Pacific Sunwear Q3 Earnings Call Transcript

123jump.com Staff
04 Dec, 2008
New York City

Pacific Sunwear third quarter sales declined 5% to $324 million. Total company same-store sales decreased 7%. Net loss from continuing operation was $3.5 million or 5 cents a diluted share compared to income of $17.1 million, or 25 cents a share. Pacific expects a loss in the fourth quarter.

Pacific Sunwear of California, Inc. ((PSUN))
Q3 2008 Earnings Call Transcript
November 18, 2008 4:30 p.m. ET

Executives

Sally Frame Kasaks - Chairwoman of the Board, Chief Executive Officer
Michael L. Henry - Chief Financial Officer, Senior Vice President, Secretary

Analysts

Adrienne Tennant - Friedman, Billings, Ramsey & Co.
Kimberly Greenberger - Citigroup
Stephanie - Piper Jaffray
Liz Dunn - Thomas Weisel Partners
Betty Chen - Wedbush Morgan Securities
Jeffrey Van Sinderen - B. Riley & Co.
Janet Kloppenburg - JJK Research
Elizabeth Pierce - Roth Capital Partners LLC
Crystal Kallik - D. A. Davidson & Co.
Dana Telsey - Telsey Advisory Group
Tracy Kogan - Credit Suisse
Marni Shapiro - The Retail Tracker
Linda Tsai - MKM Partners
Christine Chen - Needham and Company, LLC
Roxanne Meyer - UBS
Mitch Kummetz - Robert W. Baird & Co.
Julie Bryan - Jennifer Black & Associates

Presentation

Operator

Ladies and gentlemen, welcome to the Pacific Sunwear of California conference call announcing the company’s fiscal third quarter 2008 financial results. This call is being recorded and the play-back will be available starting today approximately two hours after the call through midnight, November 25, 2008. It can be accessed at 800-642-1687, or 706-645-9291. The passcode is 72074140. The call will also be archived on the Pac-Sun website at www.pacsun.com through midnight March 11, 2009.

Your speakers today are Ms. Sally Frame Kasaks, Chief Executive Officer; and Mr. Mike Henry, Chief Financial Officer. Today’s call will be limited to one hour and questions will be limited to one per participant.

Before I turn the call over to Ms. Kasaks, I would like to note that during this earnings call certain statements and responses to questions may contain forward-looking information, including forecasts of future financial performance and estimates of amounts not yet determinable, as well as our future prospects and proposed developments of business strategies. Actual results could differ materially from those projected or reflected in our forward-looking statements and reported results should not be considered an indication of future performance.

Pacific Sunwear''s future financial condition and results of operations, as well as any forward-looking statements are subject to change and to inherent known and unknown risks and uncertainties. Pacific Sunwear does not intend and undertakes no obligation to update its forward-looking statements to reflect future events or circumstances.

All forward-looking statements made in this conference call reflect Pacific Sunwear''s current analysis of existing trends and information and represent Pacific Sunwear''s judgment only as of today.

You should not assume later in the quarter or year that the comments Pacific Sunwear makes today are still valid. Actual results may differ materially from current expectations based on a number of factors affecting Pacific Sunwear''s businesses, including changes in economic conditions generally, changes in consumer spending, demands and preferences, lower than anticipated comparable store sales, higher than anticipated markdowns, higher than estimated selling, general and administrative costs, competition from other retailers, and other uncertainties generally associated with apparel retailing.

More information on factors that could affect Pacific Sunwear''s business and financial results are included in its annual report on Form 10-K for the fiscal year ended February 2, 2008 and the other public filings made with the Securities and Exchange Commission.

In addition, please note that during this call today, additional references may be made to non-GAAP financial results. Investors are encouraged to review these non-GAAP financial measures, as well as the reconciliation in our press release of these measures to the comparable GAAP. Our press release was attached to our 8-K filed with the SEC today, a copy of which can be found on our website at www.pacsun.com.

This call, the webcast, and its replay are the property of Pacific Sunwear. It is not for rebroadcast or use by any other party without the prior written consent of Pacific Sunwear. If you do not agree with these terms, please disconnect now. By remaining on the line, you agree to be bound by these terms.

With that said, I will now turn the call over to Ms. Kasaks.

Sally Frame Kasaks

Good afternoon and thank you for joining us today. I will begin the call with an overview of our third quarter results after which Mike Henry, our Chief Financial Officer, will discuss the financial details of the quarter. We will then open the lines for your questions.

It’s been well-reported that consumer spending decelerated significantly in September and October. We certainly saw this in our results for the quarter. Although we continued to make progress on our juniors business, supply chain enhancements, and e-commerce, there is no question that the deteriorating overall environment had an offsetting effect.

Although we can’t control the external environment, there are adjustments that we have made and will continue to make to put us in a better position. During what we expect to be an extended economic downturn, we are focused on reducing inventory, controlling expenses, and deferring CapEx related to store openings, remodels, and IT systems.

Turning now to our third quarter results, our third quarter sales were $324 million, a 5% decrease versus $342 million in last year’s quarter. Total company same-store sales decreased 7% during the period. Our apparel business showed a solid 7% same-store sales increase during the quarter and now represents 84% of our total sales. Although the transition out of footwear has impacted same-store sales and performance in the short-term, we expect that a greater concentration of apparel should lead to improved merchandise margins over the long-term. We will be effectively out of the footwear category by the end of the year.

Juniors’ apparel achieved same-store sales growth of 16% during the quarter and now represents 51% of our apparel sales. As a reminder, our peer group junior mix is typically greater than 60% of sales. Within our juniors’ category, bullhead denim, especially our skinny and super-skinny styles, and tops were the primary drivers for the quarter. We ended the quarter with our proprietary brands representing 57% of our junior apparel sales.

Our young men’s apparel business experienced a slight same-store sales decline during the quarter. Strength in bullhead denim and knits could not offset the weakness in tees and fleece. We ended the quarter with branded goods representing approximately 71% of our apparel assortment.

Our accessory business continued to be disappointing. Accessory same-store sales were down 28% and represented approximately 13% of our sales mix. Though we had planned to bring the accessory business down as a percent of total mix, this result was below our internal expectations.

In terms of inventory, it remains higher than we would like it to be in the current environment. We had previously planned to end the year with inventories flat to slightly up. Given the more difficult retail environment, we are now targeting significant reductions in inventory by year-end. To achieve this, we plan to raise our promotional level during the fourth quarter when mall traffic is at its peak. Although this will have a short-term adverse effect on margins and earnings specifically in the fourth quarter, we believe this is the right thing to do to position us for next year.

In closing, I remain confident that the steps we have taken this year, including closing our under-performing divisions, consolidating our distribution centers, and largely exiting the footwear business have made us a stronger company for the future. Unfortunately in the short-term, the benefits of these actions have been obscured by the continued weakening of the retail environment. Rest assured we remain committed to managing through the near-term challenges with a convincing and compelling product assortment and a clear focus on driving improved results and increased shareholder value over the long-term. I appreciate your continued support and will now turn the call over to Mike Henry.

Michael L. Henry

Thanks Sally. Results from continuing operations for the third quarter of fiscal 2008 versus the third quarter of fiscal 2007 were as follows: Total sales were $324 million this year versus $342 million last year. We ended the quarter with 940 stores versus 957 stores last year. Same-store sales declined 7% with transactions up 3% and the average sale down 10%. One-third of our stores are located in regions where same-store sales for the quarter decreased anywhere from 15% to 20%. On a positive note, e-commerce sales grew 46% during the third quarter to $10.6 million this year from $7.3 million last year. Gross margin declined 490 basis points to $93 million, or 28.7% of sales this year from $115 million or 33.6% of sales last year. Merchandise gross margins declined 360 basis points, due primarily to higher markdowns.

Non-merchandise gross margin costs were up 130 basis points. Occupancy was up 140 basis points and buying costs were up 20 basis points as a result of deleveraging these costs on the negative 7% same-store sales result.

Distribution expenses were down 30 basis points due to the consolidation of our distribution centers near the end of the first quarter this year. SG&A expenses, including goodwill and other store asset impairment charges of approximately $10 million increased 370 basis points to $95 million, or 29.5% of sales this year from $88 million or 25.8% of sales last year. On a dollar basis, excluding non-cash impairment and depreciation charges, SG&A for the third quarter was down $2 million from last year.

Asset impairments increased 260 basis points, primarily due to a $6.5 million goodwill impairment charge associated with two acquisitions the company made over 10 years ago.

Depreciation and store payroll each increased 50 basis points, primarily due to deleveraging these costs against the negative 7% same-store sales result for the quarter. Store payroll was down in dollars by over $620,000 year over year. All other SG&A expenses were up a combined 10 basis points.

Our income tax rate for the quarter was only 3% due to a year-to-date true-up of our expected annual effective tax rate to 35%.

Net loss from continuing operations was $3.5 million or $0.05 per diluted share, versus income from continuing operations of $17.1 million, or $0.25 per diluted share last year.

Turning now to our balance sheet, we ended the quarter with $108 million in working capital, including $5 million in cash. Inventories were up 12% per square foot year over year, consistent with our original guidance for the quarter of up low double-digits. Accruals for in-transit holiday deliveries accounted for two-thirds of this increase. Excluding in-transit accruals, inventories were up just under 4% per square foot year over year.

We ended the quarter with $43 million in direct borrowings under our $150 million credit facility, reflective of the annual peak period of working capital usage prior to the holiday season. As a reminder, our credit facility has a five-year term expiring in 2013, is backed primarily by our inventory, and contains no financial covenants unless we are drawn down to the last 10% of our total availability.

Year-to-date, capital expenditures were $69 million and depreciation was $59 million. During the third quarter, we opened four new stores and closed two stores.

Now turning to guidance, same-store sales are down low double-digits through the first 16 days of November. We are not currently expecting any significant improvement in the economic climate during the fourth quarter or early in 2009. Accordingly, we believe the best course of action over the short-term is to aggressively clear inventory while holiday traffic is available to us.

As a result, and assuming same-store sales decline in the high-single-digit range, we currently expect to report a fourth quarter loss of $0.03 to $0.08 per diluted share. This range includes an expected gain of approximately $0.11 per diluted share, resulting from the previously announced sale of our Anaheim distribution center. We are working very closely with the buyer and expect to close the transaction in the very near future.

In consideration of these revised earnings estimates, and assuming the receipt of approximately $24 million in net proceeds upon the sale of the Anaheim distribution center, we currently expect to end fiscal 2008 with approximately $20 million in cash and no direct borrowings outstanding under our $150 million credit facility. We now expect to end fiscal 2008 with inventories down at least high-single-digits on a square foot basis versus the prior year. We also expect to end the year with total capital expenditures of approximately $80 million and with 931 total stores.

Please recognize that the current unfavorable economic conditions and reduced consumer spending make it very difficult to forecast sales and our same-store sales during the fourth quarter of fiscal 2008 may be lower than expected, which of course would negatively affect our financial results.

Finally, although we are not prepared to discuss any specific earnings expectations for fiscal 2009, we currently expect next year’s capital expenditures to be approximately $30 million versus this year’s total of $80 million. We expect depreciation to be approximately $75 million.

Consequently, before consideration of any operating income assumptions, we would expect to generate $45 million of cash flow in 2009 solely based on our CapEx and depreciation expectations.

Operator, we will now take questions.

Question-and-Answer Session

Operator

At this time, if you would like to ask a question, please press “*1” on your telephone keypad now. We’ll pause for just a moment to compile the Q&A roster. Our first question comes from Adrienne Tennant of FBR.

Adrienne Tennant - Friedman, Billings, Ramsey & Co.

Good afternoon. I’m just wondering why if you are running in this negative low double-digit range, why would we see, given that the shift is coming in front of us and we lose some days, etc., in the weekend, why we would think to see an improvement in the overall absolute trend rate for the comp.

Michael L. Henry

It’s because of the shift in November, Adrienne, with Thanksgiving moving from the third week to the fourth week, we do expect November to be negative mid-teens probably by the time it’s all said and done but then we do expect to return to kind of a negative mid-single comp, negative high-single comp in December and January.

Adrienne Tennant - Friedman, Billings, Ramsey & Co.

Okay, because I was trying to figure out because like each week is obviously more proportional or more of an impact on November, I was thinking that maybe the shift back into December on a comp basis would be less than the shift out of November.

Michael L. Henry

Well, we’ll see how it plays out. Everyone can make their own assumptions. Our planning guys have taken a hard look at it on a category-by-category basis and looked at it week-to-week builds and month-to-month builds and historical trends and all those sorts of things, and we’ve put together the plan that we’ve communicated to you and we will see how it plays out.

Adrienne Tennant - Friedman, Billings, Ramsey & Co.

Okay, and then can you just -- are there -- how many of the stores are four-wall, non-profitable?

Michael L. Henry

Four-wall non-profitable we have approximately 100 stores. When you take back out depreciation, cash flow there are only about two dozen that are negative cash flow.

Adrienne Tennant - Friedman, Billings, Ramsey & Co.

Okay. Thank you very much. Good luck for holiday.

Michael L. Henry

You are welcome.

Operator

Your next question comes from Kimberly Greenberger of Citigroup.

Kimberly Greenberger – Citigroup

Thank you. Good evening. I had a question -- could you look out to 2009 and just talk to us about what sort of cuts you think you might be able to make in your SG&A numbers next year? And within your $30 million CapEx budget, could you just give us some rough guidance on are there any new stores in that number, how many refreshes are you doing, and is there a possibility that you might engage in more aggressive store closings for the Pac-Sun brand?

Michael L. Henry

Okay, there are several things in there. I will try to touch on each one of them. Don’t let me off the hook if I miss one.

As it relates to 2009, we are not making any comments about any specific assumptions on expense lines, margin lines, sale lines at this point. We are still in our budgeting process as we sit here today. What I would say about expenses though is when you look at our results from this recently completed third quarter, as well as the second quarter, we had been able to get SG&A down on a dollar basis year over year when you take out the non-cash charges of impairments and depreciation, and we continue to look at every single item in our business, looking for opportunities to further reduce expenses and we intend to do that. I’m just not going to get terribly specific about it right now.

As it relates to CapEx, we stated it will be $30 million for next year. There are just a handful of new stores, about a dozen relocations, and only four or five refreshes as we sit here right now, but we are continuing to work that number. We’ve had a great deal of cooperation from our landlord partners in realizing that it is tough out there in a variety of regions and we’ve worked with them to defer as many refreshes as we can at this point, and we’ve even been renegotiating certain other things as it relates to new stores and relocations, so that is -- those are numbers that are still in flux, so that’s just at a moment in time. Keep that in mind.

And as it relates to closures, we have taken a look to see, you know what, does it make any sense to close 100, 150 stores at any particular point but when you consider what would likely be from all indications relative to the demo process we just finished a few months ago and clearing our business partners of what would it take in today’s environment to do anything like that, they’ve estimated it would be at least two years worth of occupancy on each location that the landlord groups would likely want from us to exit the leases early. And when you take that into account, and Adrienne had asked a question about number of stores that are cash flow negative and there are only a couple of dozen and some of those are very minimally cash flow negative, so when you take into account the asset write-offs, cash flow performance of the stores as they are relative to that two-year occupancy penalty we’d have to pay to close, it just doesn’t make much sense at all for us to close any stores early. As a matter of fact, there are only seven in the analysis that we did that you could suggest it would make any cash flow sense to close early. One of those stores closes this month here in November; another closes two months from now in January, just in our normal course of how we are going about things. So that would leave five out of our entire population of 940 that it would make any good cash flow sense to close early.

Kimberly Greenberger – Citigroup

That makes a lot of sense, Mike. I’m just looking back at your store openings in 1999 and 2000 and I would guess that if you have an opportunity to close stores at lease expiration, you’ve got somewhere north of 150 stores coming due in their leases over the next 18 months to 24 months. Doesn’t it make sense to take a harder look at those stores and potentially think about getting out of some of those leases without any money due to the landlords?

Michael L. Henry

Certainly and that’s where we have stated previously on several occasions that we would expect to close 30 to 40 stores per year in the normal course of business over each of the next three years because there are approximately 100, 120 stores per year that will come up for consideration for renewal. There are also refreshes in there, there are new store considerations that we have in there that we need to reevaluate in this current environment -- do we think they are very strong performing locations for us, accretive locations for us? And so as we have these renewals come up, as we have kick-out clauses come up from stores we even opened two or three years ago, we are taking a very hard look at each and every location and if it is not accretive to us on a four-wall basis or a cash flow basis to a sufficient level where it would improve the overall performance of the business, then we will be closing those and that’s where we previously said that that population of 30 to 40 a year will come from.

Kimberly Greenberger – Citigroup

Great. That’s very helpful. Thanks so much.

Michael L. Henry

You are welcome.

Operator

Your next question comes from Jeff Klinefelter of Piper Jaffray.

Stephanie - Piper Jaffray

This is Stephanie for Jeff. I have a couple of questions. I’ll just start with the housekeeping -- the tax rate in the fourth quarter, Mike, how would you like us to think about that with the true-up year-to-date?

Michael L. Henry

You should think of it at that 35% rate for now. If it moves at all, we are not expecting it to move by more than a point or two.

Stephanie - Piper Jaffray

Okay, thanks and then just on the payroll, it came in down on a full dollar, total dollar basis. How much more can that be flexed as you go through the fourth quarter and then secondly, Sally, if you could just speak a little bit about the improvements and the initiatives in gross margin, merchandise margin specifically. Is there any ability to share some of the burden of the exit of the inventory with your brand partners or is that primarily your responsibility at this point? Thanks.

Michael L. Henry

I’ll cover the payroll question first. We are working very, very closely with our field team, our zone vice presidents, our regional directors, our DMs, store managers -- we look at this very closely every single week. We set targets and our field team has done a tremendous job of making a very significant effort at trying to keep the store payroll number down as much as we can.

We do have a significant number of stores, I would tell you, already on minimum coverage, meaning that they open with one person and they have one person in there, all the way into the very late afternoon or evening shift and then there’s two. So we have already got such a significant number of stores at this point -- it’s not a majority but it is a significant number of our stores on minimum coverage that there’s just a minimum level that you can’t go past. You have to have one person to open the store and you have to have one person there to greet your customers and help them find what they want when they come in, so store payroll is something we watch very, very closely every single week. We will continue to do that with the support of our field team and again, those guys have done a great job in helping us through this difficult period of time.

Sally Frame Kasaks

In terms of working with our suppliers and brands, we continue to work with them. We’ve worked with them on a number of fronts, including significant cancellation of products and so forth, so we work very closely with our brands and suppliers and over time we will see improvements in margin. But that’s all we can say.

Stephanie - Piper Jaffray

Okay, thanks. Good luck guys.

Operator

Your next question comes from Liz Dunn of Thomas Weisel Partners.

Liz Dunn - Thomas Weisel Partners

Hi, good afternoon. My question, first question relates to the gain on the sale. I believe last time you provided an update that was expected to be $0.23 and now you are looking for $0.11, so was the price negotiated down? And how much confidence do you have that the deal closes? I mean, is it a done deal at this point?

Michael L. Henry

Let’s see -- I’ll start with the first thing; the price has come down, since the original communication, the sales actually came down twice. The market conditions have continued to deteriorate and over time the price has come down two different times. The purchase price is now at $26.5 million. The first time we announced anything about entering into negotiations, it was at $35 million, so that’s the difference that you see. We continue to work very closely with the buyer at this stage. We do expect the sale of the Anaheim distribution center to close any day now. I’ve had a series of communications every day over the last series of 10 days to two weeks that everything seems to indicate we are moving forward towards getting escrow funded and getting that transaction closed and we do expect that to happen any day now.

Liz Dunn - Thomas Weisel Partners

Okay, great and then my second question just relates to the comp trend that you’ve seen in the apparel business. You know, all year long your apparel business has been doing quite well but can you give us a sense of how much of that is just you are buying deeper in apparel and sort of distorting the investment? So how much I guess has the sales trend been grown faster than the buy-in I guess is the -- I don’t know if I’m communicating this as well as I should but do you know what I’m asking, like as a percent of stock on the floor, is your sell-through up on apparel?

Sally Frame Kasaks

I’ll answer that -- in some categories it is, and some it isn''t but we’ve also made clearly a change in shift in the product and we have funded denim much more heavily than we have in the past, both in young men’s and juniors. So yes, we distorted denim, which was appropriate. Sitting here today, we could have used a few, you know, some less units but that was a deliberate effort to get us into the denim business, which has been very much a business driver in the company.

I think looking back in retrospect, we probably did not anticipate August being as difficult as it was, which turned out to be the beginning of whatever is happening now, and we were a little bit blind-sided on some of the key items in tops, frankly, as well as just total inventory units in some of the denim business, but we have been adjusting our inventories constantly to get it more aligned with the weeks of supply that we would want to run, which is where we are today. But we deliberately distorted some categories to ensure that we got into the businesses, particularly as we were exiting particularly footwear and reducing our dependencies on accessories. And we are pretty much where we would want to be -- a little high on inventory but from a business point of view, pretty much where we’d want to be.

Liz Dunn - Thomas Weisel Partners

But if we look through the third quarter, I mean, are your units up as much as your comp I guess is the simple way to ask the question.

Sally Frame Kasaks

But I think it depends on the category, Liz. I mean, I’m not going to go class by class by class but certainly -- but we have also seen though that in some cases when we’ve gotten a little more promotional on some categories, we’ve seen traffic build, we’ve seen transactions up, so there have been a number of moving parts on this. Would I like to have a little bit less denim sitting here today? Yes. On the other hand, I don’t think it’s as much a risk to the business than maybe some other product categories. I think the other issue was in our business also, we went out, we did find the consumer was much more value-priced oriented and we went out with, for example, the fleece in young men’s at $39.50. It’s a DC, a solid fleece hoodie and what we saw in August, which caused us to adjust some thinking, is where last year we were selling our heat fleece hoodies at $68 and $78, this year it seemed to be somewhere around $40 was the sweet spot, so we’ve had to adapt and adjust. So, it’s hard to answer your question with yes, we have absolutely the right stock to sales by category but we are moving through it and I think we do have a better understanding of what the center of gravity is in terms of how much denim we need going forward, as well as in some of these other categories.

Liz Dunn - Thomas Weisel Partners

Okay, great, thanks. Good luck.

Sally Frame Kasaks

Thank you.

Michael L. Henry

Thank you.

Operator

Your next question comes from Betty Chen of Wedbush Morgan.

Betty Chen - Wedbush Morgan Securities

Good afternoon Sally and Mike. Related to Liz’s question, I was wondering if you can speak to a little bit about your thoughts on merchandise buys for 2009. I would imagine some of the purchases for Q1 have already been completed. Could you give us a sense of where we are in terms of buys for the first half and how should we think about the planning even for the second half of ’09? Thanks.

Sally Frame Kasaks

Well, we’re not talking about any sales or plan numbers of next year, just be assured that based on our internal plans, we are adjusting our on order and our inventory levels to support a more conservative sales plan.

Betty Chen - Wedbush Morgan Securities

Are you seeing more cooperation from the vendors or on the private-label side, the cost pressure easing from what we were hearing?

Sally Frame Kasaks

Well, we did not see a lot of cost pressure going in, as we had said that multiple times, though we were beginning to see perhaps towards fall. So this, we’ve said this publicly a number of times. I think right now, our people are over it right now -- what we are seeing is no pressure on prices going up. We’re not seeing a lot of prices going down at this point but nothing is really going up and our key suppliers are working very closely with us to adapt our production needs going forward into spring and summer and then also we’ll start looking at fall in another month or so, so we’ll have a better idea by then. But so far we see no price pressure, some drops but not a lot. I mean, basically the price is the price for spring, with some negotiation going on.
Betty Chen - Wedbush Morgan Securities

Okay. And then a follow-up to the refreshes and thinking about controlling CapEx for next year, have we been able to kind of re-engineer the cost of refreshment and maybe even the timing of them to further reduce the capital investments?

Sally Frame Kasaks

Well, there are two parts to your question. As we stated early, we have deferred a significant number, a very large number of our refreshes, as Mike mentioned, working with our landlord partners there. They understand the situation, so we have deferred a significant number, which is part of the capital conservation. On the other hand, we are looking towards ways that we can still create a good brand expression in the store and reducing the cost and all of that is in work.

Betty Chen - Wedbush Morgan Securities

Thank you and best of luck for the holiday.

Sally Frame Kasaks

Thank you very much.

Operator

Your next question comes from Jeff Van Sinderen of B. Riley.

Jeffrey Van Sinderen - B. Riley & Co.

You guys talked a little bit about payroll and I’m just wondering if you can give us a sense of what else specifically you might target to cut operating expenses. I’m just trying to get a sense of where other cuts might be feasible.

Michael L. Henry

Well, the other thing that I would mention that’s been very significant is we have run all year, we’ve run our home office down 15% in headcount relative to what our original budget plan was. Our executive committee has looked at the open headcount list every week and said no, no, no, yes, no, no, no, yes as we go through the list, being very, very targeted about what we allow to get funded and hired and what we don’t. So home office payroll has been very diligently watched, store payroll has been very diligently watched. We’ve been very careful about travel and training costs and relocations and recruitment and everything on down the line. There isn''t a single line we haven’t looked at and been scrutinizing very carefully.

Jeffrey Van Sinderen - B. Riley & Co.

Okay, and then I know you’ve talked about being more promotional. I’m just wondering if there’s anymore color, anymore detail you can give us in terms of your promotional plans for holiday without getting too specific.

Sally Frame Kasaks

Not really -- I mean, we’ve worked out -- we’ve got a cadence, certainly we’ve got our plans for Black Friday, which is pretty similar to what we did last year. We’ve just been more cognizant of those key five days between Thanksgiving and Christmas and we just want to make sure that we’re tight. Unfortunately we believe it’s going to be a later holiday. You know, a lot of it is probably going to be in those last few days so we just want to be armed and ready to go. But beyond that, it would be just perhaps more accelerated cadence on some product than we might typically have done in the past.

Jeffrey Van Sinderen - B. Riley & Co.

Okay, fair enough. Thanks a lot and good luck.

Sally Frame Kasaks

Thank you.

Michael L. Henry

Thank you.

Operator

Your next question comes from Janet Kloppenburg of JJK Research.

Michael L. Henry

Hey, you made it.

Janet Kloppenburg - JJK Research

I made it, yeah, thank goodness. Hi Sally.

Sally Frame Kasaks

Hi.

Janet Kloppenburg - JJK Research

Okay, a couple of questions -- first if you could maybe talk about the outlook for the West Coast and Pacific Northwest, Rocky Mountain region -- are we seeing any light there at the end of the tunnel as we are anniversarying some of the deep declines we saw last year, or do you think that these particular regions will continue to force your comp declines to higher levels?

Michael L. Henry

Janet, I’ll take that one. We have not seen any significant improvement in those regions and as a matter of fact, we’ve seen significant deterioration in those regions. October of last year was the first time that we saw California, the Southwest really decline and it was in the negative high-single-digit range. As we went through the third quarter, those regions dropped off to minus 20s, minus 25s, something very, very significant and then all of a sudden, the Pacific Northwest and the great plains, which had been up a bit, down a bit earlier in the year, nothing dramatic, it was never in the top, never in the bottom, suddenly had dropped to minus double-digits and then minus 18 in October, so we have certainly seen further deterioration in some of these markets that we have been talking about all year and we are not counting on anything changing significantly going forward.

Janet Kloppenburg - JJK Research

Okay, but if you are looking for comps to be down high-single-digits in December and January which clearly that’s a new flat, you must be thinking that some parts of the country could be, could turn flat or even positive in that period. Is that a fair statement?

Michael L. Henry

Sure. We’ve seen consistent strength through the Midwest and Texas and the Northeast and the Mid-Atlantic. You know, there have been a variety of areas that have been consistently strong for us and we are continuing to see that, even in the results that we’ve communicated here about the first couple of weeks of November.

Janet Kloppenburg - JJK Research

Okay, and I was wondering, as we look into ’09, a couple of questions -- first of all, do you anticipate that the footwear and accessory categories will stabilize? That is, that we will stop seeing the deep declines that we’ve seen in those businesses? And secondly, what in terms of pricing are you thinking at all about skewing your prices to a larger amount of product to the value end?

Sally Frame Kasaks

Janet, our footwear business is now down to about 4% of our total business and by spring, it will be down to 3%, so this is where it was much higher last year so in effect, it’s become a non-issue in terms of our overall performance. It was a drag on comp as we were liquidating but no longer.

Janet Kloppenburg - JJK Research

And accessories?

Sally Frame Kasaks

Accessories we see opportunity for upside there. Our teams are working on it now. We probably under-played scarves, perhaps some jewelry as well but we are more prepared I believe going into spring and we are continuing to re-look at that because there are some trends that we can get behind.

Janet Kloppenburg - JJK Research

Okay, and on the pricing, Sally, do you think that you can move to greater value or do you need to?

Sally Frame Kasaks

We have seen our customers respond to some of our key opening price points this year. We’ve seen that, we’ve seen some good reaction to multiple pricing, so we would continue on that. I think the -- I think probably the bigger change is the amount of debts we’ve put behind key items and key, sort of more basic styles and we are looking to become a little bit lighter on some of the quantities we’ve placed behind product. So our pricing cadence isn''t going to change much for spring. I mean, we had some very good pricing -- it’s probably more the depth we are putting behind the product rather than just the price point.

Janet Kloppenburg - JJK Research

I got it. Good, and then Mike, in terms of the sale of the Anaheim distribution center, are these just technicalities now that are holding up the sale or are there some bigger issues looking?

Michael L. Henry

Well, we don’t have clear visibility into what goes on behind the scenes with -- on the other side of this transaction. We’ve just been told by the senior leadership of the buyer that they remain extremely committed to this transaction and they intend it to close any day now and there’s just some administrative things going on behind the scenes.

Janet Kloppenburg - JJK Research

Okay, so maybe we’ll see an announcement in the next week or so?

Michael L. Henry

That’s very possible.

Janet Kloppenburg - JJK Research

Okay. Well, I just wanted to wish you lots of luck for the season. I hope things improve a bit. Good luck.

Michael L. Henry

Thank you.

Sally Frame Kasaks

Thanks Janet.

Operator

Your next question comes from Liz Pierce of Roth Capital Partners.

Elizabeth Pierce - Roth Capital Partners LLC

Thanks. Sally, in your guidance for the fourth quarter, I presume negative high-single-digit on the comp that -- do you expect the girls business can kind of sustain where we’ve seen it or -- and that men’s will continue to soften? Maybe you could give us a little bit of color on that.

Sally Frame Kasaks

Well, it’s going to be hard until we get more into -- you know there’s a lot riding on Thanksgiving weekend and certainly the back half of December. We would think that the trends would be fairly consistent with what they have been over the past few weeks, though we’ve got some good solid, good assortments out there. There’s a new floor set has just gone in this weekend and we have another one in December, and I think -- so at this point I would say the trend is continuing about what they have been, more conservative on some of the young men’s, a little more ambitious on the junior’s but on balance, a pretty consistent trend.

Elizabeth Pierce - Roth Capital Partners LLC

And is that how the inventory -- I mean, were you able to edit the inventory then to support that at the last, like say last --

Sally Frame Kasaks

Pretty much, yeah. More so perhaps on the young men’s side than the junior side but we have been able to adjust, yeah.

Elizabeth Pierce - Roth Capital Partners LLC

Okay and I presume adjusting meaning --

Sally Frame Kasaks

Canceling, shifting deliveries, reworking assortments, all of the above.

Elizabeth Pierce - Roth Capital Partners LLC

And I know it’s early and you don’t want to talk too much about product for next spring, but I guess I have two questions -- one, if you are seeing anything on denim that would cause either guys or gals to update their wardrobe for spring, since that has been such a good performer for you, and then just your thoughts on Flynn, since it was a category that was somewhat problematic last year.

Sally Frame Kasaks

I’ll start with Flynn and our plan is to bring in, except in a few markets, to bring Flynn later than last year, so clearly that will also bring some of our dependency on that category down a bit but we will be bringing in a bit later than we had typically, where we may have come out a little bit stronger last year and the sales weren’t as strong in relationship to the inventory.

Right now in denim, we see enough going on that we believe -- last year we know we did not capitalize on it enough in a number of categories and styles. We believe we can make up for that deficiency from last year. I’m not sure how strong it can be, you know, after we get past the March period there will be a bit of a lull but we certainly see a range of product within denim carrying us through spring.

Elizabeth Pierce - Roth Capital Partners LLC

All my other questions have been answered, thanks.

Sally Frame Kasaks

Thanks.

Operator

Your next question comes from Crystal Kallik of D. A. Davidson.

Crystal Kallik - D. A. Davidson & Co.

Good afternoon.

Sally Frame Kasaks

Hi Crystal.

Crystal Kallik - D. A. Davidson & Co.

Hi there. I was hoping you could walk us through, I know it’s difficult to look past the macro environment but you still have had this dramatic shift out of footwear into apparel, which I presume has still been a pretty notable improvement to the merchandise margin and I think you were thinking about 100 basis point this year. Is that still playing out to about where you thought?

Michael L. Henry

I’m not sure I understand the question.

Sally Frame Kasaks

I guess I’m trying to understand, yeah. Are you asking are we getting the margins out of apparel that we would have expected?

Crystal Kallik - D. A. Davidson & Co.

Right, I mean, as you --

Sally Frame Kasaks

Yeah, I think -- yeah, on balance we are but I -- the slowdown, you know, some of this promotional activity that we are going to be engaged in will probably not permit us to reach the higher end of what we would have thought we could do but the issue is not footwear versus apparel; it’s just better managing our apparel inventories and some of the promotional cadence we put into action for the quarter.

Michael L. Henry

Well I think, if your question is more to in a normalized environment, what could we expect and I would say the answer to that would be yes, certainly the shift away from footwear and into apparel would certainly drive a very nice improvement in merchandise margin and absent all the regional noise and anything else going on out there, just the shift between non-apparel to apparel that we have accomplished this year should mean as we go through ’09, absent something else that’s out of our control, there should be good merchandise margin growth next year under any condition, just because of that shift that we’ve made away from those more under-productive categories.

Crystal Kallik - D. A. Davidson & Co.

Okay, great. And then you just started to touch on the inventory management. You have put a lot of new systems in place over the past couple of quarters, so could you walk us through where you are in that process and what else will be coming up?

Sally Frame Kasaks

I don’t think we’ve talked about putting a lot of new systems in place. I think internally we have -- there has been some information improvement, yes. I just think that we have been able to better align our on-order with some of the sales trends we’ve seen. Again, I think going -- coming out of August, again -- and I think the teen space, we felt it all much earlier -- we had to start adapting and adjusting when those two weeks in August didn’t happen, Crystal, and we’ve had to adjust and adapt since then. So beyond that, I don’t think we can comment much further.

Michael L. Henry

What you may be thinking of is one of the things that we have been talking about that we believe we do need to do relates to our core merchandising system. The system that we are running on is the same system we have had for 20 years, so there are enhancements that need to be made to that and some of that is what is in our capital plan for next year.

Crystal Kallik - D. A. Davidson & Co.

Okay, I thought you were moving towards a little more regional assorting and --

Michael L. Henry

Over time. It’s not something that has occurred currently.

Sally Frame Kasaks

That’s more of a -- that’s a whole strategic and that would take a period of time. That doesn’t just happen by turning on a switch, you know?

Crystal Kallik - D. A. Davidson & Co.

Right, okay but you have quit a bit of ways to go --

Sally Frame Kasaks

Yeah, there’s a ways to go. We’ve got quite a runway there.

Crystal Kallik - D. A. Davidson & Co.

Okay, great. Well, good luck.

Sally Frame Kasaks

Thank you.

Operator

Your next question comes from Dana Telsey of Telsey Advisory.

Dana Telsey - Telsey Advisory Group

Good afternoon everyone. Sally, can you talk a little bit about where does private label fit into the merchandise assortment going forward? How do you see that developing and is that part of the potential for gross margin improvement? Also, as you move more inventory in the space for denim, what do you see that as a percentage of the mix? Does that help the margins too? And then just lastly, if you look at the competitive environment and the landscape, including demographics, how is your customer changing? Thank you.

Sally Frame Kasaks

Well first of all, in terms of our -- you know, we’ve stated that our proprietary brands, particularly in juniors will continue to grow to some level, so yes, over time there will be margin improvement and certainly our denim mix, as it’s becoming a more significant part of the business, you know, approaching 25% of the business whereas a year ago it was probably like 13%, 14%, somewhere in that range, that really begins to indicate there is some margin improvement there.

What was the next question? I missed the last part of it.

Dana Telsey - Telsey Advisory Group

On the private label, where does private label as a percent of the business go to?

Sally Frame Kasaks

Well, we don’t do it as total, we are more segmented towards juniors and young men’s and we’ve indicated that young men’s would probably be 25% to 30% proprietary and juniors somewhere around 50%. Now that’s pretty consistent. It might go up a little, down a little, based on our bull-head denim but certainly there is opportunity within that but we are also working with our brands on a number of initiatives as well.

Dana Telsey - Telsey Advisory Group

Got it. And then the competitive environment and the customer, Sally, how do you see that changing?

Sally Frame Kasaks

I don’t know. I think -- you know, we read about the frugal pain and there are a lot of statistics out there. At this point, we do know that there is a group of teens moving into our space demographically over the next couple of years and we, I think are prepared in terms of our assortments and the changes we have made to meet them. Right now though, they are being very careful on how they are spending their money from what we can see. As I said, we have a $39.50 fleece. We put it on a table, no signage for a few days and it became one of the top items in the company without broadcasting it. So I think the teen today, they are alert, they are aware, they know what’s going on and I think that the general influence of all the economic news and parents and everything is influencing them. They are buying smart.

Dana Telsey - Telsey Advisory Group

And are you adjusting your marketing budget not only in terms of dollars but in terms of what you are doing too?

Sally Frame Kasaks

Well, we do very little, so I mean -- if you look at our margin, we have done very little. I think our major marketing initiative this year has probably been moving to paper bags because we do know that they don’t like plastic in this generation, but our marketing budget is very small. It continues to be a lot of it geared towards our e-com site. That’s a very important part of our long-term strategy, as well as some points -- greater clarity in our point of sale. We also do a little bit of advertising in Vogue. We use the Vogue teen board as well as our surf, skate, and sport magazines but it’s -- we’re not -- we don’t have a large budget there. We’re obviously always looking at it. We’re trying to do things smarter but it’s not a significant number related to some of the other areas to look at.

Dana Telsey - Telsey Advisory Group

Thank you. Best of luck.

Sally Frame Kasaks

Thank you.

Operator

Your next question comes from Paul Lejuez of Credit Suisse.

Tracy Kogan - Credit Suisse

It’s actually Tracy Kogan filling in for Paul. I have two quick questions, first for Sally -- can you talk a little bit more about the men’s business? I know you guys have talked about some changing trends there in the top area. When do you expect to see more improvement in that business?

And secondly for Mike, on the IT, just a follow-up -- you mentioned you were deferring some projects from out of ’09. Can you talk about whether any of those projects were significant or what was deferred? Thanks.

Sally Frame Kasaks

In terms of the product in young men’s, I think with the floor test that’s just got in you will see some of the changes the team have implemented there -- stronger representation flannel shirts. We’ve been able to move our denim business into more of the skinny and straight versus some of the styles we’ve gone out with for fall. What we found this year is, a couple of years ago you would have seen a lot of difference between the shapes and sizes and washes between the coast and the middle part of the country. We do not see as much of that this year. We probably overcomplicated and could have gone out more with just straight and skinny. So we’ve adjusted that but I think if you look at some of the assortments there, we’ve got a pretty good -- I think we’ve adapted and Charlie and his team have adapted to just different trends. We’ve got our V-neck printables in. As we go into Christmas though, we will be back to a stronger crew neck styling in that area. So I think we have adjusted and balanced it. Again, a lot of it is going to depend though, when you look at the strength of our business historically and the trends in the west and so forth, a lot of it is going to depend on how this plays through. I think we are balanced properly. It’s just that we’ve been disappointed before.

Michael L. Henry

And as it relates to CapEx, the very large majority of the reductions in our CapEx was actually from stores, as we deferred refreshes, delayed or deferred or walked away from new stores, reduced relocations, things of that nature. There were some significant reductions as it relates to IT as well though. There’s quite a list of things that we know we want to get to over some period of time, but as we are looking to conserve resources in an environment that we are expecting to remain very challenging for the near-term, we’ve had to prioritize those IT projects around what must we do in terms of compliance, in terms of licensing, things of that nature as it relates to our software packages. And then there are other things that we need to do as it relates to our core merchandising systems that we are moving ahead with but there are other pieces of that list and I am not going to get more specific than that but there are other things within that list that we decided -- you know what, right now we don’t really need to do it. It’s not a must at this point. It’s something we know we want to do at some point but we have chosen to defer it relative to the current environment.

Tracy Kogan - Credit Suisse

Okay, great. Thank you.

Operator

Your next question comes from Marni Shapiro of The Retail Tracker.

Marni Shapiro - The Retail Tracker

Hey guys.

Sally Frame Kasaks

Hi Marni.

Marni Shapiro - The Retail Tracker

My first question is just a quick update, if you would, on your outlet business and your online business, and if the trends there are any different from the stores. And then I have one other question for you.

Sally Frame Kasaks

The e-com business, as we’ve indicated, has continued to grow, certainly outpacing the retail store environment, so that part continues to grow and we continue to fund that.

Marni Shapiro - The Retail Tracker

Are the trends there any different? Is it denim and the same thing selling there?-

Sally Frame Kasaks

No, pretty much. It’s just we have a broader assortment there, so there may be a few more hits but denim continues to be strong and so at this point, it’s somewhat mirrored though we have a broader assortment and there are products we carry online that we don’t carry in the store, so it’s really hard just to go category for category but we are putting ---

Marni Shapiro - The Retail Tracker

And in outlet?

Sally Frame Kasaks

In outlet business, we’ve seen some strength in certain parts of the country. It might be stronger than some of the core pack businesses but from a category point of view, it still comes down to denim and tops and well-priced fleece. So the categories remain pretty similar. It’s just the pricing and depending upon the location where the outlet stores are.

Marni Shapiro - The Retail Tracker

Great, and then if you guys can all think for a moment about a normal environment where people actually shop again -- every day I am trying to will it -- but I guess a few questions about that. Sally, first of all, if you can think about that, would you say generally are you happy about the trends in apparel and what’s going on in the stores? And then I guess Mike, changes that you have made on the SG&A side, on the expense side, even the way you run the stores -- and I don’t mean when things are good necessarily opening with one person but have you made changes to the organization that you will be able to carry through, even when things are better? And then I guess for all of you, one last question -- clearly with the stock at levels it is, you are not getting paid for whatever is going on right today and so are you taking some chances in this environment to sort of test and try some things and take some risks that could really pay off over time for the company?

Sally Frame Kasaks

Well, first of all I think generally the assortments are pretty good right now. I guess -- and it’s hard to say because I also have -- I know what’s coming in each month and each delivery and I think our team has continued to look forward rather than getting too mired with the difficulty, so to some extent we are taking chances and I think you will see it with each floor set. You may agree or disagree with the assortment but I do believe the team is working to move forward, and so there are some chances that we are taking there.

So generally pleased with the assortments -- you know, you can always tinker hindsight and so forth but we remain committed to denim, we remain committed to the categories that are building and I -- we are just moving on. So I -- I’m not sure what more chances you can take though because we also have to be somewhat careful. I think in terms of some of the quantities we are laying, we are beginning to play with the breadth of assortment, maybe we should be a little bit broader and a little less narrow, so we are working through that, Marni.

Marni Shapiro - The Retail Tracker

Okay.

Sally Frame Kasaks

But those are the kinds of things we are looking at this point, because I think we’ve done a lot of seismic change in the business. You know, sometimes we forget how much this business has done and worked through over the past, particularly the past 18 months, and we have sort of trying to level set -- I think we’ve taken a lot of chances and sometimes when questioned by many of you on this call about those, I think we’ve taken those and now we are just trying to build from lessons learned and try to find out what steady state is.

Marni Shapiro - The Retail Tracker

And by chances, do you mean also on the fashion side, whether it’s the colored denim or the buffalo plaid shirts, or --

Sally Frame Kasaks

Yeah, exactly -- I mean, our team is moving on and I think it’s very exciting to see that despite -- you know, it can be negative just turning on the radio in the morning but I think our team has continued to press on in some of the -- I am really quite excited. I just wish the external environment was a little bit more hospitable because -- but it isn''t, so we’ll get through it.

Marni Shapiro - The Retail Tracker

That’s what I wanted to hear, that you are still excited about it. And my --

Sally Frame Kasaks

Oh yeah, I’m excited. I mean, if you could have seen me last week at the floor set, you would have thought I just -- I don’t know. I won’t get too carried away. But we’ve got to keep going because that’s what is going to turn on the customers -- newness, freshness, we just have to figure out what the right quantities are and to keep our stores and our customers and our people excited. That’s all we can do right now.

Marni Shapiro - The Retail Tracker

Right. And Mike, on the expense side?

Sally Frame Kasaks

We can do that, too.

Michael L. Henry

On the store payroll, you know, as I mentioned earlier, we’ve worked really closely with our field team to make sure that not just getting the number down but also looking at appropriate coverage at appropriate levels and that’s where I will leave it at that in terms of what we are looking at to contain that number as much as possible going forward.

Marni Shapiro - The Retail Tracker

But have you made changes in the organization over this period that you think you will be able to take through even when things are good, changes that really make a lot of sense for the organization that you’ve come to this conclusion because you were under pressure to make these changes?

Sally Frame Kasaks

Sometimes I think pressure makes you take a harder look and I think that’s all we can say because we are looking at every part of the -- we need to understand better because this could also be a trend line that is going on for a couple of years, not necessarily the sales but I don’t know what’s going to be a catalyst, all things aside and I think we are looking and saying gee, what does a 21st century company do in our space knowing we’ve got to build customer relations, we’ve got a lot to do but what is the right structure and I think we are learning as we go along and through our learnings, we are implementing and executing and with a little longer term view. We cannot just be short-term on these decisions though and I think that’s the question. Anybody can go out and do a slash-and-burn but we believe we are going to come out on the other side because we’ve taken so many -- we’ve done so many dramatic things over the past 18 months. Now we are looking at what is the right size organization and structure to make sure we are strong, even if this sort of goes on a bit longer than we would like it to.

Marni Shapiro - The Retail Tracker

Great. That’s what I wanted to hear. Thanks, guys. Good luck with the holiday season.

Sally Frame Kasaks

Thank you.

Michael L. Henry

Thank you.

Operator

Your next question comes from Linda Tsai of MKM Partners.

Linda Tsai - MKM Partners

Yes, hi. With 940 stores right now, looking out over the next several years, what kind of store base size are you comfortable with? Is a 940 store base about the size you are comfortable with or you will just open and close doors to more possible locations, or do you see the store base changing much from here?

Michael L. Henry

Well, we’ve said on several occasions that we will be closing 30 to 40 stores a year in the natural course, as we look at lease expirations, lease renewals, kick-out clauses and what have you. So I think as you look at our aggregate square footage of about $3.6 million, it’s likely to decline about 2% per year over the next couple of years and as you think about 30 stores a year closing over the next three years, that means close to probably 100 stores comes out of the total mix and we are somewhere in the 800 to 850 range, and I think that’s where we are feeling that’s the appropriate size.

Linda Tsai - MKM Partners

And then in your prepared remarks, you mentioned accessories aren’t at a level that you are comfortable with inventory wise. Can you just give us some more detail on that?

Sally Frame Kasaks

No, it wasn’t inventory, but the sales levels weren’t what we expected. I think there is a distortion that I do want to call out. Part of our accessory business has been what we would call dorm wear and we -- that was rolled into our accessory plan. It didn’t meet our expectations and in fact we are moving out of that category, so I think as we begin to come up -- as we go into spring it will be really more about accessories as we know it -- scarves, perhaps some jewelry, some hats, sunglasses, handbags. It was somewhat distorted this year by the dorm wear this year, last year basis. So we feel reasonably good that accessories will be somewhere about 15% of the business, 12 to 15. We are just going to better manage it in spring.

Linda Tsai - MKM Partners

What percentage was dorm wear?

Sally Frame Kasaks

It was about -- I could give a lot of numbers but it was probably -- I don’t know, give or take 20% for the back half of the year, somewhere in that number. Directionally correct, so it’s not the biggest part of the business but it does become part of the comp drain as it didn’t happen and we are pulling out of it.

Linda Tsai - MKM Partners

Okay, and then just one final question -- have you seen any increases in shrinkage with the economy being worse and maybe potentially having lower sales coverage?

Michael L. Henry

We haven’t seen anything dramatic. We take a full physical inventory every January so we will get our final answer when we take our full chain in January as to whether anything has changed significantly but we haven’t noticed anything that is so prevalent that convinces us that our aggregate shrink rate has moved very far, if at all.

Linda Tsai - MKM Partners

Great. Thanks and good luck.

Sally Frame Kasaks

Thank you.

Operator

Your next question comes from Christine Chen at Needham and Company.

Christine Chen - Needham and Company, LLC

Thank you. I wanted to explore a little bit more about I guess fashion risk. I know that over the last year, you have really expanded the number of brands that you have in the stores and some of these have done quite well for you. In this environment, will you continue to do so or will you try and stick with the tried and true brands? And then I have one other question.

Sally Frame Kasaks

I’m not sure I really want to refer to any of our brands as tried and true because within our space there’s always shifting going on so our merchants, as they review each brand at each collection, junior’s, young men’s, we really approach them to see what appears to be fitting best into our assortment so -- and you know, sometimes brands grow a little bit, sometimes they are not as strong, so that’s just the normal ebb and flow of things. It’s not a strategic decision to go or cut back somebody at this point. It really does depend on the collections they are presenting.

Christine Chen - Needham and Company, LLC

I guess to further explore that, it’s more -- are you still looking for up-and-