Tilly's, Inc. (TLYS) Q4 2015 Earnings Report, Transcript and Summary

Greetings and welcome to the Tilly’s Fourth Quarter Fiscal Year 2015 Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow a formal presentation. [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 results. On today’s call are Ed Thomas, President and CEO; and Mike Henry, CFO. A copy of today’s earnings press release is available on 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 can be made on this conference call and webcast, we refer 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 reference 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’ll 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’ll provide a brief overview of our fiscal 2015 fourth quarter performance before updating you on our 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% that 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 department. 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 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’m 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 developed a near-term action plan focused on driving improved sales productivity and standard on three key focus areas for improvement inventory management, real estate opportunities and online digital capabilities. First, I’ll discuss inventory management. Tilly’s has a very broad on a collective 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 [indiscernible] consumers we need to be tighter with our inventory flows, have greater frequency of newness that is unique Tilly’s and improve micro-merchandising to specific store characteristics. We believe we can reduce total inventory levels and still run our business effectively in season because approximately 70% of 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 the time, but it is an immediate focus to improve our inventory terms while maintaining a unique and fresh merchandise assortment. Micro-merchandising is another key component to our improving 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 exist in our stores. We are beginning to adapt some of 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’m 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 change in 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 had 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 smaller 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 for assortment in a smaller box with lower total occupancy cost. 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 investments. We are working hard to complete our buy online pick-up in the store initiative by the end of the second quarter. We are also rebranding and relaunching 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’re 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’ll 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 department comps positive with the exception of men’s and accessories which comp 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 cost were flat as a percentage of sales. SG&A expenses were $40.5 million compared to $37.8 million and deleveraged 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 pre-tax income compared to $4.1 million or 36.6% of pre-tax income. This increase in income tax expense on lower pre-tax 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 the 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 year 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 the 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 discrete 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 last year’s level during 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 and 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’d like to now open the call up for questions. Operator?

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions]. Our first question is from Dave King of ROTH Capital Partners. Please go ahead.

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 be that with the accelerating comp decline you wouldn’t necessarily be assuming as much 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?

Well 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 little bit more in markdowns and we would have in this period last year. The magnitude I think you can think of it is 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 maintain healthy product margins from quarter-to-quarter and year-to-year. So it’s not going to be some dramatic multi-hundred basis points type of issue that you need to be concerned about.

Yeah just to add to that as we said in the opening remarks we ended the quarter with very, very clean inventory and across all categories, so we’re pretty pleased about that. So I think that the 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 that you’ve mentioned, are you able to quantify how much if at all that was driven by some of the increased markdowns? I know typically that sort of company used in the discount channel. And then I guess just as more of a broader strategic question around that, with sort of the younger shopper these days doing so much through e-comm 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. Sort of 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-comm business is really there was nothing different than what we’ve historically done in terms of promotional strategy to drive the e-comm business. During the fourth quarter and current to-date and the good thing is that we’re seeing consistent traffic and conversion on e-comm 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 what we like to a lot of other retailers have been challenged with physical mall traffic. And that’s because we see a lot of inconsistency in traffic sometimes on 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 through and really past-Easter.

Okay, that’s great color. Thank you.

Thank you. The next question is from Jeff Van Sinderen of B. Riley. Please go ahead.

Good afternoon, let me say a great work managing inventory. Ed maybe you can just as a follow-up on e-comm, 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 skew count for e-comm? 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 setup there? And then also maybe along those lines this is the long question, but can you speak about localization, personalization because I think you sort of alluded to that. And then maybe how you’re thinking about making the merchandise assortment more relevant in local markets while minimizing markdowns? Thank you.

Okay. So first I guess I'll talk about the omni-channel initiatives that we have. So we’ve had in place before I came back here, a shift 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 new to -- will be new to us is to buy online ship to store and to just ship to store, which I know from my past experience and from talking to many other peers that it’s 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 results, can result in incremental purchases when the customer comes to pick up that merchandise. So that I think that and the other thing that we’re really concentrating on now to enhance the e-comm 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’ll give you more color on that as we get further into the year. Okay Jeff to that hopefully that answers your question on e-comm. In terms of localization, as we mentioned, every store in the chain we dived-in in a deeper way than I think we’ve ever done here before and really trying to identify what is the customer like what is the customer not liking in terms of brands, things like kind of the 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 we 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 effort -- initial efforts are starting to pay off and we’re starting to see improved results. So it could be something as simple as changing the percentage of women’s versus men’s in stores guests or it could be specific brands within the gender category. There is all types of things like that. And I have to -- I’m 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’re seeing so far.

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

Thanks, Jeff.

Thank you. Our next question is from Richard Jaffe of Stifel. Please go ahead.

Thanks very much guys and welcome on board Ed.

Thanks, Richard.

Thank you, hello Mike, 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 on question to Mike.

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 -- 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 the stores and improving the bottom-line. So if I was sitting here today and I had an open check book and somebody could said would you close a lot of stores, the answer is no. But certainly we would take advantage I think in some cases we’ve already begun talks with landlords in terms of maybe downsizing a few of the stores that are two big in certain malls or off-mall and types of things like that, but I think overall that’s kind of where we sit right now.

Okay. The second question Ed is I guess you’ve talked about gross margin being pretty consistent in 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?

Richard, it's actually not -- that there is so much an increase in EPS per se it’s just the model delevers rather quickly when you have negative comp. So if we are going to be in this negative 3 to negative 3 comp range you are just going to have some natural deleverage on fairly similar SG&A base.

And so yeah, the SG&A is not changing materially at the top-line that’s causing it.

That’s right.

Yeah and as the matter of fact we’ve actually made. With started the process of -- we have seen some opportunity in some areas in terms of expense reductions and we’ve already started that process, which will be more -- it's not reaction or as much as we’ve identified them has 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 implementation of this new fulfillment center for online sales and wondering if that’s been a key driver, how that’s worked out and how big online is today and how far you can go with it?

So we open 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-comm business within that facility. We wrapped up fiscal ‘15 with e-comm just north of 10% of sales. Certainly convinced that it can be significantly higher than that and particularly given the change in consumer behavior that we are all seeing in retail convinced that it will continue to grow over the time as we grow through the year. I 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.

Thank you. The next question is from Alex Pham of Mizuho Securities. Please go ahead.

Hi, it’s Alex Pham for Betty. Thanks for taking my question. I was wondering if you could talk a little bit about inventory management. You mentioned that one in 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 piggy back off of Richard’s previous question could you talk a little bit about the relative under performance of the stores that you mentioned relative to the change and maybe the maturity profiles of the current stores? Thanks.

Okay. In terms of lead times most of our branded partners their lead times are relatively long and it varies vendor even vendors as big as Nike, lead times for shoes can be much longer. Of course I come from fast fashion. So I’m used to very lead quick lead times. But I think without getting into specifics there is no question if we can ship 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’re 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 and trying to make that work and that’s kind of where we’re -- 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 went before the lease was really fully executed. That’s really when I talk about underperforming I’m really looking at sales performance relative to what was estimated. And so it really vary significantly store-to-store, it’s no one particular type of store or one geographic area. Although I do think and 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’ve 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 do we think how should we think about the four wall or sales contribution of some of the model stores.

Yeah 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 negotiate at least 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 types.

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’s completely new to us we want to take advantage of a 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 -- particular locations where we might put this store prototype. We want to be able to give that store as much of a full assortment as possible. And that's what this is designed to do -- to test and to do.

Okay, got it. And then lastly, did I hear right that there is -- 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 dogged 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’re 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 that would likely be I’d say very late 3Q or early 4Q in terms of timing. And when we know more we’ll update more on that.

Yeah and just to add to that, as we mentioned before this is kind of temporarily putting on the breaks to focus on our existing fleet. And there is certainly we have redefined a target list for developing a pipeline of locations that we want to get into in the future. So we’ll be in a good position when we decide to accelerate our growth again. We’re going to be in great shape with 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 got.

Great, thank you very much and best of luck.

Thank you.

Thank you. The next question is from Pam Quintiliano of SunTrust. Please go ahead.

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 similar what’s going on there? Do you think they’re engaged or they tempted by the other deals out there was weather that bigger deal or is it more product really there just any type of insides 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 ours what we call summer categories online. I think what we’re seeing now is more related to traffic and in some cases like 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.

Yeah Pam got to remember that roughly half of our stores are in what we call our heritage markets California, Arizona and Nevada and those really did get hit rather hard in these last couple of weeks as we’ve 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 got to factor in we’ve missed some ground as we’re sitting here roughly halfway through the quarter in terms of number of days. We’ve had to acknowledge what we’ve seen so far and factor that in.

And then as a follow-up 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 camps that the sales are lost and now we just have to move forward?

That’s a tough question. I think the challenge right now and we’re 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 don’t 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 we’ve been lacking, I think 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. We -- I could just tell you what I won’t tell you specifics, but I know that our merchant team is seeing some newness that they’re excited about in the non-branded categories for the fall. The brands are always have some newness, but certainly for fall they were encouraging what they’ve told me so far.

That’s great. And just one more follow-up once again for Ed, sorry. But in terms of -- I’m assuming you’ve done research on market perception of Tilly’s especially in some of your older markets. Just 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 is only three years, but longer term there should be a lot more. What’s just the perception 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 aren’t familiar with it?

Okay. First of all we have never had market research done, but we’re actually in the process of doing it right now. So I’ll be able to better answer that question on our next call. But in terms of what we can see is we do get -- we have internal customer surveys that we’ve done and we do it pretty regularly in that we measure it. I think the awareness is pretty good. One of the advantages that we’ve 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 just know I know that just our internet sales so considering the fact that we don’t have a lot of stores in a lot of locations outside of our heritage market. E-comm 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-comm sales, is there any granularity to give us given you’re talking about the weather in e-comm sales just regionally that gives you comfort that it really is not the product.

No we don’t breakdown e-comm regionally at all.

Yeah, I thought it was worth a shot. Thanks, guys.

Okay, thanks.

Thank you. The next question is from Howard Tubin of Guggenheim. Please go ahead.

Hi this is actually Paula calling for Howard. I just wanted to confirm, you had said that traffic has been weak in the first quarter and you’re 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 and we are certain of the same brands they carry. 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 at some of your smaller category such as beauty? And if there are any plans to roll those categories out further?

I can’t comment specifically on only one particular category. We are constantly reinvented 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’s something that’s working and we’ll continue to work on those and this is part also of the micro-merchandising I’ve talked about a lot is that certain categories like beauty might be better than some locations than others. You might see an expanded assortment in some stores.

Okay, great. Thank you.

Thank you. The next question is from Liz Pierce of Brean Capital. Please go ahead.

Thanks. Good afternoon, guys. So just a couple of follow-up questions on the catalog Ed this is same nuances, same catalog that you’ll be mailing for the spring summer season?

Well as we’ve made a number of enhancements to the last couple of catalog that might be 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 some catalog expert take a look at what we are doing and we are making settle changes as a result of that, but I wouldn’t expect anything that really materially change as far as the catalog goes.

Okay. Just I guess I should have been a little bit clear in terms of timing and about the same as last year in the number of issues because I’ve already got what two early spring and late spring?

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

Okay. And then in terms of Mike for you on the growth 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 this for Q1 based on what you just said I think to Richard question’s not made material increase in dollars. So is more on the SG&A, is it going to be really more on the margin side? And I’m just trying to circle back to the fact that inventories are down.

Yeah so I think that might be getting missed in this conversation is remember we have 11, I think is 12 more stores than we had a year ago as we finished the year. So we are 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 delevered because of the added 12 stores. And we are 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 deleverage 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-comm 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 deleveraged to net to the flat. As you go to Q1 now you have 12 more stores in there and we’ve got negative sale. So the raw dollar base of occupancy is higher and then you’ve lower sales from you comp base.

Okay. Alright, 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 payoff. When you look at your base of 224 stores and as you just have half of those are in heritage market within the heritage market how much variance is there, how many different buckets are there?

In terms of the heritage markets, Liz because we’ve been in these markets for so long there is no major differences other than maybe dictated by size of store or a particular location. But where we see the broader variances is really east of the Mississippi. Some of that honestly was -- some of the performance was really I think really a self-inflicted decision where we decided to -- at some point of time to not have as broader choice comp in some of these stores as what we do in the heritage stores. And that’s one of the opportunity we’re able to close the gap on relatively quickly.

Actually so that kinds of brings me back to my last question as you’ve talked about the 600 plus brands. So we shouldn’t be thinking that that’s you’re going to materially change that or reduce that is it just more what’s behind in terms of the deliveries the quantities per brand?

Yeah I don’t see any material change to any of the -- the number of brands we always have -- we’re always constantly perusing newer brands and pickup more brands and sometimes brands get knocked they die in certainly some go away. But I don’t there is no change in strategy as far as the broad assortment that we carry along with the kids business, which is not carry in all stores there are lot of stores. Those are big differentiation factors for us.

Great. Do you -- Ed and kind of 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 between in that percentage of breakdown.

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

Alright, thank you.

Thank you. Our final question comes from Dave King of ROTH Capital Partners. Please go ahead.

Thanks for taking my follow-up guys. I guess just a quick one, have you looked at all how many stores you guys have in malls or adjacent centers to where there is [indiscernible]. Do you have those numbers?

I don't have specifically, but at least in the malls my guess is that in every mall that we’re in that [indiscernible] is probably there.

Yeah you have to remember that several times the number of stores that we do.

Yeah so the off-mall honestly I have not looked at I don’t think anybody have looked at it really recently.

Okay, perfect. I’ll follow up online. Thank you.

Bye.

Thank you. At this time ladies and gentlemen, I’d 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.