Tillys Inc (TLYS) 2016 Q3 法說會逐字稿

Greetings, and welcome to Tilly's third-quarter FY16 earnings results conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like turn the conference over to your host, Mr. Gar Jackson. Thank you, sir. You may begin.

Thank you, operator. Good afternoon, everyone, and welcome to Tilly's third quarter FY16 earnings call. Ed Thomas, President and CEO, and Michael Henry, CFO will discuss the Company's results, and then host a Q&A session. For a copy of Tilly's earnings press release, please visit the Investor Relations section of the Company's website at Tillys.com, where you will also be able to find a recorded replay of this call for the next 30 days shortly after the conclusion of the call.

Certain forward-looking statements will be made during this call that reflect Tilly's judgment and analysis only as of today, November 30, 2016, 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 any forward-looking statement, please see the disclaimer regarding forward-looking statements that is included in our third quarter FY16 earnings release which was furnished to the SEC today on Form 8-K, as well as our other filings with the SEC referenced in that disclaimer.

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

Thanks, Gar. Good afternoon, everyone, and thanks for joining us today.

I will provide an overview of our FY16 third-quarter results, before updating you on the progress of our FY16 initiatives. Mike will then review our third-quarter results in detail, and introduce our fourth-quarter outlook.

Our FY16 third-quarter comp sales, operating income, and EPS all exceeded our outlook ranges. Comp sales including e-com increased 4.4% for the quarter, on top of last year's 3.9% increase.

Store comps were positive for the first time since last year's third quarter, and our online business continued to grow at a double-digit rate. After a soft start to the third-quarter during the peak of the back-to-school season, store traffic turned positive on a weekly basis throughout September and October, marking our first months of store traffic growth in quite some time.

On a total Company basis, all departments comped positive for the quarter with the exception of women's, which was down in the low single-digit, but improved as the quarter progressed. We generated meaningful SG&A leverage due to the tighter expense management, coupled with our positive comp result.

Third-quarter operating income of $10.7 million nearly doubled compared to last year's $5.4 million, and earnings per share up $0.22 more than doubled, compared to last year's $0.10. We ended the quarter with inventory down 9.2% per square foot, cash and marketable securities totaling $105 million, and no debt.

As we noted during our last earnings call, we anticipated some merchandising newness including strengthening -- a strengthening of athletic trends, denim, and jackets to drive our business during the back-to-school season. What we did not anticipate, was significant improvement in store traffic I noted earlier. We believe this merchandise newness and our repurposed, more localized marketing efforts had a positive impact on both traffic and conversion for the quarter.

We continue to see improved comp results in certain underperforming stores that we believe are due to the assortment adjustment initiatives launched late last year. As you may recall, we started this effort with a small group of stores during the fourth quarter of last year. Our goal was to improve sales results in certain locations where we firmly believe that we should have stronger sales, based on the quality of the locations involved.

In March, we added a second group of stores, and both groups have consistently outperformed the chain in term of comps. As a result in October, we again doubled the number of stores included in this effort to over 40 total locations. Our results thus far continue to support our thinking, and we remain encouraged by the sales improvements that we've seen from these efforts.

Turning to our online in marketing efforts, our new Chief Digital Officer is off to a great start, and we believe he will meaningfully improve the profitability and efficiency of our online, mobile and social media efforts. We continue to test our new buy online, pick-up in store program to ensure it functions as intended, before rolling it out to all stores.

We are enthusiastic about the opportunity this program has to drive additional traffic to our stores, and we intend to follow this up with a ship-to-store program offering after the holiday season. These initiatives will complement our already successful ship-from-store program that we've had in place for a couple of years.

We are excited about the opportunity to drive additional traffic and sales by improving customer engagement and satisfaction through technology. We also continue to see positive responses and consistent sign-ups to our rebranded loyalty program that was launched in mid June.

Regarding inventory management, as we have demonstrated in recent quarters, we are managing inventories tighter than we have in the past, and we are reacting faster to slower selling styles. We believe that this more disciplined approach results in faster inventory turns, and allows us to accelerate the introduction of newness for our customers.

As expected, our product margins declined modestly in the third quarter, but they remained very healthy overall. We ended the quarter with inventory per square foot down 9.2% relative to our comp store sales growth of 4.4%, and with inventory aging improved to last year. We still have more room to improve, and this will remain a primary focus for us.

Turning to real estate, we remain focused on improving the performance of our existing stores for the time being, rather than opening a significant number of new stores. As I noted earlier, we have seen positive results from our adjusted merchandising strategies in some of our stores that weren't delivering the kind of top line results that we believe they should. Additionally, we continue to work with our landlords to restructure existing store leases when natural lease expirations or kick-ups are available to us.

There are nearly 60 total stores to address in the coming year, representing just over 25% of our existing store base. While we will remain optimistic about new stores where we believe the location and economics are appropriate, our primary focus will be on improving the productivity of our existing fleet, in order to drive increased profitability for our Company overall.

In closing, our Q3 results are encouraging, and I'm proud of our team's effort over the past year. The fourth quarter is off to a decent start with a low single-digit positive comp due to a strong Black Friday and Cyber Monday. We still have a lot of work to do to further improve this business, and get back to a high single-digit annual operating margin, which remains our objective. Now I'll turn the call over to Mike to provide more details on our third-quarter operating performance, and to introduce our fourth-quarter earnings outlook.

Mike?

Thanks, Ed, and good afternoon, everyone. I'm pleased to share our third-quarter operating results for FY16, compared to FY15 as follows. Net sales of $152.1 million were up 7.3%, compared to last year's $141.7 million. Total comparable store sales including e-commerce increased 4.4% on top of last year's 3.9% increase.

Store comps were up low single-digits, and e-commerce continued to grow at a double-digit rate. Our comps were driven by an improved store traffic trend and stronger conversion.

We ended the quarter with 225 stores, a 2% increase from 220 stores a year ago. Gross profit of $48 million increased $3.3 million, or 7.5% from $44.6 million last year. Gross margin was flat at 31.5%.

A 110 basis point improvement in buying, distribution and occupancy costs offset a 110 basis point decline in product margins. Buying, distribution and occupancy costs increased $0.8 million compared to last year, but these increases were leveraged effectively on higher total sales. Product margins declined due to increased markdowns as been the case all year, due to our acting faster on slower sellers, but product margins remained very healthy overall.

SG&A expenses were $37.3 million, compared to $39.3 million last year, a decrease of $2 million. As a percentage of net sales, total SG&A was 24.5% compared to 27.7% last year, an improvement of 320 basis points.

More efficient marketing spend, lower non-cash impairment charges, corporate payroll savings, and several other smaller expense reductions accounted for 240 basis points of this improvement, resulting in our ability to leverage a smaller total expense base on increased sales. The remaining 80 basis points of improvement was attributable to severance obligations of $1.1 million recorded in last year's result.

Operating income of $10.7 million nearly doubled, compared to last year's $5.4 million. Income tax expense was $4.4 million, or 40.4% of pre-tax income, compared to $2.6 million, or 48% of pre-tax income last year. Net income of $6.4 million, or $0.22 per diluted share more than doubled, compared to $2.8 million or $0.10 per diluted share last year. Weighted average shares for the quarter were 28.5 million.

Turning to the balance sheet, we ended the quarter with cash and marketable securities totaling $105 million, a 38% increase, compared to $76 million at this time last year. We have no debt under our credit facility. Inventory decreased 9.2% on a per square foot basis, compared to our comp sales increase of 4.4%, and our inventory aging was improved versus last year.

Year-to-date capital expenditures were approximately $14.8 million this year, compared to $17.5 million last year. Capital expenditures have primarily been for remodeled stores, three new stores, and IT investment. Total CapEx for FY16 is not expected to exceed $20 million.

Turning to our outlook for the fourth quarter of FY16. Through November 28, quarter-to-date comps are up low single-digits. A strong Black Friday and Cyber Monday more than offset a weak start to November in our heritage markets of California, Arizona and Nevada, where 120 of our 225 stores reside. We believe this weak start was largely attributable to unseasonably hot weather in the West, as we saw heritage market comps bounce back well for the Thanksgiving week. We expect store traffic patterns to remain erratic, with peaks and valleys throughout the remainder of the fourth quarter.

For the quarter as a whole, we expect fourth-quarter comparable store sales to be in the range of flat to up 2%, operating income to be in the range of $7.5 million to $9.5 million, and earnings per share to be in the range of $0.15 to $0.20, compared to last year's $0.10. We expect our fourth-quarter tax rate to be approximately 40%, and diluted shares to be approximately 28.7 million. We expect inventory per square foot to remain below LY levels, and to end the year with 223 total stores, as a result of 2 store closures late in the quarter. Operator, we'll now take questions.

(Operator Instructions)

Jeff Van Sinderen, B. Riley.

First let me say, congratulations on the really substantial improvement in Q3.

Thanks, Jeff.

So just in thinking about your guidance for Q4, maybe you can just give us a little more color on what you saw around Black Friday weekend, in terms of the traffic and transaction trend? I know you said Cyber Monday was good, it seems like your income business is really strong, but wondering more about that compared to last year? And then maybe, you can just touch on how that plays into your guidance of a flat to up 2% comp? And I guess, how we should think about that, versus what is an easier, relatively easier compare in Q4 this year?

Well, first of all, our Black Friday was pretty solid, and we saw pretty good traffic on Black Friday. I think the guidance really reflects what we expect to be continued volatility in the traffic patterns, in both mall and off-mall. And really, we didn't see material difference, really between off-mall and mall, and traffic. So it's still really difficult to forecast consistently up traffic, and our guidance really pretty much reflects that.

Yes, Jeff, and I'd just add that when you look back at Q3, how we ended up doing so much better than our guidance, was the fact that our store traffic suddenly turned positive. We haven't had positive traffic in a long time. And as that began to happen, we're looking at each other and saying, well, how long is this going to last? And as soon as we flipped the calendar to November, we saw store traffic drop for the next three weeks. And even during Black Friday weekend, we had a great Thursday, Friday, but then Saturday fell off, and Sunday bounced back the other way. And then, early this week it's fallen off again. So it's going back and forth. As we said in our commentary we're seeing some erratic behaviour from traffic, and we think that's going to continue. So we're taking a cautious outlook on what the fourth quarter might bring.

Okay. That's really helpful. And then, if I can just squeeze in one more on the women's business trend. It seems like there's certainly some fashion newness out there, and it seems like there's maybe a shift in terms of the overall fashion trend that may be underway. I'm just wondering, if you can speak a little bit more to the women's business, what you see as kind of the path to getting that business positive?

Well, I think really, we're seeing enough newness in women's going into spring, so I'm not going to get into specifics in terms of what we're seeing. But part of the women's business I would say, a substantial part of the decline in the women's business was primarily attributable to cold weather product. As soon as we saw the weather turn, we started to see an improvement in most of those categories. So that's kind of where we are at, Jeff right now.

Okay. Thanks very much, and best of luck for rest of the holiday.

Thank you.

Janet Kloppenburg, JJK Research.

Hi, Ed, hi, Mike. Congratulations, really, really nice result.

Thank you.

Thank you, Janet.

A couple questions, Ed, on the women's business, just a couple of things, you said there wasn't (inaudible) improved as the quarter went along. I mean, could it have been positive in October, that's just something I'm wondering about? And I'm also, just wanted you to talk a little bit more about the markdown pressure, the timing of markdowns impacting the gross margin, should we look for that trend to potentially impact gross margins for the next few quarters? And then, also on the store, the opportunity for store closings. Did you say that 60 stores have lease expirations in the next 12 months, and maybe you can just flesh out how you're thinking about that?

Okay. So let me start with the women's. So again, Janet, the women's business was primarily impacted by warm weather, it was too warm, and specifically in our heritage markets, and I don't expect that to continue. And as we started to see colder weather, particularly in California, Arizona and Nevada, we started to see improvement in that business. So I don't see -- again, I don't think there was anything unusual there.

Markdowns.

Oh, in terms of markdowns, we're not really -- (multiple speakers) Okay, go ahead.

Can you comment on whether the women's business did get in positive territory later in the quarter?

Yes, we don't --

We're not going to comment --

Yes, we don't comment on individual months or individual weeks.

I'm sorry. I'm sorry.

That's okay, that's all right. Okay.

It was about markdowns and --

In terms of gross margin and markdowns, first of all, we started this several months ago. As we just -- we're taking markdowns on a more timely basis internally, and so it's not driven by anything unusual. And the thing that I'm most excited about is that our Black Friday, we saw a pretty healthy traffic, without giving the store away like a lot of our competitors did. So we didn't have to get unusual. I think by us getting more disciplined in terms of the inventory management process, has helped minimize any kind of major markdown exposure. And our merchandise margins have been consistently very good over the last several weeks, nothing's changed related to that. Okay?

And just on the lease expirations?

Yes, you want to talk about lease?

Sure. So yes, they're almost 60 total stores that will be actionable this year. Some of those are lease expirations, some of those are kick-outs that are available to us. Some of them are kick-outs that we addressed this past year that we maybe agreed to a one-year push of the kick-out to reevaluate again this year. The combination of all of those things has blended together a group of roughly one-quarter of our total store base, that we're going to be able to address one way or another this coming year.

Okay. And you will talk more about that with us at -- on the year end call?

Well, as we start to see results, we'll talk more about that potentially. It's difficult to say what the impact is going to be. It gets into location by location, landlord by landlord discussions, and one answer isn't going to be the case across the board. It's going to be on a case-by-case basis. There might be some things that actually increase and other things that go down. So where that actually lands out, we'll have to wait and see.

Yes, and actually, it's a good position to be in, when you've got that many stores that you can take some kind of action in. It's a good position for us to be in in terms of negotiation going forward.

Absolutely. And just one last question, Ed, when you look across the your major categories of men's, accessories, footwear, women's, is there one trend, prevailing trend that's driving this improved traffic and conversion, or is it a multitude of smaller trends?

I think it's a multitude. We saw pretty good performance across a lot of categories and a lot of different brands, so there was no single dominant thing in the men's category, shoes or anything that really, we believe really drove traffic. We think part of our traffic improvement was really somewhat related, not only to merchandise, because we always felt that overall the merchandise assortment was good. But also some of our marketing initiatives that we took, we did during the quarter, and some of the addressing the underperforming stores, and the things we did in terms of micro merchandising those stores. It was really a combination of a lot of different things. Nothing stood out in terms of being a dominant trend.

Okay. All right, great. Lots of luck for the season. We'll talk to you later.

Thank you.

Neely Tamminga, Piper Jaffray.

Great. Good afternoon. Let me add my congratulations to you and the team. So hey, Ed, could you talk a little bit more about the -- your third-party brands as well as your private label brands, kind of the national brands versus private label? And maybe give an assessment of how private label is performing for you guys, and if there is opportunities as we look into 2017?

And then, I guess, related to that, and how you are feeling about the content, kind of some the up-and-coming brands as the landscape has been evolving a little bit on the lifestyle that your brand portrays? So curious for your thoughts there. And then also, we've been hearing a little bit more about tactical shifts towards improving flows, or pulling forward flows to keep the stores very interesting around holiday. How are you guys planning to flow some of your merchandise this year versus last year? Thank you.

Okay. So in terms of the proprietary brands versus the -- what I'll call nationally recognized brands, we're happy with both. And I would not expect us to make a material change to that, the strategy that's been in place for a long time. What we tried to do is -- our stores as you know, carry a lot more brands than what our perceived our direct competition is, and we're not just about action sports. So it gives us a lot of flexibility in terms of what we can do with merchandise mix, and so on and so forth.

And the biggest thing we're trying to do is shorten the life cycle of the time, the time it takes, the lead times, it takes to get some of our merchandise in, that will give us more flexibility for adjusting to any potential trend that we missed or anything like that. So those are the major initiatives. I think the buying team has adjusted to a little bit different change in philosophy, and they've adjusted well. So we'll continue to work on that. Some brands it's -- that the bigger brands, we're not going to be able to change lead times that easily. So it's really an evolutionary process that it will take to get faster, but certainly we have speed in mind, of getting more newness to the stores more frequently.

And I guess, related to that Ed, are you planning on flowing a little bit differently this holiday versus last year, or how should we be thinking about your flows on a year-to-year basis?

Yes, I don't think that -- it's going not be materially different than what we've historically done. I mean, coming -- starting the quarter out, being down on a comp inventory basis of 9.2%, that was the biggest objective we wanted to accomplish, because we felt the inventories generally were too high. So we've consistently managed inventories down, and that we'll continue to work away at that. But in terms of flow, I think -- the only thing I'll say is we're trying to get better of adjusting to some climatic differences where -- I think, we were okay at it, we weren't great. And we're probably making more adjustments along that line of having more timely, wear now merchandise in certain markets.

Okay, great. Best wishes, and have a wonderful holiday.

Thank you. Same to you.

Pam Quintiliano, SunTrust.

Congratulations, guys. A really phenomenal quarter, especially in this environment where a lot of people are very challenged. So I just had a few questions for you. First off, regarding the assortment initiative that you have in place, is there any level of detail you can give us, on how the comps in those 40 stores have been doing relative to the rest of the base? Or just how performance has been, and also plans for next year and beyond, and how quickly you can introduce more stores into that program?

Yes, Pam. So as we noted in our prepared remarks, those stores have consistently outperformed the chain since we've been doing this. So that's why we just recently a few weeks ago, increased the number of stores to a little over 40 stores now. That first group, actually the first two groups all year long, have had better comps as a whole than the chain. So that's what's convinced us that our thinking was spot on, in terms of the opportunity that was there. And so, we've just looked at other locations now at -- it's next level down, of okay, who else do we think has opportunity to grow, and let's try to adapt some of these things to those additional stores. And that's what we're doing.

Yes, and just to add to that as we have mentioned in the past, if we see anything in these stores, these underperforming stores, control group, that we think is an opportunity in the rest of the chain, we would implement that immediately. But this is more of adjusting our merchandise mix to a specific store profile, in terms of what brands sell, what -- and that types of thing. And that's what we're concentrating on, and so far, so good. So we're going to continue it.

Great. But you won't quantify for us, right, how the comp differential, even with that first store base, or is there anything meaningful other than the strength?

No.

No.

Okay. Can't blame me for that.

No, it's been better every month, and that's as far as we'll go. (laughter)

Okay. How about another question for you guys? The localized marketing efforts, and you've mentioned a few times how that's really swung the traffic. So can you give us more detail on exactly what you're doing there? And beyond that, just when we think about weather overall and your regional emphasis, and then you mentioned how weather wasn't great in early November, and that probably hurt. So how do we think about weather to helping you guys in 3Q?

Sure. So the localized marketing efforts are -- there's a number of things we've done. We have done in-store events, some of it nationally in all stores, some of it regionally, could be sponsored by a particular brand. And we've done quite a few of those type of events which we found to be pretty successful, particularly in newer markets where they may not know Tilly's as well as our heritage markets. But certainly, generally overall, we've done a number of things. We're getting better in terms of social media marketing, and regional and more localization of that, in some cases.

One of the things, we don't talk a lot about, but we still have a catalog, and we use catalog to drive business, and we've gotten better in terms of directing them -- who we mail the catalogs to, particularly in new markets. So I would say those are, off the top of my head are the biggest things that we've done, and so far they've worked well. And then lastly, on Black Friday, we ran an opening event that was a combination of -- we gave scratches out, and we had a little bit of fun with it with virtual reality [tests] for customers. And we had a gift bag for the first 100 customers, and that really helped us in a lot of ways. But so, there is no one particular thing. We'll continue to be, to do a combination of national marketing and some localization.

And do you think weather helped you guys, particularly in the West?

As we got into Thanksgiving week, yes, I would say so. We really got off to a rough start, out here in the West. The first 2 1/2 weeks of the month it was in the 80s and 90s almost every single day. So we had a really rough start out here. And then, as we got into Thanksgiving week, and weather turned more seasonal like you'd expect it, we saw traffic and comps bounce back. So that's why we say we're pretty convinced that it was a weather phenomenon that impacted us, and that does play into our guidance.

So when you think about compares and things like that, as Jeff alluded to, one of the things we're looking at is, during those weeks, whatever sales we thought we were going to get during that time, we didn't get them. We missed them, and we're not counting on getting that missed activity back. We don't think that suddenly there's a backlog that we're owed. We missed sales during those weeks undeniably, and we're not counting on getting that back.

On the flip side, do you think in 3Q, that having exposure to the West which was more seasonally appropriate helped you?

Well, it's tough to say, because traffic just wasn't up here in the West, it was up in all markets. And our heritage markets were positive comp, as were our new markets. Some of our best comp markets were actually outside of heritage markets. We were good all across the country, and traffic was up all across the country.

So the Q3 performance really wasn't as regionally based as the early Q4 performance was. We do have traffic counters in all of our stores, so we are able to see when there are distinctly different behaviors in particular markets, or in a given region, we can see that. And that's what really happened in the beginning part of November is, it was very distinct. We were doing well outside of our heritage markets, with traffic that was flattish to up, versus out here, we were really getting hammered. And then, that changed as we got into Thanksgiving week.

Okay. And then, just if I can ask one last one? Regional penetration of online, the strength that you're seeing there, is it mirroring what you're seeing in the stores in brick-and-mortar? So does the store base help the online penetration, or even though you're not necessarily looking to expand aggressively now, are you finding areas of strength that you currently don't have stores in?

The penetration of sales on e-com mirrors our stores to a large extent, so think of it in those terms.

Great. Thank you so much. Best of luck.

Thank you.

Richard Jaffe, Stifel.

Thanks very much, guys, and sorry to beat a dead horse about traffic, but wondering if there's differences in mall versus strip stores? And any social media initiatives that you took, that you can point to, as helping wake up your customers, and get them in to take a look at the new product?

Well, first of all, there was no material difference during the quarter between mall and off-mall traffic. So we're not seeing anything unusual there, in terms of one being better than the other. I think, it's always hard to measure, when you do a number things like catalog, social media, whatever, it's always hard to really determine the exact -- (multiple speakers)

What was the one thing -- ?

(multiple speakers) what's driving the traffic, but certainly I think we get better at everything, in terms of catalog distribution again. I think, our social media, we've done some localization of that, we're getting better at it. And I still think we have further opportunity to develop that. But it's right now it's, what's happened in this market as you well know, Richard, is that there's no one multiple magic thing to drive traffic. And certainly, for a part of our demographic, social media is very important, and we continue to place high value on that.

Okay.

Betty Chen, Mizuho Securities.

Thank you, good afternoon. I would like to add my congratulations as well.

Thank you.

I was wondering, maybe Mike, you can give us a little bit of help? So in the third quarter, it seems like merchandise margin was impacted, since the team is reacting quicker to some of the markdowns. But with inventory so lean going to the fourth quarter, should we expect a similar dynamic in terms of merchandise margin pressure, or actually an opportunity to maybe be up year-over-year, since our note shows us maybe merch margins were down slightly in Q4 a year ago?

We're going to continue to do whatever is necessary to keep inventories as clean as possible. And as we think about the holiday season, as we saw in advance of Black Friday, and through the Black Friday weekend, there were a lot of our competitors that were much more promotional than we were. And so, our guidance is contemplating the potential impact of that, and us needing to respond in certain ways to the promotional environment, but also just continuing to keep inventory as diligently clean as we can. So embedded in our guidance, is an assumption that there will continue to be a certain amount of margin pressure.

Because year-over-year, Ed, just reached his one-year anniversary towards mid October I think. So he was just getting familiar with the business at this time last year, and we really just started some of these initiatives during the fourth quarter, as he was just getting on board, and getting familiar, re-familiarized with the business. So we still will have the same kind of impact that you saw in each of the first three quarters, we had a modest amount of product margin pressure, and we are anticipating that in 4Q.

Okay, okay. And then, kind of curious, in terms of the loyalty program I think, Ed, you mentioned earlier in your remarks that you were pleased with the relaunch. Anything else you can share with us, in terms of how the loyalty customers are behaving, and any learnings you may have on that during the early phases so far?

I think it's too early for us to comment on that. What I will say, is that we're starting to see more -- faster growth of that customer -- of that loyalty base, and that's exactly what we intended to do. But we introduced at a time -- kind of like a non-peak time. We've been pleased going through back-to-school, and we'll continue to market it through holidays going forward. But I think it's really too -- it's premature for us to comment on anything, other than I'll just say, so far, so good, and it's positive.

And then, Ed, also I think earlier Janet had asked about whether it is a collection of trends, that's sort of driving this strength in the business. And it sounds like you said, it is a multitude of brands. How, I guess, as you look forward, do you -- are you encouraged by the fact that may be the momentum behind some of these brands can continue into 2017? Or perhaps you even see some new emerging brands that could continue to propel the momentum next year?

Well, again, I don't think there's any one single brand or category that I'm expecting to the savior for all. We saw performance in a number of our brands in our proprietary merchandise, and I would expect that to continue. There's nothing that sticks out that says to me, okay, all of a sudden this brand is going to become [hot]. And we're always bringing in new brands.

Right.

So there's always something new that we'll add to the merchandise mix. And again, I think it helps us with the size of our store, and the fact that we've been doing this for many years, that it's not a learning curve for us, and we can manage it properly. So there's nothing that I can tell you that really is different than what I already said.

Okay. Well, the stores really did look terrific over the Thanksgiving weekend. So really best of luck for the balance of the holiday.

Thank you so much.

Thank you.

Dave King, Roth Capital Partners.

Thanks, nice quarter, guys.

Thank you.

I guess, on the guidance, maybe taking Betty's question a step further, it looks like Mike, you might be guiding operating margins down a little bit year on year. I guess, can you talk about the components of that, between product margin, [BDO] to leverage, and SG&A on the comp obviously, that you're guiding to, understanding that. But then, particularly as we think about some of the more efficient marketing spend, and then some of the payroll savings you've had, and then how should be thinking about those continuing?

Sure. So product margin pressures as I noted, we are anticipating some of that due to the promotional nature of the holiday season, and again doing whatever we have to do to keep inventories clean as possible. So we are contemplating some product margin pressure year-over-year. On SG&A, yes, we've made some structural decisions over this past year about marketing in other areas, where we've cut certain things, scaled back on others, or repurposed dollars here and there.

So on either end of our comp guidance actually, we would expect to get a modest amount of SG&A leverage, even on flat sales, at the bottom end of our guidance range, we might have a little bit of SG&A leverage. So just to make that point pretty clear, in Q3 we had 240 basis points of leverage outside of some LY severance impact. We wouldn't expect that kind of SG&A leverage in Q4 based on a flat to plus-2% comp, but I'll just tell you that we can generate a modest amount of leverage, even on the flat side.

Okay, that helpful color (multiple speakers)

Is that helpful?

Yes, that's great. And then maybe switching gears, Ed, cash was up another 9% sequentially. I guess, can you talk about how you're thinking about future investments between adding stores, further digital initiatives? And then, given your view that cash is king, should we continue to expect that balance to build? And does that change at all, or does you view on that change at all, if the environment is improving, as it looks like it might be perhaps?

Well, I would say the single biggest, we are going to invest more in technology, on the technology side, and continue to invest in our e-commerce business for sure. And then, as far as new store growth, we have a lot of deals under negotiation now, but it's still -- we need to wait, we're waiting to see how it all plays out. We still don't know where some of these major store closings are going to take place after holiday, and we want to see how the environment ends up being after Christmas. So we're prepared for pretty much any kind of option. And there's no -- it's something, as I had mentioned in the past, that our Board discusses quite frequently. And that's pretty much where we are at right now.

Fantastic. All right, thanks for the color, and good luck for the rest of the holiday.

Thank you.

Thank you.

Ladies and gentlemen, we have reached the end of our question and answer session. I would like to turn the call back to Mr. Ed Thomas for closing remarks.

Thanks again for joining us. We look forward to discussing our fourth quarter results with you in mid-March. Have a good evening, everyone.

This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time.