Brand House Collective Inc (TBHC) 2017 Q4 法說會逐字稿

Good morning, and welcome to the Kirkland's Fourth Quarter Conference Call. (Operator Instructions) Please note that this event is being recorded.

I would now like to turn the conference over to Jeff Black of SCR Partners. Please go ahead.

Thank you. Good morning, and welcome to Kirkland's conference call to review results for the fourth quarter of fiscal 2017. On the call this morning are Mike Madden, President and Chief Executive Officer; and Nicole Strain, Interim Chief Financial Officer.

The results, as well as a notice of the accessibility to 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 call, 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 both known and unknown risks and uncertainties, which may cause 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 annual report on Form 10-K filed on March 31, 2017.

With that, I will turn it over to Mike Madden.

Thank you, Jeff, and thanks to everyone, for joining us this morning. Fourth quarter results were in line with the update we provided in February, and our performance during the quarter highlighted some important areas of focus that we believe can improve our overall earnings production going forward.

While our earnings results in 2017 were not what we had hoped, we made significant progress on investments to improve our execution and refocus our merchandise assortments, and we are seeing an impact.

Average ticket is up, we've maintained positive conversion and we're achieving higher margins on our clearance product. These are solid wins for our team as we continue to focus on driving these metrics and expect further benefits in 2018 as these programs mature.

We got off to a very strong start in November, with healthy sales of holiday decor, bolstered by engaging and effective promotions and an improvement in year-over-year traffic trends.

But we experienced softer traffic trends in December, and that resulted in higher-than-anticipated promotional activity.

We were able to offset some of this pressure with a higher average ticket, which was positive throughout the quarter.

We also experienced additional margin pressure from increases in e-commerce, shipping costs and additional store deliveries to respond to consumers' preference to shop online during the crux of the holiday season and closer to their time of need.

Revenue gains in 2017 were significantly aided by continued momentum in our e-commerce channel.

Sales at kirklands.com increased 37%, representing an acceleration in our growth rate and that was the driver in achieving positive comparable store sales for the year.

We are optimistic about the trends we're seeing in the channel, and we have initiatives underway to further improve the customer experience and achieve higher profitability.

Our holiday seasonal assortment performed very well during the season, and we extended our reach to address more of our shoppers' gifting and entertaining needs. One of the takeaways on the merchandise side from the holiday season is that we could have benefited from more depth in the choices we made for our gifting assortment.

We think there is an opportunity to grow sales by investing deeper and providing floor space to these categories for holiday 2018.

The top line also benefited from traction on the investments to improve execution and merchandising, that I mentioned at the outset.

These include SKU rationalization, specific category repairs and adjustments to our pricing and promotional mix.

SKU reduction is improved in stocks and clarified presentations on the sales floor. Our forward buys of merchandise better reflect the SKU reduction and the additional controls we put into the buying process. These do not come to full fruition until late in 2017.

Our assortment recalibrations in art, textiles, gifting and fragrance are largely complete, and we're making additional alterations based on the learnings thus far.

And throughout the year, we implemented important changes to our point-of-sale systems and our promotional and coupon offers to reduce the amount of coupon stacking and using our featured offers to drive sales to higher margin goods.

We're continuing to evolve the promotional strategy and adjust our pricing to drive additional margin improvements going forward.

As it relates to the fourth quarter of 2017, in retrospect, we may have gone a little deep in spots with promotional offers in reaction to the lumpiness we encountered between Thanksgiving and Christmas. But we finished 2017 in a strong capital position with $80 million in cash and no borrowings outstanding.

As we look to 2018, our investments will center on an upgrade to Buy Online, Pickup in Store to support our e-commerce business, an expansion of our vendor direct business online and an enhanced mobile experience for our customers.

We'll also begin the transition of some of our best-selling replenishment items to a direct sourcing model. At the same time, we're accelerating the pursuit of new avenues for growth.

Home Decor sector is rapidly changing and we're focused on leveraging our consumer platform to provide inspiration and a richer set of ideas to address our customers' needs.

We have organized the team around this effort and have set aside budget dollars, both capital and operating that will involve testing and learning in our store environment, kirklands.com and possibly new innovations that have growth potential.

The financial plan we're outlining includes a low to mid single-digit gain in revenues, driven by strong growth at kirklands.com, and a modest improvement in profitability.

We see merchandise margin as an opportunity area, as we continue to get smarter in managing our promotional activity and improving the merchandise assortment.

Later in the year, our direct importing push should begin to show some impact.

One of our primary goals on the cost side for 2018 is to limit deleverage on supply-chain costs, as we focus on operational improvements and better peak season management of transportation and labor.

And on the SG&A side, we've realigned several key management functions, reduced headcount at the corporate office and transitioned the field regional structure from 3 regions to 2 regions. These moves are the outcome of our effort to streamline the business and they join ongoing work to better manage payroll at our stores.

We will see a material benefit in 2018 from the Tax and Jobs Act of 2017. We intend to maintain a conservative capital structure, and we have ample flexibility to make investments to achieve our strategic goals while returning excess cash to shareholders.

Our primary goal is to invest back into the business by accelerating key high-return projects to improve the customer experience, support growth and increase efficiency. We're devoting some of the tax benefit to support our next-gen initiatives to identify tests and other innovations to drive future growth.

The benefit will also enhance our flexibility to repurchase shares at a low valuation.

Nicole will go over the financial expectations for 2018 in more detail in just a moment.

One of the assumptions for our 2018 plan, and this is really a continuation of 2017, is slowing the pace of new store growth. We want to see a sustained improvement in overall sales productivity before we embark on a more aggressive store expansion plan. And perhaps it goes without saying, but the pace of e-commerce growth we are seeing confirms where the Home Decor shopper is going.

So further enhancement our omni-channel capabilities is our top priority for 2018. The e-commerce channel is modestly profitable despite some supply chain constraints, and we believe we can achieve an improvement in the contribution margin as we rollout Buy Online, Pickup in Store, which we call BOPUS, expand vendor direct shipping and improve mobile connectivity and conversion.

We reorganized e-commerce on a separate PL -- P&L with new leadership in 2017, and we've recently added a board member with extensive digital experience across the retail and consumer product space. We feel good about the talent and support we've added to manage this area of the business, and believe the investments we are making have the potential to generate attractive returns for the business.

I mentioned BOPUS, and we believe this capability is key to both the customer experience and the profitability of the omni-channel side of the business. We fulfill about half of our e-commerce orders in the store, but we have not been leveraging the inventory that is currently carried at the store level.

BOPUS should reduce supply-chain cost that we've been incurring by having to pick and ship each order for store delivery, and also improve inventory turns and drive additional revenue, both online and in store.

The initial push will involve introducing the new process for SKUs that represent over 20% of our revenue and we expect it to be available through all stores later this year.

Another large effort within e-commerce is further automation of our third-party drop-ship program, given its rapid expansion. Approximately, 20% of our e-commerce revenue now is shipped to customers via third parties, and it's more profitable than fulfilling consumer direct orders from our DC.

The improvements we're making in 2018 are designed to increase the speed at which we onboard vendors, and improve the way we communicate with them.

We're also devoting additional resources to mobile enhancements. The majority of traffic and revenue on the kirklands.com site is generated from a mobile device, and these enhancements will speed image loads, improve responsive design, standardize navigation and reduce mobile click-through times to improve conversion.

In marketing, we're making new customer acquisition a priority, both online and in stores by shifting some of our budget dollars from retention to acquisition. That will include added spend on digital, where we're introducing a new influencer program and enhancing our PR to foster and support inspiration.

We will continue to drive retention through e-mail, direct mail and our loyalty program, which we plan to revamp this year. These initiatives are already underway and should have an impact throughout 2018.

As it relates to merchandising, we're fast-tracking testing to drive more innovation and become more of a source for inspiration for customers within our well-established guardrails of style and affordability.

We want to position Kirkland's at the front end of the decision to purchase Home Decor as opposed to being a destination once an idea is formed by the customer. This will involve tests that begin across our stores and online for 2018.

I've challenged our team to think differently, not just turning the dials for incremental gains but truly building something unique, into a test environment that can inform our path and grow our business as the sector continues to evolve.

And with that, I'll turn it over to Nicole to go through the financials.

Thank you, Mike. Net sales for the fourth quarter increased approximately 11% compared to the same period in the prior year, or 6% on a 52-week basis.

Consolidated comparable store sales increased 2%, which included a 32% increase in e-commerce revenue.

For the quarter, store results by region were mixed with half of our states showing positive comp sales for the quarter, the strongest of which were California and Colorado; Texas and Louisiana were among the softest. A higher average ticket offset negative store traffic during the quarter.

We opened 5 new stores during the quarter and closed 2, ending the year with 418 stores, which is a net gain of 14 stores or 3.5%.

E-commerce generated $22.6 million in revenue during the quarter, accounting for approximately 10% of total revenue. This increase was driven by a combination of strong increases in website traffic and average order value. We also saw a healthy increase in revenue derived from our third-party drop-ship initiative, which continued to account for a higher portion of e-commerce revenue during the fourth quarter compared to a year ago. And again, sales via this delivery mode result in a lower initial merchandise margin, but have limited overhead costs.

Before I speak to operating results, let me take a minute to clarify a change in presentation made during the fourth quarter, the one that affects both periods.

To be more consistent with prevailing retail presentation and more closely aligned with U.S. GAAP, we are now including depreciation related to our supply chain and store facilities, as a component of cost of sales, versus depreciation expense as a stand-alone item.

To quantify, this reclassification was $5.4 million and $5 million for Q4 2017 and Q4 2016, respectively. The change in presentation had no impact on operating income or operating income as a percent of sales. We do intend to file an 8-K later today, including the quarters of fiscal 2016 and fiscal 2017 under this new presentation.

Using the new presentation methodology, gross profit margin on a like-for-like basis for Q4 decreased 130 basis points from the prior year to 35.2%.

Looking at the margin components, merchandise margin decreased 30 basis points to 53.1%. Merchandise margin continue to benefit from a higher IMU and the initiative to eliminate stacking of coupon offers, but this was more than offset by an overall increase in promotional activity during the quarter as well as a growing mix of third-party drop-ship sales.

Store occupancy costs increased 35 basis points as a percentage of sales during Q4, due to sales deleverage.

Outbound freight costs which include e-commerce shipping increased 85 basis point as a percentage of net sales, which was largely driven by an increase in e-commerce penetration.

And finally, central distribution cost decreased modestly as a percent of sales.

Moving onto operating expenses. Operating expense for the fourth quarter was 25% of sales, which was up approximately 60 basis points to last year. The primary drivers of this increase were a favorable adjustment to our self-insured workers' compensation and general liability reserve in the prior year period, and a current-period severance charge.

Those were partially offset by lower share-based compensation expense due to forfeitures and lower corporate professional fees.

With the presentation change, depreciation and amortization remained relatively flat to the prior year as a percent of sales.

Tax expense for the quarter was $8.4 million or 39.6% of pretax income compared to 36.7% in the prior year period.

The increase from last year's tax rate is due to a onetime adjustment to deferred tax asset balances due to the new tax law and a change in accounting rules for taxes associated with share-based compensation.

Combined these two had an approximate 10 percentage point impact on the full year tax rate of 46% and a decrease to full year EPS of $0.06 per share. The tax rate will benefit from the new tax law in 2018 and going forward, which I will discuss in a minute.

Net income for the quarter was $0.79 per diluted share, which was a decrease from $0.90 in the prior year quarter.

And moving onto the balance sheet and the cash flow statement. At the end of the quarter, we had $80.2 million of cash on hand, and no long-term debt or borrowings were outstanding under our revolving line of credit.

Inventories at the end of Q4 were $81.3 million, which was an increase of approximately 11% over Q4 last year. Most of this increase was a timing issue tied to the expansion of our West Coast supply-chain operation, which requires us to take ownership of inventory earlier in the pipeline.

Fiscal 2017 cash provided by operations was $45.1 million, which reflects our operating performance and changes in working capital.

Capital expenditures for 2017 were $28.4 million, of which 72% related to new store and existing store improvements, and 28% to e-commerce and supply chain investment.

During the fourth quarter, we repurchased approximately 33,000 shares at an average cost of $11.70 under our share repurchase program.

Year-to-date in 2018, we have purchased an additional 234,000 shares at an average cost of $9.12, which we used approximately $7 million available under our current share repurchase authorization.

Now turning to our expectations for fiscal 2018. We anticipate total sales to increase 3% to 5%, driven by a higher average store count and continued growth in our e-commerce channel.

Total comparable sales are expected to increase between 1% and 2%. As it relates to store count, we expect to open 20 to 25 new stores during fiscal '18 and close 10 to 15 stores.

The timing of new store openings will be equally spread over the first three quarters of the year, while store closings will be heavier weighted to the first half of the year.

Our income tax rate is anticipated to be 24%, reflecting the lower statutory rate included in the new tax law.

Full year diluted earnings per share are expected to be in the range of $0.50 to $0.60. We expect earnings improvement in each quarter, relative to fiscal 2017 with the exception of Q2, which included some favorable adjustments in the prior year.

We expect to continue to generate positive cash flow in 2018, with total capital expenditures in the range of $26 million to $29 million, but with a larger percentage dedicated to e-commerce and supply chain investments than in the prior year. We anticipate a reduction in our cash taxes due to the lower statutory corporate rate and accelerated depreciation.

We also expect to continue to repurchase shares in fiscal 2018 under our current share repurchase authorization, and we do not expect any borrowings on our line of credit during the year.

Thank you, and we are now ready for questions.

(Operator Instructions) And our first question comes from Jeff Van Sinderen from B. Riley FBR.

Mike, I know you touched on some things in the prepared comments. But could you delve a little bit more into your learnings from Q4? I guess more on what you feel you did right? How specifically you can build on those elements in 2018? What we should see there? And then, I guess, any other color you could add on what you feel like you could have done better? And then, how your course correcting in those areas for this year?

Sure, Jeff. Thanks for the question. I -- fourth quarter was an interesting quarter. We got off to a phenomenal start. I mean, we were very happy with what we saw November, and that in large part came from the success of our holiday assortment, of which, we bought up a planned 10% comp this year, and we actually hit -- we hit the plan, and that represents about $60 million of business. So that was huge for us. I think, where we're focused as we look to this year and how we're planning out that season is that, specifically, that timeframe between Black Friday and Christmas, and then post holiday as to where we can make the most improvement. And as we look at what did work within that timeframe, our move into gifting and some of the gift presentations that we had in the store worked really well. I think, if we had to do it all over again, we would have bought a little deeper and devote a little bit more space to that, and that's a learning. Our marketing as well this year, we've got a bit of a pivot toward more of an acquisition model, and we believe that can help drive some traffic during that timeframe, once we kind of move through the year with our new digital program. And then, the launch of BOPUS, I think, can have a big effect as well. We will be in a better position to fulfill orders quickly for our customer as opposed to the -- some of the delays we've experienced in the past during that timeframe. And it also gives us an opportunity to think about the assortment online during that timeframe I mentioned, as to how we take best advantage of that and get orders to customers at a faster pace. And we're much better positioned to do that going into the year. So there's a number of other things, but those are the key call-outs that I would put out there, that and managing the margin a little bit better, I think we got a little aggressive in response to the dip in traffic. Some of the dips that we saw. And I know, once we get to the fourth quarter, we'll have another year under our belt in terms of managing that promotional -- those activities. And we've obviously put a lot of attention and effort into that in 2017 as well.

Okay. Good. And then, when is the -- when will BOPUS be fully up and running?

In the back half.

Okay. And then, as you think about enhancing merchandise [content]. I know you touched on that a little bit, but just wondering how you're thinking about differentiation and customer experience this year, both in the stores and from an omni-channel perspective? Any other color you can add there.

Well, I would just -- what I would say there is, we -- on the merchandise side, we're adding some licensed product this year. I think you'll see that rolling in, starting in Q2. So watch out for the add. I think that's an add and something that we haven't done a whole lot of in the past. Our online capabilities, we'll be making improvements to our mobile offering, as I mentioned in the prepared remarks. And I think importantly, and I called this out, we've organized our team around an effort to really innovate. And that includes a dedicated team as well as some testing that we're planning to do in our existing format that will lift up some of the merchandise presentations that we feel really good about. We feel good about the product, it's about how we show it, how we sell it and how the stores pull that off and the site pulls that off. So more to come on that, Jeff. But it is a key initiative for the company in 2018, and we're all excited about it.

And our next question comes from Brad Thomas of KeyBanc Capital Markets.

Let's, here -- a couple of questions about the guidance if I could. Can you help us think about what you all are planning from a margin perspective? How are you thinking about gross margin and operating margin in the context of the $0.50 to $0.60 earnings range, please?

Yes. I'll start on that one, Brad. With -- on the margin side, I mentioned that in the script a bit, I mean, we feel like there's opportunity on the merchandise margin aspect of that. So we believe we can create some gain there. We'll give some of that back though with higher transportation costs. I mean, I think that's something that most retailers, if not all retailers, are feeling this year. And we've tried to account for that in our guidance. So that kind of leads to more of a flattish gross profit margin. And then, when you add in a little leverage from the SG&A that we expect, you'll have a slight -- the modest increase in the operating margin as contemplated in the guidance here.

Great, great. And then, it looks like with the restatement, we should probably be moving, looks like it's about $5 million a quarter from depreciation into COGS for 1Q to 3Q?

Yes. And we're going to release an 8-K later today that will go back and retroactively restate the quarters with this re-class, so you have the exact number. But, yes.

Great, great. And then, just, Mike, in terms of this backdrop where retailers that are big taxpayers are getting a nice break here. We're hearing a lot of retailers reinvest some of that. I guess just, what were your discussions with the management team and among the board about reinvesting and is there any element of reinvestments kind of contemplated in 2018 here for you all?

Yes. I mean, one technical point here in terms of the cash impact of the tax law for us. Given our seasonality and the timing of our tax payments, we'll make our tax payment in April for last year at a higher rate. And then, we really won't feel the bulk of the cash flow impact of this until '19. But obviously, we'll get the rate benefit in 2018. But same question applies, and that's how are we going to -- how are we planning on using this additional capital. And first and foremost, we're investing in the business. I've talked a lot about some e-commerce investments that we have prioritized. I think accelerating that became possible, given some of the cash flow benefit that we're going to see out of this tax law. We've been able to allocate both OpEx and CapEx to some of these -- and we're calling them next-gen initiatives, tasks, concept proof, that we'll do as we go through the team and identify what can be the sources of differentiation for us going forward. So it allows us to move faster on that as well. And then, we also have a share repurchase program out there and that gives us more flexibility to move that along as well. So that's the sequence that we think about this through and it's -- we are in a healthy cash position as it is and this just gives a little bit more flexibility.

Great. And could you remind me what that share repurchase authorization is, as we stand here today? And what share counts or what level of repurchase is baked into the earnings guidance you've given here this morning?

So the initial authorization was for $10 million. As of today, there's roughly $7 million of that remaining. What's baked into the guidance is an opportunistic approach to use the remaining authorization throughout the rest of the year. So obviously, it depends on stock price and the way that we built the model. But there is some baked in.

Got you, great. And then, maybe if I could just squeeze one more in. Just, I don't think there was explicit commentary on 1Q necessarily. But any update for us on how recent trends have been? Any color you could share with us on how your consumer is performing, given tax reform but also to some degree tax refunds look like maybe about a week late from last year?

Yes. We've tracked that as well, and they are about a week behind where they were last year. In terms of the trends in the business, I would just characterize them as we were pretty right in line with the guidance that we gave for the full year. And so a little dip late in the fourth quarter, but we're positive so far this year.

And our next question comes from Anthony Lebiedzinski from Sidoti & Company.

So Mike, you said in the press release and I think in your prepared remarks that you made important investments in 2017 to improve execution refocus merchandise assortment. So which of these investments do you think will have the most impact on your results for fiscal '18?

Well, I think -- well, all of them, we think, will because the timing of that throughout '17 was building, obviously. So some of the work that we implemented on the pricing and promotional activity systemically kind of dropped in as the year progressed. For example, the clearance margin effect started really in Q2. So we expect those margin initiatives to have a full year's effect this year, as we continue to get smarter on those. The SKU rationalization, our SKU count is down and we'll start the year in that position. As it'll be coupled with the discipline behind it so our planning team and our merchant team is working together to maintain that level of SKU control. And so we'll have a year's benefit of that. And we're doing a much better job of tying the SKU positioning to the space in the store. And that's a big initiative as well as for space planning, which in our kind of business you have to be flexible and it -- but it's very helpful to the way we plan the business. And so all those things, we think, will continue to benefit us in 2018.

Okay, very good. And also, what are your longer-term thoughts on the store base? Obviously, you gave guidance for fiscal '18, but with e-commerce accelerating, are you evaluating the store base ultimately as to where you think that will be?

Yes. I mean, we do that. We're very focused on that. We are reducing the pace of openings in 2018. And you called out probably the top reason, and that's just that unabated growth that we're seeing in e-commerce, which is a positive. And so we're focused on that. We'd like to see the brick-and-mortar traffic trends, start to come back in our favor a little bit. As I've outlined in the past, we don't have to have that positive in brick-and-mortar to generate comps because we've had these initiatives I described and what we've seen out of the average ticket, and our ability to continue to drive conversion and keep a positive track there, are able to offset that brick-and-mortar traffic decline. And while I'm on now, I'll highlight that if you really look at the touch points that we have with customers, when you combine what's happening online with what's happening in the stores, we're year-over-year higher, because of the activity that we're seeing on our site. So if you rolled it all up, and I understand one visit's not the same as others, they are not equal in terms of its convertible or how it converts to sales. But the touch points are up, because of our presence online. So -- but as it relates to store growth, we'd like to see a little bit more stability on the traffic side before we expand in a bigger way. We don't want to put undue pressure on our supply chain, that's been a focus of ours. And as we are progressing here, I think it's wise for us to not put that pressure on it, if we don't need to. And so those are the big reasons, and we continue to refine and improve our ability to open new stores and that's still intact. But these other factors, I think, lead us to want to slow down the pace a little bit.

Got it. And also when you look at the CapEx budget that you have for fiscal '18, can you give us a sense as to how much of that is going towards e-commerce? How much towards the supply chain? How much stores, maybe just put them in different buckets, that would be very helpful?

Yes. I -- last year, I think Nicole called out that 72% was new store capital. This year, it's closer to 50%.

50%.

And keep in mind, again, that the amount of capital we spend on a new store is offset in a pretty large way by the landlord's contribution as part of lease. So that is a growth CapEx figure. But clearly, if you look and step back and look at how we're allocating that capital, it's more on the e-commerce omni-channel side than it has been. And I would group the supply chain with that because they're hand-in-hand.

And our next question is a follow-up from Jeff Van Sinderen from B. Riley FBR.

Mike, you mentioned that your comps are running positive so far in Q1, which is great to hear. Is that being driven by e-com? Just wondering about that? And then, any more insight you can give us for modeling purposes on how you're thinking about the quarterly progression this year in terms of gross margin, SG&A, any other elements that maybe you can help us with there?

Okay. The first part. Yes, it's being driven by e-commerce, in a similar way as it was in Q4. So we're seeing a similar lift in e-commerce so far and a similar kind of brick-and-mortar comp if you want to look at it that way as well. So continuing to be supported and driven in large part by e-commerce. And then as far as the quarterly progression, I think Nicole highlighted on the bottom line that we expect to see some improvement year-over-year in Q1, Q3, Q4. There's some comparison issues in Q2 that are going to make that a little bit more difficult to -- in comparison to LY. As far as the margin part goes, I don't know, that there's some really big differences across the quarters. In your earlier question, you asked about Q4 and performance, we obviously think there is a margin opportunity in Q4, in 2018 that may be a little bit more of an opportunity than the other quarters. We've also made some expense reductions that will affect Q1 through Q3, because they were more or less fixed costs that we pulled out. And so, that should help spread it a little bit better than it has in the past. Hopefully, that's helpful for you.

Okay. I know, that definitely is. And then, if we could turn for a moment to direct sourcing today, that's one of the things that we saw as a pretty substantial opportunity for you, maybe you could update us on kind of how that's progressing? Maybe how we should expect that to impact gross margin this year? Anything you can give us there on order of magnitude timing would be helpful.

Yes. So given the lead times in the business and us ramping up to that, it won't really impact the margin until Q4 this year. And you know -- on a -- not a huge scale, given the way we're moving into this, which again, is focused on our replenishment portion of the assortment, which has more steady characteristics to it. And that in total makes up about 30% of the assortment. I don't think we'll get the entire 30% to the direct import model. But we are just going SKU by SKU and looking for the biggest opportunities and going after those first. And so as you go into 2019, is when you'll see more of an impact from that transition. Although, this year will be the first time you see a benefit and that should come in Q4.

Okay. And then, I just have one question on the P&L as a follow-up. I think there was a -- in the prerelease a mention of a $0.04 headwind from tax reform and severance for Q4. But I'm not sure I heard if you called that out on today's release or in the call? Does that $0.04 actually prove to be the right number of onetime costs when the final accounting was done? Or was there a shift there?

No, it stayed as $0.04 and it's pretty much equally between the two of those items.

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

Thank you, everyone, for attending the call today and your questions, and we look forward to reporting to you in a couple of months. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.