Tillys Inc (TLYS) 2015 Q4 法說會逐字稿

Greetings, and welcome to the Tilly's fourth-quarter fiscal year 2015 results conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the conference over to Mr. Chris Lal, Vice President and General Counsel for Tilly's. Thank you Mr. Lal. You may now begin.

Thank you. Good afternoon, everyone. Thank you for joining us today to review Tilly's fourth-quarter fiscal 2015 earnings result. On today's call are Ed Thomas, President and CEO; and Mike Henry, CFO. A copy of today's earnings press release is available in the Investor Relations section of Tilly's website at Tillys.com. Shortly after we end this call, a recorded replay will be available for 30 days in the Investor Relations section of the Company's website.

I would like to remind you that certain statements that we will make in this presentation are forward-looking statements. The forward-looking statements reflect Tilly's judgment and analysis only as of today, and actual results may differ materially from current expectations, based on a number of factors affecting Tilly's business. Accordingly, you should not place undue reliance on these forward-looking statements. For a more thorough discussion of the risks and uncertainties associated with the forward-looking statements to be made on this conference call and webcast, we refer you to the disclaimer regarding forward-looking statements that is included in our fourth-quarter 2015 earnings release. Which was furnished to the SEC today on Form 8-K, as well as our filings with the SEC referenced in that disclaimer.

Today's call will be limited to one hour. When we get to the Q&A portion of the call, we ask you please limit yourself to one question at a time, to give others the opportunity to also have their questions addressed. With that, I will turn the call over to Ed Thomas, Tilly's President and Chief Executive Officer.

Thanks, Chris. Good afternoon, everyone, and thanks for joining us today. I will provide a brief overview of our fiscal 2015 fourth-quarter performance before updating you are on key initiatives for fiscal 2016. Mike will then review our fourth-quarter results in greater detail and introduce our fiscal 2016 first-quarter outlook.

For the fourth quarter of fiscal 2015, total comp sales declined 0.9%, which was better than our outlook of down 2% to 4%, but was marked by inconsistent performance from week to week throughout the quarter. Our online business continued to perform well, with sequentially stronger percentage growth from quarter to quarter. However, this growth was offset by negative comps in our brick and mortar stores. By department, comp weakness in men's and accessories offset positive comps in all other departments.

Our operating income of $9.5 million for the quarter was better than our outlook range of $7 million to $9 million. However, due to an abnormally high income tax rate for the quarter, which Mike will explain later, our EPS for the quarter of $0.10 was at the bottom of our outlook range of $0.10 to $0.12. We ended the quarter with clean and current inventories that were down 5% on a per square-foot basis.

Now turning to our key initiatives for 2016, on our last call, I shared some initial impressions about Tilly's' business after my first week on the job. Now that I am five months in, those impressions remain largely the same. And we have been working hard to make changes aimed at delivering better performance for the long term. Over these past few months, we've developed a near-term action plan focused on driving improved sales productivity, and centered on three key focus areas for improvement -- inventory management, real estate opportunities and online digital capabilities.

First, I will discuss inventory management. Tilly's has a very broad and eclectic merchandise assortment, which included sales from over 600 different brands during fiscal 2015. The Company has a long history of delivering healthy product margins from quarter to quarter and year to year. However, given the behavior of today's teen consumers, we need to be tighter with our inventory flows, have greater frequency of newness that is unique to Tilly's, and improve micro merchandising to specific store characteristics.

We believe we can reduce total inventory levels and still win our business effectively in-season. Because approximately 70% of our sales come from third-party brands, we have been working with our key branded partners to shorten lead times and increase product exclusives. We will make progress in this area over time, but it is an immediate focus to improve our inventory turns, while maintaining a unique and fresh merchandise assortment.

Micro merchandising is another key component to our improving our inventory management. We have compiled individual store profiles for every store in the chain in recent weeks, that highlight the differences in brand performance, gender penetration and customer interest that exists in our stores. We are beginning to adapt some of our allocation strategies to better capitalize on these individual store differences, and we believe store results will improve with this more focused, individualized inventory management approach.

Now, turning to our real estate opportunities. As we noted during our last earnings call, we have identified a number of stores that are not performing to our expectations. We believe there is a significant opportunity to improve our overall profitability by fixing these stores, and we are in the process of testing a few strategies to improve their performance.

With the benefit of our new store profiles, we have adapted certain micro merchandising elements to individual store characteristics, as well as adjusted certain allocation methodologies. I am pleased to report that the results we have seen so far have been encouraging, and we will expand these tests to a larger number of stores in coming weeks.

With regard to new store growth, we acknowledged on our last call that we would likely reduce the number of new store openings in fiscal 2016, due to the underperformance of some of our existing stores, but also due to the changing retail landscape. As of today, we are committed to three new stores in fiscal 2016, but we will remain open to additional opportunities. As a reminder, we have to 224 total stores in 32 states -- roughly half in malls and half off-mall. We are uniquely positioned to be very selective about opening new stores only in the best environments.

Additionally, in anticipation of continuing store growth, we have been working to develop a new, more efficient smaller store prototype of approximately 4,500 square feet, compared to our current average of approximately 7,600 square feet. We operate a number of small locations that are less than 6,000 square feet today. Yet we believe this new prototype will enhance our ability to maximize sales relative to store size. We have not yet opened one of these prototype stores, but we will aim to do so during fiscal 2016, to test the same full assortment in a smaller box, with lower total occupancy costs.

Now, turning to our digital online capabilities. As we noted on our last call, we believe there are opportunities to grow sales through omni-channel execution, without requiring multi-million dollar investments. We are working hard to complete our buy online/pick up in the store initiative by the end of the second quarter.

We're also re-branding and re-launching our customer loyalty program. The new program will offer better rewards to our most loyal customers, and will be integrated with our new mobile app. We expect to relaunch the program during the second quarter.

We are also working on targeted digital marketing initiatives aimed at improving particular elements of our business. In each case, our efforts are aimed at a more seamless customer experience to increase overall customer satisfaction. We will update you further as we go through the year.

Now, I will turn the call over to Mike to provide a more detailed review of our fiscal 2015 fourth-quarter operating results, and to introduce our fiscal 2016 first-quarter outlook. Mike?

Thanks, Ed, and good afternoon, everyone. Our fourth-quarter operating results for fiscal 2015 compared to fiscal 2014 are as follows. Net sales increased 4% to $159 million from $153 million. Total comparable store sales, including e-commerce, were down 0.9%, with strong e-commerce growth offset by negative store comps.

All departments comped positive, with the exception of men's and accessories, which comped down in the low single-digits. Our comps were driven by stronger conversion, offset by lower traffic, versus the prior-year period. We ended the quarter with 224 stores compared to 212 at this time last year, a 6% increase in store count.

Gross profit increased 2% to $50 million from $49 million, due to total sales growth. Gross margin declined 70 basis points to 31.4% from 32.1%, primarily due to increased markdowns taken to ensure we ended the fiscal year with clean and current inventory levels. Buying, distribution and occupancy costs were flat as a percentage of sales. SG&A expenses were $40.5 million compared to $37.8 million, and deleverage 70 basis points on the negative comp, primarily as a result of increased marketing spend.

Income tax expense was $6.6 million or 69.6% of pretax income, compared to $4.1 million or 36.6% of pretax income. This increase in income tax expense on lower pretax income was primarily attributable to a $2.6 million tax impact from stock option expirations, which resulted in the write-off of certain previously recognized deferred tax assets.

Due to our limited history as a public Company, when stock option expirations or forfeitures occur, we must write off previously recognized deferred tax assets to the income statement, rather than offsetting them against a long-standing APIC pool within equity. To a far lesser extent, the Company's income tax rate also increased relative to last year as a result of certain prior-period tax corrections and other true-up items.

Net income was $2.9 million or $0.10 per diluted share, compared to $7.1 million or $0.25 per diluted share last year. $0.11 of this EPS decline was attributable to the year-over-year tax rate difference for the fourth quarter. Weighted average diluted shares for the quarter were 28.4 million.

Turning to the balance sheet, we ended the fourth quarter with cash and marketable securities of $101 million, a 19% increase versus last year, and no debt under our credit facility. Inventories were down 5.1% on a per square-foot basis, compared to our comp decline of 0.9%. And our inventory aging was consistent with last year. Cash used for capital expenditures during fiscal 2015 was $23.1 million compared to $23.6 million last year, primarily for new and remodeled stores and improving our digital capabilities.

Turning to our outlook for the first quarter of fiscal 2016, based on current trends, we expect comparable store sales to be in the range of negative 3% to negative 6%, operating losses to be in the range of $2 million to $4 million, and net loss per diluted share to be in the range of $0.06 to $0.10. We expect our first-quarter tax rate to be approximately 40% before applying a discreet income tax charge of approximately $0.4 million related to restricted stock vesting.

We expect diluted shares to be approximately 28.5 million. We expect inventories per square-foot to remain below last-year levels during fiscal 2016, and total CapEx to be in the range of $25 million to $30 million. With that, I turn the call back over to Ed.

Thanks, Mike. I am excited about the opportunities we have identified thus far in my first few months back at Tilly's, and look forward to working with the team to improve the business. We have a number of things to work on, as we've discussed, and I look forward to sharing our progress with you throughout the year. With that, I would like to now open the call up for questions. Operator?

(Operator Instructions)

Dave King, ROTH Capital Partners.

Thanks, good afternoon, guys.

I guess first off, wondering if you could talk about the outlook a bit, specifically with regard to product margins? I guess it would seem to me that with the accelerating comp decline, you wouldn't necessarily be assuming as much in the way of markdowns.

Is that the right way of thinking about it? And how should we be thinking about gross margin and product margin for the first quarter? Thanks.

Thanks, Dave.

So with us being in a negative comp position, we certainly do anticipate continuing to be diligent about keeping inventories clean. So we do anticipate, in this range, having to spend a little bit more in markdowns than we would have in this period last year. The magnitude I think you can think of it as being fairly consistent with what we saw in Q4. Merch margins were down 70 basis points.

Would remind you that the Company, as Ed noted, has always maintained healthy product margins from quarter to quarter and year to year. So it's not going to be some dramatic multi 100 basis-point type of issue that you need to be concerned about.

Yes, and just to add to that, as we said in the opening remarks, we ended the quarter with very, very clean inventory across all categories. So we're pretty pleased about that. And so I think that combination of what Mike talked about and that is good for us.

Okay, absolutely. That's helpful.

And then, in terms of the improving growth in e-commerce, Ed, that you had mentioned, are you able to quantify how much, if at all, that was driven by some of the increased markdown? I know typically that's sort of been used as a discount channel.

And then I guess just as more of a broader, strategic question around that. You know, with the younger shopper these days doing so much through e-com, and probably likely to do more so going forward, and you guys generally being very, very disciplined and good at keeping your product margins healthy. What's the thought around future use of that channel as sort of a discount channel? Is there any thoughts around trying to make it so you can preserve margin there more going forward as well?

The e-com business is really -- there was nothing different than what we have historically done, in terms of promotional strategy, to drive the e-com the business during the fourth quarter and current to date. And the good thing is that we are seeing consistent traffic and conversion on e-com really coming into this quarter and throughout this quarter so far. So I don't see any really need to do anything drastically different in terms of promotional strategy.

And I think there is no reason why our margins would be materially different to drive that top line. I think we, like a lot of other retails, have been challenged with physical mall traffic. And that's our biggest -- we see a lot of inconsistency in traffic, sometimes from day to day or week to week. But I think we're hoping to see more consistency in the traffic as we get further into Spring Break, and really, past Easter.

Okay, that's great color. Thank you.

Jeff Van Sinderen, B. Riley.

Good afternoon. Let me say, great work managing inventory.

Ed, maybe you can just, as a follow-up on e-com, speak a little bit more about the new initiatives you are working on to keep that business moving forward? Maybe how you think about it becoming more seamless with brick-and-mortar? Maybe touch on the SKU count for e-com? And then also how we should think about -- I know you're working on buy online/pick up in store -- how we should think about that unfolding as you get closer to being pretty much set up there?

And then also maybe along those lines -- this a long question, but -- can you speak more about localization personalization? Because I think you sort of alluded to that. And then maybe how you are thinking about making the merchandise assortment more relevant in local markets while minimizing markdowns? Thank you.

Okay. So first, I guess I will talk about the omni-channel initiatives that we have.

So we have had in place, before I came back here, a ship-from-store in place, and that's been really successful for us. And the two biggest new initiatives that are not new to the industry, but will be new to us, is to buy online/ship-to-store, and to just ship-to-store. Which, I know for my past experience and from talking to many other peers, that it is usually a good traffic driver. And the intent is to really drive more traffic to the stores, which usually, from my past experience, I know that it can result in incremental purchases when their customer comes to pick up that merchandise.

So I think that -- and the other thing that we are really concentrating on now to enhance the e-com experience or the overall experience, and just multi-channel experience, is getting better at social media marketing. So we're getting more active with that, and we will give you more color on that as we get further into the year.

Okay, Jeff, hopefully that answers your question on e-com. In terms of localization, as we mentioned, every store in the chain, we dived in a deeper way than what I think we've ever done here before. And really trying to identify what does the customer like, what is the customer not liking in terms of brands, simple things like climatic differences. And we do a lot of events in local markets. I think probably what happened was, as the Company expanded east of the Mississippi, we didn't do as much of that as what we should have.

And now we've got all the data. And actually, I think we mentioned earlier in the call that some of our initial efforts are starting to pay off, and we are starting to see improved results. So it could be something as simple as changing the percentage of women's versus men's in store [gap], or it could be specific brands within the gender category. There's all types of things like that.

And I am thrilled that the team here has responded really quickly and really well to our efforts in that area. And I'm very encouraged by what we are seeing so far.

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

Thanks, Jeff.

Richard Jaffe, Stifel.

Thanks very much, guys, and welcome aboard, Ed.

Thanks, Richard.

Just a couple of thoughts. Hello, Mike.

Store closings -- is there an opportunity to look at the portfolio and actually reduce the store count in the short term? And then I have a follow-up question, if you don't mind.

Okay. So I think in terms of our situation, the quality of the real estate portfolio is actually very good. And when we say underperforming stores, that does not mean the stores are not making money. They are just not -- you know, there are always some, but it's not really material in the scheme of things.

I think where we see the biggest opportunity is really improving the top-line results in these stores, and improving the bottom line. So if I were sitting here today and I had an open checkbook and somebody said, would you close a lot of stores? The answer is, no. But certainly, we would take advantage -- I think in some cases we have already begun talks with landlords in terms of maybe downsizing a few of the stores, that are too big in certain malls, or off-mall, and types of things like that.

But I think overall, that's kind of overall where we sit right now.

Okay. The second question, Ed, is, I guess you've talked about gross margin being pretty consistent, and your relationships with vendors helps protect gross margin. But given the very cautious or negative EPS guidance, it suggests a lot of SG&A pressure. Could you talk about what's going on with SG&A to cause so much downward pressure on the EPS?

Yes, Richard, it's actually not that there is so much of an increase in EPS per se, it is just the model de-levers rather quickly when you have negative comps. So if we're going to be in this negative 3% to negative 6% comp range, you're just going to have some natural de-leverage on a fairly similar SG&A base.

And so, yes, the SG&A is not changing materially, it's the top line that is causing it.

That's right.

Yes, and as a matter of fact, we've actually made -- we started the process of -- we've seen some opportunity in some areas, in terms of expense reductions. And we've already started that process. It's not reactionary, as much as we've identified them as permanent changes that should be made, and we started that already, very recently.

Okay. And I guess just a last question. About a year ago, you completed the implementation of this new fulfillment center for online sales. And wondering if that has been a key driver, how that's worked out? And how big online is today, and how far you can go with it?

Yes, so we opened that in May of last year. So it's been -- 2014, that's right. So almost two years. Continue to be impressed with the labor efficiencies we are seeing out of that facility. It's been serving us quite well. Lots of room for growth for the e-com business within that facility.

We wrapped up fiscal 2015 with e-com just north of 10% of sales. Certainly convinced that it can be significantly higher than that, and particularly given the changing consumer behavior that we're all seeing in retail. Convinced that it will continue to grow over time, as we go through the years. Don't have a specific target in mind for a given percentage, but certainly doing what we can to make sure that it grows.

Okay, thank you very much.

Alex Pham, Mizuho Securities.

Hi, it's Alex on for Betty. Thanks for taking my question.

I was wondering if you could talk a little bit about inventory management? You mentioned that one of the initiatives would be to shorten lead times. How fast are they now, and how fast do we think we can get them in the future?

And also to piggyback off of Richard's previous question, could you talk a little bit about the relative underperformance of the stores that you mentioned relative to the chain? And maybe the maturity profiles of the current stores? Thanks.

Okay. In terms of lead times, you know, most of our branded partners, their lead times are relatively long, and it varies by vendor. Even vendors as big as Nike, lead times for shoes can be much longer.

Of course, I come from fast fashion, so I am used to very quick lead times. But I think, without getting into specifics, there is no question, if we can chip a week or two off the lead times, it gives us a lot more flexibility in terms of maybe chasing a certain portion of trends that we may have missed or we may want to capitalize on, where we are doing well, but we need more.

So I really can't tell you anything more than that, other than, we have this discussion with everybody that we deal with. And I think everybody gets it, and is onboard in trying to make that work. And that's kind of what I can say about it right now.

Okay, and then in terms of the underperforming stores, we kind of define underperforming as what was initially estimated in terms of sales volume for a particular store before the lease was really fully executed. That's really -- when I talk about underperforming, I'm really looking at our sales performance relative to what was estimated.

And so, it really varies significantly store to store. It's no one particular type of store or one geographic area. Although I do think, we have mentioned this before, the ramp-up of new stores in new markets is slower than what I think it can be. And certainly I think we have identified a number of opportunities where we can do a better job of just coming out of the box a little -- coming out of the gate a little stronger.

Great, thanks.

And then just to follow up, in terms of the new store prototype, how should we think about the four-wall or sales contribution of some of the smaller stores?

This is Mike.

Premature to be talking about any economics at this stage. Again, as Ed mentioned, we haven't opened one of these yet. We haven't negotiated a lease for one yet. So there are a lot of things yet to be determined as we go through this process, and we might be able to update further down the road, once we're actually closer to opening an actual one of these prototypes.

And we have -- right now, we currently have stores that are smaller than 6,000 square feet, for sure. So it's not as if it is completely new to us. We want to take advantage of our new prototype that was opened last year. That store design has worked really well for us, and we're excited about it.

We want to take advantage of combining that prototype, which gives us increased capacity to take in some markets where we might put -- or particular locations where we might put this store prototype. We want to be able to get that store as much of our full assortment as possible. And that's what this is designed to test and to do.

Okay, got it.

And then lastly, did I hear right that you guys are opening three stores this year? And is that sort of a low-single-digit pace? Is that something we can kind of model out for the future?

So yes, we do have three stores on the docket for right now. Two of those are slated to open in mid-May, and the other is slated to open in October, to give you a sense of timing for your modeling purposes. The actual number -- we don't have a specific targeted number. We are going to be opportunistic as we have conversations with various landlords.

So we don't have a set number in mind of the exact number of store openings. But to the extent there are additional openings, they would likely be, I would say, very late 3Q or early 4Q in terms of timing. And when we know more, we will update more on that.

Yes, and just to add to that, as we mentioned before, this is kind of temporarily putting on the brakes, to focus on our existing fleet. And certainly we have redefined a target list for developing a pipeline of locations that we want to get into in the future, so we will be in a good position when we decide to accelerate our growth again. We're going to be in great shape in terms of having our list, the landlords are already aware of some of it, and it's really -- right now, our focus is just fixing what we've got.

Okay, great. Thank you very much, and best of luck.

Thank you.

Pam Quintiliano, SunTrust.

Great, thanks so much for taking my question, guys.

So I was hoping -- I was looking at guidance, and just trying to parse out external factors versus internally driven factors. So in terms of just when you think about your consumer broadly, your core consumer, what's going on there, do you think they are engaged? Are they tempted by the other deals out there? Was weather that big a deal, or is it more product-related? Just any type of insights there would be much appreciated.

It certainly does not seem to me like it's a merchandising problem at all. Matter of fact, we're seeing very strong sales of our, what we call, summer categories, online.

I think what we're seeing now is more related to traffic. And in some cases, different -- like Southern California recently, where the weather has been challenged the last couple of weeks. Certainly there has to be some weather impact, but I don't think it's anything really more extreme than that right now.

Yes, Pam, got to remember that roughly half of our stores are in what we call our heritage markets; California, Arizona, Nevada. And those really did get hit rather hard in these last couple of weeks, as we have had, for us, what we call cold weather, and certainly a lot of rain coming through. And really saw a drop-off in those markets in recent days and weeks, as that weather came through.

So, convinced that there is a weather element that did cause us to start off slower than we would have anticipated for the quarter. And so we've got to factor in, we have missed some ground as we're sitting here roughly halfway through the quarter, in terms of number of days. We have just had to acknowledge what we've seen so far and factor that in.

And then as a follow-up to that -- so helpful. And Ed, with your experience in retail, do you think -- are you a believer that pent-up demand, the sales will come? Or are you in the camp that the sales are lost, and now we just have to move forward?

That's a tough question (laughter). I think the challenge right now -- and we are seeing this pretty much across the whole teen sector, as we've seen for the last several months. I think probably the biggest challenge in the industry is probably more lack of newness than it is anything else.

I think -- luckily, our business model does not depend as much on the fashionable element that everybody is looking for, that one big item or category that's going to drive demand. And I think that the industry has been lacking that for a while, and most people have suffered from it, with a few exceptions. And I think that's probably more of a challenge right now than anything else.

I could just tell you, is -- I won't tell you specifics, but I know that our merchant team is seeing some newness that they are excited about in the non-branded categories for the fall. The brands always have some newness, but certainly for fall, they are encouraging, what they've told me so far.

That's great.

And then just one more follow-up, once again for Ed -- sorry. But in terms of -- I am assuming you've done research on just market perception of Tilly's, especially in some of your older markets. What's the customer awareness like? What are they thinking of the store?

And then when we think about the long-term opportunity just for the store base -- obviously this year, there's only three stores, but longer term, there should be a lot more. What's just the perception of Tilly's? And are you working -- you talked about the digital marketing, but how else do you get the word out there for people who are unfamiliar with it?

Okay, so I -- first of all, we have never had market research done, but we're actually in the process of doing it right now. So I will be able to better answer that question on our next call.

But in terms of what we can see, is, we have internal customer surveys that we have done, and where we do pretty regularly, and that we measure it. I think the awareness is pretty good.

One of the advantages that we have had for a number of years now is, we do mail our catalog to a lot of areas where we do not have physical stores. So that definitely gives us a read. We can see where our sales are coming from. And I know that just our Internet sales -- considering the fact that we don't have a lot of stores in a lot of locations outside of our heritage market, our e-com sales are pretty consistent, coming from different parts of the country.

So I don't know if that answers your question, but that's kind of what I can say about it right now.

That was very helpful.

And last one is just, are the e-com sales -- is there any granularity to give us, given you were talking about the weather and e-com sales just regionally, that gives you comfort that it really is not the product?

No, we don't break down e-com regionally at all.

Thought it was worth a shot. Thanks, guys, good luck. (laughter)

Okay, thanks.

Howard Tubin, Guggenheim.

Hi, yes, this is actually [Paolo] calling for Howard.

I just wanted to confirm, you had said that traffic has been weak in the first quarter, and you are seeing a similar promotional environment as you did in 4Q?

For us, we really haven't changed anything materially in terms of promotional activity. So we have seen some of our competitors step up some of their promotional activity recently, where certain of the same brands are carried. But for us, we really haven't changed anything materially from what we normally do.

Okay, thank you.

And as a follow up, can you give us an update on the progress of some of your smaller categories, such as beauty? And if there are any plans to roll those categories out further?

I can't comment specifically on any one particular category. We are constantly reinventing the wheel, whether it's a small category or whether it's a larger category. And so obviously, if you see it in our store, it is something that's working. And we will continue to work on those.

This is part also of the micro merchandising I've talked about a lot, is that certain categories, like beauty, might be better in some locations than others. You might see an expanded assortment in some stores.

Okay, great. Thank you.

Liz Pierce, Brean Capital.

Thanks. Good afternoon, you guys.

So just a couple of follow-up questions. On the catalog, Ed, is it the same nuances, same catalog that you will be mailing for the spring-summer season?

Well, as we made a number of enhancements to the last couple of catalogs that might not be totally visible, but it generally -- it's something that we review the results page by page, item by item, in every catalog we do. And we also recently have had a catalog expert take a look at what we are doing, and we're making subtle changes as a result of that. But I wouldn't expect anything to really materially change as far as the catalog goes.

Okay. I guess I should have been a little bit clearer. In terms of timing, about the same as last year, in the number of issues? Because I've already got, what, two, early spring and late spring?

There is no material change to what we did last year.

Okay.

And then, in terms of -- Mike, for you, on the gross margin SG&A. As we think about it, for the quarter, I think you had said last quarter, you really need 2% to 3% comp to leverage buying occupancy, and maybe 3% to 4% for G&A. As we think about the split for the pressure point for Q1, based on what you just said, I think, to Richard's question, not material increase in dollars. So on the SG&A, is it going to be so really more on the margin side?

And I'm just trying to circle back to the fact that inventories are down.

Yes, so the thing I think that might be getting missed in this conversation is, remember, we have 11 -- I think it's 12 more stores than we had a year ago, as we finished the year. So we're coming into Q1 with 12 more stores on a negative comp guidance range. That's an added raw-dollar increase in occupancy year over year, that is absolutely de-levered because of the added 12 stores. And we're not having the sales volume that we need to leverage that additional spend, that's on those brand-new 12 stores.

Right.

So there will be more de-leverage in the buying, distribution and occupancy bucket of spend, certainly than there was in fourth quarter. The thing with fourth quarter, underneath that, we actually had a good amount of leverage on distribution.

Going back to one of the questions earlier, because of the new e-com fulfillment center and other changes that have been made in distribution, we are getting great labor efficiencies from our distribution function, that enabled us to actually leverage some on that line item. Partially offset by some occupancy de-leverage to net to the flat.

As you go to Q1, now you have 12 more stores in there, and we've got negative sales. So the raw dollar base of occupancy is higher, and then you've got lower sales from your comp base.

Okay, all right, that helps a lot.

And then, Ed, in terms of you talking about the localization, so you said you are seeing some of these efforts pay off. When you look at your base of 224 stores, and as you just said, half of those are in heritage markets. Within the heritage markets, how much variance is there? How many different buckets are there?

Well, in terms of the heritage markets, because we've been in these markets for so long, there is no major differences, other than may be dictated by size of store, or a particular location. But where we see the broader variances is really east of the Mississippi.

Okay.

Some of that, honestly, was -- some of the performance was really, I think, related to a self-inflicted decision, where we decided to, at some point in time, to not have as broad of a choice comp in some of these stores, as what we do in the heritage stores. And that's one of the opportunities we were able to close the gap on relatively quickly.

Actually, so that kind of brings me back to my last question, is, you talk about the 600-plus brands. So we shouldn't be thinking that you are going to materially change that or reduce that? Is it just more what's behind in terms of the deliveries, the quantities per brand?

Yes, I don't see any material change to any of those number of brands. We are always constantly pursuing newer brands, and we pick up more brands. And sometimes, brands get -- they die, and certainly some go away.

But there is no change to strategy as far as the broad assortment that we carry. Along with the kid's business, which is not carried in all stores, but a lot of stores, those are big differentiation factors for us.

Right. Do you, Ed -- and to that point, do you anticipate changing between the 70% third-party branded and private label? Or do you think -- is that a good distribution between the two for you guys?

It works for us. So I don't anticipate any change in that percentage of breakdown.

Okay. All my other questions have been asked. Thanks, and best of luck, guys.

All, thank you.

Dave King, ROTH Capital Partners.

Thanks for taking my follow-up, guys.

Just a quick one. Have you looked at all at how many stores you guys have in malls or adjacent centers to where there's a [pax on]? Do have those numbers?

It's store by store, I think.

[Kind of like] specifically, but at least in the malls, my guess is that in every mall that we are in, [peasense] is probably there.

Yes, you have remember, they have several times the number of stores that we do.

Yes, the off-mall, honestly, I have not looked at. I don't think anybody has look at it really recently.

Okay, perfect. I will follow up online. Thank you.

Thanks. Bye.

Thank you. At this time, ladies and gentlemen, I would like to turn the conference back over to management for any closing comments.

Thanks again for joining us. We look forward to discussing our first-quarter results with you all in May. Have a good evening.

Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time, and thank you for your participation.