Brand House Collective Inc (TBHC) 2015 Q4 法說會逐字稿

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

(Operator Instructions)

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

Thank you, good morning and welcome to Kirkland's conference call to review our results for the fourth quarter of 2015. On the call this morning are Mike Madden, President and Chief Executive Officer; and Adam Holland, Vice President and Chief Financial Officer. The results, as well as notes of the accessibility of this conference call on a listen-only basis over the internet, were announced earlier this morning in a press release that has been covered by the financial media.

Except for historical information discussed during this conference call, the statements made by company management are forward-looking and made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks and uncertainties, which may cause Kirkland's actual results in future periods to differ materially from forecasted results. Those risks and uncertainties are more fully described in Kirkland's filings with the Securities and Exchange Commission, including the Company's annual report on form 10-K filed on April 14, 2015.

I will now turn it over to Mike.

Thank you, Jeff.

We were pleased that fourth-quarter earnings came in slightly above the guidance range we issued in November. Expense management provided most of the lift as gross margin remained under some pressure in the context of the softer-sales environment.

Overall, 2015 was a challenging year, but also one of maturing and advancement. We drove double-digit sales growth with a solid class of new store openings and continued strength in e-commerce trends. Yet our profit margin was below our original forecast as we encountered some macro economic issues and experienced some supply-chain and peak-season challenges.

Texas and other oil and energy-related areas came under pressure during the back half, and given our store concentrations, softer trends there had a disproportionate effect on the overall business. Additionally, a stronger dollar limited business along the border with those stores also performing below Company average. We also experienced higher supply-chain costs as port-related disruptions earlier in the year gave way to a compressed merchandise flow ahead of our peak delivery period.

Due to timing issues, we delayed the full transition of our e-commerce fulfillment operation to a new facility. This delay coincided with heavier new store activity and an acceleration of the e-commerce business resulting in lower gross margins. While earnings for Q4 reflect these macro and internal challenges, we made significant progress during 2015 to support our growth plans and strengthen the organization for the long-term.

We continue to upgrade our merchandising efforts. Through the development of our core-item strategy, we have prioritized everyday items and that's providing more stability in our overall results. During 2015, we moved forward on a number of initiatives to improve the interaction between merchandising, visual presentation, stores and marketing.

Stronger organizational linkage between these groups is crucial and it's helping us achieve higher conversion rates in our stores. Conversion improved 3% during the year and provided the lift we needed to achieve overall positive comp sales in our stores, as traffic remained choppy. Seasonal, fragrance, and housewares provided the strongest category gains during the year and reflect the balance between fashion and core that we're trying to achieve.

Our real estate effort has been a positive call out all year. We opened 43 stores in 2015, for 11% square-footage growth, and we're planning for 6% to 8% growth in 2016. We're generating much better consistency across our new-store openings, as we leverage process improvements and employ more data-driven site-selection effort.

Our new-store activity for 2015 touched 22 states, mostly where we already have a presence, but with concentrations in the upper Midwest and the mid-Atlantic. We were also able to improve our positioning in several markets through relocations. Our loyalty program and our e-commerce channel are providing a wealth of data on our shopper and we're adding that to a much more analytical site-selection process, to refine how we look at growth in new and existing markets.

Our omnichannel initiatives continue to gain traction and, with that scale, are becoming more accretive to earnings. Digital revenue increased 38% for 2015 and we've made strides to deliver a complementary experience between the brick-and-mortar and e-commerce channels, which really enhances the customer experience. A good example is promotions, where we've been very intentional about offering the same deals through both channels.

Ship-to-store continue to drive a large part of the business, accounting for two-thirds of the revenue for the year and providing opportunities for additional sales upon product pickup. Higher ticket product categories like furniture, art and wall decor are popular online and allow us to carry multiple styles that are not available in stores. We are pleased to have implemented our drop-ship program during the quarter and we're optimistic about its impact on the channel going forward.

I'd also like to note that we returned $51 million to shareholders during 2015 through a special dividend and share repurchases. We ended the year on a strong financial position with no debt and ample liquidity to invest in the Business and execute on our growth strategy.

As we've discussed in prior calls, we've made considerable investments in foundational systems and technology over the last several years. We've also added senior-level talent in our real estate, marketing, supply chain, information technology, human resources, and legal functions.

Given our plans to continue to grow the brand, and invest in the Business, we completed a strategic review during 2015. I want to share some of our conclusions and how we're thinking about 2016 and beyond. On a high level, we're focused on transforming Kirkland into a high-performing, nationally recognized home decor brand of choice. One that delivers a distinctive and a special experience for our customers. We view this vision as a multi-year effort and we are aligning our team around this goal.

The core pillars to support that transformation include, improving in store productivity, enhancing our omnichannel platform, optimizing our real estate and reinforcing a culture of continuous improvement. Over the long-term, we believe we can achieve double-digit annual revenue growth and improve our profitability to a high single-digit operating margin.

I'll touch on each of these four points. Increasing sales per store is a central part of that earnings algorithm. Driving the average store volume to over $1.6 million will allow us to achieve the scale to support the infrastructure investments we've made to support the growing business over the last few years. We are executing on a plan to improve sell-through by driving each leg of the sales model, traffic, conversion, average retail price, and units per transaction.

Delivering comp sales improvement every year is the hallmark of a high-performing retailer. With a more detailed focus on each component of the sales model, we create a better understanding of the drivers of our business and we increase the level of teamwork and accountability. Our marketing efforts will dovetail with that and support near-term traffic-driving initiatives while positioning us for longer-term branding efforts.

We are not assuming a major increase in marketing dollars for 2016, just a more targeted use of that investment. Our customer shops multiple channels and competitors for home decor and we need to make sure she thinks of us early in her buying process. As we focus on 2016, we see conversion and average unit retail as our strongest opportunities to drive comp-sales growth, but maintaining share through traffic-driving initiatives will be a big part of the plan.

Digital business continues to accelerate and we've experienced a consistent rate of year-over-year growth across the year; it contributed 7% of total revenue in 2015. We see the potential to increase that penetration to 10% which represents strong growth when you consider the build in store count that is happening in tandem.

Our customers are increasingly more comfortable buying our product assortment online, but they still desire the convenience that the brick-and-mortar presence provides. This is evident with our high level of in-store pickup. Given the nature of our product and the need to visualize in the home setting, the ability to utilize our stores is very important to them.

We're achieving strong attachment rates on promotions geared to in-store pickup and we're working on ways to improve the experience by accelerating delivery times. Many of our initiatives during 2016 to drive this part of the strategy involved the supply chain. We are in the process of moving into a separate e-commerce fulfillment center and it will be up and running over the next few weeks. This move will allow us to increase efficiency in the operation and handle larger volumes as we enter the peak season, enabling us to continue to grow the digital business in the neighborhood of 25% annually, going forward, and improve our service levels.

With regards to real estate growth, we're taking a holistic approach to existing and potential markets, that takes into account the optimal brand penetration given both in e-commerce and brick-and-mortar presence. We continue to see a path to 500 stores, but we want to make sure that our unit growth complements our e-commerce growth and vice versa. And in this environment, a moderated rate of store growth is not really a bad thing.

The 2015 class of stores is performing well, but given the continued acceleration of the digital business, and our supply chain initiative, it makes sense to be calculated. As I've mentioned, the improvements in our site-selection model have been a big part of our success. Now that we have customer and psychographic data informing the process, we're moving to better understand competitive dynamics.

We're also putting a major emphasis on continuous improvement to position the organization to respond capably and nimbly through systems and processes. A big part of long-term success comes from getting better at the little things every day. We're making this a priority within our organization and we see this as a real opportunity.

We are already addressing and making changes to key business processes, such as new store openings, ship to store, core product replenishment and we're working on reviewing our incentive plans in the field to back up our strategy and our vision. The goal of our continuous improvement activities will be to build upon the expense leverage we began to see in 2015.

I'll now stop and turn it over to Adam to discuss the financials. Adam?

Thank you, Mike.

Net sales for the fourth quarter were up 11.4%, while comparable store sales increased 1.3%. Brick-and-mortar comparable store sales were down 0.8%. This was driven by a 3% increase in conversion, offset by a 3.4% traffic decline, resulting in a slight decrease in transactions.

The number of items sold per transaction was slightly down last year and average unit retail selling price is modestly higher, leading to a small decrease in the average ticket. E-commerce revenue was $13.7 million for the quarter. That's a 36% increase over prior-year quarter and accounted for approximately 7% of total sales during Q4.

Comp sales trends in our brick-and-mortar stores were slightly negative starting the fourth quarter, but improved in December. In mid-January, we experienced adverse winter weather which impacted traffic and store sales by approximately $1 million. Geographically, comparable store results were mixed during the quarter with 15 of our 35 states showing positive brick-and-mortar store sales performance; but, similar to what we experienced in third quarter, the oil patch and energy states, Texas, Oklahoma, and Louisiana, weighed down on our comparable store sales results. Combined, these three states impacted the total comp by about 1 point.

We opened 12 new stores during the quarter, 43 for the year, ending the quarter with 2.9 million square feet under lease, which is an 11% increase from the prior year. Average store size was also up 1.5%, to 7600 square feet. Fourth-quarter gross profit margins decreased 240 basis points to 40.5%.

Merchandise margin, a component of gross profit margin, made up most of that decline as it decreased 154 basis points to 53.7%. Of that amount, approximately 70 basis points was due to promotional markdowns to stimulate traffic and manage inventory levels. Most of the remainder was attributable to higher inbound freight charges.

Moving on to the other components of gross profit margin, store occupancy costs increased 32 basis points as a percentage of net sales during the fourth quarter. This was in part due to deleverage on lower comparable store sales, as well as the timing of some of the new store openings during the quarter.

Outbound freight costs, which include e-commerce shipping, increased 11 basis points as a percentage of sales. Central distribution costs increased 47 basis points, reflecting the addition of the new e-commerce distribution facility as well as labor pressures due to peak season challenges.

Operating expenses for the fourth quarter were 24.0% of sales. That was down approximately 190 basis points versus last year. Store-related expenses leveraged during the quarter, benefiting from a reduction in our worker's compensation and general liability reserves and lower healthcare expenses.

We also recognized a benefit from insurance proceeds during the fourth quarter, which offset the credit card funds loss experienced earlier in the year. These benefits were somewhat offset by higher store payroll and marketing expenses. Corporate related expenses leveraged during the quarter driven by decreases in bonus accruals, as well as lower professional fees. E-commerce related operating expenses were slightly higher compared to the prior year quarter, as a percentage of total revenue, due to an increase in customer-service expenses.

Depreciation and amortization increased approximately 16 basis points as a percentage of sales. The tax expense for the quarter was approximately $10.1 million or 37.8% of pretax income. The net income for the quarter was $0.97 per diluted share.

Moving to the balance sheet and cash flow statement. At the end of the quarter, we had $44.4 million of cash on hand and we repurchased 1.4 million shares of common stock during the quarter for a total of $19.3 million at an average price of $13.81 per share. This completed the $30 million share repurchase plan authorized in May of 2014.

Inventories at the end of Q4 were $67.7 million, which reflect an increase of 21% over last year. This year-over-year comparison is somewhat inflated by last year's West Coast port slowdown, which lowers this comparison by approximately 3%. After factoring in our store square-footage increase of 11% and growth in our e-commerce business, we were approximately 6% heavier than we would have liked at year-end. We finished the year clean from a Christmas-seasonal standpoint, but ended heavier due to below planned sales results in the back half.

We have adjusted receipts in the first quarter and we are on track to hitting our inventory plan during the second quarter. At quarter end, we had no long-term debt and no borrowings were outstanding under our revolving credit line.

Subsequent to year end, we amended and increased the Company's senior secured revolving credit facility, from $50 million to $75 million and extended its maturity date to February, 2021. The credit facility was scheduled to expire in August of 2016. The credit facility will bear an annual interest rate equal to LIBOR plus a margin ranging from 125 to 175 basis points with no LIBOR floor.

We also lowered the unused-line fee rate. At closing, there were no outstanding borrowings under the credit facility.

During FY15, cash provided by operations was $32.2 million, reflecting our operating performance and changes in working capital. Capital expenditures were $35.1 million during 2015, with approximately 78% of CapEx relating to new stores and existing store improvements; followed by 12% relating to supply chain improvements; and IT-system improvements accounted for approximately 10%.

Turning to our FY16 guidance. We are not providing specific quarterly guidance in today's press release. We believe annual guidance better reflects the way we plan and run the Business. It's also more in-line with the majority of public companies today.

Going forward, we expect to update annual guidance, if necessary, each quarter and we'll continue to focus on communicating the interim drivers of our business fundamentals as well as our assessment of long-range goals. We expect to open 35 to 40 new stores during FY16 and close approximately 10 to 15 stores. That would equate to total revenue increased of 10% to 12% and reflect a low single-digit comparable store sales increase. Thus far in Q1, comp sales are slightly positive.

The cadence of new store openings and closings is expected to be weighted towards the first half of 2016, which should benefit the back half of the year as we enter the critical selling period with a higher store count and additional supply chain capacity from the e-commerce fulfillment facility. The shift in new-store openings to the first half should additionally alleviate supply-chain pressures akin to those that we experienced during the last two years, when store openings occurred during peak inventory seasons.

This level of sales guidance assumes continued macro challenges in some of our oil-dependent states, such as Texas, Louisiana and Oklahoma. Our full-year guidance assumes a slight contraction to a modest improvement in our operating margin. Gross profit margin is anticipated to be slightly down versus the prior year, primarily due to expenses associated with our supply-chain initiatives. Merchandise margin in the first half is not expected to decline year over year to the same degree as we just experienced in Q4.

These pressures, as well as some operational headwinds related to the volume of new-store openings, are expected to be more pronounced during the first half of the year and then moderate as we enter the back half. Operating expenses are expected to leverage during the year. As stated in the press release, we expect earnings in the first half of 2016 to decline as compared to the prior year, but then increase in the second half of the year.

Earnings-per-share is expected to be in the range of $0.98 to $1.11 per diluted share. This compares with adjusted earnings of $0.96 per diluted share in the prior-year period. This guidance assumes a tax rate of 38.5% and, 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 2016.

Capital expenditures are expected to decrease compared to 2015 and range between $25 million and $30 million, before accounting for landlord construction allowances for new stores.

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

Thanks, Adam.

While the first half will be a bit more challenging, as we enhance our supply chain and execute on the bulk of our planned unit growth, we're very excited about the path we're on. We'll be better positioned as we enter our key seasonal periods for 2016 with inventory growth moderated.

We've improved new-store openings and added a scalable e-commerce channel and both of these should benefit as we streamline the supply chain. And importantly, we remain confident about our position within the sector and believe that we offer a combination of product, value, and experience that is distinctive and supportive of our strategic plans. We're encouraged by the opportunity to grow earnings as we expand our niche in home decor and we look forward to updating you on our progress in the coming quarters.

Chad, I guess we are now ready to take a few questions.

(Operator Instructions)

Brad Thomas, KeyBanc Capital Markets.

Hi, good morning, Mike, Adam and Jeff. Congratulations on the NY holiday here and the opportunistic share purchase.

Thanks, Brad.

I wanted to first ask about inventory and your expectations for markdown cadence and merchandise margins, just as we begin this year. Adam, I know you gave some more color around where inventory levels are today. Where are you still out having to do some markdowns and how much pressure do you think that may have on the next couple quarters before you get the inventory in-line with where you would like it to be?

Brad, it's Mike, I'll start. As Adam covered, inventory was up a little over 20%; part of that was a comparison. We were up against some lower levels last year due to poor congestion. That takes it down to kind of 17%-ish and we have some new-store build, not a whole lot, but you compare that with our projected top-line growth rate and he called out about a 6% delta.

We'll weigh on the merchandise margin a bit, here in Q1 and into Q2, but not to the level we saw in Q4; because a lot of that product, we're just kind of heavy. We're not heavy in seasonal product that's already just drastically marked down; it's just adjusting receipt flow and trying to drive a little bit at the point of sale too and combining those two to get us right back into position as we enter and kind of proceed into the second quarter.

Great. And if I could add a follow-up question about the discussion of the long-term potential for the Company. I believe you referenced a high single-digit operating margin. Could you talk about some of the inputs to that? Where would you envision a normal or healthy level for merchandise margin?

What sort of impact might there be from e-commerce? What kind of sales per store or comp trends might you need to see to add a few points to operating margins from where they came in from last year?

Well, I think it really gets back to some of those longer-term goals I covered in the remarks, which is we have a growth plan to get us to a 500-store level over I'd say a 3 to 5 year period of time. We've got internal plans to drive in-store productivity which we're geared toward getting that average volume up into the $1.6 million-plus range as we continue to improve our store base but also drive some specific initiatives relative to conversion averaging at retail traffic. So, that's a big piece of it.

Getting that penetration of the e-commerce business up into the 10% range and leveraging what we're seeing with ship-to-store even further with supply chain improvements, has a big impact. I will point out that that profitability is starting to be very comparable to what we're seeing in the stores, given that two-thirds penetration, which we have right now, which is ship-to-store. That has been a positive.

And then, I think it gets to just getting a little better with things that we do on a day-to-day basis. Supply chain is a good example of that, just being prepared to handle that growth. Our store payroll model adjusting and we're adding some capabilities there.

Because the expense end of the equation is very important as well. So a lot of it is leverage, but some of it is growth. And then, on the merchandise-margin end of it, I think it's just squeezing out a little bit more every year through some of these initiatives, managing our promotions better. So, all the things together kind of get you into that 8% range, and maybe it can be more, but that is what we are shooting for right now.

That's very helpful, Mike. And if I could squeeze in just one housekeeping question for Adam, if you have it handy. Do you know what the year-end share count was? I just want to have that right after your big repurchase in the fourth quarter.

Sure, Brad It's approximately 15.8 million shares outstanding at the end of the year.

Great, thank you so much and congratulations again.

Neely Tamminga, Piper Jaffray.

Great, thank you. Hey, guys, so a couple big picture questions here from us. On the four pillars of those longer-term strategic plans, I just want to key in on a phrase that you had said that you have been working on getting the team aligned behind these. Could you expand a little bit more on that in terms of have you actually physically changed some of the KPIs or metrics around compensation for varying groups or weighting just specific targets to make sure everyone is on the same page? I would love your thoughts around that.

And then, if I may, also, dovetailing a little bit off of what Brad asked about around the ultimate operating-margin target, I just want to speak this back. So is it, you've done, obviously, double-digit in prior history; you're now talking about high single. We can understand and appreciate that it's a different environment today versus prior.

Is the primary delta then pretty much the competition landscape, do you think more, or is it around just the cost of e-commerce fulfillment or some other structural issue? We just want to make sure we're understanding that. Thanks.

Okay. I'll start with the question about the strategy. We've added a lot of new people to the team over the last 24 months. And one of the things that I felt was extremely important, in taking a new role, was to lay that foundation. So we spent a lot of time as a team, first of all, just making sure we were gelling and also getting aligned; and what I talked about today was some of the output from that.

And we are in the process of looking at how we might incentivize people differently in the context of that plan. But, that is going to play out. I think the important thing to take away is it feels like a new day in terms of what we've done.

And we are reaching down into the depths of the organization throughout the store base, throughout the distribution centers and our corporate office to ensure that everybody here is marching to the same beat; and we're very excited about having that foundation built and I think it will serve us well going forward. We've got a challenging task ahead of us in years out.

That kind of leads me to your second question, which is, how do we get the performance back to that level that we have shown in the past. And it is a different environment. We're working in multiple channels now.

The e-commerce effort we launched years ago is completely different than what we're doing now; it is so attached at the hip with the store base. That does have an impact on our operating-expense structure and our supply chain, in particular. And we're working on a lot of those things right now.

So I think that's the bigger piece in terms of why we're not talking about 12 and 13 [operating margin]. I'm not saying that's impossible. If we continue to execute well and continue to improve our delivery in each channel, I think that the Business certainly has the cash flow characteristics and the capability to drive a higher and higher operating margin. But we're focused on getting it back to that high-single, because I think that's what makes sense in the context of the timeframe we're talking about here internally.

So, that is a long-winded answer; but I think the competitive landscape, you asked about that too, it's certainly picked up. I think I'd go back to my statement though; I really feel strongly about our position in that landscape. It's more an execution thing for us and navigating through these challenges that we face and doing it well.

Absolutely. We obviously agree that you are headed in the right direction and support that for sure.

Following up a little bit more, and maybe this is more for Adam than it is for you, Mike, but can you speak just structurally around sales and inventory. I can understand there is little puts and takes here from Q3 to Q4 and Q1 to Q2, but as you do migrate more towards drop-ship, should we just structurally think over the long haul that your inventory growth will be that of less than the top-line growth that sales growth should outpace inventory growth? Is that how you guys are kind of thinking about it on broad strokes to the path to high single-digit?

And then a specific follow-up on SG&A, everyone is talking about minimum-wage increases and what have you and what the impact is to the overall model. What is that in aggregate as we think about your SG&A? It looks like you're going to leverage in the year, but, clearly, you're paying your people too; so could you contextualize what the SG&A component of wage increases might be for you guys? Thanks.

Sure, I'll go back to the first part of your inventory question; and the answer is yes, of course, we want to increase sales at a fast rate to inventory. Now what piece drop-ship plays in that, I think it's too early to say. It is still very early, although we're optimistic with what we're seeing so far. The key for us is to maintain an assortment that's unique and as proprietary as possible.

On the second piece, FSA, we have allocated expenses in the second half of 2016 based on what we know today. That's included in the guidance. We believe we've been conservative, but when we know more information, of course we'll adjust.

Great. Thanks, guys. Best wishes out there. Thanks.

Jeff Van Sinderen with B. Riley.

Good morning, let me add my congratulations. Maybe you can speak a little bit more about marketing plans this year and how we should expect those to unfold?

Sure, Jeff. We've been active really in terms of our marketing and what's driving it in e-mail. We have an FSI program that has been continuous; Social; as well as our loyalty program. And we are not planning a significant increase in our budget this year in terms of marketing, but we do think that we'll do a better job of allocating those dollars; improving the effectiveness of our e-mail campaign; working on our loyalty program to make sure that it is driving the retention that we need.

And we've really organized our marketing department, or are in the process of organizing it, around acquisition and retention and there is significant work to be done in both. But this year, it looks like a year that the traffic driving and the retention activities are going to be the focus. We will, along the way, as a parallel path, be continuing our branding efforts because we do feel, longer-term, that we still have a lot of work to do in terms of becoming top of mind with the regular consumer out there that may not be as aware of us.

So that's going to be run parallel. But right now, the focus is on retention, maximizing that loyalty program and then maximizing those budget dollars and putting them in the right place.

Okay.

And always measuring the results of those tests and activities.

That's helpful. And then I know you spoke to new-store performance continuing to be strong. Is there anything new that you are learning there? Any metrics to point to with new-store openings in the latest class? Openings maybe in second half?

And the maybe you could just touch on, I know you said, you gave sort of a weighting, but anything in terms the releases you have signed so far, maybe we should think about that and if there is any other detail you could give us on how if there's any specific numbers we could think about in terms of percentage of store openings in first half versus second half?

I'll take the first part and Adam can take the part about timing. I think we're learning something every day in terms of real estate. We've really beefed-up our analytics and use of data.

We combined the loyalty program data with our e-commerce quarter data and plotted that essentially on all the mapping that we use and that is getting us to a position where we know the psychographic profile that we're looking for. And, as we look into markets where we're not as dense and we don't have the store presence, we can see where best to place those stores and where those customers are. I think what it's showing us is there are a lot of untapped markets out there; and we have focused on our existing footprint, but as we keep working through this, I think we'll find that we have many opportunities beyond existing footprint to add stores, should we get to the point where we want to do that.

The other thing, I think, that has kind of come out, in at least last year's class, concentrating some of the activity is helpful. We did a lot of openings in the upper Midwest and having that collection of stores open around the same time, has allowed us to leverage some of our messaging and I think we've gotten a quicker reaction as a result.

And, as we look at markets going forward, I think we've got a little bit more of an eye on doing it that way. If the market will allow, I mean sometimes the real estate is just not there; and it's tight out there right now, by the way. Centers are pretty full.

So, I think that concentration is a big topic and we're pleased with the new-store results. I think that we'll just only get better in terms of the analytics and site selection.

In terms of the timing, we currently have 14 stores either completed or under construction in the first quarter, which is, going back in time, we haven't had that for several years. If you look back at our history, for the first half of the year, that's more than we've opened in the first half, I think, for the last 4 or 5 years.

So that's a very positive development, something we have been working toward since we had the new real estate team in. Because what we see is, when we open a store in our peak-selling season, in Q4 for instance, the 12 stores we opened in Q4 were challenging openings. There's a lot going on in the Business. It puts an exceptional burden on the store teams you'd rather have operating and focusing on existing customers, existing stores, versus working on a project of opening a new store.

So we see this is a very positive shift that's going to help. Our goal is to get around 30 stores opened before the end of Q2 and certainly get the remainder opened before we get too far into Q3. And that's going to be a big benefit. That's a big part of the year-over-year sales increase for next year is the timing of those openings.

That's a great to hear. Thanks very much and good luck for the rest of the quarter.

Thank you, Jeff.

David Magee, SunTrust.

Hi, good morning, everybody and congratulations. Two questions. One to piggyback off the prior question. It sounds like the new stores are doing well and, as you crest 400 stores this year, you're not that far away from the 500 target. Why wouldn't you lift the target now? It seems like the concept we're working on throughout the country.

Is there some sort of headwind in faraway regions that are worth pointing out? Is 500 just a very conservative number?

David, I think it's one thing at a time and we've got a Company that's hovered around 300, 250 to 350 for a long time. And, as you pointed out, we're going to break over that this year. We've got an e-commerce business that continues to accelerate. Frankly, in the latter part of last year at a rate that was in excess of what we expected.

So, I think we're being very measured in terms of how to combine that dynamic with an ultimate store count and what that looks like in the context of an environment where a lot of retailers are shrinking. So I think it's all about just letting this play out. We certainly have done the research to say that we could do a store count much higher than 500; but, at the moment, given all those dynamics, I think it's smart for us to stay focused on what we have in front of us.

Thanks, Mike. And my second question has to do with the promotional environment and it seemed like that during the fourth quarter and prior to it, the competition was very promotional out there. And judging by your comments, it sounds like maybe it's gotten a little more benign so far in the first quarter.

What is your sense for how that sort of plays out this year? Do you think that as we approach the second half of the year that you'll see your competition more restrained in promotions and maybe that's not as much of a headwind this year as it was last year for you?

You know, it's hard to speculate on that. I think inventory levels are coming down a little bit across the board which may signal that, David, but our sector is a very promotional sector by its nature and there's a lot of competition that has come in the sector which is driving some of that. We're a promotional retailer; it's an important part of what we do. So we've got to plan for that to moderate some, at least within our business, and expect that to remain roughly the same in the environment as well.

Do you sense that, on an annual basis, the risk is inherently the greatest around holiday time so maybe the outlook for the next couple of quarters is pretty good?

In terms of promotional activity?

Yes.

Typically it is.

Great, well, thank you and good luck, Mike.

Thanks, David.

(Operator Instructions)

Anthony Lebiedzinski, Sidoti and Company.

Good morning and thank you for taking the questions. So just to follow-up on the real estate. You're looking to open 35 to 40 new stores. Can you give us a sense as to the breakdown between existing and new markets for this year? And then also, as far as the store openings, should we expect, that on a go-forward basis, that you'll be looking to open the majority of your stores in the first half of the year as opposed to the back half as you have done historically?

Yes, Anthony, I think you'll see the footprint won't change that much from 2016 new-store class. There will be some in-fill markets; there will be some stores that are in existing states, albeit they may be new markets.

The new data we're getting has been very helpful in understanding what the total penetration of a given market is, especially in existing market, when you account for e-commerce business; and that's helped us shape our footprint a little bit better than we have in the past. In terms of the timing going forward, yes, the goal is, and it was last year, even though we were quite able to do it as well as we'd hoped, to move the openings to where we're not having any new-store activity going on as we get into the heart of the third quarter.

Okay, thank you for that. And also, you lowered or actually I should say your CapEx will be lesser than last year. So can you give us a sense, though, how much of that is going for new stores, how much is for maintenance CapEx and other initiatives you may have?

Most of that is going to new stores, Anthony. There will be some supply-chain investments that we'll need to make, but not to the degree we saw last year. A lot of these supply-chain initiatives we have been discussing are more operational expense in nature.

We'll have some system investments that, if you are in the e-commerce business, you never get away from the completely. But stores are making up the bulk of that number.

Okay, thanks. And then also, given the lower CapEx and the implied increase in net income, you should be in a position to generate better free cash flow. Last year you did the special dividend, also a share buyback. How should we think about the usage of free cash flow?

Well, Anthony, we talked about the CapEx; it is a little lower. It will help us drive, I think, strong free cash flow this year. As you look at the shareholder return activities, we did complete the last authorization and we'll be having discussions about what we want to do there with our Board in the coming weeks and months.

Got it, okay. Thank you.

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

Well thanks, everybody for your attention and interest today. Look forward to catching back up with you in May. Thank you.

Thanks, sir. The conference is now concluded. Thank you for attending, you may now disconnect.