings, can you talk a little bit about how you see the timing? Is it going to be similar to what we saw this year? Will the mall, off-mall mix be similar, and the new market versus infill mix be the same? Thanks.

Let me talk about the new store part of it, the back half of your question a little bit first. I think next year, you will see the mix be a little bit more weighted toward non-mall than it was this year. I think we have had some very distinct opportunities and we have had good performance for those non-mall locations. So I think we will continue to press that advantage, and it certainly continues to give us a strong bargaining position for those mall deals that we want to do. So I think that will be one element of it. And the second thing is, we hope to be much less backloaded in terms of new store openings next year. We are not starting from behind the starting line, as we have been in 2003. So I think we will see a little bit better dispersion to the extent that we can control, for example, the openings of new centers. So I think those two things are fairly clear. On the promotional environment, I think especially the Thanksgiving weekend was decidedly promotional. I think everyone has become aware of the giveaways and door busters and things that we have seen. We have also seen some retailers go extremely early with markdowns in Christmas seasonal. They have been quite promotional, and we've elected not to be quite so promotional. So I guess that's about what I would want to say. Rennie, do you have anything?

No.

David Magee with SunTrust Robinson Humphrey.

You mentioned the average selling price being a little higher in the quarter, and I was just curious for some more color on that as to what might be driving back and is that sustainable going forward?

We have really talked all year long about our wall decor category being just a real bedrock of strength. And I think that when you start talking about the positive recovery we have seen in our average retail since the middle of the year, you have to start with wall decor. A tremendous job of our merchants in terms of continuing to deliver great value to the customer, but also gradually walking up that average retail price for a category that is a quarter of our business or more. So it starts there. Also, we have seen a modest progression in average retail in our holiday category on a year-over-year basis. And so when you start talking about those two categories at this time of year, that's going to have a good impact on the overall average retail for the Company. And I would say those are the two I would call out.

Secondly with regard to the recent trends and sales being a little below plan, can you differentiate between the mall and non-mall locations as to how they're doing relative to plan?

Actually the non-mall guys have been doing a little better than the malls stores. That is a bit surprising, but I think not terribly surprising, if you step pretty far back from it. And I think there is some shift or we believe there is a shift, in customer preference somewhat that is underway, and that's one of the reasons that we're moving to some of the better of these non-mall locations to operate our stores.

(OPERATOR INSTRUCTIONS). Robin Murchison with Jefferies & Co.

Piggybacking off of David, when you talk about non-mall locations, is there any -- not to split hairs -- but is there any difference between non-mall outlet centers versus non-mall nicer strip centers? Are you seeing any difference in those stores?

The sample size for us still reasonably small. I would have a temptation to say that maybe the outlet centers have done somewhat better even than the other off-mall venues. But when you really get inside the numbers, even more than it might be a venue specific issue, it's a property specific issue. It just depends. We've got situations in what you would think are the more traditional lifestyle centers that are doing quite well as well as in the outlets. And you have got a situation like one of our new stores that is sort of a new thing for us down in Greenville, South Carolina that we opened just a few weeks ago near to a mall where we have a Briar Patch store. And we are not even what you think of as a real strip center. We're in a building that has two tenets. One is us and one is Starbucks. And I think as of last week, Starbucks was not even open. And I will tell you right now, the ladies in Greenville, South Carolina are finding their way to that new store, and it's exciting to see that.

We can presume that wall decor then, you're happy with wall decor? My question is since the last two weeks of October and moving into November, what areas could have been better? What areas of your merchandise mix would lag the most in terms of sales to your plan?

We have had sort of a year-long search to get to the right place on merchandise and inventory levels in garden. And we are getting there, but we have not gotten where we want to be. We have had some very successful introductions, but we have not gotten the kind of momentum back that we had in prior years. We have had, actually, a nice quarter in lamps in Q3. You will note that we had -- we specifically called out some difficulty with that back in the second quarter. But we recovered nicely through the third quarter. And as our inventory positions continue to build in lamps, in this quarter, we will do very nicely. We would like to have had a little bit better performance in our decorative accessory group in floral. But every year is different. And we have had very strong introductions in other places, and dollars tend to follow success. And I think all those categories continue to be very important to us. And we have some very successful decorative accessory introductions, some very high nice retails and very high-grade merchandise. It's a little bit of a mixed bag.

Do you think any of the weakness has to do with maybe there's not a strong enough or a new enough decor theme out there at present? Would that have anything to do with it?

I don't really think so. We occasionally, as you know, you know our stores very well. We catch a theme like a relaxed kind of thing like Tommy Bahama (ph), or various safari or things like that, and we ride those pretty hard. But you can't always depend on that. So what you do is provide very solid home decor throughout the traditional categories that we have always operated in. I think we always would love to have a theme. But we have done some fashion things in the latter part of this year that have been very successful. We have made a lot of new introductions to the store that we think provide some directions for us as we go into 2004. And I think you'll see them real difference in a number of categories next year.

Are you able to gauge where -- and this is a tough question I think for you -- because I think your competition comes from so many places -- but do you all have any sort of internal watch, in terms of you who you think presents the greatest competition to you during this time of year?

We are like everyone else. When we're traveling in stores, we look to see what everyone else is doing. But I can promise you this, no one in the merchandising group, other than kind of being aware of what's going on around you so you don't miss anything -- we are always going in our own merchandise direction. We are as consistent with that as anything I know.

It's interesting to me, last year, Bombay during the holiday season, they had their stores marked down 25 percent. And now you walk by a store and it's 25 to 40 percent or 25 to 50 percent, and I would wager that that sign stays up through December. And it seems like the environment out there seems to be a little more aggressive than I have seen in the past in terms of the home group. Maybe because it's been frankly one of the few categories in retail that has sort of consistently performed. But it does look like things are more aggressive out there this year.

I think you are right. I think that things are more promotional, more aggressive, as you said. At the same time, I am going to direct you back whether it's Bombay or any other company in terms of the competition. Whether it's full price or 25 off or 50 off or whatever, we think we have the best value in the marketplace. We think we have got it every day. Sometimes we have to mark things down. Sometimes we have to mark things down to get a little bit of extra excitement in the store as well as just move merchandise through it. But day in, day out, we think we have the best value proposition, and we think our customers know that. It's a little bit back to the strategy question, Robin. I guess to put it a different way, we really don't feel like we've got to go and put 50-off banners in our stores in order to get sales volume. We certainly don't think we've got to put 50-off banners in our stores to produce the kind of earnings we feel we need to be producing as a company and that the shareholders expect. Especially not in late November and early December, that's not been typically necessary for us to do that.

You wouldn't want to. You don't want to have to buy into that game, which it's hard to get off that unless you have --

It really is. And I honestly don't know anything about the details of Bombay. I really don't, in response to your question about them. But all I have seen is they have some higher inventories this year that might prompt that. So I just can't say what they are doing or why they are doing it. But they are very good merchants, and I'm sure they have their reasons. We have great respect for them.

Last question I will ask you is this, and there's going to be some grey area here. But at the margin, do you think that your customer, your core customer, is more impacted by what's going on in the market, i.e. financial wealth created by growth in the market -- a better performing stock market? Or would your core customer be more impacted by waiting to see this unemployment rate turn and sustainability, and I will believe it when I see it, maybe a more moderate customer? I know that you draw from both, both areas. But the preponderance of shoppers at your store, what do you think?

I would say that you know very well and everyone who follows our stores knows that we are not aimed at the five percent of the income in the country; that is just not our niche. We are aimed at the middle of the shopping base. We have said consistently, I think I have said on two prior calls, possibly, that we have been cautious about this entire year and cautious about this season, as we were planning, because we have been concerned that we have not seen sustained improvement in the jobless numbers, and we believe that that is the most telling statistic for us to watch in all the macroeconomic metrics out there. about what might happen with our customer. It's wonderful that the stock market is doing well. And I am actually kind of encouraged, personally, that we are beginning to see enough things go the right way on a macroeconomic basis that we may have significant improvement in the economy in 2004. But that has not filtered down to the gas pumps and to the jobs and to the raises and things where the heart of the Kirkland's customer lives.

Mike Napolitana with JMP Securities.

A couple of follow-up questions. On the earnings assumptions for the fourth quarter, just to summarize, do you think you can get to 86 cents on a flat comp? Or does that assume that the comp is a little bit better than flat? To get to that high end of your range?

It all depends on how the margins falls out, Mike, it really does. That's why we have a 5 penny range, and that's why we said relatively flat on comp. A little better than that helps you get there. Likewise a little better on margin helps you get there.

The second question is more of a longer-term focus, getting back to a comment made about the stores maybe being more front-end weighted -- is that a function of the fact that you opened up fewer stores this year than your long-term growth rate?

I think I understand your question, tell me if this answers it. Having completed the IPO in July 2002, we really didn't have the capital to start going out and aggressively expanding until late 2002. So we got a late start, was the point, in terms of deploying our resources towards getting leases done and construction work put together for the class of '03. The point was that the class of 2003 was almost destined to be a back-end loaded class. We think we now have the benefit of a year under our belt of building our list of target locations and things like that. So we are well underway on the identification and leasing efforts for 2004. The point being that it will not be as back-end loaded last year because we have got a better head start next year as it was for this year because we got a better head start.

You've ended up with 42 no stores. You were not trying to maybe do five or six more that are now going to slip into '04?

The answer to that is no. We have said all year that our goal was a net 30 gain in the store base and we came in at 31. We actually were able to do a few more stores than we had thought. And closed one or two more than we had thought coming up here at year end. So we were right on plan for '03.

Rob Wilson at Tiburon Research.

What was your CAPEX in Q3, and what is your expected CAPEX in Q4?

Say that again?

Your capital expenditures, what is that in Q3 and what is expected CAPEX in Q4?

We have not released those numbers. They are going to be in the 10-Q that we filed coming up in about 10 days. Let's see, round numbers, just a second I do not have all the math in front of me. We are still tracking towards that $15 million number for the year.

I am just trying to understand why you suggested that you'd be at 18 to 20 million cash at the end of the year. My calculations would have you a little bit higher. So I am curious -- could you add some color there?

I think my guess is that if we are the same point on capital expenditures, it is all going to be a function of what you are assuming on working capital. In other words, maybe you have us carrying a little more inventory or a little less inventory at year end, or maybe your payables numbers are a little different. That's the only meaningful place that it would be.

Can you give me some more guidance on inventory, what you expect that to be? Is that similar on a square foot basis as last year? I think you are a little heavy last year, weren't you?

We definitely ended the year a little bit heavy last year, we definitely did. We did have good success as we moved through December and January, clearing the seasonal merchandise, but we did finish a little bit heavier than we expected. I would say you're likely to see per store inventories slightly down at year end year-over-year.

Adam Sindler at Morgan Keegan.

A follow-up on the DC -- could you maybe comment a little bit on the efficiency you expect to generate from moving to the new DC, specifically what areas you're looking to improve from consolidating into one facility?

Sure, I will make a couple of general comments. And obviously, we understand that one of the things we will be wanting to do as we issue 2004 guidance is give more specificity here. I think that -- without taking up an extraordinary amount of time here -- I think the areas are number one, the facility. We're basically going to get a facility with twice the capacity for roughly the same cost. So you get some efficiency just in terms of the lease cost that you are paying for the actual physical plan. Number two, due to the introduction of improved systems and automation, we believe that as we move through 2004 and especially as we get into 2005, there will be considerable efficiencies in terms of labor -- labor productivity inside the warehouse and what that means for our overall cost structure. So I would say that both of those are the case. And I think that the more subtle things that we really hope to achieve really get more to the issue of just overall efficiency of our supply chain, which means better allocation practices, more timely shipments to stores, more predictable shipments to stores, better communication, all the way up and down the supply chain, all the way back to the vendor, all the way through to the sales floor, and I could kind of go on and on and on. But I would say, efficiency of the facility, efficiency of labor, and we hope some additional significant benefits as well.

Gentleman, there are no further questions at this time. I will turn the conference back over to you.

We appreciate very much everyone being on the call. We thank you for your interest and wish everyone a great holiday season. We will be talking to you in calendar 2004. Thank you.

That does conclude today's conference. Again, thank you for your participation.