Brand House Collective Inc (TBHC) 2006 Q4 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 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 fourth 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 and the press release has been covered by the financial media. Except for historical information discussed during this conference call, the statements made by Company management are forward-looking and made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements involve known and unknown risks and uncertainties which may cause Kirkland's actual results in future periods to differ materially from forecasted results. Those risks and uncertainties are more fully described in Kirkland's filings with the Securities and Exchange Commission including the Company's annual report on Form 10-K filed on April 12, 2006.

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

Thanks, Tripp, and good morning, everyone, and we appreciate you joining us. The primary purpose of today's call is to report sales and earnings results for the fourth quarter of fiscal 2006. I will summarize some of the key aspects of our results for the quarter. Mike will review the fourth quarter financial statements that were included in the press release and provide some commentary about financial guidance for the first quarter and full year fiscal 2007. Cathy and I will comment on key business initiatives.

For the fourth quarter ended February 3, 2007, we reported earnings of $0.58 per diluted share compared with earnings of $0.51 per diluted share a year ago. Due to a shift in the retail calendar, the fourth quarter of fiscal 2006 included 14 weeks as compared to 13 weeks in the prior-year quarter. Net revenue for the quarter increased 9.2% to $167.5 million compared with $153.4 million for the prior-year quarter.

As previously announced, comp store sales for the quarter decreased 6.1%, excluding the additional week in the quarter, which was within our previously issued range. Comp sales declined 8.4% in our mall stores and declined 2.6% in our off-mall stores. A decline in customer traffic was the primary contributor to the comp sales decline. Customer conversion rates were slightly higher than the prior-year quarter, driven by a strong increase in our off-mall stores. The average dollar transaction increased 3%, driven by an increase in our average retail selling price, combined with a slight increase in items per transaction. The average dollar transaction performance was consistent between mall and off-mall venues.

From a merchandising standpoint, we continued to struggle in some of our core home decor categories with negative comps in framed images, textiles, lamps and garden. We had positive comp performance in alternative wall decor, floral, mirrors and furniture. However, the results in these categories were not sufficient to offset the other category declines.

Our Christmas seasonal assortment performed above plan for the quarter on both sales and margin. We planned the seasonal category down for the quarter and focused on reducing SKUs and driving key item sales. In season, we took markdowns surgically without resorting to early full category percentage off promotions. The category accounted for 15% of our fourth quarter business, and these strategies allowed us to maximize margin in the category and surpass our sales plan.

Overall gross profit margin increased for the quarter, primarily due to the gift card breakage adjustment and its impact on the ratio. Mike will discuss this in a moment. Within the gross profit margin, merchandise margin decreased 40 basis points versus the prior-year quarter. Product margins were above last year in November and December as we managed markdowns tightly, particularly in our seasonal category. We were more aggressive with our January clearance event, and this resulted in more markdowns than we originally anticipated as we cleared unproductive inventory in advance of the spring season.

Inventory levels at the end of the year were down approximately 10% versus the prior year on an overall basis as well as a per-store basis. These inventory levels are leaner than we would like as we continue to transition our merchandise assortment to new styles and trends. As a result, we enter the first quarter with some inventory imbalances in key categories that we're working hard to correct. We'll get into this in more detail later in the call.

In real estate, we opened 13 stores during the quarter and closed 20 stores. At the end of the quarter, we operated 349 stores, 168 mall-stores and 181 off-mall stores, representing a 48% mall/52% off-mall venue make-up. This marks the first time we have ended a quarter operating a majority of our stores in off-mall venues. The size of our off-mall stores is larger than our mall stores, so despite a relatively flat year for growth, our total store square footage increased 8% versus the prior year.

Now Mike will take you through the financial statements that were included in the press release.

Thanks, Robert. Good morning. I'll start with a review of the fourth quarter income statements. Net revenue for the fourth quarter was $167.5 million, a 9.2% increase from $153.4 million in the fourth quarter of fiscal 2005. The overall increase was due to the growth in our store base and the recording of breakage related to our gift certificate and gift card program.

During the quarter, we reviewed historical redemption rates on our gift certificates and gift cards and determined that a rate of breakage should be applied, representing the portion of our gift certificate and gift card liabilities for which there is a remote likelihood of redemption. This initial adjustment was $3.6 million before taxes or a benefit of approximately $0.11 per share, and has been recorded as a component of revenue during the quarter.

Going forward, we will apply breakage rate to gift card redemption activity and record the resulting breakage as revenue. We anticipate that the recording of this breakage will result in additional earnings of approximately $0.03 per share in fiscal 2007 based upon current redemption rates.

Comparable store sales declined 6.1% for the quarter. As Robert mentioned earlier, this decline was primarily the result of fewer transactions due to declines in traffic. Gross margin for the fourth quarter increased to 36.9% of revenue from 34.9% in the fourth quarter of 2005. This increase was due to a combination of factors, primarily the recording of the breakage revenue which benefited margin by 140 basis points.

Excluding the breakage impact, gross margin increased 60 basis points for the quarter, reflecting leverage on the occupancy cost line due to the shift to less expensive off-mall real estate and additional leverage due to continued improvement in transportation cost management. These positives were partly offset by a 40 basis point decline in merchandise margin, which was primarily due to deeper mark-downs taken during our January clearance.

Operating expenses were $37.2 million or 22.2% of revenue for the quarter as compared to $32.5 million or 21.2% of revenue for the prior year. Included within operating expenses during the fourth quarter, we recorded a change in estimate related to the redemption of discount certificates issued to our private label credit card customers.

Our credit card customers receive discount reward certificates upon obtaining certain point levels related to dollars spent in our stores. Based on our review, we adjusted our estimates related to the breakage on the discount certificates issued within the program. This adjustment totaled $1.4 million before taxes or $0.04 per share. We do not anticipate an incremental impact on fiscal 2007 results from this change in estimate.

Excluding the impact of the breakage adjustments, store level operating expenses increased 40 basis points as a percentage of sales, reflecting deleverage due to the comp decline, an increase in store closing expenses and increases in payroll expense. Partially offsetting these factors, we curbed our spending and advertising during the quarter and did not run any weekly newspaper SSIs. In the prior year, we ran seven weeks of SSIs during the holiday season. At the corporate level, our expense ratio was up 10 basis points as a percentage of sales and deleverage due to the comp decline was the primary reason for this increase in the ratios.

Stock compensation expense, which is included in operating expenses, was $188,000 before tax or less than $0.01 per share for the quarter. The implementation of FAS 123R occurred effective the beginning of this fiscal year, so there was no expense included in the results for the fourth quarter of last year.

Depreciation and amortization increased 10 basis points as a percentage of sales, reflecting the comp deleverage, new store openings in 2005 and 2006 and reduction in the average term of our leases. Net interest income was higher than the prior year, reflecting higher cash balances and better rates on invested cash. Our effective tax rate for the quarter was 42.6% compared to 39.7% in the fourth quarter of fiscal 2005. The adoption of FAS 123R impacted our overall tax rate in fiscal 2006 as many of the charges taken pursuant to FAS 123R are not tax-deductible, leading to a higher effective rate. Net income for the fourth quarter was $11.4 million or $0.58 per diluted share compared to net income of $10.1 million or $0.51 per diluted share in the prior year quarter.

Turning to the balance sheet, the Company ended the quarter in solid financial position. Inventories at February 3, 2007, were $44.8 million or $128,000 per store as compared to $49.2 million or $142,000 per store at January 28, 2006, representing an overall decrease in the inventory of approximately 10% year over year.

We ended the year in good cash position. As of February 3, 2007, our cash balance was $25.4 million as compared to $14.9 million as of January 28, 2006, with no borrowings outstanding under our line of credit. For the quarter, our capital expenditures were $4.2 million, the large majority of which related to new store construction. For fiscal 2006, total capital expenditures were $19.5 million. Taking into account the landlord allowances we received when we opened new stores, the overall net capital outlay for fiscal 2006 was approximately $9.5 million.

The final topic that I'll cover today is our guidance for the first quarter and full year 2007. Based upon the performance of the first five weeks of the quarter, we are forecasting a net loss of $0.30 to $0.35 per share. We estimate that comparable store sales will range from a decrease of 14% to 17% for the quarter. Total sales are anticipated to be between $84 million and $87 million.

We anticipate gross profit margins to be flat to slightly down as compared to the prior year. We also expect to experience significant deleverage on the operating expense line, due to the expected decline in comp sales and an increase in our marketing activities. We estimate that stock compensation expenses related to FAS 123R will be approximately $250,000 or approximately $0.01 per share for the quarter. Our quarter guidance anticipates the opening of approximately 10 stores and the closing of approximately 10 stores.

For the full year, we estimate EPS ranging from a loss of $0.10 per share to income of $0.10 per share. Comp sales are expected to range from a decline of 2% to 6% on total sales of $445 million to $460 million.

The fiscal 2007 retail calendar includes 52 weeks as compared to 53 weeks for fiscal 2006. However, our top estimates are reflective of a 52-week versus 52-week comparison. This annual guidance also includes approximately $0.05 to $0.07 per share in one-time costs associated with the previously disclosed opening of our store support office in Nashville, Tennessee. We anticipate these costs to be focused primarily in the second and third quarters of the year.

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

While we're disappointed with our fourth quarter results overall, we believe that progress continues on a number of our key issues. Our focus throughout 2006 has been on broadening the style of our merchandise assortment while staying true to the heritage of Kirkland by squarely targeting our traditional styles. Our objective is delivering high-quality, trend and color-right assortments and re-establishing Kirkland's as a gift resource.

As part of broadening our assortment and thereby increasing the relevance of our product offering to our guests, we developed and executed a series of themed merchandise collections. These trend statements are designed to help call out distinctly different styles of traditional merchandise and to showcase the items in attractive vignettes and groupings.

The first of these statements, Gracious Elegance, arrived last month, and we had good response from our guests. It was designed to showcase our formal traditional style.

The second statement, Fabulously Fresh, set two weeks ago and has enjoyed strong sellthrough. It is designed to appeal to our guests with an updated traditional sensibility.

While these offerings represent a relatively small percentage of our SKUs, they set a different tone for style and quality in our stores. They also give us a different way to talk to our guests and vendors and establish our credibility for being on trend. We have supported each statement with specific collateral and in-store marketing pieces to serve as tools for guest interactions as well as team member training. We have more theme statements that will continue to set throughout the quarter -- Inspired Living; Black, White and Lavender; Spa and Summer Shop actually arrive on the floor over the course of the next week. Perfectly Pretty, our soft traditional set, will be on our floor in early April.

While we are pleased with the change in the look of the store, the merchandise style and the quality of offerings, early overall Q1 results have obviously been disappointing. We have immediately recognized some opportunities to execute better and have already reacted to them.

When we began our intentional strategic merchandise change, we didn't want to make it too dramatic or move too quickly so as to not lose our core customer base. We bought these new programs too conservatively, especially on key items within the themes, and should have bought them deeper and with more conviction. As we have identified those sales opportunities for specific SKUs, we are reordering them accordingly.

In the course of focusing on the traditional trend statements, we clearly wandered away from the key or big item element of our merchandise strategy, where we would buy hot items in large quantities, offer them at great prices and make a powerful value statement within our stores.

We have the hot items at great prices but did not buy them with intent at the quantity levels we should have. Within Gracious Elegance, for example, 10% of the SKUs accounted for 70% of the sales and likely would have been significantly more if we had bought those SKUs with key item intentions. People expect hot items and prices from Kirkland's, and not providing that was a miss on our part. We have gone back through each program that we will set and made adjustments for Q2 and beyond, where we were able to react.

As we re-establish Kirkland's as a gift resource, we have delivered a number of gift programs and have learned from each of them. Kirkland's Kitchen in the fourth quarter and our Valentine's Day program have confirmed that our guests will definitely buy pickup impulse items from Kirkland's but that we should limit the SKU count and not buy the programs as big as we did. We also learned from Valentine's Day and our new Baby program that the core items make the most sense in our offering. Within each program we have refocused our merchants on decor items, value price points and realistic forecasting, now that we have some history.

In merchandising, we were committed to rationalizing our SKU base as we worked through the 2006 SKU and inventory overages we inherited. Early Q1 experience has taught us that we may have been too zealous in our efforts. We are quickly making adjustments as appropriate.

As an example, we significantly reduced the number of framed images we offered. While each image is more productive in the new assortment, there's simply not enough SKUs to support the business plan in this category. As we continue through this strategic merchandise transition, we are rebalancing and rebuilding our inventory accordingly.

Traffic declines continue to be a significant problem, and while we plan some SSI support for our comp store base in Q1, we have not seen the trend reverse or significantly improve in response to the advertising. Part of this, we believe, is due to the disappointment our guest base has experienced in visiting our stores over the past two years, and we may have overestimated the impact of SSI activity on consumer behavior.

We also did not focus a lot of that effort on key items at value prices, potentially clouding the message to our loyal Kirkland's customer. This is especially true when we have been so overtly promotional in the past two years, attempting to drive traffic and sales. This new message will not resonate overnight.

As a result, we have reduced and redirected the planned SSI spend toward providing more in-store events and collateral support, more focus on key items and programs at value prices, periodic category sale events where we invest in the merchandise, and a refocus on our Windows and [Leafline] opportunities.

One of our most important initiatives has been to upgrade our senior leadership team, and over the past two months, have made two very significant hires. We are very pleased to have hired Sharyn Hejcl as our new General Merchandise Manager and Tony DeBruno as our new VP of Planning and Allocation. Sharyn has been in the industry for over 20 years and has the breadth of experience in both the merchandise and planning functional areas, giving her a tremendously balanced business perspective. She joined us from Bed, Bath and Beyond, where she was the Merchandise Manager in the Decorative Home sector. Prior to that she held the position of Planning Director at Bed, Bath and before that, Joanne's. She started her career in merchandising at May Company.

Tony was most recently the VP of Planning and Allocation of Bombay Company and brings 14 years of experience including playing a significant part in the planning and allocation functions at Nike and Foot Action. We are very excited about having these two talented team members contribute to the Kirkland's business.

Overall, we understand what needs to be done and think our efforts will make sense to our guests. However, we have clearly stumbled on execution and, based on merchandise leadtimes, it will take some time to optimize our potential.

I will now turn it over to Robert for some closing remarks.

I'd like to close our prepared remarks with a few comments about where we are, given the guidance for Q1 2007. Cathy and Mike were very frank in assessing Q4 and detailing the key areas where we showed progress in our turnaround, where we had falldowns and how we're reacting to opportunities, and I would like to try to give that information some perspective and context.

Our leadership team got a late start in fiscal 2006. I returned as CEO in February; Cathy came onboard around April 1, and Mike assumed the CFO job in May. Our immediate goal was to reconstitute our functional leadership, especially in merchandising, and specifically the General Merchandise Manager and the leader in Planning and Allocation. Those hires just occurred, and we're very excited about the work Sharyn Hejcl and Tony DeBruno are doing to improve our execution in the short-term and positively support our vision throughout 2007 in merchandising.

The second big impact of these new leadership hires will be felt over the next 60 to 90 days as we build down into the next levels of merchandising capability. The combination of Cathy's vision of traditional style, which is just now coming to life in our stores, and our newly enhanced merchandising and planning team gives me great confidence that we will get it right as we move deeper into 2007.

Much of our effort over the past year of merchandise has been centered in two areas -- first, maximized financial productivity of the merchandise we inherited for most of 2006; and, second, make the new offering fresh and new, style, color and trend right and, most importantly, stay with our customer base. We recognize the value of our loyal customer base and believe that our merchandising strategy will appeal to a broader group of customers; importantly, including our existing and loyal shopping base.

We're clearly a Company that's in transition in merchandise offering. We have made and no doubt will in the future make some missteps. However, I'm confident that we are rapidly closing the gap -- and a very practical gap between vision and execution and will be rewarded by our customers for presenting stylish merchandise at great prices.

Speaking of customers, traffic declines do continue to plague Kirkland's and the other home decor players, yet we know that we have been our own worst enemy over the past two years with missteps in merchandising. Throughout most of 2006, we worked to reverse those practices while building a new leadership team. I believe we lost some customers along the way. We are and will continue to work hard to regain them. Putting great product on the floor is a good start, but it won't reverse opinions and trends overnight. Rather, opinions will change one customer at a time as we prove we deserve their business.

I am very encouraged by commentary from staff, vendors, designers and our customers, who have told us that we're on the right track. The combination of value and traditional style, well executed, remains at the heart of our strategy.

A few other non-merchandise thoughts. We continue to believe the companion piece for a turnaround in financial performance is a huge uplift in our in-store customer experience. Certainly, a big part of that is better, more appealing, new merchandise, well displayed. But equally important is the opportunity we have to make our customers feel welcome and help them achieve their home decorating and gift giving goals in our stores.

We will have a new store leader in place soon. We've recommitted ourselves to better hiring and more training. We expect this effort to impact our stores significantly as we move through 2007.

Our real estate move off-mall continues to proceed as promised. We're concentrating efforts to accelerate the closing of mall stores over the next two years. You can expect that our unit growth will remain rather static if not recede slightly over the next two years as we relocate within viable existing markets and expand where it makes sense.

The good news is that our return on investment in productivity on these new off-mall stores continues to be strong even with what has been less than optimal merchandise. As we progress, the earnings potential for our business should naturally improve. The combination of better venue, better merchandise content and execution, continued strong expense in inventory control, better focused marketing message, supply and allocation chain improvements, and a better and more productive guest experiences is where our team is headed.

We believe that the task is challenging but doable. We strongly believe that as we execute better our customer will return. We also believe we will gain new customers with our merchandise and we will achieve the turnaround we see. We're not there yet, and we have much work to do, yet some of the hardest work is done -- the vision and leadership team piece. We look forward to reporting better results to you very soon. Thanks for your time.

Operator, we're prepared to respond to questions.

(OPERATOR INSTRUCTIONS). John Lawrence with Morgan Keegan.

Robert, I don't know if you want to take this or Cathy. By the time you get to the, say, second half of 2007 and a lot of these new initiatives and product displays that Cathy mentioned, how much of the SKU base will be affected or changed out, say, by the time we go into fall of 2007?

Our goal is to get around 40%. We think that's reasonable. We still need to allocate a considerable amount of our opportunities on the floor to reorder things that work, to continue to focus on key items, to insert seasonal and other things into the mix that will certainly be a part of the back half -- the customary things that you see, Halloween and Harvest and Christmas seasonal.

Cathy, we appreciate that detail on some of the things that happened for the spring offering. Can you just take a deeper dive into that? As you look at the spring program, what are some of the things so far where you think you missed the mark on the merchandise as far as either taste or that type of thing?

Where we missed the mark? I think that there are -- in terms of our learnings that we've looked at, I think there were some issues with pricing. I think we priced some goods a little bit too high, and I think that we also veered a little bit outside what we think our expertise is. So the stuff that was not home decor specifically related didn't perform as well, which is why our focus is now on better negotiating for better pricing, still offering the value, really focusing on the decor stuff and then identifying the key items upfront so we buy those deeper, and not offer as many SKUs because that becomes a little bit confusing in stores.

Really, we've done -- the Kirkland's Kitchen in the fourth quarter, which was a very quick start for us to try to learn quickly, and only Valentine's Day has truly completed its program at this point. The other stuff is all just setting or in progress or in season at this point.

(OPERATOR INSTRUCTIONS). Neely Tamminga from Piper Jaffray.

This is actually Erin Murphy for Neely Tamminga. I guess I had quick question just about the fourth quarter. Mike, you mentioned that conversion was up in the fourth quarter. Do you have the detail if that's new customers in terms of the conversion rate or if that's -- if you're seeing conversion up for your core loyal customers? I guess that's my first question. Then I have a couple follow-ups.

Can't really responded to that. That's very hard to gauge by just looking at the conversion data. What I can tell you is the conversion is much better in our off-mall venues. We were up slightly in the quarter, but it was driven by off-mall stores. I think, as we looked at the fourth quarter, one of the reasons our conversion was better is we focused in-store on collateral in the store to drive the guest to purchase when they walk in the door.

Erin, you might remember, when we were on the last call, that Cathy introduced a couple of ideas that we were doing. We had some handouts with some merchandise grouped and some really great looks, and we also had great ideas, great gift ideas that were both available to the customer. We think that really helped.

Cathy, for you, question with some of these new trend statements that has started being implemented. Now, do these transcend across the entire store? Are there pockets of the merchandise that just reflect these trends? How are you looking at the overall assortment as you implement some of these trends going forward?

I think there's a couple of different ways to answer that. There are certain things that make sense to go across the whole store that can touch on all the categories. So Gracious Elegance had a broad approach. There were textiles involved in it, there was furniture pieces, there were lamps, there was candles, there was art, so lots of different pieces that play to what we do.

Some of the things that we're bringing in -- Baby, for example, Wedding, and a lot of these seasonal things -- so Easter and Valentine's Day -- are going to be more specifically focused on pickup items. They might include our floral program and some elements like that but for the most part those will be giftable and will extend across the store.

The other thing we're doing that we didn't talk about was there were some items and some trends that we believe will work in certain parts of the country. We will be introducing those as we go into this spring season as well, focusing on big areas of opportunity that don't apply to the whole chain. Coastal is an example of that, and then the Western statement that we have that will come into the stores.

So we are taking a couple of different approaches in terms of doing what we think is right for the statement and then really taking a hard look at what we think is right for the different stores and treating them differently.

I would also say that another way to think about this is that these themes are not just sort of silo events that happen inside the store. Sort of the genius behind it is that it's all about traditional merchandise and degrees of traditional as Cathy mentioned in her statement. So you can mix and match and use those across the full spectrum; they work together.

There are a couple of items that we'll pull out of those programs that also go back into the basic line. So when we call pull together to showcase them in a way that one of our guests might want to decorate her home, a lot of those items will then become part of our everyday assortment if they prove to be successful items for us and we'll build programs in the categories off of that.

Just kind of following up on the first question, in terms of current business in Q1, can you comment maybe on how you're seeing furniture continue to perform or how that is trending, the category?

I think that this is one of the examples where we ran a very lean inventory and we focused on reducing our SKUs and we are working to get back into this category. Of course we think there are a still a lot of upside potential and we are our own worst enemy in this scenario because we don't have enough of it to be able to sell what we think we can.

Final question. Given the couple of key hires you have made in the last months as you've talked about as well, Cathy, can you just talk about maybe how you're looking at your time now, what are you major focuses, let's say in the first half of this year, given these two new people on board to help navigate through some of the turnaround?

We've talked about a lot of the different elements that are part of the strategy. While merchandise is certainly is it, there's a reflection of what we talk about from a guest experience and everything that we do. Our focus across our offices as a self-support center and global logistic center is really about supporting our stores and what they need to do the business that we need to deliver. So what we're talking about is that it's all about the stores but it's not about the stores. It's not what the stores can do, is what we can do to better support our stores. That plays across the entire organization.

So it's about making it easier to hire better people; what tools do we need to provide for that? It's about visually providing an exciting aura and environment in our stores that makes people feel that they can really help upgrade their home and add their own personality touches through the goods that we offer for them to decorate their houses.

So, as we think about all of the stuff coming together, we're actually focusing across the organization on how everybody can support that same goal. Now, with all these great hires, there's more opportunity for us to have functional responsibilities and accountability so that we can actually deliver the plan this year.

David Magee from SunTrust Robinson Humphrey.

Just a couple of questions, please. One is more of a big picture question. We've had several years in a row, I guess, where we've had the sector seemed to be in a funk and I'm just curious, as we look to 2007, do you see any -- see forces in place, reasons for optimism regarding the sector (indiscernible) your business?

Secondly, as you're now -- the majority of your stores are outside the mall and you are significantly remerchandising the stores, do you see a need to really focus on external marketing, out-of-store marketing? If so, how do you plan to go about that?

The sector, I guess you could say, since I guess we saw signs of this at the end of 2003, has definitely been in a tough place. We really haven't seen anything that leads us to believe things are going to change in the short-term. I think, kind of in response from time to time to that question, I've said that all we can do is do the best that we can on the things that we can affect. I think, clearly, as we said earlier, sometimes we have been our own worst enemy through this period of time. We clearly have done better off-mall with business even in a downturn. The question that you directed toward, do we need to be more focused outside in our message? I think we believe the answer to that is yes, and we are still struggling a bit to find the most effective way to do that.

For example, sort of early in this quarter we have done a couple of that FSI's that really didn't pop the business, and we had been very hopeful that they would. So I think as we've accessed that, we're trying to figure out how can we make that message more effective? I think what seems to drive the business even on the outside right now still continues to be value. So I think the customer in this sector continues to look for value, and I think the message has to be that in order to see a result.

Cathy, do you have any thoughts on that? You want to --? No? Okay.

Rob Wilson with Tiburon Research Group.

Cathy, have you thought about exiting any certain categories this year? Do you have any plans to do that?

At this point we have spent a lot of time walking through the rebalancing of the merchandise mix, and we have some thoughts about what we're going to do. We're not ready to share those, but we do think that the merchandise mix will change -- in response to some national industry trends as well as recognizing some opportunities that we have to further grow businesses we believe that we have had historical importance in, focusing really on the wall decor and other elements like that and working within the merchandise mix to do it. So, we have spent time thinking about it, but we're not ready to share anything at this point.

Cathy, you mentioned that you were low on furniture inventory. Is that primarily the only category that has a shortfall right now?

No, we're actually -- we were trying to manage our business down, and we probably took it a little too far. Framed art is another example. I shared a little bit of the detail with you. Each item is doing better, but we don't have enough SKUs. So we have gone out and, based on the lead times, those goods will flow in over the course of the next 30, 60, 90 days as we rebuild our inventory in we think is an intelligent way.

I wouldn't mention that some of the shortfall in furniture inventory was a result of a major transit damage problem that we had on some furniture that we expected to be able to sell in the first quarter and we weren't able to do that. So, we think our sales were significantly impacted in the quarter.

Much along those lines, Mike, embedded in your forecast or your guidance for the full year, are you forecasting potentially positive comp store sales in any of the quarters, Q2 through Q4?

I think if you look at that and you kind of -- there's a wide range, obviously. If you kind of look low to high, I think -- we do, embedded in that guidance, anticipate things to get better as the year progresses and approaching kind of a low positive comp projection toward the end of the year on the high end. But for the most part, it's more working our way back to stabilizing things flattish.

Capital expenditures for 2007 -- what should we expect there?

I think for 2007 you are looking at a little bit lower number that you saw in 2006, maybe $1 million, a couple of million dollars in terms of a good range there. We're not going to build as many stores, and there's not as many projects from a maintenance CapEX standpoint that we're going to be undertaking this year. So I think that's going to be probably $17 million, $18 million on the gross side. When you net out [$10 million] in allowance benefit, it's probably more like $7.5 million, $8 million.

The 53rd week -- what was the sales impact there so I can put that into my model for 2007?

Give or take, it's about $8 million.

And one final question, maybe for Robert or Cathy. Have you contemplated direct-mail as a way to drive traffic as opposed to FSI's?

We have actually thought about it. In fact, we have begun to execute a program where we believe that if we can capture people as they are moving into a home, it's a good time to catch them in terms of decorating. We are working with some of the marketing dollars that we had allocated to think about the best way to use it. So we have bill stuffers in our credit card statements. We have a direct-mail program we've started. We have some ads in Southern Living and Cottage Living, and then we are redirecting the money we were originally spending on the FSI, where we didn't see all the results, to try to figure out what the best way and the best appeal is. Then we'll do some analysis and research as those things come in so we can best determine where we get the best return on our investment. But we think it is a good opportunity for us.

We have actually begun to discuss the best way to get the address, most effective way both from cost and gathering good addresses to do that so that we would be able to be much more target-specific about that advertising. That's one already great contribution from Sharyn because she comes from an environment where that's done extremely well.

At this time we have no further questions. I would like to invite everyone one final chance to signal for questions today. (OPERATOR INSTRUCTIONS).

[Martin Mordeux] from [IDD Factors].

The question is have you met any resistance in the market in the extension of credit from suppliers?

No, sir. We really don't have that issue.

No, we haven't.

So all supplies have remained extending lines of credit to you, then?

Absolutely.

We have no further questions, sir. I'd like to turn it back over to you for any closing or additional comments.

Thank you very much, everyone, for being on the call. We appreciate your interest and look forward to talking with you in a couple of months.

That does conclude today's conference call. Thank you for your participation. You may now disconnect.