Brand House Collective Inc (TBHC) 2015 Q3 法說會逐字稿

Good morning and welcome to Kirkland's third-quarter 2015 earnings conference call.

(Operator Instructions)

Please note this event is being recorded. I would now like to turn the conference over to Jeff Black with Investor Relations. Please go ahead, sir.

Thanks, Chad. Thank you and good morning and welcome to Kirkland's conference call to review results for the third quarter of FY15. On the call this morning we have Mike Madden, President and Chief Executive Officer; and Adam Holland, Vice President and Chief Financial Officer.

The results as well as notice of the accessibility of this conference call in a listen-only basis over the internet were released earlier this morning in a press release that's been covered by the financial media. Except for historical information discussed during the call, the statements made by the Company management are forward-looking. They are 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' annual report on form 10-K filed on April 14, 2015. I will now turn the call over to Mike Madden. Mike?

Thanks, Jeff, and good morning to everybody. The retail environment was challenging in the third quarter particularly in October, driven primarily by softer than expected traffic. Texas and the immediately surrounding states where we have large concentrations of stores comped negative in the quarter and impacted comparable store sales by about 1 point.

The Southeast, California, and parts of the Midwest were notable bright spots and our fall seasonal business performed well. E-commerce revenue was robust and comped ahead of plan. Yet traffic weakness was not confined entirely to Texas and we ran more promotional activities than planned to stimulate demand and manage inventory. Supply chain costs were higher which also had a negative effect on the gross profit margin.

As we had forecast, we experienced some pressure on our operating expenses as we worked to get the majority of stores for 2015 open for the holiday selling season. We're on track to open a net total of 31 stores this year and we'll have 11% more stores open this year versus last as we enter the holidays.

We're excited about that because the new stores are opening above plan on a consistent basis. We think that's due to significant strides we've made in the site selection process and that gives us optimism as we continue our store growth plan.

Thus far in the fourth quarter, traffic trends while having moderated somewhat, remain challenging. But healthy conversion rates are offsetting that to yield a slightly positive overall comp against last year's increase of 8.2%. Our revised guidance range assumes traffic challenges persist and that has the potential to put some pressure on our merchandise margin in the fourth quarter.

However, the bulk of the quarter is ahead of us. The holiday assortment will continue to gain penetration in the upcoming weeks and we have a strong marketing and promotional calendar in place for the season. It's still very early in the quarter and it's pre-Black Friday so we are maintaining some conservatism ahead of these big weeks.

While overall retail trends are softer right now, we remain focused on executing our business and controlling what we can control, maximizing the potential we have to close out the year strongly by leveraging our seasonal assortment and our store additions. It's also important to point out that we expect merchandise margin pressure to be offset by leverage on our operating expenses, given our projection for double-digit growth in the fourth quarter. Adam will go over the third-quarter financials and our fourth-quarter and full-year guidance in a moment.

Despite challenging traffic, we achieved top-line growth of 10% for the third quarter. Our e-commerce revenues exceeded expectations, rising almost 40% over the prior year and adding 2.5% to our consolidated comp.

As in prior quarters, the majority of our e-commerce revenue related to in-store pick up which has clear benefits to profitability. Store comps were driven by strength in conversion which largely offset declines in traffic and average unit retail price.

From a merchandise category perspective, we are encouraged by the performance of our fall seasonal assortments, harvest and halloween. We invested more in these assortments, namely harvest, for the third quarter and we achieved our sales goals while exceeding the margin plan. Our fall seasonal performance normally is a good indicator for holiday seasonal. We also experienced relative strength in the decorative accessories category which is a key component to delivering year-around newness to our core shopper.

Overall inventory is higher in part due to the increases in store count and continued growth in e-commerce. While we ended the quarter with in-store levels a bit higher than we would like, a portion of that reflects an increase in the investment in Christmas seasonal product. Our guidance assumes a promotional fourth quarter and we have moderated our receipt plans going forward to match the pace of the business.

We're very happy with the way we're executing on our real estate expansion. We have a solid pipeline of lease opportunities and much better visibility looking forward than we've had in the past. We've spent a lot of effort validating our long-term plan for unit expansion and continue to believe 500 stores is the right number for an interim goal.

We're using a more analytical approach to site selection, using more in depth information about our customer and our competition and the results thus far have been encouraging. New stores are opening with sales above the rates of prior classes and importantly, the 2015 performance is much more consistent across all openings.

Most of the near-term expansion in the fleet will come from markets within existing operating areas. For example, Nashville has grown from two stores to seven stores and is one of our best markets. We're finding similar success in existing markets such as Detroit, Michigan and Raleigh, North Carolina. We're achieving deeper saturation in areas like these where we already have some brand recognition and that's benefiting sales and profit. We've identified a number of existing markets for new stores and believe that we can improve our efficiency in opening stores as we move forward.

Earlier, I mentioned an increase in our supply chain costs during the quarter. The planned third-quarter transition to a new facility to support fall seasonal flows and e-commerce was slower than we anticipated.

There were a lot of intersecting headwinds that affect the supply chain in the quarter. These include uneven product flow as the port situation eased, an increase in seasonal buys, compressed new store activity versus a year ago, some timing delays with access to the new facility and labor and cost challenges associated with this move.

All of these factors combined to make peak activity more of a challenge than normal, or than we expected. We expect less of an impact from these issues as we move into the fourth quarter and we'll be up and fully running with e-commerce in the new facility in the first quarter of 2016.

Looking ahead, we're moving forward with plans to expand our supply chain capabilities in the near term and beyond. We've talked about the need for more than one distribution center as we execute our growth plan. We believe expanding our supply chain and its capabilities will enable future growth, reduce our operating costs and provide us with additional flexibility in managing our demand channels. We'll update you on the details of these plans in the coming quarters.

As we look forward into 2016, we have an opportunity to grow our business profitably as we continue to invest prudently in stores, e-commerce, and our supply chain. We'll continue our real estate growth, now equipped with better tools and processes and a populated pipeline. We also expect continued growth from our e-commerce channel and we'll focus on improving our ship-to-store process to provide a better a better experience for our customers.

At the same time, we'll work to build on our progress in merchandising in stores as we embark on new initiatives to improve sell-through and comps by driving each leg of the sales model: traffic, conversion, average retail price and units per transaction. We're focusing our marketing efforts around driving traffic through new branding initiatives while tightening our marketing spend through the use of our loyalty program an email communications in addressing customer retention.

Our overall priorities for the business have not changed: taking advantage of the organic growth opportunities available in brick and mortar stores and through the e-commerce channel, increasing our in-store productivity and driving comp sales of existing units and tightening our focus on capital allocation and return on investment.

Before I turn it over to Adam, I'd like to thank our now over 10,000 associates, which reflects a staffing up for the holidays, that are ready to service our customers this season. We look forward to a big season and we really appreciate all that they do for us. Adam?

Thank you, Mike. Net sales for the third quarter were up 10.3% while comparable store sales increased 1.8%. Brick and mortar comparable store sales were down 1%. This was driven by 3% increase in conversion, offset by 3% traffic decline, resulting in flat transactions.

The number of items sold per transaction and the average unit retail selling price were both slightly down to last year, leading to a small decrease in the average ticket. E-commerce revenue was $9.6 million for the quarter. That's a 38% increase over the prior-year quarter and accounted for approximately 7% of total sales during Q3. In the third quarter last year, e-commerce was 6% of total sales.

Comp sales trends in our brick and mortar stores were slightly negative throughout the quarter. Sales results in Texas where we have our highest concentration of stores, weighed down on our Q3 comparable store sales results. The sales weakness was most pronounced in West and Central Texas along with our border stores.

We opened 21 new stores during the quarter which is on pace to meet our total store target prior to Thanksgiving. At the end of the quarter, we had 2.8 million square feet under lease which is an 11% increase from the prior year. Average store size was also up about 1% to 7,634 square feet.

Third-quarter gross profit margin decreased 180 basis points to 37.2%. Most of this contraction was due to a lower merchandise margin which decreased 105 basis points to 55.2%. Of that amount, approximately 55 basis points was due to promotional mark-downs to stimulate traffic and manage inventory levels. The remainder of the merchandise margin decline was due to higher than anticipated inbound freight charges required to process containers through our DC during peak season.

Moving on to other components of gross profit margin. Store occupancy costs increased about 43 basis points as a percent of net sales during third quarter of 2015. This was in part due to the timing of stores that opened late in the quarter and early November as well as some deleverage on lower than planned comparable store sales.

Outbound freight costs, which include e-commerce shipping, decreased 20 basis points as a percentage of sales primarily due to our shift to more in-store pick up sales from e-commerce which are a lower cost for us. Central distribution costs increased 54 basis points, reflecting the addition of the new distribution facility as well as labor pressures due to peak season challenges.

Operating expenses for the third quarter were 33.6% of sales. That was up approximately 30 basis points versus last year. Store-related expenses, such as payroll, deleveraged during the quarter due to an increase in new store activity and heavier freight deliveries. Marketing provided some leverage versus the prior-year quarter but not enough to offset the increase in store payroll.

Corporate-related expenses leveraged during the quarter, driven by decreases in payroll and expenses related to our new corporate headquarters. E-commerce-related operating expenses were flat compared to the prior-year quarter as a percentage of total revenue.

Depreciation and amortization increased 32 basis points as a percentage of sales reflecting increase in capital expenditures, including the implementation of major technology initiatives during the last several years. The tax benefit for the quarter was approximately $674,000 which reflects state employment and investment credits realized during the quarter. The net loss for the quarter was $0.02 per diluted share.

Moving to the balance sheet and the cash flow statement. At the end of the quarter, we had $32.4 million in cash on hand and we repurchased 148,507 shares of common stock during the quarter for a total of $3.4 million. And we had approximately $19.3 million remaining available for future repurchases.

Inventory was up 23% versus a year ago, driven in part by the square footage increases in e-commerce. At quarter end, we had no long-term debt and no borrowings were outstanding under our revolving line of credit.

Through the end of the third quarter, cash used in operations was $8.6 million reflecting our operating performance and an increase in working capital. Capital Expenditures were $25.7 million through the first three quarters of 2015, primarily for new store openings as well as improvements to existing stores and other supply chain investments.

Turning to our guidance. For the fourth quarter of FY15, we expect total sales to be in the range of $197 million to $200 million which reflects a comparable store sales range of flat to up 2%, compared with net sales of $178.7 million and comparable store sales increase of 8.2% in the prior-year quarter. Gross profit margin is anticipated to be down compared to the prior year primarily due to a combination of higher promotional activity and higher supply chain costs. Operating expenses are expected to leverage during the quarter with corporate-related expenses driving most of the reduction.

As a result, earnings per share is expected to be in the range of $0.88 to $0.95 per diluted share. This compares with earnings of $0.87 per diluted share in the prior-year quarter. For the full year 2015, we expect to generate earnings per share of $0.89 to $0.96 excluding the $0.02 per diluted share charge related to the retirement of the Company's previous CEO which was incurred in the first quarter.

We expect a modest decline in our fourth-quarter and year-to-date operating margin. This guidance assumes a tax rate of 38.5%. From a cash flow standpoint we continue to maintain a strong cash balance and do not anticipate any usage of our line of credit during the remainder of the year.

Capital Expenditures are currently anticipated to range between $32 million and $34 million before accounting for landlord construction allowances for new stores. These CapEx assumptions are higher than our previous forecast due to new store construction costs relating to our early February 2016 openings, as well as a shift in timing of planned investments relating to our e-commerce fulfillment center.

Thanks, and I will now turn the call back to Mike.

Well thanks, everybody and we are now ready to take a few questions.

(Operator Instructions)

The first question today comes from Brad Thomas with KeyBanc Capital Markets. Perhaps your line is muted?

Can you hear me now?

Yes, we can. Please go ahead.

Okay, sorry, headset must not be working. Good morning, everybody. I wanted to first ask about the guidance. As we look at the change in sales, looks like you're really only bringing that down by about 1%, but obviously a more substantial cut on the earnings outlook. Could you help us to just piece apart how much is sales miss versus incremental mark-downs that you're putting into place versus some of the supply chain costs and maybe some of the store and e-commerce investments that you're making?

Sure, Brad. This is Mike. I'll start and Adam can fill in the gaps. What I would -- in looking at Q4, sales is a big component there. So that's a shift down, I think about $5 million or so, on the sales line. Margin is probably your second component there, merch margin, and that reflects our conservative outlook in terms of promotional activity in the quarter in response to some of the traffic softness that we've had. Then I think the third piece of that would be supply chain in that order. Adam, do you want to add to that?

No, I think that's right. If you look at -- we didn't give specific Q4 guide, but if you look at high guide to high guide, Brad, you're looking at roughly $0.09 to $0.10 on the sales and roughly $0.08 on merch margin, which would get most of the delta between the previous Q4 guidance and the guidance we gave this morning. I think the sales component guide reflects the traffic trends we saw in the late third quarter and where we are right now. Like Mike said in his prepared comments, there's still -- most of our selling season is still ahead of us.

On the merch margin side, we had a couple things that came into play. One was the supply chain pressures. This was something that we did not anticipate the level of in the third quarter, which decreased merch margin probably by about $0.02. And we'll see another $0.02 flow through merch margin in Q4; this is that inbound freight component that Mike mentioned.

The rest of it is really promotional activity and we look at this guide and it's conservative, especially on the margin side. There's going to be a lot of other retailers with a lot of promotions out there and we wanted to be conservative when we put out the numbers and hopefully we do better. But this is where we felt like we needed to be at this point in time, a week before Thanksgiving.

Great, that's very helpful. And then if I could talk about new stores for a second. It sounds like those are still doing very well in terms of their productivity out of the gate.

As we step back and think about how new stores are affecting this year, they had been a bit of a drag from an investment standpoint the last couple of quarters. How does that play out in terms of the new store contribution to the fourth quarter specifically? And for the year as a whole, do they come in as a drag or as a contributor?

Well I think you're seeing the inflection point on that, Brad, because, yes, it has been somewhat a drag coming into the fourth quarter because we had a lot of pre-opening effect, a lot of compression in terms of the stores opening around the same time which weighed a bit on our OpEx. But even with the things we just mentioned in terms of the guide on sales and merch margin, we still expect to have leverage on the operating expense line.

One of the big reasons for that is the new store contribution and how it affects fixed costs in our operating expense structure. That's coming through in the fourth quarter, and yes, we're very encouraged by the openings that we've had. It's a very consistent class so far and it's performing above our internal expectations.

Great, all right, I'll turn it over to some others for questions, thank you.

Thanks, Brad.

The next question is from Neely Tamminga with Piper Jaffrey.

Great, good morning. I wanted to dig in a little bit more and make sure that we're super crystal on this. Traffic obviously was weak in October but did we see positive traffic in September and August? Did it fall down then in October? That's one question. I've got a couple, so let's just do that.

No, go ahead, you finish.

(laughter) All right, so that will be one. And into November, Mike, thank you so much for the quarter-to-date commentary. I think it's helpful to understand what's going on with you guys right now.

As we think about that, did Texas change at all? Or has Texas been primarily still the drag? What I'm hearing is there's some sort of weather-induced traffic general issue without their retail and then there's also Texas. So I'm trying to disaggregate that for November for you. Thanks.

Okay, as far as traffic through the quarter -- and if you'll recall from our first two quarters, we haven't had large traffic gains to speak of, but we've been right around flat, slightly negative. And that was the case at the beginning of third quarter as well. Always coupled with strong conversion; we've had strong conversion throughout the year.

October, there was a little hiccup there. Traffic dropped off another few points in that month and there were a lot of things going on, to your point. We do have a concentration in Texas. I think there was a general slowdown in retail generally during that time frame.

As we've come into the early part of the fourth quarter, we're not seeing quite that level of decline in traffic; it's a little better. I think I alluded to that in the November commentary. As far as Texas goes early this quarter, it's a little better than it was in October as well. There's a lot of diversity in our markets in Texas.

We do have some very strong stores that are out in the more oil-producing areas, and along the border as well, that are weighing it down maybe more than what you might think just in the metro areas of Dallas and Houston. So there's a lot of things going on there. I think to answer your question, it's a little better in the fourth quarter so far than it was in third.

Okay. And then in terms of your sales volume weeks that you have ahead of you, can you remind us, because you do have such a Q4-heavy year, what are some of your key volume weeks as we should be navigating and thinking about watching your stores during those key weeks?

Sure. I mean from here, next week is the heaviest volume week for us. Black Friday is our biggest day of the year and it has been ever since I worked for the Company. It's a huge day for us and we have a big plan ahead of us. I feel good about our positioning for that day and really that weekend which is what it's really become, more so than just the one day.

And then there's a little drop in volume in the early part of December and then it picks back up right before Christmas. So that week before Christmas would be your second biggest volume week. And then we have a decent amount of traffic even post-holiday with a lot of the after-Christmas shopping and events that we run there, followed by our January big semiannual sale. It's a strong set of weeks for us that we have ahead of us, but the biggest ones are next week and then the week prior to Christmas.

Okay that's helpful. Then, Adam, could you walk us through a little bit more, break down the inventory to the extent that you can around the pretty decent increase year-over-year in inventory. What portion of that are you worried about? What portion of that are you not worried about and why?

Well, like Mike said in his comments, we are at an elevated level but not to the point where we are concerned. A lot of that inventory is seasonal. The halloween, harvest selling through as successfully as it did is an indicator, typically, of how our Christmas assortment will perform.

I think you couple that with the fast-turning nature, the fact that we have reduced receipt to account, we feel like it's completely manageable. There's not an aging issue, it's current. It's got a lot of the stuff that we want for this time of the year. Like I said, that clearance mechanism we have in January is also there to help us move through any items that are non-seasonal in nature to start the year fresh.

And also obviously, Neely, it reflects the growth in the store count and the growth in e-commerce. Those are natural increases that we have baked in there.

Could you disaggregate, Adam, what in the inventory has been e-commerce-driven, growth-driven as well as store-driven? I know that's hard but I'm wondering if you have it handy in a schedule?

Well, I would say a little more than half of the overall increase is growth driven. Then there's a component, and I think that if you looked at the end of the quarter we would be -- on Christmas seasonal -- we would be about $3 million higher than we were last year, and that was planned. That's what we wanted from this year. We saw opportunity in last year's assortment to go deeper on some classes of SKUs that were selling really well last year, so we did that. So that's a piece of it.

And then the other, I think, is just some overhang from softer sales in Q3. That would be the component that we're planning for through a stronger promotional expectation for the balance of the year, and relates to what Adam just mentioned in terms of what we need to work through. And it is manageable, given our turn rate.

That's helpful, guys. Best wishes this Black Friday.

Thank you, Neely.

Our next question is from Kristine Koerber with Barrington Research Associates.

Good morning. Just a follow-up on the promotional activity during the quarter. If harvest and halloween sold through pretty well during the quarter, what are you marking down?

I think it gets into some of the other areas of assortment, Kristine. Wall decor hasn't been performing as well as we would like to see. I think we're on top of that. I think the mix there was in a shift mode and we're working through that. I'm not worried about anything content-wise in the assortment.

So wall decor has been a little soft. Lamps have been a little soft. That's a very competitive category right now and we have been reducing that assortment a bit as we work through the year. There are some things, yes, that we're having to work through but nothing that I see is really holes in the assortment that we can't fix.

Okay, so the fall seasonal did well and you're having some challenges within the core product?

Well, I think it's more traffic driven, Kristine. I mean yes, some of the core product is a little higher in terms of how much we have on hand simply because we haven't had the foot traffic that we need that we would have to normally move through it at the rate that we planned. I think it's more that and it's just adjusting some of those core buys going forward to make sure that we're matching pace with sales trends.

Kristine, I'll just add that the conversion metric is one of the barometers for the health of the assortment. The conversion was still up in Q3, so I think that just bolsters Mike's point that the traffic is the reason for any level of inventory overhang.

Okay. And then you mentioned California and the Southeast is a bright spot during the quarter. How was traffic in those regions?

It's better than, certainly, what we called out related to Texas and that Gulf Coast area. California has been a strength. The Midwest, there's pockets of the Midwest that were doing really well, that Upper Midwest Michigan, Ohio area. And then we're doing really well in the Southeast, Georgia, Alabama, Florida has been good traffic. It's mixed but strength throughout the country in different areas, but for that concentration there in Texas.

Okay. And then as far as the real estate pipeline for 2016, can you give us any color on what you're thinking as far as store openings and timing of openings?

Yes, for this year we are basically complete with our schedule. We will have 42 stores open going into the holidays. We may have one more pop up in January we're working through.

And as we walk into 2016 we, as we've said before, anticipate that pipeline to come earlier in the year. We are well positioned to have a good chunk of the opening schedule open in the front half. Even beyond saying the front half, spread across the front half so that we're not so concentrated which is what we had this year. Next year's class should be very much more front-loaded than you saw this year.

Okay. And then just one last question. Can you give us a percentage of customers that purchased product online and picked up in stores during the quarter?

Sure.

Just shy of 70%.

And that's not customers, that's revenue. So the amount of revenue that we had generated through the site, 70% of that was shipped to store.

Right, thank you.

The next question comes from David Magee with SunTrust.

Yes, hi, everybody.

Hey, Dave.

Couple of questions here. One is on the conversion during the quarter, that being up which is good to see, if you were to somehow take out the impact of being more promotional, would that number still be positive do you think?

That's obviously hard to do, but yes, I think it would be. We were running, before we got a little more heavy in the way of promotion, we had a nice conversion gain. If you go back into the prior quarters, you had it too. So yes, when we get them in the store, they're buying, whether it's promotional or not.

And if you were to adjust the current trends for traffic, would you say the conversion on the Christmas seasonal is higher year to year?

It's hard to confine conversion to the category level. We are seeing early strong results out of that assortment so that's part of the conversion gain. I think that is a component of it, yes.

I guess a better way to ask that would be adjusting for traffic, are you satisfied so far with the Christmas seasonal sell-through? Because as I understand it, it's not being overly promoted right now.

That's right. We've got some planned percent offs and things that we do. But yes, we are pleased so far with the progress in that assortment, so that's a good sign.

And then, lastly, on the extra inventory at the quarter end, to make sure I understand this, so this is, in your opinion, core product for the most part, the overage there?

I think it is; it's not seasonal. We're heading into the seasonal period here with that and we just talked about it and its early performance. It's more every-day product in some of the core categories that we carry and letting that come back in line over a few months here should be all we need.

So would you be willing to give a forecast now what the inventory might look like at year-end?

I think we'll wait on being really specific there. The one thing I would say is as you start to go in to the end of the year, we're going to start being up against the effect of the port slowdown which held our inventories levels low beginning, really, about this time last year and continuing on through April. That's something to keep in mind when you look at year-over-year compares as we go forward.

Would there be a way to quantify or adjust for that variable?

We will do that when we get to the comparison and we talk about it.

Okay, great. Well, good luck, guys, thank you.

Thanks, David.

Our next question comes from Anthony Lebiedzinski with Sidoti & Company.

Good morning, thank you for taking the question. My first question is a little bit more on Texas. Wanted to see if you could be a little bit more specific as to what you're seeing in your Dallas and Houston and San Antonio, Austin markets.

Anthony, I would call it out as we're softer in the western part of the state. Some of the markets like San Antonio along the border, Austin and further west, it's offset a bit by Dallas and Houston being a little stronger. Then we're also seeing some weakness in Oklahoma and Louisiana.

Okay, that's helpful color. And also, you spoke a lot about the additional supply chain costs. Heading into next year, I know you haven't provided guidance specifically for 2016, but would you expect to leverage the supply chain costs?

Anthony, this is Adam. For what we experienced in Q3 and what's going to bleed over into the margin in Q4, these inbound charges that were very, what I would call, discrete items to the quarter, should not happen again next year. We've had planned measures in place for awhile to avoid those type of charges.

The plan from earlier in the year was to get our second facility up and going in Jackson to defray some of those charges. As Mike mentioned, we weren't able to get that facility up and going fast enough and created a bit of an inbound backlog which caused these per diem and demurrage charges that we saw.

For those charges, yes; those should be leverageable next year. But overall supply chain, I think, you're probably not going to see the leveraging effect until we get a more robust chain all the way back to the port which could include a form of a West Coast bypass as well as a second facility outside of Jackson.

But I think next year we do have the opportunity to hold the line on supply chain costs given the measures that Adam mentioned. So that discrete component should not occur.

Got it, okay. And in terms of any expense reductions that you can take to try to offset some of the weaker top-line performance?

One thing is it's line by line, as we look ahead. If you are talking about the fourth quarter, there's not a lot we can do. We can control some of the marketing spend but I think it's important that we maintain activity there to continue to drive traffic.

As we go forward, I think we're past a lot of the fixed cost investments that we've made. Holding the line on corporate expenses is going to be really important and we certainly intend to do that going into next year. Beyond that it's looking at every line item and seeing what you can control best and putting that into place.

Okay, thank you.

Thanks.

(Operator Instructions)

Next question is a follow-up from Brad Thomas with KeyBanc Capital Markets.

Yes, hi, thanks, guys. Just a couple of other follow-ups, if I could. First, in terms of what you're seeing out there, could you tell us what you're seeing from a competitive standpoint? Do you think that you are up against -- are seeing the same issues and are increasing their level of discounting?

It's a competitive space. I think there are a lot of promotions going on but it's hard to really pinpoint by retailer. We've certainly baked that into our fourth-quarter plans and we think the season is going to be a little more promotional, given the slowness overall that was in place toward the back end of Q3. So we planned for that.

Great. And then in terms of some of the new systems and processes that you all have in place, it's obviously been something that's helped the Company do a great job over the last few years from a comp standpoint. But as you see how these systems work over a period where sales have slowed down, Mike, could you speak to how, if at all, it's helping you with your mark-down cadence or any risks that there may be?

I think it's the systems have really helped us achieve the string of positive comp quarters that we currently still have in place. A big part of that is being able to identify core merchandise which now makes up almost 40% of our total sales, every-day products that have a steady sales rate. That was a big win as we implemented a lot of those systems and processes and we've benefited from that.

I think going forward, the core, now that it's in place, I think we need some maybe deeper scrutiny as to knowing when to pull back on some of those items and know when to inject the new, to make up for that volume. I think the bigger opportunity going forward system-wise is regionality.

We're doing a little bit of that now. It's an initiative that we've really been working on with our merchants and planners to get more store-specific with our assortment. We've got a long way to go there but we do have the tools in place to help us with that. So those are all sales and margin drivers as we look ahead that we really haven't fully experienced yet.

That's great. And then if you hit your guidance, where would you expect for cash flow for the year to shake out? Or where would you expect your cash balance to be?

It would be somewhere in the range of -- it's a wide range -- but say mid $60 millions to maybe $70 million. We had -- of course a lot of that depends on the fourth-quarter operating performance, but you'll recall we did pay out at $26 million dividend earlier in the year.

We'll have some more share repurchases ahead of us which will use some of the cash. We've got a slightly higher CapEx number really due to that end-of-year timing issue that I mentioned. So still a very healthy cash balance and we feel like we're well positioned to make the investments we need to make going into next year.

Great. And then if you would hazard a guess at this as we think out to 2016, any sense for what level of comp you may need to generate operating margin expansion next year?

It's early, Brad, and we're going to give a lot of color on that the next time we speak. But I think that we can, with a modest comp, achieve that. I mean there are some roadblocks, potentially, to that for all of retail, particularly when you talk about labor costs.

For us, I think supply chain's going to be a focus but something I think we can hold pat. And if we can comp and continue this growth plan and it be more front-ended, we do have the opportunity, I think, to generate leverage at a 3% comp range.

That's great. Thank you for all of the answers and good luck this holiday season.

Thanks, Brad.

Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

Thank you, everybody, and we appreciate your attention and time on the call today. We look forward to talking with you next quarter.

Thank you, sir. The conference has now concluded. Thank you for attending. You may now disconnect.