Brand House Collective Inc (TBHC) 2004 Q4 法說會逐字稿

Good day, everyone, welcome to the Kirkland's conference call. Today's call is being recorded.

At this time for opening remarks and introductions, I'd like to turn the call over to Tripp Sullivan. Please go ahead.

Good morning and welcomed to this Kirkland's conference call to review the Company's results for the fourth quarter and fiscal 2004. On the call this morning are Robert Alderson, President and Chief Executive Officer, and Rennie Faulkner, Executive Vice President and Chief Financial Officer.

The results, as well as notice that the accessibility of this conference call on a listen-only basis over the Internet were released earlier this morning, and a press release has 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 are more fully described in Kirkland's filings with the Securities and Exchange Commission, including the Company's annual report on form 10k, filed on April 15, 2004.

Robert, now I'll turn the call over to you.

Thank you, Tripp and good morning, everyone. Thanks for joining us for our call to report sales and earnings results for the fourth quarter and fiscal 2004. We faced a challenging environment throughout out quarter. Although we were pleased about certain aspects of our execution, we clearly have more work to do, as we seek to return our stores to acceptable levels of sales and profitability.

This morning I will share some of the stronger and weaker points of our fourth quarter performance, and I will also give a progress report on the steps we're taking to turn the business around in 2005. Business is still tough for Kirkland's and the home furnishing sector, but we're confident in our strategies and believe we're laying a solid foundation for future success. Rennie will review our fourth quarter P&L and year-end balance sheet and he will conclude with some additional commentary on the earnings guidance issued in this morning's press release.

For the fourth quarter, net income came in at $0.59 per diluted share, as compared to $0.73 per diluted share for the fourth quarter of 2003. Like many retailers, we've made certain changes to our accounting for store leases, the impact of which reduced our earnings per share for the quarter by approximately $0.01 per share. Rennie will discuss these changes in more detail.

As previously announced, comp store sales for the quarter decreased 4.9 percent. Our non-mall stores performed noticeably better than our mall stores during the quarter. At the beginning of the fourth quarter, 64 of our 305 stores were in non-mall venues, and 17 of these are in our comp store base for the quarter. These non-mall comp stores produced a moderate positive sales increase for the quarter. Furthermore, the remainder of the non-mall stores trended above plan for the quarter.

From a merchandise standpoint, we were relatively pleased with the performance of our holiday category. Sales in gross margin dollars from this category were up nicely on a comparable store and total company basis. We enjoyed a timely, on-plan sell through of the category. However, for the second year in a row, most of our non-holiday categories failed to produce satisfactory sales. The bright spots among our home decor categories were lamps, gifts, candles and textiles. On the other hand, we were disappointed with our results in mirrors, garden and decorative accessories.

All in all, while we had hoped for better sales results, the quarter unfolded largely as we had expected. Not only had the year been a difficult one for the sector, but also we had experienced recent and significant changes in our leadership across three critical areas of the business. Merchandising, marketing and store operations. I am pleased with the leadership and strategies for improvement being employed in all three of these areas, and believe we're making steady progress as we seek to re-energize and better execute our business.

Turning to the Company's full year results for 2004, net sales increased 6.8 percent to $394.4 million. The sales increase was driven by the sales of the 96 new stores opened in fiscal 2003 and 2004. As comparable store sales decreased 5.2 percent for the fiscal year. For all stores open a full 12 months, our average store produced sales of $1.3 million, or $286 per square foot. The average mall store produced sales of $1.3 million and was slightly under 7 years old at the end of fiscal 2004. The average non-mall store produced sales of $1.4 million, and was about 3.5 years old at the end of 2004.

Clearly one of the most encouraging pieces of our business in fiscal 2004 was the performance of our new stores. For the year, we opened 54 new stores and closed 14 stores, producing a net increase increase in the store base of 40 stores or 14 percent. Of the 54 new stores, 44 are located in non-mall locations, including free-standing locations, lifestyle centers, and strip outlet centers. Approximately 60 percent of these new stores were in the southeast or southwest, with the remainder spread fairly evenly across the midwest, northeast and west. Our confidence in this non-mall expansion strategy continues to grow. The co-tenancy in the centers is typically a better match for the 25 to 55-year-old female, who is our core customer.

The economics of these deal compares favorably to the typical mall deal, and the size and location of the store, provides a more shopable and more easily-managed store. The early results of this class, over one-half of the stores in the class opened after October '01, suggest that this will be one of the strongest classes of new stores that we've ever had. The average store in the class is performing more than 10 percent above our new store model volume of $1.175 million. This is particularly -- this is partly a function of an increase in the average store size for this class as average footage in the class is 5,100 square feet. Sales per square foot for the class are trending above $270.

The other part of the income statement that I want to comment on briefly is our gross margin. Which declined significantly for the second year in a row. Although the comp sales decline caused some deleveraging of the occupancy and gross margin, approximately 2/3 of the gross margin decline was due to a lower merchandise margin. While we can not control the macro retail environment and results and effects on customer traffic and sales, there are still some things we can control. One of these areas where we have significant opportunity is merchandise margin.

Our ability to produce a better margin will be a function not only of better planned and more consistently replenished product content, but also our ability to control inventory levels and SKUs. In particularly -- in particular, our performance in 2004 suffered from an assortment that was frequently too broad, that is too many SKUs for a 4,000 to 5,000 square foot store, and not sufficiently focused on our core strengths, that is stylish, quality home decor at great prices.

The opportunity in 2005 is to make our stores more appealing to customers by presenting leaner are more focused product assortments on the selling floor, doing a better job tracking and replenishing best-selling items, and reducing the margin eroding effect of heavy markdowns due to inventory overstocks, all of which are well under way.

At this point, Rennie will take you through the financial statements that's were included in the press release.

Thanks, Robert. Good morning. I will start with a review of the fourth quarter P&L, and then I will cover our year-end financial position and close with some comments on guidance for 2005. First, I'd like to address a couple of corrections that we have made relative to our accounting for leases. As a result of our review and after consulting with our auditor, we have determined that changes are required in our method of recording rent expense over the terms of our store leases. We previously had recognized rent expense beginning on the earlier of the store opening date or lease commencement date, which resulted in an exclusion of the build-out or preopening period. We are now recognizing rent expense beginning on the date we occupy the space for construction.

In addition, we had previously announced a change in our treatment of tenant allowances received from landlords in connection with store construction. We previously netted such allowances against the cost of the lease hold improvements, and recorded the amortization as a reduction to depreciation. We are now accounting for such allowances as deferred rent and amortizing the amount over the lease term is a reduction to rent expense, which is included as a part of cost of sales on our income statement. The financial tables included in this morning's press release, reflect these adjustments made to correct these issues.

Net sales for the fourth quarter were $144.3 million, an 8.7 percent increase from $132.7 million in the prior year's fourth quarter. The comp store sales decline of 4.9 percent, primarily resulted from fewer transactions and fewer items sold per transaction, offset somewhat by a slightly higher average retail selling price. Gross margin for the fourth quarter declined to 37.1 percent of sales from 38.6 percent in the fourth quarter of 2003. Lower merchandise margins accounted for most of the decrease. Occupancy costs increased slightly as a percentage of sales, primarily due to an adjustment recorded related to the lease accounting changes. Offsetting this adjustment, the occupancy component of gross margin benefited from the lower occupancy ratios of the newer, non-mall stores. Distribution costs also declined slightly as a percentage of sales, reflecting efficiency gains from the new distribution center operations.

Operating expenses increased to 21.7 percent of sales from 17.9 percent of sales in the fourth quarter of fiscal 2003. Key areas of operating expense that saw significant increases included advertising and store promotion expenses, corporate salaries and professional fees were significantly higher expenses, primarily resulted from the Company's compliance efforts associated with section 404 of the Sarbanes-Oxley Act. The effect of these expense increases on the operating expense ratio was exacerbated by the comp sales decrease for the quarter.

Next, depreciation and amortization rose 50 basis points as a percentage of sales, reflecting the increased pace of new store openings in 2003 and 2004, as well as the equipment and systems investments made in connection with the new distribution center. Interest expense was slightly lower than prior year as we paid our seasonal revolver completely down by early December. Our effective tax rate for the fourth quarter was 39.5 percent, slightly above the 39.2 percent effective rate for the fourth quarter of 2003.

And finally, net income for the fourth quarter was $11.6 million or $0.59 per diluted share, a decrease or $0.73 per diluted share in 2003. Our earnings per share, which is consistent with our previously-issued guidance, was reduced by approximately a penny a share, due to the lease accounting changes.

On the balance sheet, the Company ended fiscal 2004 in good financial condition and well-positioned to finance our operations and continue with our steady growth plans. An important emphasis throughout fourth quarter was careful management and rationalization of our inventories. We sold through our holiday goods on schedule, and we took positive steps toward focusing our assortment in other key categories. If anything, we ended the year a little lower from an inventory standpoint than we ordinarily would like to see. Our inbound product flow was slower than anticipated during the quarter, as we experienced west coast dock and cross-country rail slowdowns.

The transition to new leadership in merchandising and our attempts to build a coordinated functioning team in that area, presented additional challenges as we saw to ensure a consistent flow of quality merchandise from the best resources. Having said that, with the sales environment still a challenging one, and considering the strategic importance we are placing on better buying discipline and SKU control, lean is good. We anticipate a significant flow of new product into our stores during April and May. Inventories for the total company at January 29, 2005, were $37.1 million, versus $41.6 million at January 31, 2004. This was a 10.8 percent decrease in total inventories.

As for liquidity, we ended fiscal 2004 with no debt and $17.9 million in cash on the balance sheet. We anticipate financing all of our activities in 2005, with cash flow from operations and borrowings under our revolving credit line.

One technical point I want to make: Due to the accounting change that we made in the third quarter of 2004, we now will be reporting capital investment in stores as a gross number before any landlord tenant allowance. These landlord contributions will now be included in cash flow from operations, which will have the effect of increasing our reported CapEx numbers. For fiscal 2005, we are estimating capital expenditures of approximately 26 to $30 million. Net of the anticipated landlord allowances, we estimate that the net cash outlay for capital investments will be 16 to $18 million.

The final topic that I would like to cover briefly is our sales and earnings guidance for 2005. For fiscal 2005, we are forecasting earnings per share of $0.53 to $0.63 per diluted share. While these results would represent a meaningful turnaround from our 2004 performance, our forecast still reflects a very cautious sales outlook. Particularly for the first half of the year. Key underlying assumptions for our earnings forecast include the following: Comparable store sales, ranging from flat to a 3 percent increase. A net increase of 25 stores, 55 to 60 new stores, and approximately 30 store closings. Significant improvement in merchandise margin as a result of a more focused merchandise assortment, better buying and planning practices, and improved logistics. Continued reduction in our occupancy cost ratio, as we open more non-mall stores and relocate older mall stores into more attractive non-mall venues. And the realization of key financial benefits from our distribution center, including better labor productivity, better transportation efficiency, improvement in the accuracy and timeliness to stores. Leaner store inventories and reduced store level storage costs.

For the first quarter of fiscal 2005, we expect a loss of $0.07 to $0.10 per share. We are estimating that our comparable store sales will decrease in the range of 6 to 9 percent. While we have not been able to post comp sales gains thus far, our merchandise margin is trending above prior year.

As Robert will discuss further, we see signs of progress across several key areas of the business, but it may be third quarter before we see a meaningful financial turnaround. Robert will now have some comments our strategies and growth plans for fiscal 2005.

Thanks, Rennie. Our central objective for 2005 is to produce a significant sales and earnings turnaround in our business. Since last fall, our reconstituted management team has been planning and implementing the strategies that we believe are the right ones. We're making progress but we're still not achieving the top line results that must be an essential part of any sustainable improvement in our business. What I I would like to do is provide an assessment of how we're progressing in our efforts to improve performance, within each key area of the business.

In merchandising, the cornerstone of our 2005 plan has been to build a broader, deeper, more capable team. Our search continues for an experienced merchandise executive but we have nothing specific to report at this time. Meanwhile, we have made substantial progress as we have added a VP of Merchandising, three buyers and three financial planners, in the last nine months. We're well under way informing buying teams in key categories with buyers, planners, allocators, as promised in our last call. This group is employing a more focused assortment planning practice, featuring reduced SKUs and leaner inventories, made possible by our more capable supply chain and stronger inventory control.

Great attention is being focused on content improvement to better match the brand, on replenishment practices, and on the quality of the products offered. As you would expect, the early successes have come in SKU reductions, lower inventories, higher IMU, than improved product margin. We expect continued and steady improvement Q2 and beyond, as we resolve imbalance issues in mirrors and art, reconstitute our furniture business and continue to rationalize our vendor base, as we improve product deliveries as to time, adherence to specifications, reduction in delivery damages, and quality. In doing this, Kirkland's will retain its historical price advantage for our customers.

In stores: Under new leadership and benefiting greatly from improved supply chain practices, reduced SKUs and lower running inventory levels, Kirkland stores are in the initial phase of refocusing efforts at store level toward taking care of customers. We're making important improvements in hiring and training staff, utilizing payroll hours, and emphasizing customer interaction and selling, in order to more fully exploit the advantages of a highly-edited, stylish, well-priced and better-timed merchandise offering. Task reduction, better scheduling to peak needs, improved lease line presentation and communication with the customer, elimination of offsite storage, and expense control, combined with a new human resources capability, to help us realize the goal of better service to our very loyal customer base.

Marketing: Kirkland's added a Vice President of Marketing late in Q3 of last year. The group supported our Q4 sales with a program of professional media inserts and print advertising, to stimulate traffic and educate customers as to new off-mall locations. In 2005, our efforts will center on lease line coordination and marketing, and better and more frequent communication and prove customers through e-mail, direct mail, and well coordinated in-store promotional events. An improved website will assist these communication efforts by mid-Q2.

In real estate, real estate may be the area where our path is the clearest and the success of our core strategies is now most evident. Our goal is still to develop a national footprint for Kirkland's, and it is increasingly clear that our concept is a terrific fit for a variety of off-mall destination centers that are increasingly favored by our core female customer. During 2005, we will continue to refine our off-mall store model with respect to store size, design and desired co-tenancy.

We expect to build 55 to 60 new stores in fiscal 2005. Virtually 100 percent of these estimated to be off-mall locations, while closing approximately 30 stores, virtually all of which will be older mall locations. We've made very good progress on the 2005 group. We've now signed 22 leases of the 51 approved deals for the class. We've opened 3 stores and have the other 8 Q1 openings under construction.

Logistics: As noted in mid-2004, we successfully opened our new D.C. with a fully integrated warehouse management software system, and automated conveyance and sortation systems. That facility has already enhanced distribution center throughput, enabled unit cost reduction, reduced order fulfillment cycles, and lowered freight costs as a percentage of shipped inventory. We also continue to implement better transportation practices for store deliveries.

In 2005, we expect to begin to capitalize more fully on both pool and full truckload deliveries to stores, in an effort to control freight costs. Continued emphasis on full supply chain vision will continue, with a goal to improve and better control flow from manufacturer to distribution center.

We expect to bring well over 90 percent of all goods through the distribution center in 2005, versus vendor direct deliveries, in order to achieve further cost savings opportunities and improve our store's in-stock position. That concludes our prepared remarks operator, we're now open for questions.

[OPERATOR INSTRUCTIONS] We go first to Neely Tamminga at Piper Jaffray. Great, thank you and good morning to Robert and Rennie.

Good morning.

Just a couple of questions here, with respect to maybe Rennie can start with the average selling price. Is this a mix shift that we're seeing in terms of the increase or was it just more full-priced selling? It would be helpful to know how that is and then flowing from that, how should we look at category opportunities this year, is furniture continuing to be an opportunity, have you seen strength there? And maybe where is that coming out in terms of percentage of sales versus last year and next year?

Okay, let me take the first half of that. I'll let Robert comment on furniture. With respect to the fourth quarter, average selling price trend, it was kind of a little bit -- I would say definitely a mix shift, Neely, we addressed in our commentary some of the stronger performing categories and some of the weaker performing categories. For example, a category like mirrors that was a weaker performing category, but is a higher-ticket category. So, we definitely had a mix shift going on there.

And also, you know, even within -- some of the stronger performing categories, we had higher retails, the easiest example would be holiday. Where we had higher retails and that was one of the better-performing categories. Likewise in gifts. So, most of it, Neely, I would think of as a mix shift.

Thank you.

Specifically with respect to furniture, we're in a transition mode right now, we're really looking to put a higher quality piece of furniture in our store, but still at a price that's attractive to our customer, and I think you're going to see a little bit less breadth in the category as we go through the year.

Our inventory levels are low right now, but we're beginning with the addition of a new buyer to exploit that opportunity. We think that this could be anywhere from 1 to 5 percent of our business, and with an opportunity to obviously put some nice retails in the store, but the big thing right now, is that we're rationalizing that vendor base and making sure that the quality is right, and that the delivery is there, so that we don't experience damages that are margin eroders.

Thank you so much and good luck.

Thank you.

We'll go now to Peter Benedict, CIBC World Markets.

Hey, guys, a couple of questions. First, just kind of a housekeeping item, one maybe I missed it. Can you give us what the end of the quarter mall versus non-mall store position was? And if you had the store footage, Rennie, that would be great, too.

And secondly, just, I guess, expanding on that prior question, any additional color on some of the merchandising things you have on tap? I don't know how much detail you're going to want to go into, but interested there.

And with the detail on the marketing spend, how much was spent in dollars in '04, if you're willing to give us that? And how much do you expect to spend in '05? Thanks.

All right. You have three questions there. Let me address one and three. Robert can take the one in the middle.

Peter, I do not have the footage numbers handy, as far as the detailed numbers on that. The store count at year-end was 320, and Peter that was about -- it was about 80 stores off-mall. I may be off by a couple, I just don't have the number right in front of me. We will obviously have that in our year-end filings.

Let's see, the other question was on marketing. We typically have not disclosed that, Peter, other than to say that our marketing expenditures have never run more than about 1 percent of sales, and so you can assume that's about where we came out for fiscal 2004.

As we look forward, you know, we will be growing that, but we will be growing it cautiously. So, order of magnitude, I would say, you know, I wouldn't think of it as being anymore than 2 percent of sales and, you know, wouldn't -- wouldn't surprise me if it came in a little less than that for 2005.

Peter, you asked about -- let me see if I frame the question correctly, sort of what our best opportunities are in the -- in the merchandise for the first half?

Yeah.

Oh, you know, the art business has always been a great driver of our business and it's still very steady, and as we correct some imbalances that we have in large art that will resolve as we get into the mid-second quarter, it will drive our business strongly throughout the first half. We continue to do a great job with that with upgraded moldings and mats, and driving off of our traditional images, and we're also doing a better job in contemporary images, so I think that's good news there. Our mirror business, in the beginning of -- about the first part, week or two of the second quarter, we'll get very much stronger. We have a new buyer in place and new vendors and new programs and we will be in stock for the first time since, gosh, August or September of last year, since we've been properly stocked in that category.

Textiles continues to be a very strong part of our business and that is in pretty much all areas in throws, rugs, pillows, it's -- it's very good, it's very stylish. It's very nice prices. Good value to the customer, but good for us, also.

Lighting business has had a very strong rebound, and that's both in the candles and the candle holders, and other sconces and things, that are related to the category, nonelectrified lighting. That business is up very nicely for us. We have new styles, a lot of good product flowing, and our flow of business has been a very pleasant surprise for us this year. We've had a great rebound there with some really quality product, and a lot of new things pour into the store right now at -- at very nice retail. So, I think those are the big opportunities in the first half.

Peter, quick footnote, the number is 79. 79 non-mall stores at year-end.

And once again, ladies and gentlemen, please press star 1 for questions or comments at this time. Again, star 1. We'll go to Neely Tamminga, Piper Jaffray.

Thank you. I just had another question with respect to category performance. Lawn and garden. I think that maybe this coming season we have an opportunity versus last year's performance. I'm just wondering what the strategy is specifically with respect to lawn and garden.

Garden right now is down as a percentage of our -- our first quarter business. It was -- it was a category that we struggled in and throughout 2004. As you know from following our Company, in 2001, 2 and 3, we were strongly relying on resin statuary that we sold at great prices, boxed in great quantity and that business has largely died.

Our emphasis right now is trying to move toward more natural materials, stone and metal. Some of our inspirational pieces in the category are doing well right now. It's -- it's a category that continues in transition. I think you have to think about it in in conjunction with the opportunity, in the sort of patio and indoor/outdoor living, with some new programs that we will have coming in the second and third quarters, where we will have some indoor/outdoor things, such as rugs that will be, we think, strong sellers and we will continue to drive that business, with metal that will have an outdoor finish.

So, a lot of opportunity there and we are -- I promise -- giving that category a lot of attention, because it's been a big driver of our business for a long time, and the transition from statuary has been painful over the last year. But we're on it better now.

Thank you Robert, and I have a question for Rennie. As we look maybe at the end of the past year or maybe as we look at the end of this next coming year, can you give us a sense of -- when you're looking at the non-mall versus mall-based stores, how -- I mean we know, obviously, where you're going to end in terms of the numbers of stores, in terms of the contribution, but on the 4-wall basis, where do you see the balance of the profitability of the these formats coming from? Is it going to be skewed more towards the non-mall stores in terms of the 4-wall total company profit? Can you give us just a little more color on that, Rennie?

Okay. Let me -- let me make sure I answer that. I think I know what you're asking. Let me take a shot at it here. You acknowledged that it's clear what we're trying to do in terms of store count, you're issue is, that given the favorable occupancy cost advantage and sales productivity advantage, how quickly do we get to a point where the non-mall stores are contributing a majority of profit. Is that --

Absolutely, Rennie. I can't pull one over on you! [laughter]

That's what I thought you were asking! Let me answer it this way, you can do your own math. Consider that as we -- as we move through the year, and as we affect this transition to non-mall, consider that the 4-wall profitability advantage is -- I would say, reliably in the range of 400 basis points in favor of the non-mall venues, and in a number of cases, more than that.

Uh-huh.

But I think you can reliably assume that you've got a 4 percentage point advantage in terms of what you're bringing down to the 4-wall profit line.

Okay.

And I think based that, you can probably do your math to -- to get where you want to be. Obviously a significant amount of that is the favorable occupancy ratio. What happens, obviously, in situations where we have a greater spread between a mall -- or excuse me, between a non-mall store and a mall, obviously is, you get the great combination of not only sales productivity and leverage on occupancy, but you get considerably greater efficiency in things like payroll, also.

One of the things that Robert alluded to, which is one of the things we don't talk a whole lot about is, even if you have a bigger footprint in the non-mall stores, they're actually easier to run in three to four different ways, in terms of the freight plays and the back room operation, the ability to lay out the floor and create a little more room there. There are a number of things that make those operations easier to run. So, 400 basis point spread is what I would model.

Excellent. And just in terms of mall traffic, you know, nationally we're seeing mall traffic pick up, post-holiday. Do you see that trending in in of your stores, or is that not happening for you all?

You know, our traffic numbers don't show great comparisons of -- for the first part of this fiscal year, but I really -- and so I would say no, we don't see that, although I would say that in the last two weeks, as I've been in stores, I have anecdotally felt that some of the mall store traffic was better. I would say that a lot of the early traffic gains in this year, the calendar year, January/February, are attributable to some of the tourist locations.

We've got a weak dollar and we have a lot of people pouring in the United States, and buying things right now. And we've seen along in Florida, southern Texas, Las Vegas, Phoenix area, places like that, we've seen an uptick in traffic, and I think a lot of the national traffic numbers for malls are skewed by that. So, that would be my take on it.

Thank you, Robert, that's very helpful.

Thanks.

We'll go now to David Magee, SunTrust Robinson Humphrey.

Hi, good morning.

Hey, David.

Just a couple of questions. First, with the closing of 30 stores this year, will it make a meaningful impact on the overall company profitability?

I think the answer to that is no. The short answer. Let me kind of give a little bit of color around that. If you look at the 30 stores we anticipate closing this year, many of these will be relocated in market -- repositioned in market, in 2005. To the extent we can make the closing and the opening of the companion store, so to speak, fairly close together, and to the extent that's a favorable upgrade, which obviously is the intent and has been the history with our move from mall to non-mall, then you really have a fairly -- you don't have a problem with, you know, losing profit from the closing of the store.

What you might have, David, is you might have a little bit of a shifting effect. You might have an effect where an otherwise profitable store that we're closing in the first quarter, and just the timing of the new center, or our construction or whatever, gives way to maybe a late second quarter or third quarter opening, you've got a little bit of a vacuum in there where the market is not producing that profit, if you can follow what I'm saying. There may be a little bit of that, but over the course of the year, really not much of an effect, because of the kind of dollar-in/dollar out situation, with opening what we believe will be productive replacement stores.

The other thing that's worth noting, just in support of my thesis here, is that you also have in a class of 30 closings, probably more than a handful, I don't know, whatever, 40 percent of them, that we're kind of pleased to be getting out of.

That's was more my point, I thought that maybe a significant number may be unprofitable.

David, they're really not. Not any of those are -- or maybe a couple. We can give you individual attention to answer to that question. Rennie gave you the really conservative rightful answer, and I will tell you -- of those 30 stores that are currently set up to go, 15 of them are not going to be replaced, and there's not a one there that I shed a tear for in leaving. And we may have 4-wall contributed in the store, but in terms of having long-term profitability potential and ability to comp those stores, heck, I'm glad to be out of them.

Uh-huh. And just --

Four or five of them are old Briarpatch stores that, you know, we've just tapped out all the ability that we can to grow that.

Only one of the 30 stores, David, was truly 4-wall negative.

Okay.

But I used 40 percent, Robert used 50 percent. I think there's clearly a number of stores that we're happy to be moving on.

Thanks. And then secondly, with regard to the non-mall versus comp store performance, you know, I guess I calculate the differential to be roughly, you know, 6 points, let's say. You know, some of that probably is due to the age differential between, you know, those two groups. If you could compare, you know, or X out that factor, and maybe compare the newer mall stores with the non-mall stores that you spoke of, the 17 that are comping, perhaps positively, any gut feel for what the differential might be there?

Well, I'm -- there's several ways to go with that. I mean obviously, the way we've done comps, the class of '03, and the class of '04, are excluded from your question in a sense. I can tell you this, on a -- on a small base of stores, so take this with a grain of salt, the spread was similar for the class of '02, in terms of how it comped in '04, but that's a pretty small sample. I think maybe the better way to answer that is that, if you look at -- just forget comp for a minute, just set that aside, if you just look at stores and you just evaluate the stores that we've opened in 2003 and 2004, we've opened 96 stores in 2003 and 2004. From a top line operating profit, whatever way you want to look at it, there is a -- there is a clear have-and-have-not situation there, in non-mall to mall.

Uh-huh.

It is as clear as the comp numbers would imply.

I see. Very well, thank you and good luck.

Thanks, David.

We'll go now to Robin Murchison, Jefferies and Company.

Hi, it's actually Brian for Robin. Rennie, just a housekeeping question first, do you have the store opening plan for the quarter set up at this point yet?

We do. Let me --

I think I can give it to you pretty close, while he's looking. Q1 is 11, Q2 is about 14. 12 of the 14? No?

No, I think a little more back-end loaded than that. Out of a class of 60 stores or so, be looking for about, let's see, 30 to 35 percent of those in the front half.

Okay.

We are trying -- I think Robert's got some notes here, we're trying to do all we can, to accelerate some of those Q3 openings into Q2.

Okay.

I think from the standpoint of your modeling, I would prefer you be conservative and push some of those off into Q3.

Okay. Now, on the furniture side of the business, are you seeing difference in the performance in furniture, between mall stores and non-mall stores at this point?

Yeah, I mean we have -- we have a group of stores within our store base of about 50, that are better-sized to handle a little broader furniture group, and that's really what we're concentrating on right now, to develop -- a mix for that group and then we'll, as we test through that particular group, we'll begin to filter more and more things into the rest of the storebase, based on the ability of the store to handle it.

And are you seeing any -- how's the customer reacting to the price points on the furniture? Because I've seen some of your items that are priced at 600 or $700, how is the customer reacting to those much higher price points?

The number -- when you see that number, most of those are vanity sinks.

Uh-huh and the club chair.

Yeah. And the club chair has been, you know, it's been okay. The vanity has been a big opportunity, and we have a major price advantage in the sink vanities versus the rest of the world, and we also have a new program coming out with those, -- that should be hitting stores in the next two weeks or so. Well be able to sell those things KD and they will be convenient for the customer to take home. They're great quality and no change whatsoever in the materials. So, we think that business is going to continue to hold up, and the price advantage that Kirkland's has is still there.

And on the marketing side, I notice you've been sending out the flyers or the inserts in the newspapers, and I was just wondering how the customer has been reacting to that especially since it has a more -- I would say a more sophisticated feel to it.

Well, you're right. And, Robert, I think even talked about some of this in his comments. We did use -- the free-standing inserts as part of our fourth quarter marketing approach, along with some select -- in some selective markets, we also did some ROP advertising. I think, you know, the analysis that we've done on that, suggests that we did have a noticeable, you know, positive effect on sales, in the week or so after running those inserts.

Now, obviously, you know, many of those had coupons associated with those to bring customers in, and encourage them to buy. I think from a strict ROI standpoint, it's not -- it is not been so far for us a big homerun, it's kind of been a breakeven kind of proposition. In other words, we've gotten some sales, but not enough sales to really create a big profit boost. So, I would say that's still something that we're kind of evaluating.

Okay.

And I think as we've said repeatedly, we're just not going to kind of jump off the cliff with a -- with still a marketing department that's in its early stages -- of understanding our customer, and getting our legs underneath us, -- and coordinating with new leadership and merchandising and that kind of thing. We're not going to jump off the cliff there. It was interesting it was in some ways successful, but it was not a big homerun. So we will be measured in the use of that going forward.

Thank you so much, guys and good luck. Thank you.

We'll go now to Rob Wilson, Tiburon Research.

Yes, thank you. Rennie, I jumped on late. Did you go over the SG&A increase in the quarter, Q4? And also, did you provide the traffic counts and average unit retail and units per transaction statistics for Q4?

Yeah, we didn't give actual traffic counts, but we did talk a lot about the mix of -- of, you know, transactions, basically summary, Rob, was transactions down, items per transaction down, average retail up, and that was kind of the mix. I think -- I'm sorry, your other question was SG&A?

Yes.

We really have not talked about SG&A. We did have some of it. We did have some of it that we discussed in the prepared remarks. One of the elements of SG&A was that we did get more aggressive as we moved through fourth quarter on the advertising and promotion front. Both some in-store things we did, in terms of associate incentives, as well as compared to our history anyway, a much more significant free-standing insert and ROP advertising program. So that was one big piece.

There were some year-over-year increases in corporate salaries, just based on the ads we made, and head count over the last year. And a pretty significant number, actually, was a significant leap in professional fees, most of which was the accountants and consultants associated with the Sarbanes Oxley project. We probably had something well north of a half a million dollars in the quarter just for that.

How should we look at SG&A going forward? Should we not see these sort of increases going forward?

I think.I mean obviously things get exacerbated when you've got the negative comp that we've had, but from an overall dollar standpoint, I think that certainly in terms of, you know, store-related expense, the one area that I think we'll continue to see increases in, but I think they will be measured, will be in the marketing area. We're continuing to -- as I've mentioned on the last question, we're continuing to experiment with some different things, trying to do that intelligently, trying to see what really resonates with our customer, and we will be doing that throughout the first half of this year. Other than that, I think if anything, we've got some opportunities to get more efficient with our expense structure in stores, based largely on our improved logistics effort. And what that implies for efficiency of store-level operations in the back room.

I think you will see us very much focusing on shifting some of the labor hours that historically have been spent dealing with really erratic inventory flows, and those labor hours will be trimmed, and in some cases reoriented and redirected to the front of the store. So, I think long answer, but I think in stores, the only thing that's really kind a near-term pressure point, would be the marketing piece. From a corporate standpoint, I think that there will be expense increases we'll experience as we move through the year. Hopefully those will be coupled with improvement in the sales environment, but I think maybe relative to what you saw in Q4, certainly we don't have to have another year 1 of section 404, so, you're not going to look at that again.

And from a [clerk] payroll standpoint, some important things we're trying to deal with, obviously merchandising that we've talked about, and some other areas of the business, but nothing, I don't think, that's going to be as dramatic as what you're thinking about, looking at Q4.

And can we go back to the AUR? If I remember correctly, a year ago your AUR was higher 10 percent. So, if it was higher again, Q4 of this past year, what was that increase?

It was really a mix shift, that question actually also came up earlier. It was a mix shift. If you look inside the categories that sold well in the 2004 in the fourth quarter, we had some upticks in the average unit retail, for example holiday and in gifts.

Actually, I mis-spoke earlier, I was trying to say -- I actually commented about mirrors. Mirrors, which is a high average unit retail, actually trended down, going against the average unit retail trend. I mis-spoke when I said that earlier. But there were a number of situations. Gifts with one, holiday was one. Another one that comes to mind is furniture, where unit retails were up. So mix shift, Rob, is what took place in fourth quarter.

So, two straight years of higher average unit retail in Q4?

That's correct. It's not as strong this year as it was last year.

Right. Was AUR higher in the last, let's say the whole year, Q1 through Q3? I mean generally was AUR higher in '04?

The answer to that is yes.

Okay. Well, thank you.

Yep. Thank you.

We'll go back to Peter Benedict, CIBC World Markets.

Sorry, guys, no, my questions were answered. Thanks.

Once again, please press star 1 for questions. We are standing by with no further questions, I'd like to turn the conference back over to Mr. Alderson for any additional or closing comments.

Thanks, everyone, for joining us on the call, and we look forward to talking to you again soon. Thanks.

Once again, ladies and gentlemen, that concludes today's call, thank you for your participation. You may disconnect at this time.