Brand House Collective Inc (TBHC) 2014 Q1 法說會逐字稿

Ladies and gentlemen thank you for standing by and welcome to the Kirkland's Inc. first-quarter 2014 conference call.

(Operator Instructions)

As a reminder, this conference is being recorded, Thursday, May 22, 2014. I would now like to turn the conference over to Tripp Sullivan of Corporate Communications. Please go ahead, Sir.

Good morning and welcome to the Kirkland's conference call to review the Company's results for the first quarter of FY14. 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 notes the accessibility in 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 the company Management are forward-looking and made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risk and uncertainties which may cause Kirkland's actual results in future periods to differ materially from forecasted results. Those risk 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 17, 2014.

I'll now turn the call over to Mike for a review of the financial results. Mike?

Thanks, Tripp. Good morning everybody.

For the first quarter, net sales were $108.3 million at the 6.9% increase versus the prior year quarter. Comparable store sales including e-commerce sales increased 5%. Comparable brick-and-mortar sales were up 3.7% despite the impact of winter weather early in the quarter.

During February and through the first week of March, we lost 90 store days and an additional 225 days were delayed or closed early due to the weather. Weather became less of an issue as the quarter progressed.

E-commerce sales were $5.4 million for the quarter, a 38% increase over the prior year quarter. At the store level, the comp sales gain was driven by 3% increase in transactions combined with a slight increase in the average ticket. The increase in transactions resulted from a 4% lift in the conversion rate, partially offset by a 1% decline in traffic. The increase in the average ticket was the result of an increase in items per transaction that overcame a small decline in the average unit retail price.

From a geographic standpoint, sales were generally strong across most of the country, particularly in Texas, Florida and throughout the Southeast. Most merchandise categories recorded strong sales performance during the quarter, most notably textiles, lamps, housewares and holiday. These increases were partially offset by declines in outdoor living, frames and floral, relatively small categories.

Of the 324 stores at the end of the quarter, 91% were in off mall venues and 9% were in enclosed malls. At the end of the quarter, we had 2.44 million square feet under lease, that's a 5% increase from the prior year. The average store size was up 3% at 7516 square feet.

Gross profit margin for the first quarter increased 40 basis points to 39.4%. The increase was primarily due to an increase in our merchandise margin, which increased 80 basis points to 55.9%. As expected, lower year-over-year inbound freight costs helped our merchandise margin during the first quarter, providing a benefit of approximately 45 basis points.

Aside from the inbound freight tailwind, merchandise margin improved due to lower markdowns, promotional discounts. The earlier part of the quarter provided the largest portion of the year-over-year merchandise margin lift. Promotional activity picked up later in the quarter over the Easter holiday period, lessening the year-over-year gain.

Store occupancy costs decreased 10 basis points versus the prior year quarter, outbound freight costs were up 25 basis points as a percentage of sales, primarily due to an increase in the e-commerce business. Rate pressure on distribution center to store truck routes also contributed to the increase. Central distribution costs were up 25 basis points as a percentage of sales, reflecting an increase in labor cost associated with the expanding e-commerce business.

Operating expenses for the quarter were $34.9 million, that's 32.3% of sales as compared to 32.4% of sales in the prior year quarter. Comp leverage provided decline in various categories of expenses as a percentage of sales particularly store payroll, our largest operating expense, which declined 24 basis points as a percentage of sales versus the prior year.

We also continued to see positive trends in our self-insurance reserves, reflecting better Workers' Compensation and general liability claims experience. These benefits were offset partly by an increase in marketing expenses of about $300,000 versus the prior year, $230,000 in severance benefits related to the departure of our former SVP of supply chain. And an increase in corporate headcount and operating expenses associated with our multi-channel initiatives.

Depreciation and amortization increased 23 basis points as a percentage of sales, reflecting the increase in capital expenditures in recent fiscal years and the implementation of major technology upgrades. Income tax expense was $1.3 million, or 39.1% of pretax income versus expense of $1.1 million or 37.3% of pretax income recorded in the prior year quarter.

Turning to the balance sheet and the cash flow statement, at the end of the quarter we had $82.4 million in cash on hand, compared to $74.1 million at the end of the prior year period. This increase in cash reflects the improvement in our operating performance along with the reduction in capital expenditures last year.

Inventories ended the quarter at $50.7 million, reflecting an increase in total inventory of 6% over the prior year quarter. Per retail store, inventories were up 1.6%. The remainder of the increase relates to an additional seven stores versus the prior year and the growth in the e-commerce business. At quarter end, we had no long term debt and no borrowings were outstanding under our revolving line of credit.

For the first quarter, cash provided by operations was $221,000, reflecting the improved operating performance but offset by working capital shifts such as increases in income tax payments and incentives bonus payouts versus the prior year. Capital expenditures were $6.9 million for the quarter due primarily to an increase in new store openings at seven this year versus one last year and the launch of our multi-channel order management system project.

As part of our release this morning we also announced the authorization by the Board of Directors of our share repurchase plan providing for purchases in the aggregate of up to $30 million for our outstanding common stock over the next few years. With improving trends, the strength of our balance sheet and cash position, our ability to generate cash and our positive long-term outlook for the business, we see the share repurchase authorization as an opportunity to return value to shareholders in addition to continuing the investments already begun in stores and online.

Turning to our guidance for the second quarter of FY14, we expect total sales to be in the range of $104 million to $105 million which reflects an increase in comparable store sales of 3% to 4% compared with net sales of $97.1 million and a comparable store sales decrease of 0.2% in the prior year quarter. We anticipate opening eight stores and closing two stores during the quarter.

Early in the second quarter, comp sales trends continued to run positive. However much of the quarter remains in front of us including our big semiannual sale event in July. Traffic trends continued to improve sequentially and are now essentially flat on a year-over-year basis, while merchandise margin continues to be slightly over the prior year, albeit not at the levels reported in Q1.

Encouragingly, and similar to last year, we were able to secure fixed container rates through the spring of 2015 that are slightly lower than our current rate. As a result, we do not expect inbound freight have a negative impact on our merchandise margin during FY14 or into early FY15.

We anticipate operating expenses to increase 7% to 9% during the quarter, reflecting higher depreciation, corporate personnel and e-commerce expenses. As a result, we expect a loss of $0.03 to $0.06 per share as compared to a loss of $0.03 per share in the prior year quarter. Inventories at the end of the second quarter are expected to be up slightly versus the prior year, in total, due to a higher store count but flat on a per store basis.

For the full year FY14, our topline and earnings guidance remains unchanged and does not take into account share repurchase activity. As far as our margin and expense assumptions for the full-year, we expect inbound freight costs to be slightly lower on a year-over-year basis for the balance of the year. Excluding the inbound freight impact, we expect merchandise margin to improve year-over-year as we continue to leverage the investments made in merchandising systems and processes.

Sales leverage will serve to offset increased expenses in corporate personnel, e-commerce, multi-channel capabilities. We expect marketing expenses to approximate that of last year, or increase slightly as we refine our branding activities and focus on the most successful components of the tests we performed last year.

We've now signed a lease for our corporate office relocation and this relocation's expected to begin in the summer and be complete by the end of Q3. We estimate that the relocation will have an impact of approximately $0.03 to $0.04 during the back half on our operating expenses.

Our 39% tax rate assumption reflects the lack of certain job tax credits, such as the work opportunity tax credit that have yet to be renewed by Congress. Should Congress address the renewal of these credits this year, we will record a credit to the tax rate during the quarter in which the credits are reinstated.

From a cash flow standpoint, we still expect to generate positive cash flow for 2014, excluding share repurchase activity. Do not anticipate any usage of our line of credit during the year and expect capital expenditures to range between $33 million and $36 million in 2014 before landlord construction allowances for new stores. As I mentioned last quarter, these CapEx assumptions reflect the increase in store openings, the office relocation, multi-channel and information technology projects and distribution center enhancements.

We currently estimate that approximately $17 million to $18 million of the total CapEx will relate to new stores. $9 million to $10 million relate to multi-channel capabilities and information technology. $2 million to $3 million will relate to the distribution center and supply chain. The balance of our CapEx relating to the office relocation and maintenance items.

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

Thanks, Mike. Good morning everyone.

We had a very good quarter, featuring a strong comparable sales gain and earnings per share at the top of the guidance range, overcoming a slow start to the quarter from persistent cold temperatures in most of the country and another series of mostly February winter storms. Our business improved nicely in March and only moderated slightly in April as more normalized weather patterns finally signalled the advent of spring.

We were perhaps most pleased to see store traffic continue at steady improvement to almost flat to the prior year resulting in a positive sequential impact on transactions that should continue throughout this year. All in all, it was a very solid and balanced performance and continues to suggest that Kirkland's is providing its customers with an improving and compelling merchandise mix and store experience.

The incremental improvement in merchandise margin was pleasing and resulted from the combination of better information from technology gains, lower inbound freight and fewer markdown promotions from a nicely balanced merchandise mix. We continue to anticipate benefits in late 2014 and beyond from additions to our retail enterprise and e-commerce technology, both recently installing and coming online later this year, specifically planning and allocation and order management.

The retail climate remains somewhat murky. The retail bellwether, Walmart, along with several others unexpectedly delivered what was viewed as disappointing quarterly results. While our business has remained steady and continues to evidence a consistent improvement we began in early 2013, it's always concerning to see these broader trends as we try to project future performance.

The downward trend of consumer spending in the US during March and April, with April negative to the prior year quarter, seems to signal continued slow growth, which could affect retail sales downstream. We remain mindful of the importance of real value and right style with customers, who smartly continue to exercise prudent caution in their family and personal spending, after experiencing years of slow economic growth, historically high unemployment and devalued housing. Occasional signs of improvement are not sustained, so as to develop a broad consensus of confidence in the minds of consumers and investors.

We continue to focus on the basics. That's delivering discernible value in the form of right style, right trend, right price and a favorable store experience.

We've been very pleased with the continued impact of our K club loyalty program as we've now enrolled more than 2 million super customers since the program rollout in late 2013. These super customers tend to spend more and visit our stores much more frequently and it's exciting to consider the downstream opportunities this program can offer to augment our enhanced internet and traditional media marketing contacts, which we expect to develop.

Our e-commerce channel continues to deliver on planned results in sales margin, with strong gains in categories like housewares, floral, clocks and decorative accessories. The number of SKUs available online continues to increase almost 5000 now up more than 100% to the prior year quarter and representing strong growth over the first quarter. Web exclusive items continue to be more than 40% of total quarterly revenue, increases in customer visits, site and process enhancements along with robust sales gains suggest that we are resonating with customers in this channel, yet, we are very aware that we're still early stage in realizing the potential of this business.

We're also driving additional traffic to our stores through the site with over 40% of our online business being shipped to stores for customer pickup. During the quarter, textiles, housewares, fragrance, clocks, ornamental wall decor joined the resurgent art and decorative accessory categories, lamps, furniture and mirrors to provide strong, across-the-board merchandise performance in the key categories that drive our day our day today in-store business.

We remain pleased with the category balance and the consistent performance in contribution of our core item category, which is delivering 30% or so of our revenue. We're still learning how to leverage our new store system's ability to most efficiently maintain core items, while retaining our historic hook of new and different merchandise.

Despite the economic low and recent spate of disappointing retail results, Kirkland's expects steady sales in merchandise performance in Q2. Thus Mike's earlier guidance to positive comparable sales. Our spending in the form of investment in people to execute our growth plans has necessarily increased versus the prior year quarter and the second quarter is historically our most difficult.

We believe that we're getting close to rightsize in our support group, with the plans we've made. So, while we'll continue to add required talent we realize it's time to concentrate on leveraging those investments in all areas of our business to drive our topline growth.

During the second quarter we expect to open 8 to 10 stores and close 2 after our first quarter of 7 openings and 7 closings. Store development activity will naturally accelerate in Q2 and especially Q3 as more space turnovers occur. We have 12 new store scheduled now for Q3, but expect that number to move around, hopefully in a positive way with both additions and deletions as we reach the busiest time of the year for construction.

On our last call we announced our plan for 10% annual square footage growth in 2014 and beyond, depending as always, on relatively on time space delivery from strip center landlords, never a given. We'll update you periodically as the development year materializes and the situation on store closings becomes more transparent. Store growth is, not surprisingly, one of our most important initiatives for topline growth, given our unique, organic store growth opportunity in the home sector.

I am pleased to be reporting to you today on behalf of the Company and to be involved in so many exciting initiatives in our Company. Our Board, Committee of Independent Directors is still engaged in the process of planning the transition of our leadership to a successor CEO.

We do not have an announcement at the moment. But, it's important to note that the Board is not pressed by my timing to deliver a successor within a particular timeframe. And is free to consider all possibilities and exercise all prudent caution.

The Company continues to perform very well and has big plans to grow and perform even better. I'm actually quite pleased to have a bit more time to be personally involved in some key initiatives beyond recovery and major foundational reset that began during my watch and which I have heavy personal interest and investment. This is a highly engaged and committed management team and you have our assurance it will remain in both the team and totally engaged while the Board does its work.

As a fellow shareholder, I'm very satisfied with our Board's approach and actions and believe it will deliver a well considered solution at the appropriate time. Thanks for your time today and your interest in Kirkland's and operator, we're ready to answer questions.

(Operator Instructions).

Neely Tamminga, Piper Jaffray.

Congratulations, you guys. It's great to see the progress in your business.

If I could ask -- Mike, you made a mention that the merchandise margin, so far quarter to date is up slightly. Could you give a little bit more color what's behind that? Is it tied to some sort of product mix situation or is it just kind of overall healthier, fuller price type sales?

Then, I just have a follow-up housekeeping question to that.

Okay. Well, I think we mentioned we were up 80 basis points in the first quarter. We're not up 80 to start Q2. As I said, we're up slightly.

The quarter ended on a little bit promotion -- more promotional note, I think around the Easter and Mother's Day timeframe. The retail environment was pretty promotional and we participated in that.

The good news, here, it's not -- it's not a dramatic effect on our margin. We were able to generate sales as the quarter closed out, that were very profitable sales and we go into the second quarter with that trend intact.

I wouldn't say there's that much of a shift in the mix right now. We've got pretty much most categories performing pretty well, as we stated. Hopefully, that continues as we move through Q2.

I just reiterate. I think on the last call I think I said we would like to see continued improvement and expect continued improvement incrementally this year. If we got 40 to 60 basis points of quarterly improvement as we move through 2014, we'd be very pleased.

We'll get some of that now with our inbound freight deal. That will continue to take some pressure off.

But, I think I mentioned a couple of times and I think Mike mentioned it, or alluded to it, we have really good balance in our mix right now and some of the categories that were a little bit of a drag on us previously have shown some nice improvement in recent months as we've worked really hard to make the improvements and we think we're on the right trend, right style and that we have great pricing, still. So, we're reasonably happy with how that's going.

Great. I just have a high level-ish and housekeeping question here on e-commerce and mobile.

If I'm interpreting this all correctly, basically, your track record is getting better. You're still seeing a pretty decent acceleration in your e-commerce business.

Mobile continues to be, potentially, a driver for both conversion and traffic. Is it all about that you're getting a whole new customer basically into your store and that's part of this next phase of the Kirkland's story, is that you're attracting, by being more of a footprint online you actually are attracting a new customer altogether? Is that your read and interpretation of that?

I think there's certainly components of what you covered there that we're seeing. It's early and -- but, the combination of some things give us that impression, even on our loyalty program we're finding that half of those people that are signing up weren't even in our email database, which suggests that we're not connecting as well with the traffic that's coming in. So, that's a store level observation.

As you get to the online piece, we have about one-third of our unique site visits are coming from a mobile phone. Which is -- that's an important statistic. It kind of directs where we are going to be spending our effort.

Tablet, we've optimized the tablet recently, that's a little less than 20% of the visitors are coming from a tablet. That's half of your traffic, essentially, that is non-PC related. We've got to adapt to that, everybody does. But, we're trying to do that and I think that is a younger, maybe different -- slightly different customer that we reach by doing that.

That's great. It's going to be fun to watch that unfold.

Congratulations, you guys. Keep up the good work.

David McGee with SunTrust.

Good quarter. A couple of questions.

One, given that the macro is still weak and there hasn't been a commitment made to change advertising, based on a test of last year, what's behind the traffic improving so nicely on a sequential basis?

I'd say part of that, David, is just a progression through the last few quarters, where we have seen -- an improving mix which is shown in the conversion rate being up. I'm kind of tying it back to our history when we've seen a prolonged conversion lift that kind of turns into a traffic benefit, it's kind of a lagging indicator, I guess. So, I think some of it is just kind of getting a little better each quarter and building up to that.

Come back sooner, I guess, right?

More frequently, yes.

I agree with Mike.

I think the improvement in the mix that we've seen, which has been evidenced by metrics. I think we predicted, consistently throughout 2013, and even in the beginning of this year, that we would see this happen because of what we were seeing in reaction to the mix. I would also say that I think, although we are not spending that much more in advertising this year, I think we're directing it a bit differently and using the learnings of last year in order to maximize there.

We are also expanding some markets that are going to get some exposure and we continue to press on the social side of contact with customers and the email side and the loyalty program. I think all of those, together, and I would also, once again, put a spotlight on the loyalty program, the lift from it, and say that this is a somewhat naturally but widespread effect that's cumulatively lifting the boats.

David, just to add it one bit to that, the marketing that Robert alluded to, although we're spending about the same amount of money this year, for example, this quarter coming up we'll be in 25 markets in primarily print form versus 10 in the prior year test. So we're reaching more people with the same amount of dollars by focusing a little bit more on print and a little less on TV.

We're seeing brand awareness tick up and traffic and sales in those markets. So, it's not an insignificant part of the traffic, progression that we've seen, but we just haven't been in that many markets to say that it's affecting the whole chain, yet.

I see.

Then, I guess is it fair to assume, based on what you said earlier, that a large part of your online business is coming from customers that are close to your stores? Didn't you say a large percentage choose to pick it up in the store?

Yes. That number is about 40% of our orders that are delivered to the store for the customer, yes.

It seems like that could be a big opportunity, as well, developing the customer base in areas in which you don't have stores.

Absolutely. It goes hand-in-hand. As we grow into some of these markets, that helps the web, as well. It works both ways.

We don't have presence in some of these markets and we're getting some internet sales from them. It's to your point, right now, it is more confined to our existing footprint. We're working to change that through online marketing as well, we do a lot of that.

I would say, David, if we don't convert a in-store pickup customer, shame on us. We're trying to provide incentives for that and to make that a point of emphasis in our stores. Because, that's a proven customer whose highly motivated to come in the store that day.

Right. Great. Thank you and best of luck, here.

(Operator Instructions).

Anthony Lebiedzinski with Sidoti & Company.

I just wanted to ask as far as the branding campaign. You mentioned, Mike, that you're doing this in 25 markets versus 10 markets. When you look at your whole business, how many markets, actually, do you have internally?

Well, just to put it in perspective, the 25 is 133 stores, that's about 40% of the chain. It depends on what you define as a market. We have stores in very small towns and we have stores in major metro.

One of the things that I would point out on the 25, is that it does include some larger markets in the mix. In the test last year, just from a cost standpoint, well mainly from a cost standpoint, we did not go into the Dallas's and the Houston's. We are able to do that in this marketing, because the cost and the entry point is a little easier to take on.

At what point can we expect that you'll be reaching out your entire store base or close to the entire store base with these efforts?

Well, let's see, we're in year two of a test and we're from no markets to 40%. I don't know that it'll progress along the same lines, because, again, we're geographically dispersed, such that some markets are not very efficient for us to enter. We've been trying to keep a balance between expending a lot of SG&A on a new marketing capability with -- we want to control those costs as best we can and not go into some of these markets that you don't have the presence, or the ability to spread it around to enough volume to make it make sense.

So, some of that we'll go with as we grow the real estate. I think it will take a few years. It could take a couple of years to get to a use of 100%. I don't see that right now. Because, we've got to -- we've got to grow the Company a little bit.

Okay. In other words, you need a certain amount of critical mass of stores in a market to make this worth your investment?

Yes. I think we did a study, at one point. I want to say -- don't quote me on the number -- it's close -- but, I want to say to hit max efficiency we would only be reaching about two-thirds or 70% of the chain. That was about a year ago. So, we'll keep looking at that.

It also needs to correspond with what's working and we're trying to take a step-by-step approach to that and adjust as we move forward and see what really is making a difference.

Okay. That make sense. Also, how much of your same-store sales gain would you say was attributable to having a better merchandise system in place?

Well, that's a hard one to really quantify. I think what we try to monitor there is some in-stock levels on some of the items that we put a focus on as core.

We look at our merchandise margin in concert with the sales. We reflect on how we're using the system and see where it's making a difference. I would hesitate to assign a number to the comp gain but we think it's a benefit, for sure.

Okay. In terms of the overall expected benefits from having this improved merchandise system, if we were to use a baseball analogy, what inning are we in in terms of expected benefits from this?

I'd say third inning. We're still early stage. We don't have everything fully loaded on it, yet. We don't have experienced time with it.

There are just -- there's so much area of growth and opportunity and it really is about how you continue to adapt personnel and process to hire capability or better capability. We're trying to take a very holistic approach as to how we look at it and how we approach those -- or, that intended improvement.

Okay. Thank you very much.

Brad Thomas with KeyBanc Capital Markets.

Let me add my congratulations, as well.

I wanted to follow-up on the margin question from earlier. Robert, I think you were saying that you'd be pleased to see 40 to 60 basis points. I just want to clarify, was that merchandise margin you're talking about, or gross margin that you're talking about there?

Merchandise margin.

Okay. As we think about the net effect on the gross margin, I guess this would be a question for Mike, how should we think about the net of the different outbound freight and central distribution cost? Would you expect those to be a headwind?

What I would say, collectively, with all these items other than merchandise margin, which if we hit what Robert said, if you call it 40 to 60, or whatever, that the gross margin would be a tick higher than that, because you're going to leverage occupancy with a comp gain and you're going to, probably, have a little headwind on the outbound piece because of -- more of our business may be shifting to e-commerce. There's more labor to deal with that in our DC that we're kind of working through right now, because we're starting to hit a point where we've got to insert some efficiencies in that process.

So, there's some slight headwind maybe on the outbound and the central DC. Not too much. But I think net occupancy outbound DC you're going to leverage a little bit. With the comps that are forecast.

Okay. That's great. I just wanted to make sure we're all clear on that given -- you're starting to lap some of the success that you had last year.

To that point, if I could just follow-up on comps, the recent trends in traffic sound very encouraging. What are you expecting, in terms of the balance of the comp going forward as we think about ticket and traffic?

In terms of where it's coming from in the transaction statistics?

Right.

Yes. Well, I think it's a combination. We are seeing better traffic trends, sequentially.

We're not to the point where we're saying we're up year over year consistently, yet. But, we're basically on where we were last year now in terms of count and the trend is going in the right direction. So that could, conceivably, help comps in the back half if that continued.

I don't think we're baking too much of that into our guidance. I think it's more still in line with conversion and ticket. But, it does kind of help to put that out there and to know that your traffic is stabilized a bit, or is in a better place.

Great. If I could just ask one more on the share repurchase program. I imagine there's not a lot you could say.

The last program that you put into place, I think was about an 18 month window for authorization. You completed the program in 12 months. Anything you can tell us about your level of excitement to get out and purchase shares at this current price?

We're probably not ready to comment on that. We've got some work to do, in terms of putting a plan in place to actually execute and we're working on that with our Board.

Great. Thanks so much, guys. Keep up the great work.

David Berman with Berman Capital.

A few questions. The first one is on capital expenditures.

You're saying that the capital expenditures are going up to about $35 million. That's almost double last year's capital expenditures of about $17.9 million.

I think one of the great stories -- success stories of your great turnaround since 2008 is your cash flow and how you are building the cash. But, with that net cash from operations being about between $30 million and $40 million for each of the last three years, it seems like your capital expenditures are going to eat up most of your cash flow.

So, I'm just trying to understand why you're deciding to double your CapEx this year and if you could just embellish on it, you mentioned some of the things you're spending it on. Can you embellish on that, please?

Sure. A big part of the increase is stores. We're going to build more stores than we built last year. I think we've got guidance of 35 to 40 and last year we did 24. So, that's a part of it.

Remember, that our CapEx is gross, it's gross dollars. As we talk about our store model and you've got to also think about that we're getting a big contribution from the landlord to build that store.

Last few years that's been about $5 million. $4 million or $5 million.

Just on a per store basis I would say it's $250,000 to $300,000 on a $450,000 gross buildout. So, it's a big part of it. It will be more than $5 million this year because we're building more stores. So, that's a big piece of the increase.

The other one is just our investment in order management, as a major project on the e-commerce side. When we get past that project, which is kind of a 4 to 5 all in with the integrations and the connection with all the other systems and all the functionality we're trying to turn on.

We get past that, I think to Robert's point earlier in the call, we'll add some people on the G&A said we've done some projects to position us to be able to operate in this brick-and-mortar and online world and I think you'd see CapEx drop next year, is what I'm saying. That's -- Those are the two major differences.

The idea of jumping to 35 to 40 new stores, because you've had flat store growth on a net basis for the last few years, right? I'm looking at 324, 323, 310. Is this like a sudden change in philosophy to suddenly increase in the number of stores?

I think philosophy only to the extent that I think we understand with all the foundational work and the investment that we've made in the last three or four years, it's time for this Company -- and we are positioned now to opportunistically grow and build our topline and become a more relevant player in this sector.

We're never going to be out of control and we suggested that a 10% square footage -- net square footage growth rate would be a positive step in that direction and one that we felt like we could easily control. It's not more stores than we've built before. We've done this before.

You haven't got any so far this year in Q1. So the 35 to 40 are going to come -- you've got a few in Q2 coming. Most of it is going to be -- are you on track with that for Q3 and Q4? 30 stores plus, right?

No. We've already opened seven in Q1. If I'm understanding our question. 8 to 10 in the second and we will be somewhere -- I'm going to guess we'll be minimum 12 as I said earlier. We may be more in Q3.

Now, we occasionally opened stores in Q4. But, it's typically on the backside of the holiday season when it's not an impact on the most critical selling weeks.

Are you finding that the bigger stores are better? I noticed that your average -- your net sales per square foot has gone down 15% in the last five years. Is that because the stores are just bigger? What is that from?

Largely because of slightly bigger stores. But, our stores are -- I think we called out 7516 square foot on average. The ones that we opened today would be in the -- typically around 7500 to 8000 square feet.

We're trying to maintain -- when we look at those deals, we look at them with the idea of maintaining and controlling our occupancy percentage. So, you know, I think we're below 10% as a chain and as we look at new deals going forward, if we get into more expensive parts of the country, on an individual basis, they're not going to all be 7%, 8%, 9% occupancy cost deals.

We'll still be at a very advantageous place, vis-a-vis most retail chains in terms of the occupancy side. So, as long as we remain cautious about what we do and we don't get crazy, if we would only open a 15,000 square-foot store if we could get that footage for the price we pay for eight.

Right. When I look at the big picture, I get a little nervous.

First of all, I'm not a fan of the buyback program, we joke about that. I don't understand what -- because the exciting thing about investing in your Company is that you've got this big cash balance, which you know you've been through a really bad period in 2007, 2008, so you sort of need to have a bigger cushion then maybe most other companies. And that is there to pay out as a dividend one day.

Wouldn't it be -- I mean, I understand the Board looked through all this, but do management get compensated if there's a one-time dividend? Probably not, right? If I see that happening then use the cash. Robert, especially given that your earnings per share are down, you haven't earned over a dollar in about three years, now.

Well, I'm having a little bit of trouble hearing you, the specifics of your question. But let me say it -- let me respond this way.

We are not incentivized on share price in terms of how we get paid. We're incentivized on the operating line, operating net income.

So, our job is to deliver operating income and earnings at the same time. So, there's a balance that's required there and we don't -- this is not -- when we're dealing with a share buyback, it doesn't have anything to do with how management gets paid.

All right. I understand that.

Anyway, I'd rather you did a one-time dividend. I guess it's too late for that.

It is too late for that. I would also say, David, that our Board has never taken anything off the table and we'll continue to look at all alternatives and we talk about every one of them at that time and we do that with our advisors. Continue to remind us.

I want to show you optimism for the earnings going forward 5% a great comp this quarter, well done. The concern is that we are (inaudible). Every retailer's missing numbers. The mall traffic's going down, the internet is taking over. Your earnings have been stable for three years.

In many ways, no fault of your own, given all these changes you talk about, yet you're increasing the stores. I'm just a little concerned about the direction. It's not like back 10 years ago, where you get paid for growth or you're not getting earnings improvement. It's costing you a lot of money with your CapEx.

We haven't done it, yet. So, why don't we talk about that in a year and see whether we made the progress or not that you're talking about. I don't think it's necessarily follows that we get that result.

I understand. Look, I know where you're sitting there and it's frustrating not to get the topline growth over the last four years. But, it's great to see you as a cash flow company, decent returns even if you not a growth company and see the cash grow and grow and grow. That seems like the compelling part of your story and I wouldn't be too dissatisfied with that.

We're not. Mike made the point earlier that, even in a higher CapEx year, this year, we expect cash to grow. And we expect to have less CapEx next year and therefore, we would expect cash to grow more next year.

One thing about this model, is that it throws off ample cash for what I believe is a very safe position for the balance sheet of this company. It provides that.

It does, it does, but this year's cutting it fine. $35 million of CapEx, $40 million's a high in the last five years of your cash flow. It's cutting it fine.

I'd like to see a little bit more legroom. You're in a very tough environment, here. It's not that peachy to do these numbers with good margins and topline in this environment. It's a strange world out there.

Thank you. We do appreciate your concern.

I appreciate all your good work and I appreciate the cash flow. Please start using the buying back of the shares, all right? Thanks a lot.

Mr. Alderson, we have no further questions at this time. I'll now turn the call back to you.

We thank everybody for their time today and, of course, their interest in Kirkland's. We'll be talking to you in a few months about Q2. So, 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 line.