Brand House Collective Inc (TBHC) 2004 Q1 法說會逐字稿

Good day, 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 conference over to Mr. Tripp Sullivan. Please go ahead, sir.

Thank you. Good morning, and welcome to this Kirkland's Inc. conference call to review the Company's results for the first quarter of fiscal 2004. 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 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 April 15, 2004. With that said, I will turn the call over to you, Robert.

Good morning, everyone. Today Rennie and I will comment on Kirkland's sales and earnings results for the first quarter of fiscal 2004, as well as provide observations on current business trends and our outlook for the second quarter. We also will update you on the progress of our distribution center project and other important initiatives that we are undertaking to improve business and build a successful company. For the first quarter, earnings came in at 4 cents per diluted share, in line with our previously issued guidance. Comp store sales for the quarter increased 1.5 percent following a comp increase of 5.1 percent for the first quarter of 2003. The quarter started with good sales trends but the tone of business weakened noticeably beginning in the latter part of March. We responded to the weaker environment with targeted markdowns but even this more aggressive pricing posture did not generate the sales volume that we had planned for the month of April. Despite these soft sales and margin trends, we were able to produce earnings for the quarter that were in line with our stated guidance, as operating expense control remained very good. Several merchandise categories made significant contributions to the first-quarter sales increase. Categories that experienced the largest percent of increases were wall decor, textiles, furniture and gifts, as we were able to drive sales with healthy inventory levels and exciting innovative product. Results were not as strong in candles, floral, garden and decorative accessories, categories that we deemphasized in flavor of allocating dollars to areas exhibiting better sales trends. Our first-quarter sales generally were characterized by higher average retail prices and lower unit sales volumes.

New store activity was fairly modest during the first quarter. We opened three new stores and closed five stores, ending the quarter with 278 stores in operation in 35 states. We have experienced more delays with our new store openings than anticipated. In some cases, we've reached positions internally to pursue different opportunities where we have felt such a change would be in our best interests strategically and financially. In most cases, we've encountered landlord delivery delays that have pushed back opening dates. As we enter second quarter, the pace of new store openings will pick up considerably. We are on target to open 14 to 17 stores here in the second quarter, mostly during the month of July.

Heading into next week's ICSC meeting in Las Vegas, which is the most important deal-making real estate meeting of the year, we only have five or six slots left to fill within our class of 50 to 55 new stores. We also have made positive early strides toward building the class of 2005. We still anticipate 10 to 15 total store closings for fiscal 2004.

Activity related to our new distribution center commanded much attention during the first quarter and I'm pleased to report that construction is complete. We're in the final stages of our equipment and systems testing and are on schedule to commence operations before the end of June. We remain excited about the development of a modern efficient supply chain to support our expanding base of stores. The startup of the distribution center is a major milestone in this effort and we'll be working hard for the balance of 2004 to use the capabilities of this new DC to drive greater inventory efficiency and better sales and gross margin performance in our stores. We remain conservative about projecting any near-term financial benefit from the new DC, but as we look to fiscal 2005, we envision significant benefits, including better labor productivity, better transportation efficiency, leaner store level inventories and reduced store level storage costs.

At this point, Rennie will take you through the first-quarter financial statements that were included in the press release and provide some commentary on our second-quarter outlook.

Thank you, Robert. Good morning. 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 12.5 percent and comparable store sales increased 1.5 percent for the quarter. As Robert mentioned, sales increases were driven by a higher average retail price compared to prior year. Gross margin for the first quarter decreased to 31.4 percent of sales from 32.1 percent in the first quarter of 2002 -- of 2003, sorry. The deleveraging effect of the modest comp sales increase contributed the majority of the 70 basis point decline in gross margin, as occupancy costs rose as a percentage of sales. Freight expense also rose slightly as a percentage of sales. Operating expenses were below plan for the quarter due primarily to modest incentive compensation payouts and positive variances in several corporate expense areas. Operating expenses as a percentage of sales rose 20 basis points for the quarter. We made no draws under our revolving credit facility during the first quarter so our only interest expense consisted of various bank fees and the quarterly amortization of debt issue costs. Our effective tax rate for the quarter was 39.5 percent and diluted earnings per share came in at 4 cents, in line with our previously issued guidance.

Turning to the balance sheet, the Company ended the quarter in solid financial position. We ended the period with $2.1 million in cash and no borrowings under our revolving credit facility. Our business typically has significant cash needs during the first quarter due to April income tax payments, and this year we had the additional cash requirements of investments we are making for equipment and systems at the new distribution center. Total inventories at May 1, 2004 were 51.9 million versus 41.6 million at February 1, 2003 and 40.8 million at May 3, 2003. Inventory levels at quarter-end were approximately $2.5 million above plan, due primarily to the early arrival of certain merchandise that is targeted for second-quarter business. Our inventories are still very fresh and current. As of May 1, 2004, approximately 96 percent of our inventory was less than six months old. However, we definitely are keeping a close eye on inventory levels in light of the soft sales trends that we have been experiencing in April and May. We have adopted a more aggressive markdown stance than we had originally planned to ensure that we sell through the goods that we have on hand today and make room for new merchandise as we enter the second half of the year. Therefore, we now expect the gross margins will be impacted as we take the necessary steps to accelerate merchandise sell-through in a difficult sales environment. Consistent with our customary approach, our intention is to be focused with our markdowns in order to build traffic to support better overall sales rather than just cutting prices indiscriminately to move merchandise. We also will take full advantage of our June Big Sale event to clear goods in preparation for the fall season. Looking forward, the cash flow picture looks good and we still expect to finance all of our activities in 2004 with cash flow from operations and borrowings under our revolving credit line.

The final topic that I want to cover today is our guidance for second quarter and our updated guidance for fiscal 2004. The recent downturn in business that we've experienced suggests a cautious outlook for the second quarter. Our current expectation is that comparable store sales will decline for the second quarter in the range of 2 to (technical difficulty) below last year's second quarter. Comparable store sales for the second quarter 2003 declined 0.9 percent. We are disappointed with this outlook for current business. Entering fiscal 2004, we felt that the Mother's Day period and the balance of second quarter represented one of our best opportunities for sales and margin improvement versus prior year. We planned our Mother's Day assortments and related promotional collateral as thoroughly as we ever have and our stores were ready to produce the sales. Even two weeks ago when we issued our sales release, we felt strategically well positioned and business appeared to have stabilized somewhat. However, we had a very soft Mother's Day weekend and have continued to have negative comp sales during the last week and a half. During that time, our internal statistics have pointed to a worsening of traffic trends in our stores in comparison to the weeks leading up to Mother's Day. As sales trends have remained soft, we have taken markdowns as appropriate to generate excitement in the stores but the response has not been sufficient to produce positive comps. Accordingly, absent a reversal of sales trends, we now anticipate a decline in second-quarter gross margin versus prior year. While we are confident that we will manage expenses tightly, we are now forecasting that the shortfall in sales and gross margin versus our original expectations will lead to second-quarter earnings ranging from a net loss of 3 cents to a net loss of 7 cents per diluted share. We earned 4 cents per diluted share for the second quarter of fiscal 2003. As a result of our cautious near-term outlook, we are also adjusting downward our estimate for fiscal 2004 earnings. Our new range of estimated earnings for fiscal 2004 is 90 cents to $1 per diluted share. Our full-year estimate for comparable store sales is now a range of flat to 3 percent above prior year. It is difficult to be optimistic about the second half of the year when current business is so soft. At the same time, our analysis does not reveal any fundamental weakness in merchandise approach or operating strategy that might preclude a recovery if we see a pick-up in consumer appetites for home decor. Accordingly, our best judgment today is to forecast a wider range of potential EPS outcomes for fiscal 2004. The lower end reflects a continuation of difficult sales trends in the third and fourth quarters, while the top-end approximates achievement of our original guidance for the second half of the year.

Before I turn the call back to Robert, I want to make a brief comment about our sales and earnings guidance. Despite having to adjust our forecast to account for the changing retail environment over the past six to 12 months, we remain committed to providing guidance to you on a quarterly and annual basis. Having been public for a much shorter time than our peers, we believe it is important for us to update you on the factors that are influencing our quarterly performance. We also feel it is important to help you understand our business and how our financial model works. We are committed to being upfront with you in our discussions of the factors that influence our short-term and long-term prospects and how they in turn translate into sales and earnings performance. Kirkland's is engaged in a multi-year effort to build a specialty retailer of national scope and success. During this time, we will experience times of good sales and times of not-so-good sales. We will always do our best to achieve the best possible results in each quarter and we will also strive to make decisions that give us the best chance of sustaining long-term success, keeping the fact that we are stewards of your investment uppermost in our minds. I will now turn it over to Robert for final remarks.

Thanks, Rennie. As he noted, we are disappointed with the current pace of business and the resulting outlook for the second quarter. The environment is certainly difficult with a very jumbled economic picture. Signs of economic recovery and some positive news on jobs have emerged in the face of erratic consumer confidence surveys, disconcerting developments with the war in Iraq, rapidly rising fuel prices, the eruption of inflation fears and the seeming inevitability of rising interest rates. Such uncertainly appears to be affecting consumer traffic in our stores. And when the consumer shops, she is clearly favoring apparel over the home right now. Such developments are not positive in the near-term but Kirkland's has thrived in many difficult environments over the last 36 years, as we've successfully negotiated liquidity-driven recessions, oil price shocks, near run-away inflation and market meltdowns. Our job is to once again excel no matter how other retailers fare and despite the presently uncertain economic environment. We are committed to doing that.

So how are we reacting? On our March conference call, we outlined our plan for making Kirkland's a better company in 2004 and we're making good progress in implementing that. The central idea remains to improve Kirkland's, in other words, control what you can. The effort begins with our strongest attribute, improving our merchandising effort. Since the call, we've made two key additions to our buying team and have hired three new merchandise planners. We said we would improve the breadth and depth of our merchandising team and focus on and add a better planning capability and we're doing so. We said we would improve our marketing effort, which is very important and we're progressing in a marketing executive search, which we hope to complete within the next 30 to 45 days. One of our strategic goals for 2004 is to better identify and communicate with our customers and more successfully bring traffic to our stores. We also expect to better coordinate our in-store and lease-line collateral with our merchandising effort and more effectively use our advertising dollars. Last week, we initiated a program to accumulate customer e-mail addresses as we develop a larger audience for periodic e-mail communications to make customers more aware of why they should visit our stores.

Our proprietary credit card introduction remains on schedule. We are currently testing in two stores and will roll out before the end of the second quarter. We expect the credit card launch to generate some customer excitement and traffic, and the card will certainly augment our effort to communicate regularly with our best customers.

On the distribution information technology fronts, we've completed the wide area network installation successfully and as described, the distribution center project remains on schedule to come online in June. We've talked much about the distribution center, but I would remind you that although it is important, it's just one piece of a commitment to vast improvement of our supply chain from orders to customer. Equally important, we continue to work on store level technology and practice improvements to better convert our customer opportunities with a better-trained more highly motivated staff displaying a real commitment to better customer service and selling. On the real estate front, we remain positive on the short and longer-term benefits of our move toward more off-mall locations.

To summarize, our management team is hard at work and committed to building a better company. Notwithstanding current business conditions, we're making prudent decisions that will strengthen our ability to produce positive results and increase the value of your investment. That concludes our prepared remarks, operator. We are now available for questions.

(OPERATOR INSTRUCTIONS). Peter Benedict, CIBC World Markets.

A couple of questions. First of all, Robert, maybe if you could discuss for us what you're seeing your competition do? It sounds like things were obviously weak in April and here to May. Any kind of color on what you're seeing in terms of the competitive environment? Secondly, just some updates on your marketing plan for the fourth quarter. You said you're working on the new hire. Do you think you're going to get someone in place that will enable you to have some sort of impact on the fourth quarter when you do most of your business? And then lastly, could you talk about the real estate planning process? What types of challenges you guys face with the shift off-mall versus on-mall, how that process of securing real estate is different, and basically what your strategy is for dealing with that? Thanks.

In terms of what we're seeing in the marketplace, the competition, I think we're seeing a -- continue to see a very promotional marketplace. I think we're all in this sector experiencing some traffic difficulties. The news, particularly, in our sector throughout is not particularly great, which would indicate that this is a little bit more widespread than it is particularly company-specific. Some of the categories of merchandise seem to be a bit in transition, at least in our case. And we see some transition in our particular categories, for example in garden, much more of a transition to outdoor entertaining and lifestyle kinds of things. We don't do that particularly well because of the -- our box is 4600 square feet. I think the big-box guys can do that much better than we can and we will be a little bit more limited with that than perhaps they are. But there are other things that we're doing very nicely and we continue to look to see what our customer is looking for and try to find that place on the style curve where we can be effective with them. I think it's what everybody in the category is doing right now, Peter. Rennie, do you have anything to say about that?

No. I think just, only thing I would say, Peter, I think in terms of anything that we feel like strategically or in terms of certain categories of whatever is directly affecting our business competitively, I don't think we feel like we see anything like that. I don't think there's anything extraordinary going on competitively that's taking market share from us or has created a problem that was not there in the past.

And I think we said on the last call that we think there's some people in this sector that market a lot better than we do. And then in line with I guess the second part of your question, we are committed to responding to that in a very positive way.

Yes, I do think we're -- I think we're reasonably close to a hire. I can't tell you today that we have that person in hand but we are narrowing it down nicely. And I think the person who comes on board will have some impact in the fourth quarter. I said it back in the call when we last talked about this that the fourth quarter last year was amazingly promotional. And we felt like that on the key selling dates during the fourth quarter that we would try to be in a position to respond as necessary with the kinds of things that would be exciting to our customers. I think we can plan for that with our merchandise offerings and still deliver a reasonable margin performance. I think that we can be much better in the way that we communicate with customers, both now and into the fourth quarter, about what's outstanding about the Kirkland's stores, both on a when and what's there basis and let them know why they should come to our stores and when they should come to our stores. So it's all about that and it's also about building a better understanding of who that customer is and getting in regular contact with them. I think our sector does that; I think most of the people in the sector do that better than we have and it's incumbent upon us to be better with it. So I think we will have an impact on the hire.

On the real estate side, the move off-mall is working we think pretty well right now. And we see a lot of demand for the stores. We are still seeing reasonable deals that in total are in -- on an all-in basis for occupancy costs, represent a savings over working in malls. We're seeing shorter terms and, therefore, lesser risk. We're seeing very reasonable tenant allowances from the landlords in these off-mall venues. We continue to find the unpopulated with the kinds of tenants that we want to be with, that is other players in the home decor sector and ladies' fashion. The difficulty I think as we move off in a big way is that the opening dates, delivery dates of new projects and the delivery dates of spaces are not quite as precise and as dependable as you find in the mall sector. It's a little more fluid, and I think that's been probably the biggest difficulty or the biggest -- maybe not surprised -- but development that we found.

Peter, one of the things we're missing on the real estate side also is, when you're dealing with the malls, you've got a fairly small group of developers you're dealing with. And we're dealing with these off-mall venues across 30 or 40 stores, and you've got a couple of dozen, possibly, different developers. And I think that you learn as you go through also what different operating styles are and what deadlines mean to different people in different organizations and I think you learn as you go. But I think the comment on the real estate and the delays, I really -- I wouldn't make too much of that. We felt like we needed to say something about that because as things drift, you do lose sales in the second and third quarter against your original expectation, but I don't think we feel like there's any kind of a big picture problem there. We are real satisfied with the move off-mall and we're digesting a few delays this year, but we're learning a lot as we go.

And I would emphasize, again, Peter, that we've made changes, you know, as things have not -- as opportunities have presented themselves and we can improve our position, we've done so. And so if it meant dropping a deal and picking up a better one and it opened in third quarter instead of second, we've not hesitated to do that because that's a long-term decision that seemed to make sense for the Company. And so some of that's a little bit self-inflicted.

All right, guys. Thanks. That makes sense.

Thank you.

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

Hi, good morning. My question is regarding the two key hires, I guess they're going to report to Chris LaFont? And then also the reception of the higher price point items, I mean during the quarter, you had the bath vanities and then you brought in light fixtures. What kind of consumer response did you see to that? And then again, if you'll just touch on what the strengths are of these two key hires, what areas you expect them to benefit? Or is it just going to augment the overall merchandising process?

Okay. On the hire side, yes, they will report to Chris. The two guys, the two people who came in the buying group are very experienced buyers, both of them from the department store sector, one from Rich's and one from Neiman's. I think the biggest advantage that we see from bringing these people in is that they're very experienced. They're very experienced in working with planners. And as you know, we are inserting a much more intense focus on the planning capability. I think there are strengths are, especially in the person who's coming in as VP of product development, is a great experience in working directly with vendors in developing product, in targeting that product in accordance with good merchandise planning. I think both of these guys bring a different kind of experience and they bring a different viewpoint and they work with the different vendors. So I think they're going to add to the total experience of our merchandise group.

Robert, not to -- I assume that both of these people came out of the home or domestic side of the business?

Yes, they did and they have good experience in our sector. So it's -- go ahead, Rennie.

I was just going to add to that. I think one of the most important things about the hires that we've made are that not only do they bring this experience Robert's talking about in terms of product, but I think if you look at the whole landscape of what we're trying to accomplish to improve the Company, one of the things that's going on is we're trying to get better at the entire integration of merchandising, which is a core strength, has been a long-time core strength of the Company. But the integration of merchandising more effectively with stores, visual and marketing to make sure we're going to market, we're presenting a face in front of the customer that's the most effective every single day. And I think that these two people both come from organizations where that integration is much more of an ingrained business practice than we've had here, especially as it relates to marketing. So I think we're very encouraged about what these folks will bring to the table as we launch a proprietary credit card. As we make one or more key hires in marketing, as we get more aggressive about communication with our customer, I think these people will be very effective members of the team, of Chris's team, and of all of our team in helping us go to market more effectively to that lady.

To create a more, sort of holistic, synergistic message product, visuals, everything, whatever you do in magazines on a go-forward basis, everything's more coordinated?

I think in a sound bite Robin, yes. I think that is what it is. And I think, even I would say I think the experience that these folks have in the integration of the logistics piece, as well. Just a real simple example, I mean if you're planning a promotion -- it's not like we don't know how to plan promotions. We do. We've been doing it for a long time. I just think that our level of sophistication I think will rise. And I think that part of what this new distribution center will do for us is enhance our ability to be more on target and more precise on our timing of promotions. If there's something six weeks out that we want to make sure we run and maybe we want to dovetail with an insert in the credit card mailer, you know, making that work in terms of the supply chain piece, the marketing piece, the product piece, and I think we've got a lot of skill here already, but I think these people will be important members of that entire effort.

Robin Murchison; What about the out-priced product, merchandise that -- you had a lighting fixture to display -- (indiscernible) to display lighting fixtures. How did that work for you?

Well, the up-priced products generally work nicely in the first quarter. The, you know on the furniture side, the sink or cabinet sort of business worked extremely well and those were in price points that went as high as $1000, which is a pretty big price point for the Kirkland's store. It's early on the lighting fixtures. We're really just now getting into the strong promotion time for those and making those a big part of what happens in the first quarter. I think we're going to see some very positive results from it. We already have -- we only have eight styles that we are currently showing in the stores. And of those eight, we have three of them that have moved up into what we think are best-seller groups. And so we have some early indication that this effort now is going to be very positive. So I think, generally, what the sink and the cabinetry, the accent furniture, the lighting tends to show is that we can sell a higher price product to our customer if we also give them the requisite value and the style or look that they want. And so we are very encouraged by that. And I think the genesis for all that has been the experience that we had in the wall decor category. I think that was the thing that gave us the confidence to do these other things, and so far so good.

Is there any concern and I know the group did -- I mean collectively the group is not doing well, but specifically, with regard to the Kirkland's format, any concern that there's just not a compelling trend? I mean we've had the Tommy Bahama thing around for a while. I'm told that out of the North Carolina trade shows that the -- and this is early so mainstream America will probably feel it later if it is in fact true -- but I'm told that the whole Tuscan thing with kitchens is dead and it's going to a clean, contemporary line. I mean certainly we're seeing that in some other areas if you look at some of the design product coming out in terms of China from Kate Spade and Vera Wang, and it's turning towards a different look. I wonder how much of that plays into maybe you just don't have a refreshed mix and maybe it's early, maybe we're in the midst of a transition. Any thoughts?

I think we're always in transition and I think there are some trends that are reasonably distinct now and that we're working with. Certainly some of the palm and bahama and some of those trends are and safari and those things, they're clearly gone. And there are things that are out there. The more contemporary or casual looks in art and lamps is definitely there. I mentioned before in the garden and floral area, the outdoor entertainment or lifestyle or patio living sort of trend is very clear and distinct right now; and you can pick up any catalog today and see the guys that are working that side of the business and see the kind of emphasis they put on that, outdoor rugs, outdoor lamps, outdoor furniture, fireplace and related items that work with that and outdoor art. So good direction there. Global gaming colors -- there are some colors that are very strong right now, and there's still legs under the retro or nostalgia thing. So I still think there's -- I think we understand that part of the marketplace. We're in it constantly.

And last thing, I did miss your comments regarding that outdoor furniture living and I too have observed that or seen that or read it or all of the above. Do you have a presence in that or are you gaining a presence in that area?

We're doing some of it, Robin. We're not -- by the size of our box, we're not able to put the furniture piece of that in in the way that maybe some of the big boxes are able to do or the catalog operators. So I mean I think we are a little limited but I certainly think there's a place in it for Kirkland's.

Thanks, very much.

Thank you.

Kevin Full (ph), Next Generation Equity Research.

What is the merchandise margin kind of that you're assuming for the second quarter? I know there's some opportunity there from last year and kind of what are your drivers there in your thinking -- first question.

For second quarter, Kevin, and we don't disclose merchandise margins separately, but as we said in our prepared remarks, we are now seeing in light of the soft sales trends and what we feel will be a need, certainly, over the next several weeks, to continue to be pretty aggressive promotionally, that, combined with the anticipated negative comp, is going to lead to a down gross margin in the second quarter. Order of magnitude, probably plus or minus around 100 basis points below prior year.

Okay. And then in terms of the key fourth-quarter flows, you know given the trends and your expectations, kind of what are you doing with inventory flows or what are you thinking on an early basis?

I don't understand the question.

In terms of your comp inventory levels, are you going to cut those back in relation to the weakened sales trends?

Obviously when you have soft sales, the intensity with which you're looking at those inventory levels increases, obviously, because you don't want to allow anything to get outside the bounds of what you can manage. We were about $2.5 million heavy on gross inventories coming into the quarter. Really that was not a function so much of sales weakness. Our sales in the first quarter were not that far off what we had originally anticipated. Rather, that was really more of a timing issue. We've talked about that a little bit. We see that, in terms of looking at our receipt flow, we see that stabilizing and kind of returning back to plan over the next 60 to 75 days. Obviously, if we end up with prolonged downward sales trends, we'll be trimming our go-forward receipt plan and taking action as necessary. So I guess if I understand your question, the answer is, we are a little bit above where we wanted to be right now. Most of that is timing and our receipt flow, looking out over the next 60 days, it looks like we will kind of self-correct on that. However, we are just going to watch sales trends week-to-week, and if we have to adjust beyond order, we'll adjust beyond order.

We are just in week 16, so we have a long way to go to know where we're going to be in fourth quarter, and we have a lot of dry powder for that.

And we have not spent as much time Kevin -- I know you recently initiated on the stock, we look at a variety of things every single week. On Monday morning, we look at what we call really all of our open to buy stats, our on-order, our inventory position, our store inventory position, our DC inventory position, flows of merchandise you know across the entire supply chain. And so I think we feel like we've got a good handle on that and we'll be reacting as necessary given sales movements.

Okay. In then longer-term with your kind of you know, you guys advertise a lot less than the competition and it's mostly word-of-mouth. Kind of what percentage of sales do you see that getting to longer-term?

Well it's around one percent of sales right now and I think the issue of how much that grows as a percent of sales over time will really be largely determined as we continue filling in this marketing effort we've been talking about. I think we'll be looking to the leadership that we add in that area for some guidance. But I also think that we're going to be reluctant to go out and re-invent the marketing budget overnight. I would be surprised if you saw that number suddenly jump up to 2.5, 3 percent of sales quickly. A lot of effective marketing, we continue to believe, is done in store and is done in direct contact with customers that does not have to be cost prohibitive. The marketing is going to be available to us through the credit car, it's going to be very cost-effective. So you know in terms of the mix of various aspects of the marketing effort, including media advertising, I think you're safe right now for -- you know to think over the next year or so that we're still going to be around that one percent of sales number.

Okay. And one last question quick question, in terms of the product acceptance, do you get any sense of conversion rates once the customers are in the store, they're accepting certain categories or rejecting others or --?

We do. I don't have anything in front of me going down to that granular detail in terms of conversion in categories other than just looking at the sales trends in the categories. But if you look at conversion data, really one of the reasons I guess we feel pretty confident in our assertion relating to traffic being an important indicator during the first quarter or an important reason for the sales downturn in April and May rather, is that the conversion was really relatively steady over the course of that time. And in fact, actually, there is some evidence that our conversion might have even gotten a little bit better here in the first half of May. So when you couple that with what we're seeing on transaction counts and traffic, the conversion is sort of consistent with expectation.

Okay great, that's helpful.

Thank you.

Emmy Norfolis (ph), Pilot Advisors.

Sorry, I got disconnected from the call earlier so if they asked the question, I apologize. Can you tell me what's happened -- I mean is it candles that there is weakness? Is it the pricing? Is it that the customer's pinched? Is it they are going and they are buying them somewhere else? They're not using as much? Is it only candles and wall decorations and floral? I mean is it more of the economy that's hurting them? Is it they already have the product and they don't just want it anymore? I'm just trying to understand exactly why there's so much weakness.

Well, when you think of Kirkland's candle business, when we're talking about candles, we're really not talking about candles in the sense that you see a big box or at a store like Illuminations. We're really in the candleholder business more than we are candles. And we do sell candles with candle holders, but it's sort of the -- and so that puts us in a situation where those are as much decorative accessories as they are really more decorative accessory category items, but -- and that business has just been a little weak for us for the last year or so, actually. And I think some of that has to do with what we've had is a little bit of general weakness in the floral, garden and candle category. Also have not allocated as much of our inventory dollar to those categories as we have some others that have been stronger and much more positive in sales.

I think that's a really important aspect of it, Emmy, and we kind of alluded to this in our prepared remarks. Really, those categories that were more trailing performers in the first quarter, by and large are categories that we deemphasized in favor of some of the others. So now you know, you can always look back and say well gee, should you have deemphasized them? Well, you know we are reacting to trends and available product in the marketplace and where we feel like we can make our best stand; and I think as I mentioned earlier, we don't think there's anything really fundamentally wrong with merchandise approach. We also don't feel like we fundamentally missed something big or anything like that in the first quarter. Business got softer in April. It has remained soft in May. We are still very active in all of these categories. It's just that our dollars are flowing more to the ones that Robert mentioned as leaders, art, furniture, textiles etc.

Okay. And are your price points too high compared to the competition?

I don't think so, Emmy. We've always been extremely competitive on virtually anything that we sell. And I think that's been the hallmark of -- the value that we've delivered to customers has been the central theme of that connection for 36 years. And we look at the marketplace constantly. I don't think it's a pricing issue.

Your customer, I mean, it's usually -- it's the female at what financial bracket?

Usually average to slightly above average income would be the largest number of customers.

So typically this person might not be getting squeezed as much as a Wal-Mart customer on the gasoline prices.

I think everybody winces when they pull up to the pump right now, and you fill up your car or your SUV and it's $50, or -- and I think everyone feels that. Even if they have money in their pocket I think they react to it and I think we are very sensitive to fuel prices and have been for a long time. And also in the Northeast and some of the -- across the north-Midwest, when you're in the colder times of the year, it's heating oil also. I think it has and effect. Even if you have money, it has an effect.

(OPERATOR INSTRUCTIONS). Susan McGarry, Granahan.

I'm not sure whether you mentioned this earlier, but could you talk about comps in the mall versus comps in the off-mall concept? And also just talk about how your new stores are doing relative to the historical patterns?

Sure, Susan. As far as comps, whenever we talk about mall and non-mall, we still need to qualify that by reminding everybody that the base of the non-mall stores is still relatively small. I think right at the end of the quarter, I think we had 35 or 36 non-mall stores and the balance were mall stores. And of those 35 or 36, all of those were not in the comp base. But with that having been said, we did see, which has been a continuation of what we've seen in recent quarters, we did see better comp performance out of the non-mall venues, out of the non-mall stores than we did out of the mall stores. The second part of the question was new store performance, right?

Yes.

On new store performance, I think the basic response is we're still pleased with how we're doing in terms of new store performance. The class of 2003 and the early look at the class of 2004, I would have to say that in the down trends that we've seen in recent weeks, you know, the new stores have not been immune to that. So they have suffered with some of the struggles in sales like the other stores as well. But just overall as you look at the picture, we are encouraged, continue to be encouraged, by our new stores and by the opportunities we see there. We did mention I think on the call a couple of quarters ago that we have had some situations in markets where we're relatively less known, that it's taken a little while to ramp there in terms of the customer awareness. You know, that's something that we're working on. So that's probably the weakest comment I would make about the class. I think overall we're real pleased and we're especially pleased with the non-mall stores.

And Rennie, could you give us a sense of the magnitude of difference between the mall and the non-mall comps? I mean is it striking or is it just kind of marginal?

I would say it's reasonably significant, Susan. But I've got to say, I want to say that with a real word of caution because you're talking about a massive difference in the base of stores here. And we were talking about probably close to 20 or stores, comps stores, versus close to 200. So no, I think if you look at the actual percentage numbers, you know the malls -- the non-mall stores did a good bit better. But I think when you look inside those 20 or so stores, I mean, there's some real stellar performers and you just need to put an asterisk on that.

And just for a little more flavor on recent trends, so, the deceleration in recent weeks has been getting more sharp? I mean things are kind of getting worse and worse in terms of trends?

Well let's talk precisely about weeks, because I think if you look at individual weeks, it's instructive. We spoke last in market on May the sixth, and at that point in time, we felt like some of the weakness that we had seen toward the end of the first quarter, which is to say the last couple of weeks of April, you know, what we were seeing in our business at that time was that we saw some degree of stabilization in the sales trends, okay? Let's see, May sixth was Thursday, all right, and then you have the seventh Friday and Mother's Day was the eighth, or rather the eighth was Saturday of Mother's Day weekend. That weekend was clearly less than we had expected and was clearly a deceleration from what we had seen in the prior week or two. Since that time, you know it really has not gotten a lot better. So has there been a deceleration in sort of the first -- or over the last 15 days compared to the prior 15 days? I would say the answer is yes.

Okay, all right. Thanks.

John Lawrence, Morgan Keegan.

Hi, guys. This is actually Adam calling in for John. And I apologize beforehand. I missed the comments regarding the real estate situation. If I could just get a little bit more color on what the out-landlord delivery delays, and then -- are about. And then secondly, when you're looking at some of the areas, just in regard to economic decisions, if that means if you're finding better locations from a traffic standpoint or better locations from a price per square foot standpoint? Thanks.

Adam, the delivery delays, are -- I think what we were trying to say is they were a little more common in the non-mall venues than we experience in the mall venues. And so, and we also said that it was related to both of delay in projects opening when you have a new project and also delays in getting space turned over in existing projects. So we've encountered some of that. But we also made the point that we have generated some delays on our own in several cases where we have not been totally closed up on a deal and had a better opportunity and we moved to the better opportunity and it might open later. And we felt like that was the best thing to do for the Company long-term and short-term. So I think what the point, takeaway here is, it's more pronounced; it's causing the class to be a little more back-weighted than we wanted it to be, and had perhaps told you it was going to be. We wanted you to know that but it's manageable. We're still going to deliver the stores and we think we've got a good class in hand. And as we go to the ICSC, we are really very well positioned with only five or six deals left to do and that's about what you want to have in your hand when you go out there, because this is the biggest deal-making event of the year. Now you've got a question about --?

Just going back to your comment -- you said that you had some own delays, that you had a deal not closed up and then found a better space. That better space, is that referring to better location real estate-wise or just more favorable lease economics?

It could be either one or both, either one or both. And then I think we evaluate deals in sort of a holistic way, and so it could've been either one or both.

Okay that was it. Thanks, guys.

Thank you.

It appears we have no further questions at this time. At this time, I would like to turn the conference back over to our speakers for any additional or closing remarks.

Thanks, everyone, for your participation on the call today. We'll be available for any follow-up questions that you may have and look forward to speaking with you on the next conference call. Good day.

This does conclude today's teleconference. We would like to thank you for your participation. You may now disconnect.