Brand House Collective Inc (TBHC) 2006 Q1 法說會逐字稿

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

Good morning, and welcome to this Kirkland's, Inc. conference call to review the Company's results for the first quarter of fiscal 2006. On the call this morning are Robert Alderson, Chief Executive Officer, Cathy David, President and Chief Operating Officer, and Mike Madden, 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 in a press release that 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 12, 2006.

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

Good morning everyone. Thanks for joining us. The primary purpose of today's call is to report sales and earnings results for the first quarter of fiscal 2006. I will summarize some of the key aspects of our financial results. Mike will review the first quarter financial statements that were included in the press release, and provide some commentary about our financial outlook for the second quarter and full year fiscal 2006. Cathy and I will then discuss some of the key initiatives that are currently underway across the functional areas of the business.

For the first quarter we reported a net loss of $0.16 per share, consistent with the original guidance we issued in March. We reported a net loss of $0.09 per share for the first quarter of fiscal 2005.

As previously announced comp store sales for the quarter decreased 5.1%. Declines in customer traffic and transactions were the primary contributor to the comp sales decrease. These declines were more pronounced in our mall stores. The decreases in customer traffic were partially offset by slightly higher conversion rates and a strong increase in our average dollar transaction.

As has been the case in recent periods, our off-mall stores performed noticeably better than our mall stores during the quarter. Off-mall stores reported a comparable sales decrease of 0.9% for the quarter compared to a 6.8% decrease in our mall stores. Average sales volume in our off-mall stores was 25% higher than mall stores during the quarter. Our new store class of 2005, which is exclusively off-mall, and largely not included in the comp base, also produced encouraging results and outperformed our internal sales targets.

From a merchandising standpoint we produced healthy comparable store sales results in categories, including furniture, alternative wall decor, mirrors, frames and candles. We have been successful in these categories by capitalizing on style trends, as well as providing an appropriate level of depth in key items -- key areas of each assortment. The success in these categories, however, was not enough to offset declines in framed art, textiles and lamps.

We are focused on providing a more unique trend right assortment in each of these categories, while reflecting a better level of depth in key items. During the quarter we took targeted markdowns to clear less productive merchandise and rationalize our inventories in key categories. Due to the lack of sales momentum in important categories such as framed art, textiles and lamps, these markdowns were heavier than anticipated and impacted our overall earnings. Encouragingly the categories showing positive comp sales during the quarter also had strong merchandise margins.

On the real estate front, we opened 10 stores during the quarter and closed 19 stores. All of the openings were off-mall stores, and all but one of the closings were mall stores. At the end of the quarter we operated 338 stores, 192 in-mall and 146 off-mall, representing a 57% mall, 43% off-mall venue makeup. Our off-mall stores are larger than our mall stores. So while the overall unit increase over last year's first quarter was 8.3%, our total square footage increased 16.3%.

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

Good morning. I'm going to start with a review of the first quarter income statement. Net sales for the first quarter were $92.6 million, a 9.3% increase from 84.7 million in the first quarter of fiscal 2005. The comp store sales decrease of 5.1% primarily resulted from fewer transactions due to declines in customer traffic. Offsetting the traffic impact, customer conversion rates were slightly higher for the quarter, reflecting conversion improvement in both mall and off-mall stores. The average ticket increased during the quarter, reflecting a strong increase in the average retail selling price, offset by a slight decline in the number of items sold per transaction.

Gross margin for the first quarter decreased to 30.1% of sales from 31.6% in the first quarter of 2005. The principal 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 was 50 basis points lower as a percentage of sales, despite the comparable store sales decline. The shift to more off-mall stores with lower occupancy costs offset the impact of the sales decline on the ratio.

The other components of cost of sales, freight and distribution costs, also decreased 50 basis points as a percentage of sales, reflecting continued improvement in transportation cost management and improved distribution center efficiency, despite rising fuel costs.

Operating expenses were flat as a percentage of sales, 30.9% of sales this year and in the prior year quarter. At the store level, payroll ratios improved slightly for the quarter, due to tighter management of payroll hours. This improvement was offset by the impact of the negative comparable store sales performance on components of store expenses, such as utilities and other fixed overhead. Additionally, increases in advertising activities also had a negative impact on the ratio.

At the corporate level our expense ratio decreased slightly as a percentage of sales as a result of reductions in professional fees and travel costs. Corporate costs also included a pretax amount of approximately $400,000, or $0.01 per share, related to the February termination of our former Chief Executive Officer.

Depreciation and amortization increased 60 basis points as a percentage of sales, reflecting the new store openings in 2005, as well as a reduction in the average term of our leases. During the first quarter we began recording stock compensation expense in accordance with the new accounting standard FAS 123R. We reported a pretax expense of $195,000 for the quarter, or less than $0.01 per share. Had we applied FAS 123R in the prior year quarter, earnings would have been reduced by approximately $175,000, or less than $0.01 per share.

Interest income increased over the prior year as rates on our excess invested cash were better than in the prior year. Our effective tax rate for the quarter was 41% as compared to 39.5% in the first quarter of fiscal 2005. The adoption of FAS 123R has a negative impact on our overall tax rate for the year, as many of the charges taken pursuant to FAS 123R are not tax-deductible. As a result, we're currently estimating our fiscal 2006 tax rate to be 41%.

Net loss for the quarter was $3 million, or $0.16 per share, as compared to a net loss of 1.7 million, or $0.09 per share, in the first quarter of fiscal 2005.

Turning over to the balance sheet. The Company ended the quarter in good financial position. Inventories at April 29, 2006 were 49.9 million, or 148,000 per store, as compared to 48.4 million, or $155,000 per store at April 30, 2005. We have carefully managed our open to buy dollars during a difficult sales environment. We're comfortable with our current levels of inventory.

We had no borrowings outstanding under our credit line at the end of the quarter, and had $2.8 million in cash. This compares to no borrowings and $4.4 million in cash at the end of the first quarter last year.

For the quarter our capital expenditures were 3.9 million, the large majority of which related to new store construction. For fiscal 2006 we are estimating capital expenditures of approximately 26 million to $28 million. Taking into account the landlord allowances we receive when we open new stores, we anticipate that the overall capital outlay for the year will be around 11 to $13 million.

The final topic I will cover briefly today is our guidance for second quarter and full year 2006. For the second quarter we were forecasting a net loss of $0.23 to $0.27 per share. We estimate that comparable store sales will range from a decrease of 4% to 7% for the quarter. Total sales are anticipated to be between 93 million and 96 million. Despite our planned clearance event during the quarter and our ongoing efforts to rationalize our inventories in key categories, we do anticipate merchandise margin improvement during the quarter as compared to the prior year.

We estimate that stock compensation expense related to FAS 123R will approximate a pretax amount of $250,000, or approximately $0.01 per share, for the quarter. Our guidance includes the planned opening of 15 stores for the quarter and closing of 7 stores. For the full year we're moderating our sales and earnings expectations to account for the persistence of weak traffic and sales trends in our stores, and in the broader home decor retail sector. We're optimistic about the progress we're making in repositioning our merchandise assortment, and believe that these efforts will make a difference beginning in the back half of the year. However, with a lack of better visibility at this time, we think it appropriate to adjust our guidance.

I will now turn it back to Robert and Cathy for an update on current business initiatives.

It has been an eventful two months at Kirkland's since we last spoke with you in March. We hired Cathy David as President and Chief Operating Officer on March 22. Cathy brings to Kirkland's a proven ability to set a merchandising vision and develop top talent to lead our organization. Her diverse experience in retail, and enthusiasm and passion for our product, make her uniquely qualified to lead this effort. I'm extremely excited to have Cathy on our team.

Renny Faulkner, our CFO for the last eight years resigned effective April 29 to take another position in his home state of North Carolina. We thank Renny for his leadership and the many valuable contributions he made to the Company. And we wish him and his family great success and happiness in the future. At the same time, we're pleased that Mike Madden is our new CFO. Most of you know and have talked and worked with Mike. In his last six years at Kirkland's he has demonstrated a high-level competence, leadership and commitment to Kirkland's. We're absolutely confident in his abilities and looking forward to his leadership in the finance area.

Despite the management changes and transition during the quarter, we're working together cohesively as a management team to execute on the strategies that we believe will lead to an earnings turnaround in our business. To talk about some of the details, I'm going to turn it over to Cathy.

Good morning to everyone, and thanks for being on the call today. I'm delighted to be here to talk to you about the opportunities that we have at Kirkland's. I have been a fan of Kirkland's for some time as a customer, and that enthusiasm is one of the reasons I joined the team. Having been here for about seven weeks, I believe that we have the talent and ability to deliver on the promise of Kirkland's. Our whole team is currently working very hard and very quickly to develop the key strategies imperative to return Kirkland's to its former position as a market leader in merchandise and as a solid financial performer.

Obviously, the main focus area is merchandising. No question, we have lost the broad appeal that has been a trademark of Kirkland's merchandising strategy. We strayed widely from the proven success of offering the latest styles at great value. While we still have a very loyal, core customer base, the recent narrowing of our merchandise style has not attracted sufficient customers within or outside of that base to deliver positive financial results and comp growth.

As we look forward, we don't want to alienate our core customer with sweeping and risky change, but we do want to broaden our appeal. Translated into action, that means we're redefining what traditional style means, and developing an assortment that recognizes and includes traditional as classic as opposed to the heavily over embellished merchandise that we inherited.

In lamps, for example, it means more natural and updated materials. Glass, metal and wood instead of an over reliance on red and gold resin with scrolls. There's nothing wrong with that style being a part of the assortment, but we have too many SKUs that offer the same look and style. This contributes to customer indecision, slower sales and SKU expansion, while narrowing the appeal of the entire assortment. We're working to return to Kirkland's historic key item focus, which has contributed to our success in the past, and which we have veered away from in the past 12 months.

We're working on broadening our view of the world. For most of 2005 our buyers have been reacting to a specific and narrow view of merchandise direction. We're taking specific steps to broaden our buyers' horizons. Together we are trend shopping, meeting with new vendors, attending new markets, and have engaged a new trend adviser. I have spent time with the buyers, both in stores and at markets, most recently the New York Tabletop and High Point markets. Specific items reflecting trends found at these markets will be arriving in our stores later this year and in early 2007.

We're in the middle of developing more tightly defined trends and themes, which will allow us to buy smarter and deliver a more compelling visual statement to attract our customers' attention. In recent months the mix has not been sufficiently focused, and our store experience reflects that lack of clarity. In my judgment, we have also suffered from SKU creep across all categories. In our case, it has resulted from a lack of commitment to key items, and poor buying practices. We have a plan to rationalize the SKU base, and are whittling down the total number of SKUs with Q3, Q4 and spring 2007 decisions. We're committed to making these changes in a fiscally responsible way, as we modify the content.

Our buying team is relatively new, but I'm pleased with their attitude, performance and work ethic. They have been very open to new ideas, and have reacted well to new direction. While merchandising is our overall key focus, and the place where I'm spending most my time and effort, there are still many other areas which will contribute to our success. Our real estate group continues to lead us off-mall with very promising returns. We will continue to move aggressively in this direction. Off-mall store performance continues to validate the strategy. I am excited about our potential in these locations as we provide better content and improve our in-store experience.

We have made tremendous strides in our logistical and distribution infrastructure. We operate a state-of-the-art distribution facility, and have made great improvements in DC to store efficiency and cost control. While we're realizing tangible benefits from that operation, we're working to take our whole supply chain to another level in support of our merchandising initiative. In the next 90 days we will implement a new level of merchandise visibility from stores to DC.

Our Vice President of Logistics and Distribution left for Asia yesterday to work personally with many of our resources to develop specific action plans to facilitate flow from stores and control costs. In terms of store operations, I have just returned from a meeting in Texas with all of our multi-unit managers, where I spent two days with our key field team from across the country working on our priorities, including guest service and customer conversion. We have a great deal of talent, enthusiasm and commitment.

We have an emerging service culture in our stores, and are providing the tools, training and incentives to help us achieve our in-store goals. We have just hired a new Director of Training to further support our efforts at delivering a delightful store experience for our customers.

I'm quite clear about what I need to do and what that means in terms of Kirkland's performance. We have many good things to build on and strong reasons for optimism. The Company is in good financial position, despite the last couple of years of disappointing results. We have a lot of work to do. And while we're limited in our ability to affect the merchandise for the balance of year as much as we would prefer, we're engaged with a sense of urgency and a strong commitment to deliver profitable growth and return Kirkland's to a top performer in this sector.

Lastly, I would like to update you on the progress for the new store prototype. We have now completed our third of a group of four new prototype stores. Two of these stores have been opened for about eight weeks, and one opened this week. We have been very pleased by the performance of these stores and the positive impact on sales. Importantly, the feedback from our customers has been very positive. There are things about the design that we're still evaluating and refining, but we still anticipate that a substantial number of our new store openings in the back half of the year will reflect this new design.

That concludes our prepared remarks. Operator, we would now like to take questions.

(OPERATOR INSTRUCTIONS). Neely Tamminga with Piper Jaffray.

Cathy, it is fun for me to hear such enthusiasm and newness come into the story, and I want to hear more. I mean you have done a great job, and I think you only have two months under your belt at this point, but I would love to hear from your perspective of who the Kirkland's customer was before and where do you think maybe she'd has moved to during this transition time for Kirkland's, and how we're going to get her back? I think you have outlined some great plans, but I just want to hear more about your perspective and the research that you have done coming into this decision to work with the Company.

Thanks for starting with an easy question for me. I think that there has been a Kirkland's customer that has actually had a pretty broad swath across the population, because of the broad appeal of the merchandise, and the gift and novelty component. We're actually working pretty hard to try to get a better answer using more data in terms of who specifically our customer is. I think part of that answer is that it may be different in our off-mall versus mall stores, and it may be different in different parts of the country.

Segmenting our stores is a big opportunity for us. In general I will tell you that we think -- we believe it's a suburban female, ages 25 to 49, family-oriented with above-average income. But that doesn't actually capture the heart of who she is, and what she is looking for, and what she is trying to do in her home.

So we're working on the more emotional side of it and trying to connect with specifically who she is. We have some of our stores doing exit surveys. We're working with some professional organizations to do customer surveys and research. And we're working with our own stores. We have our executive team spending a lot more time out in the field intentionally. We think a lot of the answers are actually in the stores, and we have tried to run this business from this building for little bit too long.

In terms of getting her back, I would tell you that I think at the end of the day what we're working on hardest is the merchandise and making sure we have a broad enough appeal and specific reasons for her to come back. So we want to both give her ideas for her home. And then as she needs reasons to buy gifts for people, we want a return to be that place that people go and they are proud to give a gift from Kirkland's. So that is a key component of our strategy.

We're working on an e-mail campaign and collecting e-mail names, because we think that is a very efficient way for us to go. Our stores are spread out pretty widely, so the idea of efficient media markets doesn't cover the majority of our stores, and we're not at the point where we would look at TV advertising.

But for us the experience that customers have in-store is what we have to get to first. And getting people back means having what they want and having an engaging store experience, which is why we spent a lot of time at the market this week, or at the field meeting this week talking about how do we do that. And really it is about passionate, attentive associates who care about the product and who care about our customers, and making the right hiring decisions upfront. I don't have any sort of rocket science answers, but I think pretty basic principles that we're spending a lot of time on and challenging the way we have done business, both recently and making sure we understand what the specific formula is that has made Kirkland's work so well for so long.

I loved your discussion on the lamps. I couldn't agree with you more. I thought that those were pretty accurate and right on points. How would you view other major categories for this Company, that being wall art and wall decor? How do you think some of the evolution can actually look for wall decor -- and framed art?

That is an interesting question, even the way you phrased it. Because one of the things we're working on is understanding when consumers come in -- when our customers come into the stores what are they looking for? If they're looking for ways to decorate their house, they're looking for wall decor. And we spent a lot of time thinking about framed art as a category and alternative art as a category, and metal as a category. We need to think from a customer's point of view that she is looking for something to decorate her space. So size may matter. It may be place. It may be wall art. It may be metal.

But as we find success in one area of the business, we have a particular area in framed art and the alternative metals where we are looking and saying, we believe that this particular art, shadow box with artifacts in it makes sense. We're working to see how does that translate to other categories then, because it shouldn't just work in one category without being rolled out to the other categories. For us it is a more cohesive buying strategy with a single view of what a customer is coming to us for, and then how do we do a better job of delivering on that.

Other areas that we're working on beyond wall decor in terms of where we believe we have been trend wrong are textiles and garden. And we're working on reinventing what that looks like both for next year, and then in the meantime what can we do in the short term to deliver some differences in the balance of this year.

Excellent. Great answers. I really look forward to having you onboard, and good luck this summer and into next year.

(OPERATOR INSTRUCTIONS). Laura Richardson with BB&T.

Welcome, Cathy. One follow-up question for you, Cathy, and then I was going to get into a couple more financially oriented ones. In terms of figuring out the customer you have lost, is there another survey methodology besides the store exits that you are using for that?

There are two things. One is the customer we have lost -- there is a customer who comes in and doesn't buy, so we want to understand why she didn't buy. But there is also -- we have a credit card business that we can look back and see who has been a customer of ours and hasn't come back. That is a good starting point for us to figure that out.

One of the things that we're celebrating this year is our 40th birthday. And that will happen in September. It is an important message for two reasons. One is we want to make sure that people know we have been around for a long time, and we're here, and we're inviting them back. We will send them birthday party invitations. But the other part is that we want to make sure that in markets where people don't know us as well, that we have an opportunity to announce ourselves as who we are and a player in the home market place.

Interesting. Thanks. This one may end up being for Mike. But can you remind us, Mike, in Q2 last year the gross margin was down pretty significantly. There was a lot of clearance activity. It seems like you have an easy comparison there. But if there is clearance this year, how do you get higher merchandise margin this year in Q2 than last year, if you're doing the same kind of clearance that you did last year?

First of all, we think we are in a better position on inventories in terms of where we are with our inventory levels. And then secondly, as you alluded to, it was very heavy last year. We had to work through a little bit more inventory, and we just see opportunity on the margin second quarter on that comparison.

That makes some sense. And then for all of you, can you comment on what you think can help drive -- what probably needs to be a positive comp in the second half when, as Cathy said, it is the lead times you work under, you can't make all the changes to merchandising you would like to by the second half of this year?

It is Robert. I think -- obviously content will not be totally fixed immediately. We're going to see improvement we think beginning in the second -- in the third quarter and continuing into the fourth. But hopefully by spring we will be better where we want to be.

But I think one of the things that we're working really hard on is trying to identify key items and opportunities that we have in the back half to drive sales, to be -- and to have those key items in sufficient depth, to be impactful in the store, to really make a statement to the customer, and priced right. We also have some serious opportunities that I think on the margin side in the back half that, as we have better content, I think that will also contribute. As we have I guess tried to say in a really clear way -- we were off focus for the last 12 months or so. We have been widely assorted. We have really not had a clear message to deliver to our customers about what was important in our store. I think we're going to be (multiple speakers).

Gold lamps were important.

Yes. That is a great example. I would be probably embarrassed to tell you how many SKUs that we have that look alike. And so that is not very helpful. I think we're going to have a lot to do with making that better in the back half.

I think there is opportunity. We're not -- Mike is going to talk to you about the guidance if you have any more questions, but the merchandising opportunity is there. Also, Cathy mentioned the service opportunity that we have in the back half. I think we can do a much better job. And I think the initiative that we started 18 months ago in a big way when we brought Dwayne Cochran to the Company is beginning to bear fruit. I think with Cathy's enthusiasm and her ability to work with our multi unit managers, I think we are going to see a big lift from that as we go forward.

David Magee with SunTrust Robinson Humphrey.

My question has to do with, as you redo the merchandise and whatnot, and you talked about the e-mail emphasis, I'm curious beyond that though how you plan to reacquaint yourself with an expanded customer base on a marketing front? And then as a second part to that question, what are your current thoughts on the Kirkland's name, I guess, being used as the private-label for Costco, and is that increasingly an issue in your minds, and what can be done about that?

It is Cathy. I would say that at this point we're spending a lot of time trying to evaluate the investment we would make and the potential return from advertising in the back half. We're trying to save our bullets for that point. But we do think it is very important overall for us to put something in front of our customers. We just want to make sure that we're delivering a message that is consistent with the experience that they will have in stores. And that the experience they will have in stores is worthy of the customers and what we actually want to put in front of people. So working on a couple of fronts to deliver that, and then just trying to figure out the best spend of our advertising dollars.

We are spending a fair amount of time working right now on, as we open new stores, making sure in those markets that we open them in a big way, with more of a splash than we have in the past. Recognizing that it is an opportunity for a first impression, especially when we go off-mall.

The other thing you asked about was the Kirkland's name. And I love Costco personally. I think that that is a positive that people are associating that. Obviously we have nothing to do with them. And as they move more into home, it gives us an opportunity to -- how do we further differentiate the Kirkland's Home Stores from just the private-label of Costco and separately there? Neither of us are going to change our name. And so we are at this point benefiting probably from some halo effect of people knowing what Kirkland's is. And if that encourages them to walk into one of our stores, if they don't know us in a new marketplace, that is great. We just have to deliver experience that is worth coming back for for Kirkland's Home, not mistakenly walking into the wrong store. Robert, you have a better perspective on this.

We have an occasional customer that has some confusion, but it is not a widespread thing, even with the stores that we have opened in the West, which is really more of Costco's world. But we have Costco in our markets, for example in Memphis. And we don't find a great deal of negative energy from that. I would also say that Kirkland's has been around 40 years, and I don't want to get into the legal part of it, but we have a common-law user and some filings that we think are supportive of our name. And as we continue to use the Kirkland's Home for everything that we do, I think we're going to be able to clearly differentiate ourselves.

Thank you and good luck.

Rob Wilson with Tiburon Research Group.

Cathy, could you speak more, you said you have basically a new buying team. Could you help us understand the composition of your new buying team, and maybe the number of buyers that you have today versus maybe a year ago?

What I was saying is that it is a relatively new buying team in the sense of from an experience perspective. We have seven buyers today versus five last year, and we had two in October of 2005. I'm sorry, two have started since October of 2005.

I think that my point there was we were following a lot of direction given by former leadership in this Company, and now we're asking the buyers to do the job they were hired for. I'm delighted with the job they are doing, the perspective they are bringing, the attitude they are bringing. And overall we're working on the right structure to make sure we have the right people, the right jobs, right coordination of departments, because it is actually a pretty lean buying team.

But the backgrounds of some of the folks are from Stein Mart, Kohl's, Crate & Barrel, Sachs, so we have an a lot of experience coming from other places. But in this environment this organization is really unique because of its nimbleness and flexibility, and the idea of how we are thinking about things. We can move very quickly. And it is different than the bureaucratic way that other retailers do their business in terms of planning so far out, and not having the flexibility to react. While we do want to have an overall plan pretty far out, the ability to react and be nimble in the short term is very important for us. That is really what we don't want to lose. But helping people understand how that system works and how to react and use that leverage is what we are working on with them. But I'm delighted with the team overall.

Also, you had mentioned your average customer age was 25 to 49. Is that more your target average age or is that what you believe your current target customer age is?

That is an interesting question. I certainly think it is our target customer, but we have had a very broad base over time in terms of the width of customer age. And the broad appeal of what Kirkland's merchandise has had has really driven that broad customer age base.

I think that we have a very classic design that may skew a little older at this point. And so what we want to do is make sure we don't alienate that customer and broaden back to welcoming everybody into the store, but really focusing on the 25 to 49 year old.

I had always assumed that you had an older customer than 25 to 49, so that is why I asked the question.

I actually thought that as well. And what I can tell you is from time in the stores and time with our store field team, and then to the extent we have data on it, is actually there is an interesting phenomenon. It is like a multi generational shopping experience, so mothers and daughters or grandmothers and granddaughters and people going off to college and people setting up first apartments. So there is a bit more use in the mix than I expected, which is why I think that as we broaden our style we will get even more sales that come as a result of changing our merchandise mix.

Rob, I think some of that has come from the placement of our off-mall stores into high population growth markets where that customer tends to be a bit younger than you would expect, or that we expected, actually.

Fair enough. And then finally for Mike, could you speak -- you said advertising was higher as a percent of sales. Could you speak a little bit to that and maybe the expectations for the rest of the year? And I appreciate you guys taking my call.

Sure. We had planed to do -- I think actually in the quarter we did five inserts versus three last year, so that led to a higher expense in the first quarter. And then when you do the math, the ratio actually creeped up a little bit. But if you look for the rest of the year, our focus on the advertising budget is primarily in the fourth quarter. And as Cathy said, we're evaluating how we're going to ensure that we spend that money wisely, but the focus is definitely on the fourth quarter. We did a Mother's Day insert that will affect second. But that is an anniversary event. And the majority of the remaining budget will be in the fourth.

Was there any thought of direct-mail? I don't know if you have spoken to that in the past, but maybe update us there.

At this point I would just say that it is something that we're considering in the mix. I think it is important for us to test, so I think what we're trying to do is evaluate the different mixes of tests and what we actually -- our intended objective, and then the outcomes. Because, again, the media efficiencies of the market are not fabulous, so we are trying to figure out all the alternate options for us.

Thank you. Good luck.

(OPERATOR INSTRUCTIONS). There are no further questions at this time. I would like to turn the conference back over to management for any additional and/or closing comments you would like to make at this time.

Thanks everyone for your participation on our call today. We will be available for follow-up questions that you might have later today. Thanks.

Ladies and gentlemen, this does conclude today's conference call. At this time we would like to thank you for your participation. You may now disconnect, and have a great afternoon.

Thank you.