Brand House Collective Inc (TBHC) 2012 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Kirkland's Inc. second-quarter 2012 conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session.

(Operator Instructions)

As a reminder, this conference is being recorded, Friday August 17, 2012. I would now 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 second quarter of fiscal 2012. 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 of the accessibility of this conference call on a listen-only basis over the internet were released earlier this morning, in a press release that has been covered by the financial media. Except for historical information discussed during this conference call, the statements made by Company management are forward-looking and made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks and uncertainties, which may cause Kirkland's actual results in future periods to differ materially from forecasted results. Those risks and uncertainties are more fully described in Kirkland's filings with the Securities and Exchange Commission, including the Company's annual report on Form 10-K filed on April 12, 2012.

With that said, I'll turn the call over to Mike for a review of the financials. Mike?

Thanks, Tripp, and good morning. I'll begin with a review of the second-quarter financial statements and then finish with financial guidance for the third quarter, and our updated performance goals for fiscal 2012.

For the second quarter, net sales were $91 million, a 1.5% increase versus the prior year quarter. Comparable store sales, including e-commerce decreased 3.6%. E-commerce sales were $3.5 million for the quarter, a 111% increase over the prior year.

Comparable brick and mortar sales were down 5.8%, with average sales per brick and mortar store down 2%. For brick and mortar stores, the comp sales decline was driven by an 8% decrease in transactions, partially offset by 2% increase in the average ticket. The decrease in transactions resulted from a 6% decline in the conversion rate, combined with a 2% decrease in traffic count. The increase in the average ticket was the result of an increase in items per transaction, offset partially by a slight decline in the average retail selling price.

Sales performance by geographic area was relatively consistent across the chain, with slightly better results in the upper Midwest and Northeast, and weaker results in our Southwestern border stores. Merchandise categories contributing most of the comp decline were decorative accessories, wall decor, textiles, and frames.

In real estate, we opened 10 stores and closed five stores during the quarter, bringing us to 302 stores at quarter's end. 86% of the total stores at quarter-end were off-mall and 14% were located in malls.

At the end of the quarter, we had 2.1 million square feet under lease, a 9% increase from the prior year. Average store size was up 6% to just over 7,000 square feet.

Gross profit margin for the second quarter decreased approximately 140 basis points to 33% of sales, from 34.4% in the prior year. The components of gross profit margin were as follows.

First, merchandise margin decreased 70 basis points as a percentage of sales. Higher-than-expected promotional activity undertaken during the quarter in response to the soft sales trends, combined with additional markdown pressure, led to a lower-than-expected merchandise margin for the quarter. Inbound freight costs were flat to the prior year and had little impact on the year-over-year comparison.

Second, store occupancy costs increased approximately 20 basis points as a percentage of sales, reflecting the negative comparable store sales results.

Third, outbound freight costs increased 30 basis points, reflecting an increase in e-commerce sales, which carried higher shipping costs. Excluding e-commerce, outbound freight costs were flat to the prior year.

And fourth, central distribution costs increased 20 basis points versus the prior-year quarter, reflecting the comparable store sales declines, combined with the increase in e-commerce sales.

Operating expenses for the quarter were $30.7 million, or 33.8% of sales, as compared to $28.8 million, or 32.1% of sales for the prior-year quarter. 60 basis points of this increase was due to a prior-year bonus accrual reversal in the amount of $500,000. The remainder of the increase as a percentage of sales relates primarily to the decline in comparable store sales, combined with increases in healthcare, marketing, and information technology expenses.

Depreciation and amortization increased 50 basis points as a percentage of sales, reflecting increased capital expenditures, combined with the slight increase in total sales. Operating loss for the second quarter was $4 million, or 4.3% of sales, as compared to an operating loss of $0.6 million, or 0.7% of sales for the prior year quarter.

We reported an income tax benefit of $2 million, or 49.7% of pretax loss versus a benefit of $0.1 million, or 19.7% of pretax loss for the prior year quarter. During this year's quarter, a portion of the tax benefit amounting to approximately $400,000 related to federal and state employment tax credits received, that related to prior years in excess of our expectations.

Net loss for the quarter was approximately $2 million or $0.11 per share, as compared to net loss of $0.5 million, or $0.02 per share in the prior-year quarter. At the end of the quarter, there were 17,061,615 million shares outstanding.

Turning to the balance sheet and the cash flow statement, at the end of the second quarter, we had $49.6 million in cash on hand compared to $75.1 million at the end of the prior-year quarter, and $83.1 million at the end of 2011. During the trailing 12-month period, we repurchased 3.4 million shares of our common stock for a total of $40 million, completing the repurchase authorization that was established in August of 2011. Despite the softness in our sales trends and a planned heavy capital expenditure budget this year, we still expect to generate positive cash flow during 2012, excluding the impact of previous share repurchase activity.

Inventories at the end of the quarter were $49.8 million compared to $47.7 million in the prior year. Including e-commerce, this represents a 4% increase in total inventory above our expectations, due in part to the sale shortfall. However, e-commerce inventories have grown in support of continued strong business expected for the back half.

At the store level, we planned inventories conservatively throughout the year, and on a per store basis, we actually ended the second quarter down 2% versus the prior year. On a per square foot basis, we were down 7% year-over-year. Consequently, we were comfortable with our level of inventory entering the back half, and we expect to end the third quarter with inventories in the range of $62 million to $64 million, which represents our seasonal peak timeframe.

We continue to operate the business without any long-term debt and no borrowings were outstanding on our revolving line of credit at the end of the quarter. Capital expenditures were $10.7 million for the quarter, and included the following. $4.7 million for new store construction. $2.5 million for information technology projects including our Oracle merchandising system that is slated for go-live this fall, $2.4 million for store improvements, including the introduction of new more flexible merchandise fixtures that allow for better clarity of presentation, as well as the reset and refreshing of many of our older, smaller locations. $600,000 was for improvements in our distribution center to support better workflow and additional space for e-commerce fulfillment. And lastly, the remaining $500,000 spent during the quarter related to various routine maintenance capital expenditures.

The final item I'll cover before turning the call over to Robert is to provide our guidance for the third quarter and our updated outlook for the fiscal year. For the third quarter ending October 27, 2012, we expect total sales to be in the range of $97 million to $99 million, reflecting a range of comparable store sales results of down 3% to 5%, compared with sales of $89.7 million and a comparable store sales decrease of 3.6% in the prior-year quarter.

We expect gross profit margin to be down in the range of 150 to 200 basis points versus the prior-year quarter, reflecting a decrease in the merchandise margin, and due to higher inbound freight costs, as well as an expected promotional sales environment, combined with smaller increases in outbound freight, occupancy, and central distribution costs as a percentage of sales. Operating expenses for the third quarter should be above that of the second quarter by 6% to 8%, reflecting the seasonality of the business, and an increase in new store activity. Based on these high-level assumptions, we would expect to report a loss of $0.03 to $0.07 per share for the third quarter.

We expect to open 14 to 16 stores during the quarter, and close four stores. For the full-year fiscal 2012, we expect to open 40 to 44 new stores and close approximately 30 stores. This overall store activity would equate to unit growth of approximately 4% and square footage growth of approximately 9%.

We expect total sales for fiscal 2012 to increase 4.4% to 6% over the prior year. This expectation for total sales growth reflects the additional week in the retail calendar for fiscal 2012, which includes 53 weeks. This level of sales growth would imply comparable store sales in the low single-digit negative territory, excluding the impact of the additional week.

Based on our current outlook, we would expect operating margin for fiscal 2012 to be below last year, in the range of 200 to 250 basis points. Rising inbound freight costs will make merchandise margin gains more difficult to achieve in the back half than originally anticipated, and we are assuming a continuation of the promotional environment we saw in the first half of the year. Continuing investments in our technology infrastructure and business processes, as well as personnel additions in key areas of the business, will also provide operating margin pressure inside fiscal 2012.

With a tax rate assumption ranging between 38% and 38.5% for the year, we would expect earnings per share to be in the range of $0.72 to $0.82 for fiscal 2012. From a cash flow standpoint, we anticipate capital expenditures totalling $29 million to $32 million before landlord construction allowances for new stores. Approximately $16 million to $18 million of the total CapEx will relate to new store construction, $7 million to $8 million will relate to information technology, and the balance relating to distribution center improvements and store merchandise fixture enhancements, and other refurbishments.

Thanks, and I'll now turn the call over to Robert.

Thanks. The second quarter was not what we hoped for. The same areas of concern from the first quarter continue to affect business results.

Gross sales were up slightly versus the prior-year quarter, but comparable sales decreased 3.6% against a slight decline in traffic. Traffic was down 1% in off-mall stores, but down 3% in mall-based stores. Conversion negatively affected transactions and drove the comp decline.

Despite a stronger initial markup, merchandise margin for the quarter declined 70 basis points. As a result of heavier-than-expected promotional activity, prompted by the conversion decline, and our efforts to control inventory, both as to amount and composition, as we prepared to enter the second half of the year. Our store inventories are down 7% on a square foot basis and 2% per store versus the prior year, as Mike said. We're up slightly in total, due to store growth, but importantly, an increase in e-commerce inventories versus the prior year to support our early stage business, which is running ahead of plan.

As to category and large clients performance, art, table lamps, candles, large mirrors, pillows, garden gift and statuary had sale strong increases during the second quarter, furniture was essentially flat. Continued struggles in decorative accessories, ornamental wall art, frames and textiles strongly influenced the comp sales decline for the quarter. As we reallocate our inventory spend for the back half of the year, we will continue to see movement in down numbers in deck frames in ornamental wall decor, but our actions should result in a healthier business in each, in Q4 and beyond.

Considering first-quarter results in conversion and the prevailing economic climate, we planned a number of promotional events with hot prices on event-specific merchandise for the second quarter to drive traffic and sales. Some of the events were seasonally-related, like Mother's Day, Fourth of July, Father's Day, and Memorial Day. Others, like our semi-annual Big Sale and numerous one-day and weekend sales, gave us an opportunity to highlight sale opportunities in a smaller group of items.

We had the best Saturday before Mother's Day in our history and the event generally performed well. We believe we can improve results going forward with less seasonally-related merchandise. The same lesson would apply to Memorial Day and Fourth of July, as the patriotic, picnic and outdoor seasonal merchandise was highly promoted and competitive throughout the marketplace. Father's Day is a somewhat new target event for us, and was marginally successful, since it's a very limited holiday shopping period, and the merchandise is a tough fit for our store.

We also planned some new introductions and refocused some others. Early in the quarter, we presented a new to Kirkland's outdoor patio group, including outdoor and pool-related furniture, with mixed results in stores and better sales consistency online, where we see continued opportunity to expand that business. Concurrently, to support the outdoor group and our summer seasonal theme, we introduced summer fun, an eclectic group of outdoor entertaining and gift merchandise, with similar results, some very good, and some not so good.

Back-to-school runs through September. While we're still learning, and haven't seen quite the results we want in a relatively new to Kirkland's business. As with housewares and wedding, we're optimistic that we can complement our core business, bridge some seasonal periods, increase visits, and provide our customer with a meaningful assortment that adds interest and provides support to our year-round businesses. Our semi-annual big sale event is always focused on well-priced items with great value, and our prime categories continues to deliver outstanding results.

Kirkland's has always been item-focused, featuring new products at great prices. For spring, we aggregated and dedicated fixtures to some fun, highly giftable, well-priced, and often seasonally-related merchandise in a prime selling area in our stores, as an organized impulse area, aimed at building sales and ticket. Our early results have been favorable. We're still learning what works best, and we'll keep testing items, price points, and seasonality throughout the balance of the year.

During the first half, we executed multiple efforts to be seasonally appropriate, and to deliver event-specific merchandise at compelling prices, with a goal to build the traffic and sales, yet we did not meet or exceed the prior comparison period. It's hard to discuss results and especially conversion without referencing the protracted, somewhat dismal state of consumer sentiment, which actually seems worse today than what we experienced in Q1.

We sell a lot of fun and a lot of value, but we don't sell necessities. Our moderate-income customer is in year four of continued high unemployment, weak job growth, and a poor housing market. Our consumer faces the added specter of year-end political gridlock which may not be totally understood, but she knows it's not good news. Our customer's reaction since April has been to stay in the current job, spend less, pay down debt when possible, and save more.

As we previously said, we can't blame the environment. Many retailers have done well, and we all swim in the same ocean. So we must look for better performance from the customers we have.

As we take a high-level look at the quarter results, we probably overreacted to the questionable environment and planned and tried to execute too many promotional activities, buying too much event and seasonally-related merchandise, and thereby pressured our merchandise margins unnecessarily, which is correctable. Additionally, going forward, I think we can and will also plan our second-quarter inventory levels much more precisely, and lower to help our assortment and sales results.

Our Oracle retail enterprise system is less than 45 days from cutover, absent any last-minute problems. We don't expect instant rewards, but we're preparing well ahead of time to utilize this richer information deliverables. Just as we have augmented our corporate team for the Oracle implementation, we've been adjusting our merchandise planning and buying processes to take the earliest advantage of the system, and in order to use the information more effectively now with existing systems, even before Oracle goes live.

With this work over the past several months, we expect to affect our Q3 and Q4 buys significantly, with a much more data-driven process. Natural results should be more emphasis on our core items, fewer SKUs, eventually lower-running inventories, and a more consistent margin-rich business. We can accomplish this and still meet our customer's expectations on new and unique merchandise at great prices, while also providing a better stock position on best-selling items. If we match our merchandising talent with better information and better process, we're confident that we will find the merchandise consistency we seek.

We've noted in past calls that we clearly recognize the need to deliver a more effective and compelling marketing message through all mediums in order to build traffic and customer counts and maintain the sales and patronage of our existing loyal customer base. To that end, we've been engaged with a national marketing firm in a major branding project to provide the context for delivering our value message. Also, we've engaged and are now working with a new national PR advertising team to improve our new store opening effectiveness, in an effort to increase and maintain exposure and awareness of our new stores in both existing and new markets. As an essential element of that effort, we are realigning our in-store visual presentation scheme to maximize the impact of our investment and work in merchandising and marketing.

Also, we will complete, within the third quarter, the store fixture rollout that affects three-quarters of our store base, with retrofits and upgrades of additional or new fixtures, along with a position realignment designed to take advantage of 10 to 12 additional selling spaces created thereby. We hope to reassert our historic focus on transparency and value pricing, impact merchandising, and visual acuity.

We continue to progress in our early stage e-commerce effort. We're about to complete an expansion of the space allocated to e-commerce fulfillment in our distribution center. Our SKU count has grown to over 2,800, or about double one year ago. We expect to at least double our year one business within this fiscal year.

We're preparing to test business enhancements, like white glove delivery and third-party fulfillment drop ship, while continuing to emphasize and grow in-store pickup. Our original plan was for web exclusion -- web-exclusive merchandise to grow to and maintain at about 20% to 25% of the SKU set, but we have so far been able to maintain over 40%, a pleasant surprise. We're continuing to test web-based promotions to find our best and most effective opportunities, and the timing thereof. As we suggested would be the case for the first few years, a strong majority of our online sales come from geographic areas where we have stores, which presents another branding opportunity.

Our real estate plans for this year remain unchanged. In the third quarter, we expect to open about 15 stores and close 4 or so. And for the full fiscal year, it still appears that we'll open at least 40 or so new stores and close about 30, for about 10 net new stores.

We do expect a net gain in new store openings to begin to stretch significantly after 2013. It's too soon to opine much about the current class, but early results are good. Deals remain reasonably priced and space availability is adequate but not abundant, for better spaces in the most desirable strip centers.

We continue to be cautious in our outlook and guidance. While unsure of the timing, we have done and are doing a lot of foundational work and investment that will pay off, especially the fine tuning of our merchandise mix and reasserting our great price, style, and quality equals value message. As we've moved off-mall, I don't think our compelling price story stands out so much. We can't fix the world economic conditions, but we can fix that, and also buy better, so that's where we're concentrating.

That said, while we're rightfully cautious and conservative, we're also neither discouraged or daunted. We expect to return to Kirkland's previous levels of sales profitability and operating efficiency. We've completed our stock buyback well ahead of schedule, and still maintain and expect to maintain a strong balance sheet and cash position with no debt.

Thank you for your time and your interest in Kirkland's. And operator, we're prepared to take questions.

(Operator Instructions)

And our first question comes from the line of Brad Thomas from KeyBanc Capital. Your line is open. Please go ahead.

Let's see, I want to just follow up a little bit at a high level, in terms of what you're seeing out there. It doesn't feel like comps changed a great deal from last quarter, but did continue to moderate down a little bit more. A lot of references obviously to difficult consumer landscape, but how much do you think the consumer, versus perhaps the merchandise on your part not hitting the mark, versus the competitive landscape changing?

As I said, I don't think you can discount the moment that we're in, and have been for a while, with our customer. Depending on what you sell, and in dealing with moderate income customer as we do, you may find the result different than ours. But we don't -- as I said, we don't sell anything that's needed for life, so I think the customer makes decisions based on how much they have, and what their expectations and fears are, and what they feel like they can spend. And I think family and all the things related to family come first. So I think we are affected.

We, obviously with the work we're doing and the systems that we're putting in, specifically the work on process. We are aware that we can and must buy better, and more precisely, and continue to make gains in merchandise productivity, specifically sales and margin. And so that is a part of it, and we recognize it, and that's really the only thing we can affect. And we can also market ourselves better. I think the change, as I said, off-mall, I don't think our message that we have the best prices generally, stands out nearly as much in a group of large boxes that -- whether they are really low price or not, get some credit for that, based on the size of their box, what they carry, and what they are able to price, some of the things within their mix. So I think it's a combination of all of it, Brad.

Okay, and then obviously your guidance today gives us an outlook for store openings and mentions share repurchase. But in light of couple of quarters, things have gotten a little bit softer. Have there been discussions about perhaps either slowing down the openings or reining in the share repurchase just until we start to get more stabilization at the store level?

Well, Brad, on the store opening plan for this year, we're pretty much settled. We have leases for the most part that are final, and a lot of activity to come in Q3 and early Q4, with those openings. We still are in a position to affect next year and we're constantly monitoring trends in the business, and I think we've historically been a pretty conservative management team, and will continue to be so. So we will look at that. But as far as this year goes, we're settled.

We'll open the 40 to 44 and close the 30, and keep monitoring the business. On the buyback side, we did complete the $40 million authorization during the second quarter, and we will we will continually, as we always do, evaluate our cash position in light of all these investments we just went through on the call, and also have discussions at our Board level about what to, how to consider that. But we are always watching the business and that's first and foremost in our minds, as we make decisions about use of capital.

Brad, also, I would say next year, we only have I think five leases that we're committed to at this moment. So we'd like to get well ahead of our prior year, but I think we constantly look at it, as Mike said, and I can tell you that we'll be very careful about that.

Okay, and then just a housekeeping item. Mike, you mentioned the container rates being higher. As we model the back half of the year, what drag should we model in for gross margin associated with where container rates are tracking now?

Obviously, it's a constantly-moving target, but right now I would say 50 to 100 basis points. A little bit more in the fourth quarter than the third, because the recent increases won't really impact margins on that inventory, until it sells through in Q4.

Right. I think we've seen moderation in rates recently, so hopefully that continues.

As I said, it's a moving target. And you can rest assured, we're taking every effort to locate the best rates and move our goods across at the best price we can.

All right. Well, thanks so much, and best of luck.

Thank you, and our next question comes from the line of Joan Storms from Wedbush Capital. Your line is open. Please go ahead.

I have a question just with regards to the consumer sentiment. There have been some other -- and maybe also just related, to take a step back, your core customer, talk about your core customer versus the Pier One or William Sonoma or Cost Plus or a Bed Bath. Is your real estate location targeting really more middle than to middle-upper, and that customer you feel is being more negatively impacted than the others? Is that sort of--?

Well, I think if you ask us, we -- to describe the demographics of our customer, they would, they would fall in the $45,000 to $80,000, which would put us -- if you drew a line, a mean line through that, you would probably find Pier One on the upper side of that line, and we would probably would be in the middle to below that. I think we do get a slightly more moderate customer, and I think we have some of all of it, but predominantly we would see that customer, and I think they are more effected.

Okay, and then just as a follow-up, on the areas that have been weak on the dec-acc and the wall decor, and I know you had made some changes within the buying area. What are the lead times there? And I think you had mentioned you would expect some improvement in those areas, starting in the fourth quarter and into next year?

We do. We do expect some improvement in the back of this year, and especially as we move into the first half of next year. We have made some changes. And the changes are more about process and more about providing more focus to those categories, and making sure that they have adequate resources to do the best job that they can do. It takes six to nine months to change the [world] in a category, and that would be the best news.

When we were struggling with art back in the middle of 2010, I told everybody that we would fix the category, but expect it to take six months to a year. And it took about eight to nine months to really see the difference. So I think we will get that done, but it won't be apparent immediately. And as I said in the script, I think we'll continue to see some down numbers in dec and ornamental wall decor in the fourth quarter, even into the fourth quarter, and certainly in third, as we reallocate the spend, and some money will come out of those categories and be redirected to others. And that will promote some of that down result.

Okay. That's helpful. And then lastly, then I'll let someone else ask questions. Curious about your redesign of the interior of the store. Traditionally, you've had it set in certain ways with the category adjacency. What sort of changes should we look for there?

Well, I think you'll find it to be a much more open arrangement. It will be 90 degrees instead of a 45-degree oblique set, for when you walk in the store. I think you'll see more -- you'll have more vision across the store to the walls and to the back. In a lot of stores, you'll see some of the old fixtures that date back eight to ten years or more have been replaced. And so our stores will have a more uniform look, and they will also be able to be directed much better and much more precisely, with one set of directions, instead of two or three.

So we expect to get several things out of that. And one of the things that I mentioned is that with the set, we should generate, depending on the size of the store, three or four to eight to ten or more new selling spaces. And some of those will be directed to promotional opportunities and things that we need to reserve space for, in order to feature in our store, and others will take the overload that we have in other areas.

So we're actually going to benefit very nicely there by the way the set has occurred. We're also taken some large art cabinets off the floor that were very difficult to display and sell from, as well as to replenish. So it's not everything we're going to ever do in fixtures, but it's a great start to making our stores much more uniform and a little bit easier to work with. And hopefully shop.

Okay. What would be the timing for this to start?

We'll be finished with the reset by the end of the third quarter. We are already well into it. I would say we're 20%, 25% into it now.

Maybe a little more.

That's great. Look forward to checking that out. Thank you.

Thank you. And our next question comes from the line of David Magee from SunTrust Robinson Humphrey. Your line is open. Please go ahead.

Just first, a related question to Joan's. I'm curious if you've gone through the exercise of analyzing the stores, with regard to maybe being the markets that are number one, maybe where housing has turned a little more positive, or conversely, those markets in which maybe in definite, more moderate income areas. Are you seeing a real divergence in the chain from those factors, do you think?

I think we are. And I think we, I think we've noted some places where -- California has recently gotten a lot of press because they have had some areas that are really booming, and some that haven't started going yet. And we've had some really nice success out there in the past year with store openings. The market's a little better in Florida, and that's affected our results. Texas seems to be getting a little better.

The border -- we have a number of border stores, and they are a little bit of a drag right now over what they have been the last two or three years, due to the duty situation there. And I think some, some violence and robbery on the border that discourages shopping and bringing things back across. The border is always -- it's either really good or it's not so good, so I think that's affecting our Texas stores. But we're seeing out, especially in West Texas, and some of the stores that are not affected by over-the-border traffic, we're seeing really nice increases. Houston's still affected, and it is, as well as San Antonio, and both of those are border-affected. Upper Midwest, we've seen some nice increases, and so we're encouraged by that, but I think the thesis that some areas are recovering and when housing recovers we do better, I think is going to prove to be true.

Thanks, Robert. And secondly, maybe for Mike. Based on your guidance you've given for EPS this year, and the timing of stores and CapEx and inventory, would you care to give a ballpark figure on the cash balance at year end?

Yes, based on the guidance, I think it will be around the $70 million, $65 million to $70 million range. It's early. Q4, obviously as you know, weighs a lot on our business and impacts our results, but that's where I would say, based on the guidance.

Great. Thanks, and good luck.

(Operator Instructions)

Our next question comes from the line of Anthony Lebiedzinski from Sidoti & Company. Your line is open. Please go ahead.

First, could you just comment on your overall comp sales in your mall stores versus your off-mall locations?

Yes, malls are -- keep in mind, first, you're only talking about 40 stores out of the chain at this moment. But the mall stores are in the higher single-digit negative range, and the off-mall stores would be in the low single-digit negatives.

Okay.

So it's a small impact overall because it's only 40 stores, but they are underperforming.

Okay, and was wondering if you could comment, how much of your e-commerce actually sales resulted in store pickup?

It's around 45%, 40% to 45%.

Okay, and are you able to -- or what strategies do you have in place for your customer as she comes into the store, picks up the merchandise, to try to get them to purchase more products?

Well, they are certainly notified and the process is there to where the management team at the store level knows when the customer's coming to pick it up, and they can be prepared on that front, with complementary items, ways to entice them to buy more when they get in the store. And that's obviously a crucial part of the link in between e-commerce and our store business and one that we want to continue to get better at. There's a big opportunity there.

Okay. All right. Thank you very much.

Thank you. And our next question comes from the line of Matt Dhane from Tieton Capital. Your line is open. Please go ahead.

I was curious, what's, what do you believe is leading to e-commerce running ahead of your plan?

Well, it's, it's a rapidly maturing business. We launched it in late 2010, without a lot of fanfare. We didn't put a lot of marketing behind it. We started with a low SKU count. We've more than doubled the SKU count. We've added some marketing on websites, with search engine optimization and paid search ads. And we've gone after that in a bigger way. We've improved the visual aspect of the site. So there is a lot of things we've incrementally added on in this 1.5 years, since we really went live. It's hard to predict exactly what you're going to get, and we've been pretty close, but we've happily been a little bit over that plan.

I think the biggest change for us has been a dedicated team to both manage and buy for it. We have a lot of people working on it to make it grow and to maximize its results, whereas the prior time that we tried it, we were trying to do that as I guess an appendage of our existing business. And I think that was a mistake. And the way we're going about it now gets a lot of good work done that supports the business, and helps it grow.

Great. And as a follow-up, I was curious, how would you compare the margin structure for your e-commerce business versus your bricks and mortar?

On the merchandise side, it's pretty similar, but the freight piece I think weighs on the e-commerce margin a bit. So right now, at this level of volume, it's not as profitable as a top tier store, but we're starting to hit that point where that incremental revenue is dropping down to the bottom line at a good flow-through. We're past this base level of infrastructure we had to put in, so we knew that was the way it would happen.

We're profitable now on the site, which is a big positive, and we crossed that over several months ago. So, from this point forward, I think it can be more and more profitable, but the freight piece is the most difficult piece, as you hear and read about a lot, and we're dealing with that, just like everybody else.

Great. Thank you.

Thank you, and our next question comes from the line of Alex Fuhrman from Piper Jaffray. Your line is open. Please go ahead.

Was wondering if you could talk just a little bit about the decline in conversion, if you feel that was driven by the product, and then really how that trended throughout the quarter. And then obviously, most of your stores off-mall at this point, but was there any difference in conversion between the two different real estate formats?

The conversion between the two mall and off-mall was -- it's similar. I said down 6 for the company. It was basically down 6 for both mall and off-mall.

Okay, and was that pretty constant throughout the quarter, as you progressed, or did you notice that moving one direction or the other?

I would say it's been pretty constant. When we run a good, strong promotion on that particular day, you can see conversion improve a bit. But it's -- you lose some of that when you move off that promotional cadence. So I would say, just generally speaking, it was constant throughout the quarter.

Okay. Well, that's helpful. Thanks, guys, and good luck.

Thank you, and we have no further questions at this time. Mr. Alderson, I'll turn the call back over to you for your closing remarks.

Thank you very much for your time and interest and we look forward to speaking with you later. 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.