Brand House Collective Inc (TBHC) 2005 Q3 法說會逐字稿

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

Good morning and welcome to this Kirkland's Incorporated conference call to review the Company's results for the third quarter of fiscal 2005. On the call this morning are Jack Lewis, 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 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 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 14, 2005.

With that said, I will turn the call over to you, Jack.

Okay, thank you. Good morning everyone. Thanks for joining our call this morning. The primary purpose of today's call is to report sales and earnings results for the third quarter of fiscal 2005. I will summarize some of the key aspects of our financial results and I will also comment on the progress we're making on key strategies and initiatives that we have undertaken for the turnaround of the business. Rennie will review the third quarter financial statements that were included in the press release and provide some commentary on our financial outlook for the fourth quarter of fiscal 2005.

For the third quarter, we reported a net loss of $0.13 per diluted share. Consistent with our previously issued guidance. We reported a net loss of $0.16 per share for the third quarter of fiscal 2004. As previously announced, comp store sales for the quarter decreased 3.4% which was within our previously issued range.

Sales were negatively impacted during the quarter due to hurricanes Katrina, Rita and Wilma which accounted for lost sales of approximately 1.3 million or 7/10% in comparable store sales for the quarter. We are pleased with the efforts of all of our associates in dealing with the aftermath of these hurricanes. All of our stores affected by the storms are now back in operation, except for the Biloxi, Mississippi store which has been closed. Customer traffic declines in both mall and off mall stores were the primary contributor to the comps sales decrease. Our off mall stores were more successful than mall stores in overcoming these traffic challenges by increasing customer conversion rates and achieving higher average dollar transactions.

Accordingly, overall sales performance for off mall stores was superior to mall stores. Off mall stores actually had a comp increase of 1% for the quarter compared to a comp decrease of 4.7% for mall stores. Average sales volume in off mall comp stores was 26% higher than mall comp stores. The new store class of 2004 which was 80% off mall and the new store class of 2005 which is exclusively off mall, also produced encouraging sales results.

From a merchandising standpoint, we produced strong positive comps sales results in the following six categories. Alternative wall decor, furniture, decorative accessories, mirrors, floral and candles. The sales increases in these categories were largely due to new and unique items focusing on our customer's preference for traditionally styled home decor. Art and lamps, our two largest categories experienced comp declines for the quarter. These declines were primarily due to a lack of freshness in the assortments and an over reliance on reorder SKUs.

We are intently focused on increasing the newness quotient in these and other categories. Both for the fourth quarter and for next year's spring season. In addressing a challenging sales environment, exacerbated by the hurricanes and rising gas prices, we took additional markdowns in the post Labor Day period. Although margins returned to expected levels in October, these markdowns led to below plan merchandise margins for the quarter. We ended the quarter with appropriate inventory levels in our stores as we prepare for our peak selling season. Further, we will continue to receive fresh merchandise in our stores in the coming weeks.

We have had an active and successful year so far in real estate with successful new store openings and driving off mall venues. And prudent closings in a number of mall locations. During the third quarter, we opened 26 stores and closed 5 stores, bringing our year-to-date activity to 45 openings and 31 closings. All of the new stores are off mall and all but one of the closings are mall stores. As of quarter end, we had 334 stores in operation, 211 in malls and 123 off mall. For all of fiscal 2005, we anticipate opening 59 stores and closing 32 stores which will bring our total store count to 347 at year-end. At year-end, we expect our store base to be comprised of 210 mall locations and 137 off mall locations, representing a 60/40 venue make up. On our comp store basis we will begin fiscal 2006 with 283 stores in the comp base, 73% mall, and 27% off mall.

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

Thank you, Jack. Good morning. I will begin with a review of the third quarter income statement. Net sales for the third quarter were $90.2 million, an 8.9% increase from 82.8 million in the prior year's third quarter. The comp store sales decrease of 3.4% primarily resulted from fewer transactions due to weak customer traffic trends. Offsetting the traffic impact customer conversion rates were higher for the quarter reflecting conversion improvement in both mall and off mall stores. The average ticket increased during the quarter reflecting an increase in the number of items sold per transaction, as well as an increase in the average retail selling price. The average ticket trends were similar in mall and off mall stores.

Gross margin for the third quarter decreased to 28.5% of sales from 29.7% in the third quarter of 2004. The principle factor in the year-over-year margin decline was a lower merchandise margin due to the higher level of markdowns as compared to the prior year. The occupancy component of gross margin increased slightly as a percentage of sales due to the deleveraging effect of the comp sales decline. The shift to more off mall stores with lower occupancy costs did help to mitigate the impact of the sales decline on this ratio.

The other components of cost of sales. freight and distribution costs, decreased about 50 basis points as a percentage of sales, reflecting strong performance by our logistics team in the areas of distribution center efficiency and transportation cost management in spite of external challenges such as high fuel costs.

Operating expenses decreased to 28.7% of sales from 31.2% of sales in the third quarter of fiscal '04. On a dollar basis, total operating expenses were essentially flat for the quarter below the 9.5% year-over-year growth in the store base. The decrease in the overall expense ratio was the result of various actions taken at both the store and corporate level. At the store level, tighter control over payroll expense as well as decreases in the use of outside storage space and related equipment rental were the primary drivers of the ratio improvement. At the corporate level, reductions in professional fees and travel costs drove the decrease. Overall, we were pleased with our ability to control operating costs in a difficult sales environment.

Depreciation and amortization increased 60 basis points as a percentage of sales primarily reflecting the new store openings in 2004 and 2005. The majority of our leases for off mall stores have five-year terms with a minimum of two five-year options. Accordingly, we typically are depreciating the leasehold improvements over five years rather than ten which was our customary treatment with a ten-year mall lease.

Interest expense was less than prior year as revolver borrowings were below prior year levels throughout the quarter. During the prior year quarter we refinanced our bank line of credit and incurred a onetime early termination charge in write-off of issue costs totaling $364,000 on a pretax basis. Our effective tax rate for the quarter was 39.5%, same as the prior year quarter. And finally, net loss for the third quarter was $2.5 million or $0.13 per diluted share as compared to a net loss of $3 million or $0.16 per diluted share in the third quarter of fiscal 2004.

Now let's move to the balance sheet. The Company ended the quarter in solid financial position with inventory at October 29, 2005, of $57.8 million or $173,000 per store. This compared to $50.3 million or $165,000 per store at October 30, 2004. At quarter end we had 3.7 million in borrowings outstanding under our credit line, this compared to 16.2 million at October 30, 2004. During the past two weeks, we have made additional draws under our credit line to fund new merchandise receipts and an active new store construction schedule. As of yesterday, we had $11 million outstanding under our credit line and do not expect that balance to increase significantly. We anticipate that we will pay the credit line to a zero balance by year-end.

For fiscal 2005, we are estimating capital expenditures of approximately 27 to $29 million, the majority of which relates to new store construction. Net of landlord allowances, we estimate that the net cash outlay for capital investments in fiscal 2005 will be 15 to $17 million.

The final topic that I want to cover today is our guidance for fourth quarter 2005. For the fourth quarter, we are forecasting net income of $0.57 to $0.65 per diluted share. We are estimating that our comparable store sales will decline by 1 to 4% for the quarter. Total sales are anticipated to be between 152 million and $157 million.

Traffic continues to be a concern, and our guidance reflects some caution with regard to a continuation of these trends. It also acknowledges the macroeconomic factors such as higher energy costs this winter that may have an impact on holiday sales. Another factor in our cautious outlook is a relatively slow start for sales in our holiday category.

Despite these issues, we see opportunities in the fourth quarter. We have planned an increase in our marketing activities to drive traffic during the key six-week holiday selling period. We also are continuing to receive fresh, new merchandise in our stores for this all-important time frame. Furthermore, we will have a higher percentage of off mall stores in operation this year with off mall comprising 38% of our store base at Thanksgiving 2005, versus 23% in 2004.

Based on our fourth quarter guidance and our results year-to-date, for fiscal 2005 we now are forecasting earnings of $0.06 to $0.14 per diluted share with a comparable store sales decrease of 5 to 7% for the full year. Total sales are anticipated to be between $414 million and $419 million.

Now I would like to turn it back to Jack for an update on our progress on the key strategies and initiatives we have going to position the Company for success.

Okay, thanks Rennie. During the last five months we have divided most of our management energies between two major efforts. Improving our sales and earnings performance near-term, and secondly, planning for a successful spring season in 2006. Statistically speaking, our number one sales challenge remains. How do we overcome the negative traffic trends in our stores that we have experienced all year.

As a merchandise driven organization, our first answer to this question is that we must give our shopper more of what she wants. Word-of-mouth advertising is a powerful driver of traffic to our stores. And it works in the opposite direction also. When she is dissatisfied, she is less inclined to make a return visit. Our most intense effort since my arrival in June has been focused on improving our merchandising organization. Listening to our customers preferences. Establishing a clear strategy. Hiring new buyers, clarifying responsibilities, improving the quality of our merchandise analysis and decision-making. As a result, our strategy is set. Our buying team is in place. Our decision-making is quicker and more fact-based. And there are signs of improvement.

Over the last three quarters, we have seen an increase in the number of merchandise categories showing year over year sales gains. Our focus now is on strengthening performance in those categories that are not yet comping positively. As we deal with an increasingly competitive sector and especially as we accelerate our transition to off mall real estate, we also recognize that effective customer communication is a vital component of building and sustaining traffic. Accordingly, our marketing team has developed an integrated marketing strategy for the fourth quarter that includes more frequent insert and e-mail advertising, together with a coordinated in-store visual package. We expect to see positive results from this enhanced marketing effort. And we also expect to accumulate valuable data on customer response that we can use in refining our spring 2006 strategies.

Looking towards next year, we have just completed our preliminary budget for fiscal 2006. An essential component of that budget process has been an intensified bottoms up merchandise planning effort. Another important step in our future planning efforts took place last month when our Vice President of merchandising and one of our experienced buyers traveled to China for two weeks. The area of focuses were on product development for fall 2006, secondly identification of potential vendor partners in certain merchandise categories and thirdly, due diligence concerning the potential financial benefit of a direct import strategy for Kirkland's. It was a productive trip, and we are digesting the information and formulating our plan for what such a strategy can meet for fiscal 2006 and 2007.

The other key components of our 2006 budget includes operating expenses, capital investment, and store opening and closing strategy are also in excellent shape and will be buttoned up in the coming weeks. While our emphasis is appropriately on near-term business improvement and solid planning for fiscal 2006, we are also laying the foundation for a company that can be productive and profitable for many years. One of the most exciting things going on right now is the completion of a new prototype store design that we will be testing in the first quarter of 2006. We're working with a leading retail design firm. We have designed a store that responds directly to the wants and needs of our core customer. Our goal is to employ the 6,500 put prototype design in one existing store and 3 new stores before the end of Q1 2006. We will monitor the performance of these stores and make adjustments if necessary during the remainder of 2006.

The final comment I wish to make is one of appreciation for all of our associates in the home office, distribution center and stores. The retail business is tough work. And its especially tough when you're battling tough traffic trends at the same time you are implementing significant changes across the organization. This is a Company with good, smart, hard-working people. And together we are identifying opportunities to make Kirkland's once again a leading performer.

I particular want to highlight the extraordinary efforts of our field and store personnel in those areas that were devastated by Hurricane Katrina and Rita. Their dedication to helping and supporting each other in their communities and their efforts to restore the business operations of affected stores have been remarkable and inspiring.

In summary, we see signs of progress across all areas of the Company. But we're not satisfied with the financial results. Where we have experienced success we are aggressively seeking to capitalize on that success. Where we have not achieved acceptable results, we have identified the core problems and have undertaken actions to solve those problems. Our management team is united in its commitment to turn this business around and deliver our shareholders a strong return on their investment in Kirkland's.

That concludes our prepared remarks and operator, we are now -- I'd like to take some questions.

Thank you. The question-and-answer session will be conducted electronically. (OPERATOR INSTRUCTIONS) Neely Tamminga with Piper Jaffray.

Great, thank you. This is Erin Murphy for Neely Tamminga. Jack, just probably four questions for you, one is, how are you planning for the week after Christmas, in terms of are you planning to have new product flow, or will you be flowing clearance promotional products. And then secondly, how are you planning inventories to look by the end of this year and if possible could you give us a glimpse of how you will be planning them for the beginning of next year? Thank you.

Yes, our primary focus and thanks, Erin, for the question. Our primary focus is going to be on new and seasonal merchandise. We have done considerable research or completed a research project with our customers this spring. And that is exactly what they said they want from us. And when we look at the successes that we have had in growing comp sales in multiple departments, particularly in the third quarter, the ones that are growing are the ones that have the most newness, and promotional buys and seasonal buys. So that will be our focus.

Okay, great. Thanks. In terms of inventory?

We think we will be in fine shape on inventory. Our primary focus has been on these categories that are actually showing substantial growth in sales in the third period. We take very tight control of our inventories, they are reviewed on a weekly basis, actually a daily basis, but we all get together weekly and review the exact status of where we are. So we are very confident that we will end up in an inventory situation that we're very comfortable with.

This is Rennie. Let me add one thing in a little more -- in terms of numbers stuff on the inventory. One thing that we do believe and you may recall this from previous comments we made earlier in the year, we do believe that we started fiscal '05 with lighter inventories in our stores than we really ideally would have. And so I think as we move toward year-end, we will begin fiscal '06 by design with higher inventories than we began fiscal '05. Now obviously, some of the same dynamics exist in any Christmas season which is number one thing you want to do is you want to come out of Christmas near clear of the seasonal category. Because that is the category that's got true obsolescences if you carry that into fiscal '06. So those principles obviously still apply; but we do expect to see higher per store inventories heading into '06.

Great, thank you and good luck in the fourth quarter.

Adam Sindler with Morgan Keegan.

This is Adam, I'm calling for John this morning. How is was everyone doing? I just had a couple questions, I guess, first, just to start off, I was wondering if you could discuss a little bit more about the store operations? You gave a good review of what is going on at the corporate level with regard to planning and decision-making and things like that. But at the store level, I know that I think before, Jack, right before you got there, the Company started to make some changes. I wondered if you could give a little more update on that?

Yes, we have done a complete evaluation, and somewhat of a reorganization in the field reducing our regions to three. And that was the elimination of two. We have restructured our districts in terms of their reporting and all of this has facilitated communications -- quicker communications in our ability to review the performance of the regions in the districts. That has been the primary focus in the field. And we are also been working on training our stores to be much better in terms of customer service, doing demonstrations of products in the stores. Just being much more customer sensitive and customer service oriented.

Okay, and that was actually a question, given the change in the merchandise strategy, obviously it's a little bit easier to sell a whole room. How will the training change to be able to teach this new philosophy on merchandising?

Yes, we're actually doing a couple of things, one is, we have an idea book that we're providing the stores. And in this idea book, it actually shows coordinated groupings of merchandise. And as we continue to expand on our classic traditional merchandise assortment, we are much better or more capable of pulling together coordinated displays in our store. Previously, when we had more of a mishmash of merchandise, it was much more complicated and difficult to pull together unified looks. But with the merchandise strategy that we are implementing now, it just really makes it easier for the associates to sell because we are presenting the merchandise in coordinated looks. We're providing pictures or examples of how to do mantels with coordinated looks, tabletop arrangements, and just attempting to give them better tools to make their job easier.

And just a couple of other housekeeping questions. Rennie, maybe this is for you. Going to the gross margin, the (indiscernible) deleveraged a little bit, and then there was a little bit lower margins due to markdown, could you give sort of an order of magnitude and not necessarily maybe a basis point value but an order of magnitude as to which one was the greater of the two? Or had more of an impact on the gross margin line?

Yes, I attempted to do that in the script, but let me try to clarify that. The occupancy ratio was pretty doggone flat. There was a little bit of deleveraging but a very modest amount, so really the year-over-year decline was principally a merchandise margin decline.

Okay, and then just same question on the SG&A, when you're looking at the payroll management and then the decrease in store space. I imagine that has to do with the larger off mall stores, is that correct? Off mall stores are slightly larger in square footage, and provide a little more back store area, is that correct, or no? Or is that more to do with inventory management?

I really think -- it's a good question -- I really think it has more to do with inventory management. I think that we still have -- you are right, pretty much todate, these larger off mall footprints have proportionally larger back room space, but I think given the fact we're still talking about between 30 and 40% of the store base, most of what we're really talking about in year-over-year savings is a function of inventory management.

Okay, and that has to do with better efficiency at the distribution level?

I would say that is the case. I would also say when you look at a quarter that was as difficult from a sales standpoint as it was and we pretty much ran the business on the same level of operating cost as we did a year ago with 10% more stores --.

It is efficiency?

It is the efficiency and import management and all of that, but the biggest line item below gross margin is payroll. So a significant amount of it was more disciplined payroll management at the stores in light of the pullback in sales volume.

Okay, and then just lastly, real quickly, I believe that Jack mentioned or that you mentioned in the guidance that there is a slow start to sales in the holiday category. Is that holiday specific only or is that sort of gift as well?

It is primarily Christmas.

Okay, okay.

What we are experiencing literally every year is Christmas gets later and later and later. So we are just cautiously watching that and its being reviewed consistently.

Great. Thanks. Appreciate it.

(OPERATOR INSTRUCTIONS) Peter Benedict with CIBC.

Hi guys, this is Bob (indiscernible) filling in for Peter. Just a few quick questions on your 4Q sales guidance, I seem to imply your new store productivity which is below our recent trends, can you comment on what you have been seeing with regards to new store sales performance? And then is there any timing impact of store opening issues in 4Q that could be impacting that number? And I have two follow up questions after that. Thanks.

Well, I don't know how your models working and I am guessing that maybe there is a timing issue that is affecting there. All I can comment on is what we know to be the case and that is one of the most important bright spots in the COMPANY is our new stores. And that has not changed, and it continues to be the case, and our optimism for the class of 2005 if anything is above the class of '04. So as to the arithmetic, I can't -- I don't know that I can help you there not knowing how your model is calculated.

Hello?

It appears our participant has disconnected. (OPERATOR INSTRUCTIONS) Laura Richardson with BB&T.

Following up on the discussion on margins, I want to get a better sense of what is the gross margin assumption factored into your Q4. And then SG&A, and then I've got a couple of other questions.

All right. I think that as we look at Q4, and to a certain extent you can probably back into this a little bit with the earnings numbers we gave. I think when you look at Q4 on the margin side, we're hoping to be able to pull together sort of flattish margins compared to prior year.

Okay, you're talking gross?

That is what we are hoping. I think the guidance, honestly, when you start playing around with the numbers, Laura, the guidance reflects really numbers a little bit below that.

Yes, you have to have it that being pretty substantially down, especially if I assume your SG&A efficiencies continue anywhere near the rate they did in the third quarter.

Well, I think that if you're looking at, if you are looking at year-over-year growth in G&A, in sort of the low to mid single digits, then I think you --.

In dollars, you're saying?

Yes, in dollars. I think invariably you're going to get back to a modest pullback in the gross margin. And you know, you can play around with the mix between those two and like I said when you have a category that's a margin rich category like Christmas off to a slow start, you're sitting here a week before Thanksgiving and you know Christmas comes late and you know all of those things but you just can't go out there and assume you're going to have the kind of margin sell through you want.

Right, okay. So really the big assumption is gross margin in the quarter, because it looks like sales is probably at least in line with what I was expecting before? Which is a comps a little better than this quarter, maybe?

I think your inference is correct. I think we are taking a guarded approach on margin and that is a function of some of the things we have had to do to drive business and drive traffic in recent weeks, and I think that is continued, that is still our approach.

Okay, and just following up on that, it seems like in terms of what you've been doing to drive business, maybe there are more markdowns in the store but as a consumer I am getting fewer of the e-mails telling me come in for 20% off. The e-mails seems to be more focused on new product and not the discounts.

Well, it's actually a combination. The customer's primary focus is on newness. So we have been attempting to emphasize that. In our inserts over the next five weeks, they will include coupons, so we are pushing both agendas. And we have got new freestanding inserts that we are dropping in ADVO and newspapers for the next five weeks.

Okay, and now it is new from last year?

There are more of them this year than last year.

Okay, like how many more?

Four more. Last year we did three; this year we're doing seven.

Okay, how big a trade area around the store do you do those in?

It varies by market, some markets the customer travels further, but essentially within a ten-mile radius. And one of the reasons we use ADVO it's a much more targeted medium than newspapers. And we analyze where our customer base is and we can deliver directly to their mailboxes.

So you're doing selected ZIP codes within that ten-mile radius with ADVO?

Absolutely.

Okay, and then last thing I was going to ask about was the direct importing. What is the cost savings to you when you do that? What percent of the assortment are you buying that way now?

Well, today we buy through agents, (multiple speakers) in the states, and this --

Everything?

And this will be our first attempt at buying direct or on a direct basis. And there are a few ways that you can buy on a direct basis, you can buy through an agent, you can buy direct from the factory, or you can buy from agents that provide different commission rates. We're working our way through that now, and trying to determine who could -- the primary objective is to get new unique products. We will be working with the facilitating agents and factories that can provide that the best. So we are, right now, reviewing all of the product -- we visited over 30 factories in these twelve days and we are analyzing the results of those visits, and the impact they can have on our merchandise assortment. As we make that decision we will be able to give you a more finite idea as to what our gross margin improvement would be.

Okay, but it sounds like you're doing it more for to find new product as opposed to save money. Or on the cost of goods.

It's both. It is definitely both, and I think our belief and our early stages analysis is one goes in hand with the other. We really think that.

Are you big enough that you can actually lock up a factory's entire run in something to be exclusive in it?

It is doubtful that we would take a factory's entire run, but we can take sufficient quantities to make it very meaningful for us to make that investment. We import now about 80 -- we don't direct import, but about 80% of the merchandise we sell is imported. So if we can transition that to a direct import basis, we think we can come up with better product and cost savings.

Yes, it's a good amount of money. Okay, thank you. Good luck guys.

Chris (indiscernible) with SunTrust Robinson Humphrey.

Hello, I am on the call today for David. I had a question about how you see yourself currently positioned in the marketplace which has become more competitive in home decor and particularly how you see yourself positioned versus increased competition from discounters? And if you expect that that position change at all and how you would communicate that to customers?

That is a very good question. When we evaluated the market, and as we talk to our customers and our associates and long-term associates here, what they kept telling us is what they wanted from Kirkland's was classic traditional merchandise. So when we evaluated our assortment we found out that only about 38% of that assortment really was targeted towards that customer. And on the products that made us successful. So we have been focusing on classic traditional merchandise. When you compare us to other competitors like department -- discount stores, each of them seems to have their own niche. Wal-Mart is more on the country look, Target is more on the contemporary look, and when you look at retailers in our sector, there looks tend to be more straight line, more urban, where ours is classic traditional with Bombay chests with brass knobs, pillows with embellishments, embroidery adornments. Paisley patterns, but it is a unique niche but it's a large market share. And we think that we can do that very, very well and the growth that we're seeing now in our successful departments are the ones that are really focusing on that style of classic traditional.

In the past, you have talked also about I think some customer feedback about traditional with a mix of eclectic. Is there a little bit less focus now on that eclectic and a little more on traditional or do you still see that as a balance that you can execute?

Yes, the primary focus is on classic traditional. But the customers want newness and freshness that will update that look. And that is where the eclectic part of the mix comes in. So it will be continuous an important part of the mix but the foundation is the classic traditional look. And then we supplement that with eclectic supplements.

So as far as communicating or sort of restating your focus on the classic traditional to the customer and communicating that position to them, is the store presentation -- and I'm guessing maybe some of what is being included in the new store prototype the way that you see primarily communicating that?

Yes, and that is a very good question also. In fact that was one of the primary reasons that we went to work on this new store prototype. It includes, it gives our stores ability to reduce the size of the stockroom, put more merchandise on the floor in categories, but it also allows sufficient space to show coordinated groupings. And from our research and what our customers tell us, she is after two things, she wants first to see a coordinated look that she can live with in her home or wants in her home. But then she wants to be able to go to a category grouping and pick that merchandise up easily. And this new prototype facilitates both those decisions.

Great, thanks very much.

At this time there is one more question in our queue. (OPERATOR INSTRUCTIONS) Charles Ying (ph) with Hyperion Research Group.

Just to briefly return to the direct importation strategy, I was wondering if this is something you decide to go with when we can see this implemented by? And also, what kinds of additions or changes you would have to make to your merchandising and distribution operations to implement this?

You will see -- on this trip, we did Harvest, Halloween, Christmas and some furniture. So the primary or most of the additions to our merchandise assortment will come in third and fourth quarter. This really will not have a significant impact on our distribution at all. 98% of our merchandise currently goes through our distribution center here in Jackson, and it is as I mentioned, 80% of that merchandise that we currently handle is imported. It is just not direct imported.

Okay, and you don't foresee any impact here merchandising operations otherwise?

No.

All right, thank you so much.

Thank you, Charles.

Dan Hooper (ph) with Peninsula Capital.

Could you talk a little bit about the differences in kind of your store level returns from the off mall and the in mall?

We continue to see outperformance in the off mall venue and we spend the time, most of the time on these calls we talk about sales, and I think this morning we commented on comp sales specifically. When you look at four wall contribution, there is a noticeable spread of several hundred basis points between the four wall profitability of these off mall stores and the mall stores. That is principally driven by lower per foot occupancy costs combined with higher sales and the result is a significantly lower occupancy ratio. There are also some other advantages that we are beginning to see, for example, with higher sales productivity we're seeing lower payroll ratios as well. So we are still learning about exactly how to refine that financial model. But as we sit here today, getting better at it all the time and I think we will get even better as we roll out the new prototype design next year. We are already seeing four Wall profitability spreads that are, you know, 300 basis points to 700 basis points better in these off mall stores.

Did you say that sales in the off mall are actually higher than the in mall?

Sales in the off mall stores have been trending higher than the mall stores. Now, there is a certain amount of that that is a function of higher footage, and it is not unusual, we have seen especially in some of the openings in '05 and '04 that when we taken the size up to 6000 or 6500 feet, you experience a brief pullback in the sales per foot. But the operating profit per foot is still dramatically better. So it is a higher per store sales number, a higher per store operating profit dollar number, a better four wall profit percentage and maybe a lower per foot sales number. But that is sort of the least of our concerns if we are able to do the other things.

And you mentioned that you're working on a new prototype for next year, is that an off mall prototype or an in mall?

It is an off mall prototype. We're not opening anymore mall stores. We're trying to prudently close them as leases expire and as kickout opportunities present themselves, and 100% of our expansion strategy is outside the mall.

Last question, and I will let somebody else get a chance. Do you feel you have been with the company five months -- do you feel like you have had a chance to affect the merchandise for this holiday season the way you would have liked?

Not as much as I liked. There was merchandise that we are currently selling that was bought last February, and there was no chance to really evaluate that merchandise and make sure that it fit our style direction, and the value pricing model that we have.

Adam Sindler with Morgan Keegan.

Just one quick follow-up regarding the moves to the off mall, given the trend of moving off mall, not only with yourself but several other retailers, about how many times do you really get -- when you look at a market and you identify let's say, three or four locations -- about what percentage of the time do you actually get those locations versus having to go to a second year? With regard to real estate? Could you comment on that?

We're trying to understand the question first.

Let's say you are closing a mall store and opening an off mall store, and you've picked several based on traffic and based on demographics, and obviously you know there are several locations you would like to be. Given the shift of mall to off mall, not only with yourself but other retailers that you're competing against for that real estate, about how much of the time do you actually get the most preferred space? From your standpoint?

Well, getting a preferred space is a function of a lot of things. Our competition for the space is one of the things we are identifying, but how far in advance your committing to your lease, kind of first mover advantage kind of stuff. So there is a lot of factors that play into that. I don't have this scientifically, but I would say -- gosh, I don't know -- I mean two-thirds of the time I think, we're able to get to our preferred venue. I think we have done enough -- a lot of credit to our real estate group, getting out and really combing a lot of markets across the country in the last couple of years. And I think we have got a bulls-eye on the properties that we think are the best ones as a result of demographics and things like that you're alluding to.

But also co-tenancy; and I think we have done a lot to refine what co-tenants we're looking for, what kind of demographic we are looking at. And so as a result, I think most of the time we're able to get to our preferred venue. There are certainly times when competitive factors enter in, and we have to go to choice number two. But I think the more success we have in these off mall stores, the more we're seen as a desired and attractive tenant in these off mall properties.

Great, thanks Rennie, I appreciate it.

It appears there are no further questions at this time. Mr. Lewis, I will turn the call back over to you for any additional or closing remarks.

Okay, I want to thank everyone for their participation in the call today. We will be available for follow-up questions that you may have. We look forward to speaking with you on our next conference call, so thanks again and have a good Thanksgiving.

This does conclude today's conference call. Thank you for joining us, have a great day.