Brand House Collective Inc (TBHC) 2006 Q3 法說會逐字稿

Good day, and welcome, everyone, to this Kirkland's, Inc. conference call. Today's call is being recorded. At this time for opening remarks and introductions, I would like to turn the program over to Mr. 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 third 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 of all 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 were 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.

Thanks, Tripp, and good morning, everyone. We appreciate you joining us. The primary purpose of today's call is to report sales and earnings results for the third quarter of fiscal 2006. I will summarize some of the key aspects of our results for the quarter, Mike will review the third quarter financial statements that were included in the press release and also provide some commentary about financial guidance for the fourth quarter and full-year fiscal 2006. Cathy and I will then comment on key business initiatives.

For the third quarter, we reported a net loss of $0.15 per share ahead of the guidance we provided in late August. We reported a net loss of $0.13 per share for the third quarter of fiscal 2005. EPS results for the third quarter include a non-cash before-tax charge of $700,000 or $0.02 per share related to the impairment of fixed assets in certain underperforming stores.

As previously announced, comp store sales for the quarter decreased 6.7%, which was within our previously issued range. Comp sales declined 9.1% in our mall stores and declined 2.7% in our off-mall stores. Overall, sales performance continues to be better in our off-mall stores. The average sales volume in off-mall stores was 24% higher than mall stores during the quarter.

A declining 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. Off-mall stores converted customers at higher rates than in the prior year, while mall stores hit declines in their conversion rates.

The average dollar transaction increased 5%, driven by an increase in our average retail selling price, 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 sale increases in the categories of decorative accessories, furniture, mirrors, floral, and candles. The success in those categories, however, was not enough to offset declines in framed images, textiles, and lamps. Halloween and Harvest performed well in the quarter with a strong sellthrough, exceeding last year in plan and sales and margin. Cathy will speak in more detail about the Christmas seasonal performance later. It's a bit early to project with certainty, but we do anticipate good sellthrough in attaining our primary goal of margin improvement in the Christmas seasonal category.

Better control over inventories and fewer markdowns led to a higher merchandise margin for the quarter. Margin improvement is key to our turnaround effort. As we have discussed, our merchandise assortments is in a period of transition as we seek to refine our style direction, broaden our appeal, and focus on key items in SKU reduction.

During the quarter, we continued to work through existing styles and holdover content, and with fiscally responsible use of markdowns and strong inventory control, we were able to show margin improvement over the prior year. We ended the quarter with the appropriate inventory levels on-hand in stores as we entered the peak selling season. Inventory levels were slightly higher on a per store basis as compared to the prior year, but lower on a per square foot basis as our store size has increased due to the shift off mall.

In real estate, we opened 17 stores during the quarter and closed three stores. At the end of the quarter, we operated 356 stores -- 185 mall stores and 171 off-mall stores, representing a 52/48% split mall to off-mall. Our off-mall stores are larger than our mall stores, so while the overall unit increase over last year's third quarter was 6.6%, our total square footage increased 12.6%.

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

Good morning. Thanks, Robert. I'll start with a review of the third quarter income statement. Net sales for the third quarter were $95.8 million, a 6.2% increase from $90.2 million in the third quarter of fiscal 2005. The overall sales increase was due to the growth in our store base. Comparable store sales declined 6.7% 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 third quarter increased to 30.1% of sales from 28.5% in the third quarter of 2005. This increase was due to a combination of factors including a higher merchandise margin which accounted for an increase of 60 basis points.

The occupancy component of cost of sales is 30 basis points lower as a percentage of sales reflecting the shift to less expensive off-mall real estate. Freight and distribution costs decreased 70 basis points as a percentage of sales, reflecting continued improvement in transportation cost management and lower fuel surcharges.

Operating expenses were $28.5 million or 29.7% of sales for the quarter as compared to $25.9 million or 28.7% of sales for the prior year. At the store level, payroll and other store operating costs increased about 90 basis points as a percentage of sales for the quarter, due primarily to deleverage from the comp decline. Additionally, modest planned increases in marketing expenses to support our 40th anniversary and an increase in our self-insurance reserves had a negative effect on the ratio.

At the corporate level, our expense ratio was up 10 basis points as a percentage of sales. Travel and meeting costs increased over the prior year due to regional field management meetings being held in August this quarter, but not in the prior year quarter.

With regard to stock compensation, during the third quarter, we recorded a pretax expense of $210,000 or approximately $0.01 per share. The implementation of FAS 123R occurred effective the beginning of this fiscal year, so there is no expense included in the earnings results for the third quarter of last year.

Our third quarter results also include a non-cash charge related to the impairment of the fixed assets of 10 underperforming stores as required by generally accepted accounting principles. This charge totaled approximately $700,000 on a pretax basis or $0.02 per share and is included as a separate line item on the statement of operations in this morning's release.

Depreciation and amortization increased 40 basis points as a percentage of sales, reflecting new store openings in 2005 and 2006, as well as a reduction in the average term of our leases. Net interest expense was slightly higher than the prior year, reflecting an increase in interest rates on similar levels of borrowing.

Our effective tax rate for the quarter was 41.9% as compared to 39.5% in the third quarter of fiscal 2005. The adoption of FAS 123R impacts our overall tax rate for the year as many of the charges taken pursuant to FAS 123R are not tax-deductible.

The net loss for the third quarter was $2.9 million or $0.15 per share as compared to a net loss of $2.5 million or $0.13 per share in the third quarter of fiscal 2005.

Turning to the balance sheet, the Company ended the quarter in good financial position. Inventories at October 28, 2006, were $63.1 million or $177,000 per store as compared to $57.8 million or 173,000 per store at October 29, 2005.

On a square footage basis, inventory levels were slightly lower than the prior year as we have carefully managed our open-to-buy-dollars during this difficult sales environment. Borrowings under our revolving credit line were $5.9 million at the end of the quarter compared to $3.7 million in the prior year.

Excess availability under our line of credit as of the end of the quarter with $30.5 million. For the quarter, our capital expenditures were $6.6 million, the large majority of which related to new store construction. For fiscal 2006, we are estimating capital expenditures of approximately $20 million to $22 million. Taking into account the landlord allowances we receive when we open new stores, we anticipate the overall net capital outlay for the year to be between $9 million and $11 million.

The final topic I'll cover today is our guidance for the fourth quarter and full-year 2006. For the fourth quarter, we are forecasting net income of $0.54 to $0.62 per share. The fourth quarter of fiscal 2006 includes 14 weeks as compared to 13 weeks last year due to the retail calendar shift that occurs this year.

We estimate that comparable store sales will range from a decrease of 1% to 4% for the quarter, but adjusting for the extra weight, the comp expectation would equate to a decrease of 5% to 8% for the quarter. Total sales are anticipated to be between $163 million and $167 million.

We anticipate gross profit margins to be higher than in the prior year as we continue to control inventories and benefit from the positive trends in occupancy costs and freight and distribution costs. We expect to experience some deleverage on the operating expense line due to the expected decline in comparable store sales.

We estimate that stock compensation expenses related to FAS 123R will approximate $250,000 before-tax or approximately $0.01 per share for the quarter. Our quarter guidance anticipates the opening of approximately 13 stores and the closing of approximately 20 stores. The openings will be weighted toward the beginning of the quarter and for the most part, the closings will occur during the last week of the fiscal year. Due to the shift in the retail calendar and the fact that many of our leases have January 31 expiration dates, we will have additional closings fall into this fiscal year that in recent years would have fallen into the following fiscal period.

From a sales and modeling perspective, there is no meaningful impact of this shift due to the timing, but it will impact our fiscal year ending store count comparisons. For the full-year, this fourth quarter guidance would imply EPS ranging from a loss of $0.05 per share to income of $0.03 per share.

Comp sales are expected to range from a decline of 4% to 6%, but adjusting for the calendar impact again, the comparable store sales expectation equates to a decline of 6% to 8%.

I will now turn it over to Robert for an update on current business initiatives.

Thanks, Mike. Our team remains totally focused on affecting change in our merchandise direction and performance. We continue striving to deliver a high-quality merchandise assortment that's style, trend and color-right and which delivers substantial value regardless of price point.

We continue to believe that our niche remains in traditional merchandise delivered in understandable themes that would broad customer appeal and showcase items that are interchangeable across themes.

As we move toward those goals, we continue significant editing and reallocation of SKUs within categories and classes, so as to maximize financial [performance]. We expect considerable progress in SKU rationalization to be apparent during spring 2007 after we complete our January clearance and big sale.

The merchandising team is committed to and making progress on returning both a key item focus and a significant component of affordable but stylish gifts to the mix to help drive traffic and topline results. We are also reemphasizing visual acuity in the stores. Our insertion of a design director to coordinate store level visual in windows at the [leash] line and throughout the store, together with a commitment to rebuilding our visual field team to better train and assist our store associates, recognizes the importance we place on better interaction with our guests and effectively suggesting decorating and gift giving ideas.

In stores, we're emphasizing better practices to drive both conversion and improvement in the average dollar transaction. Immediately after the Thanksgiving weekend, we will implement the improved store practices suggested by the multivariable testing project conducted by our field team.

I said approximately three months ago I thought results were lagging initiative and effort and that we were making progress. I also said I didn't know when we would reach the inflection point on performance. I still don't know given sector trends, especially as relates to traffic. But I am confident that we're making progress by vigorously addressing those things which we can possibly affect and are within our control.

At the same time, Cathy and I continue to evaluate and improve the capability of our senior management team. Active and intensive searches continue for a General Merchandise Manager and a Senior Planning and Allocation Executive. We very recently initiated a search for a Senior Executive to lead our store's organization. We are fully engaged and will make announcements with respect to those hires when it's appropriate.

In real estate, we continue to execute the venue transaction by replaced transition by replacing higher cost mall locations with lower occupancy cost, higher volume off-mall locations. We expect to open 49 stores this year, slightly down from our revised estimate of 50 to 55 stores.

We've experienced numerous instances of project slippage into 2007 for a variety of reasons. The strategy remains unchanged -- replace mall stores with off-mall stores located in proven viable markets and expand in our core proven markets, Florida, the Southeast, Texas and the Southwest. Regardless of location, our strategy centers on prudent deals located in high-growth markets with desirable co-tenancy.

As we look ahead to 2007, we expect to open approximately 40 stores while closing approximately the same. We believe it prudent in a time of headwind in our sector to concentrate our resources more acutely on improving our business while being sensitive to preserving a strong capital position.

We are cognizant of our opportunity to maximize our sales in the very important fourth quarter and working hard toward that goal. Cathy is going to talk with you more specifically about our Q4 and about our merchandising for spring of next year. Cathy?

Thanks, Robert. Good morning, and thanks to each of you for being on the call today. Things continue to be busy for our team and our energies are focused on delivering better merchandise and a better guest experience.

In terms of Q4, our holiday season is underway and we are set and prepared for the upcoming Thanksgiving weekend and the balance of the year. With seasonal merchandise typically accounting for a significant portion of our fourth quarter business, we are concentrating on managing that category effectively.

Given our limited ability to impact the seasonal assortment and the fact that we [bought] it with a planned decrease in sales, we are cautiously pleased at this date with the performance of the seasonal merchandise. Sales are lagging slightly, but we have had stronger margin performance that we believe will allow us to achieve our sellthrough target at an appropriate margin.

Our markdown strategy has shifted from full category percent up promotions early and promotional gimmicks to surgical spending of markdown dollars utilizing both temporary promotions and hard markdowns. We bought about half the holiday SKUs we did last year. This tactic was in line with our strategy of reducing SKUs and focusing on key items. Key items in categories performing well include the Nature's Christmas collection, holiday art, outdoor products, sentimental decorations, and giftables.

Different than in prior years, our stores are dressed up for the holidays with decorations, music, attire, food sampling and scents, which help us to produce a more festive environment for our guests. We have introduced holiday-specific gift cards as well as food gifts for the first time this year. We have spent our marketing dollars in what we believe are creative and efficient ways to drive conversion and traffic.

In terms of traffic, we are currently running double truck advertisements in Southern Living and Cottage Living. These ads are beautifully photographed lifestyle shots of key items and include coupons which will help us determine the effectiveness of the ads.

Our Kirkland's credit cardholders will receive both statement stuffers and a stand-alone direct-mail holiday card, each with a promotional discount opportunity. We have 1.7 million bounce-back bag stuffer promotions being distributed now, with a set of weekly coupons for the month of December.

Our email list continues to grow and be a very effective way of communicating with our guests. Our email blasts have shifted from essentially coupon distribution to a focus on products and promotion. As part of our Internet efforts, we launched a holiday section on kirklands.com, which I think is absolutely terrific and incredibly creative, and invites you to visit the site.

We have a calendar countdown to Christmas and have provided a dynamic and fun interactive experience intended to engage our guests with some great ideas and activities, including online virtual decorating of a Christmas tree and a fireplace; creatively rewriting a Christmas song with some Mad Lib logic; and playing a matching game of Kirkland's gift packages. We also have some great recipes and the chance to produce and send photo greeting cards to family and friends.

On the conversion site of the equation, we have produced three separate idea guides for our guests, focusing on decorating, entertaining, and gift giving. These are being distributed in stores and feature our merchandise and lots of holiday tips.

In support of our key items, we have implemented a program called Bright Ideas that helps to showcase products and provide suggestions on creative ways to use the merchandise and decorating, entertaining, and gift giving. These are designed on tear-off sheets and are merchandised next to the product so guests can get an idea and take both the product and idea page home.

While these are clearly intended for our guests, there is substantial benefit with our team members having these tools for education and guest engagement. For the first time, Kirkland's Home has developed a holiday-specific gift card program, and we believe the Limited Edition designs of these very elegant gift cards will benefit our after-Christmas sales as they are redeemed.

Speaking of after Christmas, we intend to be ready to take advantage of those shoppers who are looking for a great deal in January. Our traditional bake sale will begin immediately after Christmas with a balance of fresh great values that we have bought for the sale and a focus on clearing out our older merchandise to make way for our spring sets.

Spring is the season of new beginnings and for us, we will begin with some great seasonal sets and the introduction of our redefined traditional strategy. There are pieces in-store today which reflect each of the three degrees of traditional style which service the key building blocks for our merchandising strategy, but the visual focus and presentation of those styles will become evident in February and gain momentum as we continue to rollout new trends and themes each month throughout the spring season.

In support of the new merchandise programs, we have instituted a number of new buying practices and disciplines, including style-outs, business reviews, SKU tracking of both quantity and style, new markdown plans, and using our new mock store buildout for developing effective strategies and programs. All of these things help to deliver better merchandise which in turn delivers a better guest experience in-store.

Both our guests and our team members are reacting positively to our new merchandising strategies. We are revamping our communications process and our field leadership development programs. We will be implementing new practices in stores based on thorough testing and analysis, and feedback from our Mystery Shopper program.

We believe that Kirkland's Home is a truly personal store and for 40 years has been a trusted resource for great products at great prices. We have the ability to deliver a personal and interactive shopping experience to provide unique and distinctive merchandise along with great ideas.

We will continue to offer great prices on our products. In essence, we are evolving into a value boutique, which provides the great stuff you find at cool little shops but can do it at great price point so you feel twice as good about your purchase.

It continues to be a challenging yet very exciting time for Kirkland's team, and we are making progress every day toward our goals of delivering better merchandise and a better guest experience in-store.

That concludes our formal remarks and we would now be glad to take any questions you might have at this time.

(OPERATOR INSTRUCTIONS). Neely Tamminga, Piper Jaffray.

This is Erin Murphy for Neely Tamminga. A couple of questions. Cathy, if you could just speak a little bit more on the SKU reduction. What process have you made -- I believe at the end of the second quarter you had talked about SKU reduction down 30%. Are you pleased with where it is now or is there still a little bit more room to take that down further?

And then secondly, on gifting for the holidays, what percentage of the mix will gifting be this year versus last year? And then finally, for Mike, merchandise margin rate is up 60 basis points in the third quarter. Should we be looking for a similar rate in the fourth quarter in terms of improvement? Thanks.

I'll go first. In terms of the SKUs, we are currently about flat to the progress we had made, but given that there's a lot of holiday merchandise that kind of muddies the count, we're feeling good about that. What we're really working hard on is both the quantity and the style to ensure that we have newness spread across the three different categories of traditional that we're talking about and we feel very confident that we're moving in the right direction, have made a lot of progress that you'll really start to see in the spring.

In terms of the percent of gift giving, that is a little trickier in the sense that most of the items can be given as gifts. In terms of what we bought as gifts -- I would guess probably somewhere in the 20% to 30% of the SKUs offered are really designed as gift giving as opposed to specifically decorating. A little hard to tell, but our focus as we are buying it -- we've been overseas with our buyers for next year already and are going back in January, and at that point, we're actually going after a more hard-core gift assortment that we can define for next year.

As to the margin question, yes -- in terms of the guidance we gave, it would imply a similar comparison in terms of the basis point improvement on the merchandise side in the fourth quarter.

Maybe I just missed this on the call, but could you split out again the comp differential between the off-mall and the mall-based stores again? I think I missed -- (multiple speakers).

Yes, it was 9.1 decline in the mall stores and it was a 2.7 decline in the off-mall.

Thank you very much, and happy holidays and good luck.

Vivian Ma, CIBC World Market.

I wanted to get a little bit more clarification on your strategy in entering the fourth quarter. You've mentioned that your merchandise margin is up, but considering that you're entering a very competitive time of the year, how are you going to balance your merchandise margins while making sure that your inventory is fresh as you enter the new year?

I think our inventories are in really good shape. We have managed the Christmas seasonal a bit differently than we have for the last couple of years. We've been very surgical in our markdowns and gross margin dollars have been really in good shape versus prior years. We're taking very targeted markdowns. We watch the seasonal every day and watch those items that are looking like they have a lagging sellthrough or those that are accelerating.

So I think we've been very, very efficient in the way that we've handled it and we expect a sellthrough to occur on time. This organization is really focused on managing this. We're very nimble and able to react, and you have to remember that we bought the holiday down this year more than 10%, and so we feel like we're in really good shape.

We've had a lot of support in terms of connecting with customers to what we think helped drive that and the things that we are doing inside the store to suggest the ideas to move those Christmas seasonal items, both giftable and decorating, we think are very strong. So we think we're pretty much on plan to accomplish what we want to do.

I think, as Cathy said, I think we're going to have a very strong January that we planned for, and I think given the things that we'll do to drive traffic then, if we have anything that is not sold, it will be because we planned it and we will have an opportunity to get rid of it on December 26.

Rob Wilson, Siberian Research Group.

Is this the second quarter the merchandise margin was higher than last year? Second quarter in a row?

That's correct.

And also, you mentioned about food gifts in Q4. You said that this is the first quarter you're going to do that. Is there an opportunity to introduce consumables maybe, especially since you're off-mall year-round?

I think that as we look at the business and the customers who are coming in, we are starting to think about what we want to make sure that we do sell. What's important for us, though, is that we continue to offer unique and differentiated merchandise. When we start to talk about some of the consumables, if they are just straight market items, I think there's a sensitivity to how do we make that a special experience, but this is a good opportunity for us to test. The early reaction has been quite positive and we're very pleased with it. But clearly there's an opportunity for us to think about doing that, particularly because a lot of that stuff is given as gifts.

As long as I've known you, you've struggled with lamps. Are you thinking of just exiting the lamp category?

I think that lamps has been an important part of our heritage in what we've done. I think part of the struggle we got into is we started to expand the category, but offered not a lot of newness and difference. The category itself is down. It's down across the country in terms of what we're hearing overall, and what we're trying to do is just react to that and figure out how to make it strong, given where it is, but not focus on it as a growth opportunity for us. So we want to leverage the business that we have and continue to satisfy that demand, but at the same time explore the other businesses where we feel that there's more growth opportunity.

I would also add to what Cathy said, that we are beginning to move into the store some lamps that I believe are much more stylish, much more on-trend, much more fitting the kind of decorating and merchandising themes that we'll have available in the store beginning in the spring. And frankly, I don't think the merchandise that's in the store today really is supportive of that. We may be a little ahead of ourselves and certainly the move is away from very cheap resin promotional lamps.

It's really hard to make a dent in that market given the level of competition. And I would say this -- that we're clearly planned down in lamps for 2007, and I think it's going to take a little transition time as we reeducate our customer about the things that we're doing inside that store to support that category. So I think it can be important, but maybe it won't be 10% to 12% of our overall sales as it has been in prior years.

And maybe Cathy, I guess when we met a couple of months ago, you mentioned something about kitchen being a category you guys might expand into in a greater way next week year. Are there any other categories other than kitchen? And now maybe some consumable opportunity that you're thinking about next year?

One of the things we've talked about, Rob, is sort of redefining kitchen as both a room and an opportunity for giving gifts that service entertaining. And so as we think about the gift category, there's a series of gift categories that become important things for us in how we think about it.

So when we think about how we manage that, we're still in the process of -- we're looking at next year how we can go back after the hard-core gift giving opportunities around baby gift, around wedding gift, around hostess gifts, around holiday gift, and doing a stronger presentation which, if you're in the store today, you'll see Kirkland's Kitchen which is a soft shop. It's where the food gifts are. It's not kitchen in terms of hard good items, but it's actually where we are selling the food gifts.

It's been very well-received because it's actually a presentation that we can do both in mall stores and in off-mall stores and create a sense of excitement and a destination. This is an opportunity for us to test it in terms of rolling out in the spring what we think we want to be able to do in terms of baby and wedding and the other hard-core gift giving opportunities.

I just want to confirm, we are going to see some changes next year.

Yes, I can confirm that.

As we move into -- it won't all happen on the first day of February, but as we move into February, March, April, you're going to see a decidedly different feel and I think you'll see a more stylish, much more coordinated merchandise offering that will be trend-right, color-right, and will be, I think, really interesting to our customers. It's still going to have value, but it's going to be great, I think.

I think the other challenge we have -- and just to be clear, we're not trying to empty the entire store in January of everything that exists and that we sell. We sell a lot of those goods today. And so the opportunity is to recognize what we have to carry to keep that customer base and then expand that customer base by introducing newness and making it apparent and visually for people as they come in. The flow will happen some in February, some in March, some in April, some in May, and as we plan out the year, you'll see newness and freshness as we go on, but it will continue to build. So it won't all arrive in the stores February 1.

Another thing you'll see in the store that we haven't done very well at all in the last few years is that you will see some, I guess we call them Hello tables, where you'll see some theme merchandise that as you enter the store, will be, I think, very interesting to our customers. It will suggest gift giving and it will be theme-right and seasonally correct and I think that's going to be something that will be very interesting and will drive some business and some traffic.

One final question. Are there any indicators that the larger big-box retailers are maybe paring back on some of their shelf space in home furnishings?

I don't know that that's the case.

We haven't seen it [through our] customers and respected colleagues, but you guys study that market a little harder than we do on the numerical side. So --

All we've heard are just rumor stuff, and so I really wouldn't want to comment on any other retailer without having some actual knowledge and understanding of what they are trying to do and so I don't think I can help you there.

(OPERATOR INSTRUCTIONS). Tucker Golden, Solas Capital.

I just had two questions. First, a point of clarification. On your store closures for this year, are you still planning to close 30? So, an additional 20 this quarter, bringing the total to 30?

No, we've already closed 27 through the end of the quarter, so it will be 20 in addition to that. And, as I was alluding to in the prepared remarks, they're at the very tail-end of the fiscal year due to the timing of the lease expirations on those closures.

Your total closures would be 47?

47.

And then just a question on inventory. I see inventory is up 9% over last year, your payables a little lighter relative to inventory. Can you give us some sort of insurance that in terms of aging, there hasn't been much of a change or if there has, why?

I think our aging is in good shape and not unlike what it's been in the past in terms of -- from last receipt date, which is the way we look at it quite often. So there's really no aging issues to speak of.

John Lawrence, Morgan Keegan.

Robert, would you talk a little bit from the real estate perspective, just some of the new stores you've opened in some of those markets, and how some of those stores are performing and how you can still go into some of those markets with the off-mall stores?

The 2006 class -- is that specifically what you're talking about?

Yes, that's fine.

The 2006 class is going to be 49 stores and if you sort of break the market apart a little bit, 12 of them in Florida; one in Pennsylvania -- that's the closest thing to a northeast store we have; six in the midwest; 14 in the southeast; 5 in the west; and 11 in Texas and Oklahoma. So, pretty much all of that class is into the sweet spot of the places where we've done well.

We've had really good performance in these stores in the southeast, Texas, Florida, and the west. The stores that we did in the midwest have not been as good as we hoped, but all of them look like they are okay. I don't see anything that's going to fall below the floor there. All of the openings that we have left in this class are focused in the southeast, Florida and Texas, which is really good news.

The sales out of that group that's opened so far has been on average 100-150,000 above the average of off-mall stores. We've had very strong EBITDA performance, and a very strong return on investment off of that group. So, so far we have a few left to open, but the store performance in 2006 looks really good.

If you have any specific area that you want to talk about, I'm happy to, but all of those stores are, of course, off-mall, and we tried to locate them exactly, as I said earlier, in order to take advantage of the co-tenancy and the infrastructure and the dominant center in the market and typically in a proven market with high growth.

And I might have missed it, but did you indicate '07 openings -- you cut that back a little bit, but where will those stores be focused? Just filling in existing markets?

Yes, I think the very great percentage of those will take advantage of expirations of whatever kind in proven markets and we've already committed about 35, 36 of those stores and have 15 or 16 leases signed. They're all in what we believe pretty solid markets. We did say that we were not going to open quite as many stores next year and I think in a time that we're in, in our sector, we think that's just good use of our money to -- we have a good balance sheet position. We don't want that to erode. We continue to be able to grow out of our cash flow and we don't want anything to change. We want to continue to stay fiscally conservative and yet, we want to continue to transition the store base off-mall. So I think we found a reasonable balance here about how to approach it as both conservative and prudent.

At this point we have no further questions in our queue. I would like to provide everyone one final chance to signal for questions today. (OPERATOR INSTRUCTIONS). At this time I would like to turn the call back to Mr. Alderson for closing remarks.

Thanks, everyone. We appreciate you being on the call today. We will be available for follow-up questions by phone if you have them. Thank you and we'll talk to you soon.

Thank you, everyone, for your participation on today's conference call. You may disconnect at this time.