Brand House Collective Inc (TBHC) 2006 Q2 法說會逐字稿

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 second 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 risk 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'll turn the call over to you, Robert.

Thanks, Tripp. Good morning, everyone. Thanks for joining us. The primary purpose of today's call is to report sales and earnings results for the second quarter of 2006. I will summarize some of the key aspects of our results for the quarter. Mike will review the second-quarter financial statements that were included in the press release and provide some commentary about financial guidance for the third quarter and full-year fiscal 2006. Cathy and I will then discuss in detail some of the progress we are making on key initiatives to drive the business.

For the second quarter, we reported a net loss of $0.29 per share, slightly better than the revised guidance we provided earlier in the month. We reported a net loss of $0.29 per share for the second quarter of fiscal 2005.

As previously announced, comp store sales for the quarter decreased 9%. A decline in customer traffic leading to fewer transactions was the primary contributor to the comp sales decline.

Customer conversion rates were slightly lower than the prior-year quarter. Conversion rates were lower than last year in mall stores, but slightly higher in our off-mall stores.

The average dollar transaction increased 6%, driven by an increase in our average retail selling price but partially offset by a decrease in items per transaction. The average dollar transaction performance was consistent between mall and off-mall venues.

From a merchandising standpoint, we produced comparable store sales increases in the categories of alternative wall decor, candles, furniture, floral, decorative accessories, and housewares. The success in these categories was not enough to offset declines in framed images, textiles, lamps, and garden.

During the quarter, we continued to work through the less-productive merchandise content within all categories, and targeted inventory rationalization and SKU reduction as important initiatives.

We made good progress during the quarter in reducing SKU counts, down almost 30% from the beginning of the quarter. These SKU reductions are a big part of positioning us to make a powerful statement to our customers through a more unique trend-right assortment, with a better level of depth in key items as we move forward.

We took markdowns during the quarter to help accomplish these objectives in a fiscally responsible manner. Further, we managed our inventory receipts based on the sales trend. As a result, our inventory levels are in good shape as we enter the back half of the year. In absolute dollar terms, our inventories are only slightly higher than last year despite having the 29 additional stores operating at the end of the quarter.

In real estate, we opened nine stores during the quarter and closed five stores. At the end of the quarter, we operated 342 stores -- 188 mall stores, 154 off-mall stores, representing a 55% mall, 45% off-mall venue make-up. Our off-mall stores are larger than our mall stores. So while the overall unit increase over last year's second quarter was 9.3%, our total square footage increased 16.8%.

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

Thanks, Robert. Good morning. I will start with a review of the second-quarter income statement. Net sales for the second quarter were $91 million, a 4.8% increase from $86.8 million in the second quarter of fiscal 2005. The overall sales increase was due to the growth in our store base.

Comparable store sales declined 9% for the quarter. As Robert mentioned earlier, this decline was primarily the result of fewer transactions due to declines in customer traffic.

Gross margin for the second quarter increased to 24.1% of sales from 22.6% in the second quarter of fiscal 2005. The principal factor in the year-over-year margin increase was the higher merchandise margin, which accounted for an increase of 170 basis points. The occupancy component of gross margin was 70 basis points higher as a percentage of sales due to the deleveraging effect of the comparable store sales decline.

Freight and distribution costs decreased 50 basis points as a percentage of sales, reflecting continued improvement in transportation cost management, despite rising fuel costs. We continue to benefit from more efficient freight delivery methods from DC to stores.

Moving to operating expenses, during the quarter we recorded a onetime charge of approximately $728,000 before tax, or $0.02 per share, related to an agreement entered into during the quarter with our current Chief Executive Officer, providing for certain postemployment compensatory and health benefits. This onetime charge has been stated separately on the income statement included in this morning's press release.

Also listed separately on the income statement was our expense related to stock compensation. As we mentioned in the last quarterly call, with this fiscal year we began recording stock compensation expense in accordance with the new accounting standard FAS 123(R).

During the second quarter, we recorded a pretax expense of $338,000 for the quarter or $0.01 per share. The implementation of this standard was not recorded prior years, so there is no expense included in the earnings results for the second quarter of last year.

Excluding these two items, operating expenses were slightly below prior year as a percentage of sales, 29.1% of sales this year versus 29.2% in the prior-year quarter.

At the store level, payroll and other store operating expenses increased about 100 basis points for the quarter, due primarily to the deleveraging effect of the comparable store sales decrease. Additionally, increases in utilities costs and planned increases in marketing expense had a negative effect on the ratio.

At the corporate level, our expense ratio decreased significantly as a percentage of sales due to reductions in corporate salaries, professional fees, and relocation expenses related to new hires. We're managing corporate salaries tightly in this period of difficult sales trends, and we were below last year on a dollar and a percentage of sales basis in corporate salaries for the quarter. We also had favorable comparisons in professional fees due to reductions in audit and compliance expenses.

Depreciation and amortization increased 60 basis points as a percentage of sales reflecting the new store openings in 2005 and 2006, as well as reduction in the average term of our leases.

Net interest expense was essentially flat for the quarter due to similar levels of borrowing under our credit line when comparing this year and last year.

Other income increased to $259,000 for the quarter as compared to $82,000 in the prior year, due to the receipt of insurance proceeds related to claims made in 2005 due to Hurricane Katrina.

Our effective tax rate for the quarter was 43.2%, as compared to 39.5% in the second quarter of fiscal 2005. The adoption of FAS 123(R) impacts our overall tax rate for the year, as many of the charges taken pursuant to FAS 123(R) are not tax-deductible. As a result, we're currently estimating our fiscal 2006 tax rate to be 42.5%, based on the level of expected pretax income for the full year.

Net loss for the second quarter was $5.6 million or $0.29 per share as compared to a net loss of $5.7 million or $0.29 per share last year.

Turning to the balance sheet, the Company ended the quarter in good financial position. Inventories at July 29, 2006, were $46.3 million or $135,000 per store, compared to $46 million or $147,000 per store at July 30, 2005. We have carefully managed our open-to-buy dollars during a difficult sales environment, and we are comfortable with our inventory levels heading into the back half of the year.

Borrowings under our revolving credit line were $600,000 at the end of the quarter compared to $2.7 million in the prior year. Excess availability under our line of credit as of the end of the quarter was $22.6 million compared to $21.2 million last year.

For the quarter, our capital expenditures were $4.8 million, the large majority of which were related to new store construction. For fiscal 2006, we're estimating capital expenditures of approximately $25 million to $27 million. Taking into account the landlord allowances we receive when we open these stores, we anticipate the overall net capital outlay for the year to be between 10 and $12 million.

The final topic I will cover briefly today is our guidance for third quarter and full year. For the third quarter we're forecasting a net loss of $0.18 to $0.22 per share. We estimate that this comparable store sales will range from a decrease of 6% to 9% for the quarter. Total sales are anticipated to be $93 million to $96 million.

We anticipate gross profit margins to be flat to up slightly compared to the prior year. We expect to experience some deleverage on the operating expense line due to the expected decline in comp sales. We estimate that the stock compensation expense related to FAS 123(R) will approximate $250,000 before tax or approximately $0.01 per share for the quarter.

Our guidance anticipates the opening of approximately 20 stores during the quarter and the closing of three stores. The new store openings will be weighted toward the end of the quarter.

For the full year, we're lowering our sales and earnings expectations to account for the persistence of weak traffic, sales trends in our stores, concerns over macroeconomic factors affecting consumer spending in the home decor retail sector.

We are hard at work in the merchandising area of the business, but we also recognize that many of these changes will not be fully reflected until fiscal 2007. This full-year guidance reflects a fourth-quarter comp sales expectation of a decline of 1% to 4% based on a 13 week versus 13 week comparison, combined with an expectation of an improvement in our gross profit margin. Due to the shift in the retail calendar, our fourth quarter will include 14 weeks this year as opposed to the normal 13 weeks.

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

Thanks, Mike. It's been an extremely busy but productive time over the last three months since we last spoke with you. At that time, we had announced some changes in our management team, and we are only beginning to formulate some of our plans and strategies to turn around the performance of the business. While not yet reflected by financial results, we're making progress.

It is no secret that the main area of focus for us has been merchandising. We have talked frankly about the mistakes we feel we have made in merchandise assortment in the recent past.

We have a number of strategic initiatives that we're working on. These include restoring our broad customer appeal with trend-right quality merchandise; developing and focusing on key items in depth at great value; reducing and controlling SKUs; redefining our traditional style; returning the gift product to our customers; and reemphasizing the visual presentation; and driving customer conversion through better customer service. Cathy will go over some of this in more detail in a moment.

But our entire focus is on delivering a better received, more focused, and more financially productive merchandise assortment in coming quarters. Our real estate group continues to execute our off-mall strategy by replacing higher cost mall locations with lower occupancy cost, higher volume off-mall locations.

We are expecting to open 50 to 55 stores this year, down from our original projection of 60 stores, largely due to delays in completion of several new developments. These deals will now fall in the 2007.

However, our strategy remains unchanged. Continue to shift the store base off-mall in attractive, viable markets [through] replacements of successful mall stores. Expand through prudent, targeted organic growth in core Kirkland's markets.

In our stores, we continue to focus on the basics, improving the quality of our people and their level of training, and driving improvement in conversion and guest service. I will now turn it over to Cathy to discuss some specifics related to overall business initiatives.

Thanks, Robert. Good morning to you all. Thank you for being on the call today. As Robert said earlier, we have been hard at work in every area of the business over the last three months, developing our strategies to turn the business around. It has been a challenging and very exciting time for our leadership team. Today, I want to go into a little more depth about how we're acting upon the challenges that Robert laid out in his remarks.

Restoring a broader appeal with trend-right merchandise is first and foremost among our merchandising initiatives. As we communicated on the last call, our merchandise assortment had become overly narrow and focused on a particular style of content. For us, that meant a heavy concentration of red, gold, and beige on the color palette. It also meant a more formal style, featuring heavy adornment and ornate finishes.

We believe there is a market opportunity for traditional home decor and serve a customer who prefers that style. There is a place in our assortment for the formal traditional style we have been offering. However, to broaden our appeal, we're expanding our view of traditional and what it means to our customers.

We are buying our merchandise with three degrees of traditional style in mind -- formal, updated, and soft. We expect to attract more and different customers and are incorporating these distinctions into our buying practices.

With that overriding style direction, there are many tactical measures we're taking to ensure our success. First, Kirkland's has long been known for offering a selection of trend-right, key items that have been bought with conviction and depth. Armed with a clear style direction, our merchants are identifying key item opportunities, and we're beginning to buy with the commitment that we have lacked over the past 12 months. This will also ultimately allow us to provide our customers with a powerful visual presentation and a clear statement as to what we stand for from a merchandise perspective.

Part of this vision includes more iconic pieces and better quality merchandise. The value part of the equation is still very important but we have paid more attention to the price, rather than the price-quality balance, over the past 18 months. To facilitate this transition, our buying team is attending more merchandise markets and working with more vendors than ever so that we can maximize our exposure to trends and ideas and finding great items.

Secondly, we're committed to SKU reduction and control. As we mentioned earlier, we have pared our SKU count by almost 30% at the beginning of the second quarter through responsible use of markdowns and clearance activity. This is a key part of enabling us to introduce new items without adding SKUs to the total or destroying margin.

We also just finished building a mock store at our Jackson, Tennessee, distribution center, which gives us a real world operating environment and the ability to visually manage the whole assortment and maintain control of the total SKU base.

Finally, we're recommitting ourselves to the gift component of our merchandise mix. The Kirkland's customer has always visited our stores not only for quality, value-priced home decor but also as a place to find gifts for her family and friends. We have strayed too far from this part of our business.

We will be offering key groups of gift merchandise this holiday season that will represent our first efforts to return this all-important component to our merchandise mix in a bigger way.

In terms of marketing, we do have some exciting plans for the remainder of the year. Our focus is on the opportunities available in stores, and this allows us to be very creative about where and how we spend our money.

2006 represents the 40th year of Kirkland's Home. We're planning on a 40th anniversary celebration to take place in all of our stores during the month of September.

Our e-mail database has grown from less than 100,000 addresses 16 months ago to over 1.3 million active addresses today. We continue to use this form of marketing heavily through weekly e-mail blasts, with good results.

While we believe strongly in the power of the Internet to connect with our customers, as part of our focus on improving the core business we made the decision at the end of July to remove the product commerce portion from our website. The transaction business simply did not make economic sense for us at this time.

On the store side, it's all about guest service. We believe that the Kirkland's Home store experience is unique and one where we can differentiate ourselves by engaging in meaningful interaction with our guest as she gets ideas to freshen up her home or find the perfect gift.

We have rolled out a new guest service training program to all our stores. We have produced and delivered a Look Book, which serves as a great tool for design ideas when our team members are working with our customers. We also have a training guide for the Look Book that helps educate our team members on design principles and creative ideas. This supports our belief that we sell ideas and that our customers are looking for advice, confirmation, and guidance. We have hired a terrific new director of training to continue and build on these efforts.

Further, to aid our associates in their guest service initiative, we're devoting more of our resources to in-store collaterals, visual presentation, and other conversion tools to help them tell the story and close the deal. These tools include guides focused on decorating, entertaining, and gift giving.

Despite our traffic declines we still have a lot of customers coming through our doors. We're committed to spending our dollars where they count the most, within the four walls of each one of our stores.

I have been at Kirkland for five months, have spent a lot of time with vendors, some of whom we do business with and some of whom we don't. I have been to six major merchandise markets with our buying team. I have been to dozens of our stores, both with our field management teams and on blind visits. I have talked with dozens of customers, both current and former shoppers. And I continue to be a student of the retail marketplace.

What I am really excited about is that our entire leadership team has just come back from three regional field meetings where we had the chance to visit with and learn from every store manager in our Company. There is a spirit of positive energy and a renewed sense of urgency throughout the Kirkland's Home organization. We believe there is a lot we can do to drive our business.

While there are clear macroeconomic factors contributing to our performance, we do not believe we can use that as an excuse and will continue to build on our momentum, turning our efforts into results.

Thanks, Cathy. Cathy and our entire Kirkland's team are excited, hard at work, and enthusiastic about the progress we have seen in the past five months as we work toward turning around our business.

As yet, financial performance lags initiative and effort. Given the very difficult retail and sector environments, we recognize that this is a long distance race and not a sprint. We cannot accurately provide visibility on the timing of the turnaround.

Kirkland's cannot control consumer demand and actions, but we certainly can offer a more effective and appealing assortment and provide a more pleasing and productive guest experience in our stores, both of which will be differentiating in our space. We're totally committed to short and long-term improvement versus our peers and to producing top of sector financial results.

That concludes our prepared remarks. Operator, we are now available to take any questions.

(OPERATOR INSTRUCTIONS) Neely Tamminga, Piper Jaffray.

Thanks for that overview. It would be really helpful, Cathy, to have you talk a little bit about how much of the assortment you have been able to affect or touch, whether it be for the third quarter, fourth quarter, or first quarter next year.

I think obviously a really great idea to get back into gift and do it in a meaningful way and a very timely way around Q4. Maybe if you could just highlight a few items in terms of the price-value relationship that you guys are planning to return to.

Then just as a housekeeping, two items here for Mike. Mike, if you could talk a little bit about the breakout of interest expense for the revolver that would be helpful; as well as the deleverage impact on occupancy in Q4, could that be diminished somewhat given the shift towards more off-mall stores? So if you could talk about that relationship too, that would be great.

Boy, that was a long question; I have already forgotten my part.

How much merchandise are you affecting?

That is a little bit hard to quantify, Neely. I think the key thing that we have done is lay out a framework for what it is going to look like going forward. There is a fair amount of inherited content that we're still dealing with, that is still arriving, and it is still in our stores.

But what we're trying to do is set up the framework so that, come spring, we will actually be able to deliver on the three styles of traditional and what it looks like. The store will have a very different visual perspective.

There are certainly items that are arriving now. You will see some lamps made out of different materials. There are some glass lamps. There are some great [bounce] throws. There's some new alternative wall art. There's some clear vases and some great chargers and jugs as decorative accessories.

But those are sort of more item specific, because as we take the SKUs down and try to add new SKUs, we're trying to balance that in a fiscally responsible way. So I can point to some items today. It is really -- the full effect, you are not going to see it until the spring.

As you know, we went through the holiday assortments. While we were able to edit, we were not able to sort of control and set those up from the beginning. But again, the total number of SKUs have gone down by a third, which gave us the opportunity to paint the canvas that we went to be able to do.

You also asked about the price-value equation. I think that the last call we talked a little bit about having dumbed down some of the product to reach specific price points. I think we underestimated our customer and what she wants to buy and what she is looking for.

So what we're trying to do is find the right item; make sure it's the right quality; and then negotiate for the great value price by using it as a key item and being able to buy a large quantity, so that we can deliver the best value in the marketplace. You do that one at a time. But now with the framework it's a little bit easier, because we understand how we want to buy. And that is what we're working with the buyers on.

On my questions, Neely, one was related to interest expense. Our interest expense is completely related to the revolver. If you look at the second quarter, we had $57,000 of interest expense. That interest rate is LIBOR plus 125; so we have had the rate go up, obviously, in this period of increasing rates.

But over the quarter we probably didn't borrow as much on average as we did last year. So that kind of led to that comparison. I hope that answered your question.

It does. Then in terms of the deleverage of the occupancy in the fourth quarter?

Right, right. Yes, the off-mall should impact us in the fourth quarter and allow us to shed some leverage on that line, given we will be majority off-mall once we get into the fourth quarter. That should help us on the margin line.

Great. Thanks, guys, and good luck.

(OPERATOR INSTRUCTIONS) David Magee with SunTrust Robinson Humphrey.

This is Chris Rapalje on the call for David this morning. I had a question; first just a quick housekeeping question. I assume that the guidance for the year includes the $0.02 charge from this quarter. Is that correct?

That's correct.

Okay. Then, looking forward, I was wondering if you could give some color on what we might expect to see in regard to advertising for the fourth quarter. I believe you had talked about that activity being heaviest in the fourth quarter. I just wanted to know what kind of formats you are expecting to use.

One of the things that we are talking about is the fact that we have all of these customers coming into our store, and making sure that once they get in the store that we have the opportunity to help sell them on the items we have and give them ideas. So we are focusing on in-store advertising, using our banners; and then creating gift guides, visual collaterals for decorating guides and entertaining guides.

One of the challenges we have is we did not have terrifically efficient media markets. So while we can support some stores through newspaper advertising, we can't support the majority. So we decided that the best use of our money was to use it from an in-store perspective.

In September, however, I referenced the 40th anniversary of Kirkland's Home. That we are actually kind of taking a bit of a PR focus on, to gain national exposure and to engage our guests in the celebration with fun ideas, events, and contests.

So there's essentially three different things that we are going to do in September to celebrate Kirkland's Home. First, we're going to introduce the Next Great American Artist contest, where we are going to invite everyone across America, and especially in the markets where we operate, to contribute a design ideas. Some kind of artwork that we would then judge and then sell next spring. So we would help identify the next great American artist, and then come back and sell whoever, the winning artwork, in our stores,

Part of that is also we're going to use guerrilla marketing at art festivals, the big art fairs that go on around the country, and have canvases set up, and hope to create a lot of media interest through the PR.

We're also going to leverage the Internet and have an online treasure hunt where we actually have photo puzzles distributed weekly to over 1 million guests. They're going to have to determine what the differences are between the pictures, kind of engaging puzzle. The answers are only going to be available in the store.

Then lastly, we are actually going to have a special event. We are attempting to break a Guinness Book of World's Records with the world's largest pillow fight as part of a fun event that is going to take place in one of our Texas stores. But we are actually going to have bits and pieces of it scattered throughout the balance of the country.

So that we will have through the month a series of engaging, interactive celebrations that happen in all stores. Just as a reminder, our total e-mail numbers have gone from 600,000 16 months ago to 1.3 million active addresses now, and we are continuing to use that forum to tell people about new products as well as to offer occasional specials and ideas.

Are those e-mail addresses primarily from in-store capture? Or are you purchasing lists or anything of that nature?

Entirely in-store capture.

Okay, all right. Thanks very much.

Laura Richardson with BB&T Capital Markets.

I just wanted to really focus on the fourth quarter and get a sense of what you're expecting will be better by Q4. Because when you do the back of the envelope math -- and I think you guys gave a number too for 4Q comps -- we need to see some serious improvement from the last couple quarters' trends in Q4. So if you could help me understand that, that would be great.

Okay, Laura, I will start; and maybe Cathy will join me and fill some gaps as I talk about this a little bit. I think the major sort of I guess reason for optimism for Q4 is that I think we will have a much better situation with depth on key items in the fourth quarter. That has already begun to filter into our merchandise mix. I think we will be in much better shape there.

I think our seasonal buy has been very carefully controlled. We are actually going to have about 10% less per store at cost. That has been very carefully edited by Cathy. We didn't have the opportunity to aggregate the items that would be presented. But we did have an opportunity in about 40 days to be able to edit those and to do the best that we could to make that an appealing assortment. So that was edited from about 320 to about 200 SKUs.

So I think given the way that that has been handled, and the way it is going to fall into the store, I think that bodes well for the quarter.

Can I actually ask a follow-up question right in there on the seasonal? Because I noticed there is Christmas in the stores that I have visited in the last week or so. Is the assortment 100% there? I didn't count SKUS, so I don't know if there were 200 SKUs there. But there was one pretty big fixture in both the stores of Christmas and also of Halloween.

Laura, it is not all in yet. There is a Halloween fixture, kind of a harvest fall fixture, and a Christmas fixture. We have a customer who is very interested in celebrating the seasons and kind of getting ahead. So I was surprised (indiscernible) how early we introduced Christmas in total.

But it's only about 20% of the assortment has come in at this point, so more will come in. But there's about 60% of the Halloween and harvest assortments that are in, which give people a great reason to come in and decorate. I think there are some terrific items in those assortments.

Last year I was a customer of Kirkland's during holiday season, and remember going in, and there was a lot of products and a lot of different items. It was almost overwhelming. It was like I wasn't even sure where to focus and where to concentrate.

I think visually when you go in this year, it's a little bit cleaner. We've done a pretty good job on packaging and helping to color code from an operational perspective for stores. We have made some operational improvements that will help them this fourth quarter and allow them to focus on being on the floor and guest service.

Part of the meetings that we just had, we had a whole visual session where we worked with stores on how to visually merchandise the stores. Because it's a tough store to merchandise. So it's not planogrammed. We want every store to feel very residential and be a comfortable, inviting experience for our guests.

That is really one of our challenges and what we have been working on to make sure that that happens this fourth quarter, while we are dealing still with some of the cards that we were dealt; so that we are ready for the spring season postholiday.

Okay. One more thing on the seasonal and then I want to get back to Robert's list of what he thinks is going to be different in Q4 this year. Is there any read thus far on the seasonal sales for the Halloween and the Christmas?

It's a very early read, but they are on plan.

Okay, thanks. Robert, I didn't want to -- I just wanted to dig deeper on the seasonal, but I wanted to hear everything else you had to say about Q4 as well.

Okay. I think we have already mentioned that we will be returning some, what we think will be much more customer receptive gift items, to the mix in the fourth quarter. Those will really begin to hit the stores in a sort of November, December, January time frame.

You know, it's a significant number of SKUs. You never know how it is going to do. But we know that our customer returns to the store much more often when that is in the store.

I think we will do a better job with big sales, which will be the period from about December 27 through January 15, when customers historically have some cash in hand and are interested in some items at a great price. They are also interested in beginning to do some things for their house as they begin to face the winter season.

So we will be ready with some key items in depth that will be a traffic driver for that customer during that period, which represents an opportunity that we haven't capitalized on really here in a couple of years.

The other thing, I think, is our stores are going to be much more operationally friendly to our staff. Although we are going to have different content coming in throughout the quarter, the big change they're going to see is a much better-controlled inventory level and the effect of reduced SKU count. So I think they are going to have a more shoppable store.

That only plays to our advantage if we do a really good job converting and working with customers inside the store. We have a big commitment for that.

So to kind of go over it, I think it is a better planned, more effective seasonal assortment, key items, fewer SKUS, continuing to work with better item content coming in through the quarter, adding the gifts, a better focus on the post Christmas day and day-after segment of time, and -- Cathy, do have anything you want to add to that?

No, I think that (inaudible).

Okay.

We recognize we need to have a better fourth quarter (multiple speakers).

Yes. Maybe my last follow-up on this is it sounds like for the 40th anniversary in September you have a lot of events planned. Is that all going to be in September? Or does any of that carry into Q4?

You know, the logistics may carry a little bit past September. But the intention is to celebrate the month of September for the entire month, which is usually a pretty non-month in terms of advertising and doing things. So it gives us a chance to differentiate ourselves. I think it is some creative stuff our teams have come up with.

Yes, it's definitely creative stuff. Okay, thanks, guys. Good luck.

At this time, we have no further questions. (OPERATOR INSTRUCTIONS) Adam Sindler with Morgan Keegan.

Just a quick question for John. Can you give us an update on the prototype stores? Sort of how they are doing and what you're seeing there, versus some of the base stores; some things that are working.

We are beginning to roll out sort of the third iteration of that store this year. We continue to make improvements on it. There is really not enough of a base to tell you that, gosh, this is worth 10% or 15% in sales.

I think it's been very well received by stores and the ones that we have opened have done well. But they are in off-mall locations, and those stores have done better generally also. So right now there is really not enough data that I think we can tell you definitively.

But we believe it is well received by customers, because we get good commentary from them. So that is about all I can tell you, in all honesty.

All right. Thanks.

At this time, we have no further questions. I would like to turn the call back over to Mr. Alderson for any additional or closing remarks.

Well, thank you very much for joining us today, and we look forward to talking with you later. Thanks.

That does conclude today's conference call. You may disconnect at this time.