Brand House Collective Inc (TBHC) 2011 Q3 法說會逐字稿

Welcome to Kirkland's third-quarter 2011 conference call. (Operator Instructions). As a reminder, this conference is being recorded Friday, November 18, 2011. I would now like to turn the conference over to Tripp Sullivan of Corporate Communications. Please go ahead.

Good morning and welcome to this Kirkland's conference call to review the Company's results for the third quarter of fiscal 2011. On the call this morning are Robert Alderson, President and Chief Executive Officer, and Mike Madden, Senior Vice President and Chief Financial Officer.

The results, as well as notice to the accessibility of this conference call on a listen-only basis over the Internet, were released earlier this morning in a press release that has been covered by the financial media. Except for historical information discussed during this conference call, the statements made by Company management are forward-looking and made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks and uncertainties, which may cause Kirkland's actual results in future periods to differ materially from forecasted results. Those risks and uncertainties are more fully described in Kirkland's filings with the Securities and Exchange Commission, including the Company's Annual Report on Form 10-K filed on April 14, 2011.

That said, I will turn the call over to Mike for a review of the financials. Mike?

Thanks. Good morning, everybody. I will begin with a review of the third-quarter financial statements.

For the third quarter, net sales were $97.1 million. That is up 4.7% versus the prior year quarter. Comparable store sales decreased 3.6%, and average sales per store were down 0.5%. The comp sales decline was driven by a 4% decline in transactions, partially offset by a slight increase in the average ticket. The decrease in transactions resulted primarily from a 3% decline in traffic counts and a 1% decline in the conversion rate. The increase in the average ticket was the result of a 3% increase in items per transaction, partly offset by a decline in the average retail selling price.

From a geographic standpoint, we saw positive comparable store sales results in California, the upper Midwest and North Carolina. Results were below average in Texas and Louisiana. Merchandise categories showing positive comp performance were art, furniture, floral, textiles and gift. These increases were offset primarily by declines in alternative wall decor, decorative accessories and frames.

Our fall Halloween and harvest offering performed well during the quarter, recording a 7% increase over the prior year at similar merchandise margins to last year. E-commerce sales, which are not currently included in our comp base, were $2 million for the quarter, representing an acceleration of 25% from the prior quarter.

The business launched in November of 2010, so there were no e-commerce sales in the prior year period. In real estate we opened 13 stores and closed six stores during the quarter. At the end of the quarter, we operated 301 stores. 250 of these stores or 83% were in off-mall venues, and 51 stores or 17% were located in enclosed malls. At the end of the quarter, square footage under lease was 2,038,952, and that's an 8.1% increase from the prior year quarter. The average store size was 6774 square feet, which is a 6.5% increase over the prior year.

Gross profit margin for the third quarter decreased approximately 160 basis points to 37.2% of sales from 38.8% in the prior year. The components of reported gross profit margin were as follows. First, merchandise margin decreased 27 basis points as a percentage of sales. The decrease in merchandise margin was the result of higher rates of promotional activity and markdowns as compared to the prior year. As expected, declines in inbound freight costs helped to offset some of the promotional pressure on the merchandise margin. During the third quarter, inbound freight costs as a percentage of sales declined 87 basis points versus the prior year. We expect a similar year-over-year benefit from lower freight costs during the fourth quarter.

Secondly, store occupancy costs increased 36 basis points as a percentage of sales. This increase is primarily the result of the decline in comparable store sales and a reduction in the number of renegotiated leases versus the prior year.

Third, outbound freight costs increased 82 basis points as a percentage of sales, reflecting an increase in shipping rates, diesel fuel costs, as well as shipping and packaging costs associated with the e-commerce.

Last year's numbers for outbound freight do not include shipping costs associated with e-commerce due to the operation going live during the fourth quarter of fiscal 2010.

And lastly, central distribution costs increased 13 basis points as a percentage of sales, primarily due to deleverage.

Operating expenses for the quarter were $31.3 million or 32.2% of sales as compared to $29.1 million or 31.4% of sales for the prior year quarter. An increase in marketing expenses of approximately $425,000 versus the prior year quarter resulted in an increase in percentage of sales of approximately 40 basis points. Increases in utilities and telecom expenses, information systems, maintenance and support, and IT equipment leasing, combined with de-leverage from the comparable store sales decrease, accounted for the balance of the increase as a percentage of sales.

Depreciation was $2.9 million versus $3.1 million in the prior year quarter, a decrease of 39 basis points as a percentage of sales. The year-over-year decline in depreciation expense was primarily the result of extensions of store leases for which the fixed assets had already been fully depreciated.

Capital expenditures for information technology that have been made in recent quarters will not impact depreciation until the associated projects go live. For example, during the third quarter, we completed our rollout of new point of sales software to our stores. The inclusion of depreciation related to this project will begin in the fourth quarter this year and amount to approximately $100,000 in additional depreciation per quarter going forward.

We reported income tax expense for the quarter of $673,000, and that is 35.1% of pretax income compared to an expense of $1.5 million in the prior year quarter or 39.9% of pretax income. Net income for the quarter was $1.2 million or $0.06 per diluted share as compared to net income of $2.3 million or $0.11 per diluted share in the prior year quarter.

Turning over to the balance sheet and the cash flow statement, inventories at October 29, 2011, were $59.9 million, a 5.4% increase over the prior year quarter. We were pleased to end the quarter at the bottom of our guidance range of $60 million to $62 million. Per store, inventories increased 3.7% to $199,000 as compared to $192,000 in the prior year. Total store square footage increased 8.1% over the prior year. Therefore, on a per square-foot basis, inventories were actually down slightly versus the prior year.

As expected, our cash balance increased versus the prior year, despite a period of heavy capital investment and the initiation of a share repurchase program. We had $60.3 million in cash on hand at the end of the quarter with no borrowings outstanding under our revolving line of credit. Capital expenditures for the quarter were $9.4 million, consisting primarily of information, technology investments and the construction of 13 new stores.

For the year-to-date, capital expenditures were $21.2 million, of which approximately $12 million related to new store construction, approximately $7 million related to information technology, and the balance related to fixture enhancements and other maintenance-related items.

On August 19, 2011, the day of our last call, we announced the authorization by our Board of Directors of a share repurchase plan, providing for the purchase of up to $40 million worth of our outstanding common stock over the ensuing 18 months.

During the third quarter, we purchased 837,803 shares of common stock for a total purchase price of approximately $8 million, resulting in an average share purchase price of $9.50. The purchases were accomplished through open market trading subject to Safe Harbor guidelines and through the use of a 10b5-1 trading plan.

As of October 29, 2011, we had 19.5 million shares outstanding. Subsequent to quarter-end through yesterday, we had purchased an additional 80,548 shares of stock, resulting in a total of 918,351 shares purchased to date. Our approach to the repurchase plan will continue to be opportunistic.

Moving on to our outlook for the fourth quarter, given early trends in November, we expect fourth-quarter comparable store sales will range from down 5% to down 2%. Based on these assumptions for comparable store sales and the expected opening of eight additional net new stores, total sales are expected to range between $142 million and $145 million for the quarter. Merchandise margin percentage should be in the range of what we experienced in the prior year quarter, and given the expected decline in comparable store sales, gross profit margin should be slightly below prior year levels.

Operating expenses should track closely to sales and store growth. Given these assumptions, we expect earnings to range between $0.65 and $0.70 per share for the quarter.

On the balance sheet side, we expect inventories to range between $46 million and $48 million to end the fourth quarter. Excluding the impact of share repurchase activity, during the fourth quarter, we would expect year-end cash balances to range between $85 million and $90 million. We expect total capital expenditures to be between $25 million and $27 million for the full fiscal year.

For the full year, we now expect to open approximately nine net new stores, representing square footage growth of approximately 10% versus the prior year. We are pleased with the results we are seeing from the new stores that we have opened thus far. The new stores continue to exceed our expectations for first-year sales volume and profitability.

We are also in the process of changing service providers for our private label credit card program. The current program will come to an end after the holiday season, and we will be relaunching the program in January 2012. We are excited about the relaunch and believe it will help ignite new enthusiasm for the program and ultimately generate incremental sales in 2012.

Before turning the call back over to Robert, I will -- I also wanted to announce or to provide an update on some of our technology initiatives. As we have discussed on many occasions, we are in the midst of a major transformation in terms of our technology and the tools that help us run our business. During 2010 we introduced a new e-commerce platform and launched the new website, along with direct to consumer selling.

We also implemented a new financial reporting software system and went live with it effective at the beginning of this fiscal year. During the first half of 2011, we deployed new point-of-sale hardware in the stores in the form of new cash register equipment and back-office servers to support the upcoming software launch. And during the third quarter of 2011, we completed the full rollout of a new point of sale software system to all of our store locations, a major accomplishment for our information systems and store teams.

We are in the midst of the development phase of our Merchandise Management software project. Our Merchandise Management system is the core of our information systems, the system of record for our inventory. As such and due to its heavy interaction with all of our other systems, the project has a high degree of complexity. We are optimally planning for a mid-2012 to early fall 2012 cut-over date. This system will be transformative for Kirkland's in terms of how we buy and assort, allocate and deliver goods to stores, ultimately helping us drive sales and merchandise margins. We expect a constant flow of new projects that will keep the technological capabilities of Kirkland's state-of-the-art and in sync with how customers want to do business.

I will now turn the call back over to Robert.

Thanks, Mike. We were gratified for the gradual progress in our business during the third quarter. Sales in merchandise margin were improved during the quarter and produced the sequential lift in comparable sales and earnings per share that we reported today.

We realized much of that improvement during the second half of the third quarter with nice improvement in virtually all common sales metrics that we used to track our business. We did have slightly easier comparisons in the latter weeks of the quarter, but that was not the major driver of improved results. We were very pleased to see an improvement in traffic during the back half of the quarter and to see positive trends in our average ticket, both of which have been a concern for several quarters.

Merchandise productivity is always at the heart of sustained profitability. During the quarter, framed art, furniture, floral, textiles, gift and seasonal produced strong comparable sales results -- increases. Framed art has received great attention from our merchandising leadership and investors over the past several months due to its share of contribution to our annual sales. We reported progress in the second quarter in merchandise margin in the category and were pleased to see both a mid-single-digit comp increase and over 200 basis points increase in merchandise margin for the category in the past quarter.

Another focused category of the past several months, furniture, had a strong sales performance and enjoyed stable margins. Our concentration on improved quality, style, scale and function continues into the spring 2012 season as we build on that success with new introductions and feature the category more prominently both in-store and online.

Gift and seasonal were strong contributors during the quarter. Our Halloween harvest seasonal performed extremely well on both the sales and margin lines and exited on time and according to plan. As was also true last year, Christmas seasonal sales have started more slowly; however, it is early in the season. We have strong confidence in the freshness, scale and appeal of the seasonal mix. We will report more fully on Christmas seasonal results in our next call.

Our new impulse area near the cash [wrap] shows early promise as a strong sales contributor and will be deployed and funded beyond the Christmas season.

As we discussed on our last call, we are in the midst of a major overhaul of certain classes of alternative wall decor and wall collage frames with a major inventory down size and recasting underway, extending into the first half of next year. We will reinvest that inventory spend on a variety of categories and ideas to support improved results.

Lamps and decorative accessories, both key, large, core categories will continue to be areas of strong focus for improved results going forward. The formula for improvement is really the same. During the first quarter, we will introduce a substantial number of new, more stylish items featuring new materials, shapes, colors, larger scale and while still delivering great value and quality to our customers.

The effort to improve our merchandising productivity across all categories is intense and ongoing. We are adding capability and experience to our team of new buyers to add focus to expanding categories and looking for new ways to use our messaging vehicles in-store and online to support merchandise sales.

We are at the end of the first 12-month period of operating our new e-commerce channel. We have approximately 2000 SKUs for sale with approximately 30% being Web exclusive. Our initial operating metrics are solid and suggest continued investment in expanding our platform capabilities and third-party partnerships, our SKU offering, our marketing effort and our fulfillment ability, including White Glove home delivery. We very recently installed the Omniture Analytics software to help us better understand our online customers and their preferences and our online business and help us react more quickly and efficiently to our Web-based opportunities. We are planning the significant sales and SKU growth in this channel over the next three years. Our goal remains a customer experience seamlessly and well supported by either channel.

Recasting our store base to strip center stores and new store growth continue, but landlord-related delays still hamper our 2011 growth plan. We have revised our expected net new store plan for this year again, due to the series of delays in transferring possession of space.

New strip center development continues to lag and may not restart and be a factor for a number of years. Our financial stability and strength, as well as our ability to flex on space size and react quickly to deal opportunities, continues to put us in a good position to capitalize on space opportunities at historically favorable occupancy costs. We now expect to add about nine new stores net this year versus the 20 we projected at the beginning of the year. Our square footage growth continues at about 10% for 2011, and that seems a relatively safe goal for 2012.

Based on what we hope results in a strong early start to the 2012 class, in an effort to expand the universe of available deals for the period, we project that we can return to the net 20 plus level of unit openings next year, while continuing to maintain favorable lease terms.

The 2011 class now expected to be 34 in total number has a large number of Q4 openings relatively, including several which will open in January, the last month of our fiscal year. While not optimal or desired, late is better than not at all as the opportunities seemed worthy.

Therefore, the performance of the class is not as transparent as we would have hoped at this point, but we still expect it to reasonably mirror the 2010 class in both sales and contributions. Our commitment is to remain intent on each and every deal being prudent and very profitable and to always value quality over quantity.

The holiday selling season is underway. We are prepared for the season with merchandise, messages and margin to drive our business. As in the past three years, we believe the holiday shopper will again be cautious, deal-driven and late with their spending. Exactly when the shopper breaks loose with strong spending during the season is anyone's guess at the moment. But we are prepared to and expect to do our share of the business both before and after Christmas. We are also ready for the post-Christmas in January sale and clearance period with strong offerings.

Thank you for your time and interest. We are prepared to take questions.

(Operator Instructions). Brad Thomas, KeyBanc Capital Markets.

I wanted to first talk a little bit about your comp guidance for the fourth quarter. It sounds like things improved as you went through the third quarter yet -- and you have a much easier comparison in the fourth quarter. What is it that leads you to give comp guidance that is in a similar range to your total comp for the third quarter?

Well, I mean the first place we start is the trend that we are experiencing up to now, and that trend would suggest that we are right smack in the middle if not slightly higher than the middle of the range that we gave. Do we have opportunity as the core progresses? We think we do. December was a tough month for us last year, and we have got a seasonal offering that can support some sales this year. But, at this stage, we really wanted to keep it within the trends that we are seeing, and that was the basis for the guidance.

Okay. To follow up on that, it sounds like there are some categories that you have seen a nice improvement in results. Can you just talk a little bit about the category mix in the fourth quarter, and does that play out to be any sort of a benefit or a detriment relative to what third-quarter trends have been?

Well, I think we saw, as I said, some improved merchandise performance in the third quarter. I would hope that the work that we are doing in all those categories -- framed art, furniture, textiles, floral -- as well as the ones that we are trying to rehabilitate -- and that specifically is alternative wall decor, our wall frame collages, our decorative accessories and lamps -- we would hope that the work that we are doing will see continued progress in the fourth quarter. But much like we did with framed art, we called that one out several months ago and said we have a lot of focus on this, and we are doing a lot of different things to improve that category. And I think in the fourth quarter -- and the third quarter, we saw the benefit of both margin and sales -- nice sales increases that were good and reflective of the level of work and the depth of work that we had done. So I hope we see that.

A lot of it depends on in the fourth quarter on how well seasonal does. It's a big piece of our business. We feel really good about it. It is just really early. We are just past Veterans Day weekend, and we have the Thanksgiving weekend coming up next week. So, if this call came after that, I could tell you a lot more about it. But I feel pretty good that we will see that performance improvement. But it is a little early, as Mike said.

Okay. And then I wanted to follow up about the new store productivity. It sounds like you are still pleased with the results. At this point I think we are starting to get a little bit more of your store base getting into the comp that you have opened over the last few years. What is it that you are seeing about a recently opened or reopened store as it gets into year two and enters the comp base, and if you could also just remind us, at what point in time do those newly opened stores enter the comp base?

The comp definition is 13 full fiscal months. So that is when they roll in, and that is for every new store. Whether it is a replacement or a new market that we are going into, they are all treated the same.

As for what we are seeing in terms of the comps, I would say generally speaking that the comps for the new stores are in line with what we are seeing in the Company. They are -- one thing to remember there is they are heavily dominated by replacements and existing markets. So to the extent a replacement store behaves differently than a new market, which we believe it does, I think you will see it tracking closer to the Company in that case. Whereas a new market, I think there is a two, three-year maturity ramp as the awareness gathers and people realize that we are there and in the market.

And then just one last follow-up on that new store productivity. In your last three quarters, your topline results have run about 8% to 9% above what your comp has been. At the end of the year, the square footage growth will be pretty high. Your guidance, I think, implies a little bit lower rate. Does that just have to do with the timing of the new store openings in the fourth quarter, or is there anything else that we should factor into our assumption for new store productivity for the fourth quarter? I just want to make sure we have a proper understanding.

Yes, I think that is primarily timing. We have several that are opening late this year.

Okay. Sounds good. Thanks so much, Robert, Mike, and best of luck this holiday season.

Annie Erner, P.A.W. Partners. David Magee, SunTrust.

Just a couple of questions please. First, you may have said this and I missed it, but how much of the mix does seasonal comprise this year versus last year? Has there been a meaningful change there?

Not a meaningful change. We bought it up high mid single digits. We did so based off success in the prior year and also because we had some higher retails in this year's offering in slightly fewer SKUs. So yes, it is significant, but not terribly more so than last year.

Would you say it is 30% or 40% of the mix during the holidays?

It is not that much. It is 20%, low 20%s. I think you are talking about given that we did buy it up this year, you are probably talking about a couple of percentage points of the total mix in terms of that shift, if that makes sense.

Okay. How much did you all buy in terms of opportunistic merchandise, stuff that you could really promote well, say, versus last year? Is that something that is an advantage that you might have this year?

We have a few, but not a significant percentage. Probably one of the best examples is table picture frames that we got a really nice opportunity buy on. But that is something that has been very difficult for us to execute because we don't have a continued presence with a buying group on the West Coast. We also have tremendous competition for those opportunity buys.

And then lastly, as you look at your performance at the stores across the base and certainly there is a range of performance that you see out there, are you seeing common characteristics at the better end in the stores out there that are outperforming better than the chain? How would you describe, if you can, any common characteristics?

I think recently we have seen a little bit of drop in performance both in the traffic and financial line on some of our mall stores. They appear in recent weeks to be as we get into the season to be a little weaker vis-a-vis the strip center stores. We have done really well in some of our new markets, as Mike mentioned earlier. Been strong in California, the upper Midwest, got some new leadership that has done a really nice job over in the Carolinas. We have a lot of those opportunities in next year as we continue to improve the store and field leadership and to, I think, do a better job on the visual side as it will be a really big effort, which provides an opportunity.

The better income markets, if you -- we have not really dug that deeply in, but just looking somewhat superficially with our merchants, we have seen a little bit better performance in some of those markets, which would imply that the more affluent customer is a little bit more able to spend right now or a little bit less cautious at the moment. There seems to be a little bit of a dichotomy in the average income shopper. Some are still cautious, and some are still willing to spend. When you look at some of the savings rate changes among that group, it's a little bit mixed. So some are spending, and some are not.

But really, as you look at the fourth quarter, it ought to be a little bit like last year because not much has changed. We try to be better with our merchandise and try to take advantage of the system better with our messaging, with our going in margins, and the messages that support it and be sharper in events and try to gain our marketshare that way. But, on the consumer side, we don't think it is going to be a lot different.

Great. Thanks, Robert, and good luck in the holidays.

Anthony Lebiedzinski, Sidoti & Co.

A couple of questions here now. Could you just remind us how the fourth quarter of last year, how it trended by month either -- I don't know if you can quantify that -- but maybe just give us a flavor as to what kind of comparisons are you guys facing?

I will try. We don't give monthly comps out, as you know. But, just in speaking to the flow of business last year, the toughest month of the three was December, and that is a five-week month and means a little bit more to the quarter than the other two. And then you had mid single-digit performance in the other two months negative.

Okay. That is helpful. And in the second quarter, you also called out that Texas and Louisiana were underperforming markets for you. Can you explain why do you think that is the case, and what can you do to address those issues?

I cannot say that there is anything really unique. I think there has been some economic struggles down in Louisiana area, post-oil spill, and that had an impact on our business. But Texas is a diverse state for us. We have almost 60 stores in the state, and we have struggled a bit on the border with some of the issues down there. We have a lot of stores on the border, and that has held us back, and we are up against some pretty tough numbers there in Texas. So it is hard to pinpoint exactly why that is the case, but you have got to point back to that that state has a diverse set of stores in it, and we are up against some really good results last year and in the year prior.

Surprisingly, Dallas, a market that you would think would stay really strong, has been -- and a little bit in Houston has been a source of a little of that weakness, but Mike is right. Down on the border has been where it has been most pronounced, and it is fairly obvious from the news what has driven some of that.

Okay. Thanks for that clarification. And then as far as the store openings next year, I think, Robert, you said that you expect at this point net of 20 for next year. Any ideas as to the timing of the new store openings? It looks like you have had some issues with this year, so could you see perhaps the next year openings being more front-end loaded?

I can see it, and I have said it for a couple of years that I expected that to happen, and I do, again, in 2012. But it has not actually turned out that way, and I don't want to promise. All I will say is that we are encouraged that we think we can be off to a stronger first-half start in openings, and what I would say about that is we have north of 20 leases either assigned or committed. But getting those to a transfer of space and ability to construct is typically where a lot of retailers are finding the sticking point.

And the second part of that is that we have about seven stores teed up to actually open in the first quarter. I think we probably did not open that many in the whole first half of this year. And if they all open as they should, we really will be off to a good start.

I think there is a little -- and I think one of the things that gives us a little bit of sense that things are a little better is that on space availability I don't think will change that much next year. We are seeing a bit of momentum build among the landlords in their ability and their inclination to break up large spaces. I think they are learning how to do it and getting accustomed to doing it and recognizing that there is really not going to be a single user white knight to come along and take up that space. So I think that is going to free up some space next year and maybe a little bit earlier than we have been seeing it in the past.

Okay. And lastly, just a housekeeping question. Can you give us a break down of mall versus off-mall stores at the end of the quarter?

Yes, at the end of the quarter, it was 250 off-mall and 51 on-mall.

Alex Fuhrman, Piper Jaffray.

A couple of questions here for you. First of all, it really looks like over the last couple of quarters conversion has somewhat stabilized. That had been down a lot it seemed like in the fourth and first quarter, not so much here in the second and third quarter, despite the fact that your inventories are actually probably in better position now. Do you attribute that to better merchandise or just more productive traffic coming into the stores? Is there anything that you are seeing there?

Well, I hope it is a combination of both. I don't know that I could tell you that it is one or the other.

Okay. Then e-commerce, I mean it seems like this is actually starting to generate a pretty significant amount of revenue here just a year out of the gate. I'm just curious to get your thoughts on how that plays into the broader multichannel strategy? Have you seen that that has mostly been used for a full-price selling or clearance, and does that enable you to be more nimble with your inventory position where everything is warehoused? And I guess building on Brad's comment from earlier, it does seem like the spread between comp and net sales here in Q4 is a little wider than we might have thought. Can you share maybe how much e-commerce revenue is baked into that guidance number for Q4?

Not any except for the -- what you want --

Yes, we do have some baked in. Obviously this is going to be the first full fourth quarter we have run the business. I think you can expect that it is more than third quarter that we have got baked in there. But we have not disclosed that in the past, and I'm not going to start now.

And I think the point is, is that in terms of how we look at the quarter, we don't think the e-commerce is going to move this fourth quarter. Next year as we begin to build sales and sales momentum and we add more SKUs and we add partnerships and other abilities and capabilities to that channel, then I think we will begin to see where it really makes a difference. But, as we look at this quarter, I don't think that is a really big factor. We are going to do all the business obviously that we can do there, and it will be decent for the level of SKUs that we have. But we have a lot of growth to do there, and I think that we are going to begin to see that next year.

Great. That all sounds good. And then just a couple of little housekeeping things. You said outbound freight here had a positive impact. There had been headwind for a while. Now that is a tailwind and should be so in Q4 it sounds like. Heading into next year, is that something that you would expect to continue to be something that is going to help out gross margin in the first half of the year?

First of all, just to clarify it, it is inbound freight that we had the benefit, and that is part of our merchandise margin as you are looking at the breakdown. So it was inbound freight, container rates coming from overseas. And yes, I mean we saw some benefit in Q3. We expect benefit in Q4, and that is playing out as we anticipated.

As we get into next year, while it is a little early to project what the containers are going to be costing us, what we have seen over the last several months is a stability in that pricing that we did not see for the prior two years. There was a lot of volatility.

It seems like at least at this stage as we go into next year that that is going to be a little bit more stable, and it will not swing our results as dramatically as it has in the last several quarters.

Great. And then just one last quick question for you guys. I think you alluded to 10% square footage growth again next year. Any idea what that might be in terms of just unit growth?

Next year -- I think Robert in part of his comments mentioned a net 20 number. If we were to achieve a net 20 next year, I think the square footage growth would be a little bit north of 10. It would not be at 10. It would be closer to 15.

And I said I thought that 20 plus or so was -- that is the goal, and I think it once -- it always depends on availability. And I think if you ask any retailer that is opening new stores today, they would tell you that that is a bit of an uncertainty in their planning. It is really what opportunities do you have and how quickly can you realize those opportunities.

Great. Well, thanks, guys, and congrats on the progress you are making. Looking forward to checking out the stores this holiday.

(Operator Instructions). Bill Dezellem, Tieton Capital Management.

A couple of questions, first of all. Relative to the categories that you will be rejuvenating going forward or are in process of now, to what degree is there merchandise that still needs to be liquidated, and how do you anticipate that impacting both sales and margins as they would be reported externally?

Well, I don't think it is a significant factor. It is not something that bothers us in terms of projecting margin in the first half of next year. I think what we do, we have a process here, and we review literally every item every two weeks to 30 days depending on the category and the volume of that particular category or class. We take action on it to either reorder it or let it sell out normally or in some cases mark it down, and we are pretty aggressive about our first mark. And we have a markdown cadence that moves inventory, I think, very quickly. We don't move it anywhere else. We deal with it in the store. I don't -- I think we are well, well underway, if you will refer back to my remarks, I said we are well underway in the downsize of commitment and actual inventory in those categories where we intended to take the spend down, and we have already reinvested in other categories. And we would expect hopefully to see more productivity from that spend in the first half of next year.

That is helpful. Thank you. And then housekeeping question, other current assets were up a couple of million bucks from the Q2 and somewhere in the neighborhood of $3 million versus year ago quarter. What are the components of that?

The primary one there is timing of landlord construction allowance receipts.

So this (multiple speakers)

We have a larger receivable out there this year, and it is a timing-related matter. We will collect those allowances through the fourth quarter and make sure all of that is in by the end of the fiscal year.

Mr. Robert Alderson, there are no further questions. I will now turn the call back to you.

Thank you very much, everyone, for your interest and being on the call, and we look forward to talking to you after the fourth quarter. Thanks.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.