Michaels Companies Inc
Q1 2016 Earnings Call Transcript

Published: 7 Jun 2016

[Operator:]

Good morning. My name is Candace and I will be your conference operator today. At this time, we would like to welcome everyone to the Michaels Company earnings conference call for the first quarter of fiscal 2016. All lines have been placed on mute to prevent any background noise. If you need assistance during the conference call, please press star then zero and an operator will assist you. Thank you. I’d now like to turn the call over to your host, Kiley Rawlins, Vice President of Investor Relations and Communications. Ms. Rawlins, you may begin the conference.

[Kiley Rawlins:]

Thank you, Candace. Good morning everyone and thank you for joining us today. Earlier this morning, we released our first quarter financial results. A copy of the press release is available on the Investor Relations section of our website at www.michaels.com. Before we begin our discussion, let me remind you that today’s press release and the presentations made by our executives on this call may constitute forward-looking statements and are made pursuant to and within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, as amended. While these statements address plans or events which we expect will or may occur in the future, a number of factors as set forth in our SEC filings and press releases could cause actual results to differ materially from our expectations. We refer you to and specifically incorporate the cautionary and risk statements contained in today’s press release and in our SEC filings. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of today, June 7, 2016. We have no obligation to update or revise our forward-looking statements except as required by law, and you should not expect us to do so. In today’s earnings release, we have presented non-GAAP financial measures such as adjusted EBITDA as defined in our credit agreement, adjusted operating income, adjusted net income, and adjusted earnings per share. Adjusted operating income, adjusted net income, and adjusted earnings per share have been presented to reflect our view of our ongoing operations by adjusting for non-recurring inventory-related purchase accounting adjustments and non-recurring integration costs associated with the February 2016 acquisition of Lamrite West. A reconciliation of these measures to the corresponding GAAP measures can be found in today’s earnings release. Our call today will begin with some highlights from Chuck Rubin, Chairman and CEO, and then Chuck Sonsteby, Vice Chairman will review our financial results and outlook in more detail. Denise Paulonis, SVP of Finance is also on the call with us this morning and will be available during the Q&A session. Following our prepared remarks, the call will be open for questions. As a reminder, we’d appreciate it if participants could limit themselves to one question and one follow-up. Now I will now turn the call over to Chuck Rubin. Chuck?

[Carl Rubin:]

Thank you, Kiley, and good morning everyone. This morning, we reported results from Q1 of fiscal 2016, the first quarter to include the financial impact of the Lamrite West acquisition. We are generally pleased with our overall financial performance for the first quarter. From a comparable store sales standpoint, the quarter got off to a strong start before trends softened in April. Despite this, we expanded gross margins and leveraged expenses in the core Michaels business and delivered adjusted earnings per share at the upper end of our guidance range. In addition, we continued to make strategic investments in support of our Vision 2020 strategy. For the quarter, we delivered total sales of $1.2 billion, an increase of 7.5% or 8.1% on a constant currency basis versus last year. Comparable store sales increased 0.9% or 1.4% on a constant currency basis, driven by increases in both transactions and average ticket. Excluding non-recurring costs associated with the acquisition of Lamrite West, adjusted operating income increased 6.3% and adjusted diluted EPS increased 12.5% to $0.36 per share. From a comparable store sales perspective, customers responded favorably to our trend-right selection of spring floral, new home décor and Easter product, and we were pleased with the performance of our Lowest Price of the Season event, which moved from April last year into March this year. As we discussed on our last call, an early Easter can be difficult for our business. For many of our customers, Easter is a harbinger for spring, so fewer selling days between Valentine’s Day and Easter effectively compresses the Easter-spring selling season. While this year’s earlier LPOS event exceeded our expectations, the change in timing combined with an earlier Easter resulted in an absence of natural event drivers in the April period this year. Our plan to make up for this included additional in-store and promotional events, but the early sell-through of spring seasonal product due to the timing of Easter and the stronger than expected performance of our LPOS event combined with what seemed to be an overall consumer malaise in April resulted in a softer than planned April sales period. I am pleased profitability for the core Michaels business continued to increase. We expanded gross profit rate by about 10 basis points and leveraged SG&A expense by about 50 basis points, resulting in nice operating margin expansion. Now for some category color. In the first quarter this year, paper crafting, fine art and frames, and home décor delivered strong comps, while celebrations, yarn, and custom framing continued to face headwinds. During the quarter, we continued to make investments to support our Vision 2020 strategy, our strategic framework for growth and investment decisions. As a reminder, our Vision 2020 strategy is built on five key pillars

[Charles Sonsteby:]

Well thanks, and good morning. We’re pleased to have delivered on our earnings targets and advanced our investment agenda in the first quarter. Our first quarter net sales increased 7.5% to $1.2 billion, up from $1.1 billion last year. On a local currency basis, net sales grew 8.1%. The increase in net sales was primarily due to $53 million in sales from the acquisition of Lamrite West, including the 33 Pat Catan stores, and $19 million related to the operation of 24 net additional stores during the period. Comparable store sales increased 0.9% or 1.4% on a constant currency basis, driven by modest growth in both transactions and ticket. Normalizing for FX and Rainbow Loom, our two-year stacked comp was 5.6%. During the quarter, we opened 11 new Michaels stores and one new Pat Catan store. We also closed three Michaels stores and two Aaron Brothers stores during the quarter, so our total store count for all brands at the end of the quarter was 1,352 stores. Gross profit dollars for the quarter grew 5.2% to $465 million, and our gross profit rate for the quarter was 40.1% versus 41% last year, a decrease of 90 basis points. The decrease in gross profit rate was due to the acquisition of Lamrite West which reduced consolidated gross profit rate by about 100 basis points. The year-over-year decrease was a result of three factors

[Operator:]

[Operator instructions] Our first question comes from Matthew Fassler of Goldman Sachs. Your line is now open.

[Matthew Fassler:]

Thanks so much, and good morning. My questions relate to sales. First of all, you had this very strong fourth quarter. Two first quarters in a row, a little bit lighter, and I understand there was some exogenous factors perhaps impacting that. Any thoughts on changes to the seasonality of the business as you’ve raised your game in some of the seasonal categories? Is the business tilting to be more of a second half or specifically fourth quarter business? Is the opportunity set changing seasonally for you?

[Carl Rubin:]

Matt, it’s Chuck Rubin. So a couple of parts to the answer. First of all, just to clarify your point, last year on a reported basis, it was a low comp, but when you adjust out the Rainbow Loom effect, I believe we were on an adjusted basis about a 4% comp, so--

[Matthew Fassler:]

Fair enough.

[Carl Rubin:]

--I believe this quarter was actually quite strong. This year, you know, clearly when you have a disappointment on the comp, I don’t think any retailer that saw a tough April isn’t going back to try and really dig into what was going on. We felt good February through March with where we were, and April obviously was a very tough month. So yeah, we’ve gone back - some of the promotions that we ran in April didn’t work as well as we had hoped, and some of our inventory positions weren’t quite as deep as we had hoped that they would be. To your point, seasonal business and trend business, the newness factor is clearly becoming an increasing part of our business, and I think there are some things we can do better on that in the first quarter. So yeah, we’ve already started to think through next year’s first quarter, given the long lead time there is on our products, so the short answer is, yeah, we’re going to go back and re-think a little bit about the inventory and the promotional cadence that we have. But you know, the Easter timing, also again just to--we’re not big believers of hiding behind the weather or the calendar, but the Easter timing this year was a tough one for us.

[Charles Sonsteby:]

And it gets much better as we go into 2017.

[Matthew Fassler:]

Got it. Then just a quick follow-up on sales. So Q1 was, I think, a bit lighter than the street; Q2, the sales guidance, I think is a little below where people had modeled that. I know you kept your year unchanged, so that implies some nice acceleration into the second half. I know the FX will hurt you a little bit less as you make your way through the year, so that’s part of it; but anything in particular from a product perspective, execution perspective driving that visibility as you look to the second half?

[Carl Rubin:]

Yes, just on Q2, as Chuck said, it’s a low volume quarter, so--and there’s not a lot of activity, natural events in the second quarter. As you look at the back half, we continue to get exceedingly better at the seasonal part of our business - Halloween, Christmas, fall. We’re more aggressive in how we’re playing in the so-called back to school realm this fall. These resets that we’re doing in the seasonal merchandising pad that we talked about, that all gives us some pretty good confidence that we’ve got a good plan in place. You know, a little bit nervous about the election and some of the distraction that sometimes that has caused for retail and all consumer businesses in the past, but we feel pretty solid about what we’ve got planned, and we’ve learned a lot about our marketing as well. So our success over the past couple of years has been that we’ve focused more on the shopping environment, the product that we sell and how we communicate, and we think we’ve got some good things in plan for the back half this year.

[Matthew Fassler:]

Thank you so much, guys.

[Operator:]

Thank you. Our next question comes from Christopher Horvers with JP Morgan. Your line is now open.

[Christopher Horvers:]

Thanks. Good morning, guys.

[Carl Rubin:]

Morning, Chris.

[Christopher Horvers:]

So wanted to--Chuck Sonsteby, wanted to get your thoughts on your new role, how your responsibilities are going to be different from what your responsibilities now, obviously ex-the CFO change. What responsibilities still retain as CAO, and just broadly the timing and the decision process around the Vice Chairman role?

[Charles Sonsteby:]

Well I think, you know, that’s still TBD. It’s going to depend on who we hire as CFO so that we can see what talents they bring on board, and then where I can actually add to the team.

[Carl Rubin:]

Also, you know, some of this is our business continues to show new opportunities for growth. The opportunity we have with Lamrite West is very interesting for us. Our sourcing opportunity that we touched on in the script, and we’ll talk more about it later this year, provides very interesting opportunities for us as well to continue to expand margins. We’re already a high margin business, and the opportunity to expand that is very attractive. You know, I was very fortunate to find Chuck here when I arrived, and he’s been a terrific, terrific partner to me and a terrific foundation for the success of this company, so there’s lots of things that Chuck can do. The one thing he can’t do is turn back time. He is 62 years old, so part of this is also succession planning - he’s not going anywhere in the near term, but I don’t--I think at 62 years old, the shorter part of his career is ahead of him as opposed to being behind him. So between the opportunities that the company has, and we’ve done a very good job of building out our management team but there’s an opportunity to continue to expand that to tap into all of our growth, top line and bottom line opportunities, and a recognition that succession planning is a key part of what we need to do to continue this company being number one in our space. That’s what led to this decision. I’m very pleased that we were able to extend that to Chuck, and I’m even more pleased that he signed up for it.

[Christopher Horvers:]

Understood. Thanks for the detail on the second quarter. It seems like there’s $0.03 of inventory timing shifting out of 2Q, and that seems to be a large part of the delta versus the street. But on the top line outlook, how different is your 2Q comp guide today versus what your internal plan was at the start of the year? It sounds like April was pretty bad, perhaps negative. Is the current comp guidance baking in hope, or is this how comfortable are you with where the business is today versus what you’re guiding to?

[Carl Rubin:]

You know, Chris, for what we see now, we’re comfortable - obviously that’s what we’re guiding to. April--Q2 is a short quarter, it’s a low volume quarter. There’s not a lot of things that happen, there’s not a lot of holidays that are meaningful. It’s just a low volume time frame, so it’s hard to move the needle in an appreciable way either way. We have taken some learnings out of April and we’ve made some adjustments to what we’re doing. We are setting our Q3 presentation earlier than we did last year - we’re much more aggressive, so the month of July, which is another kind of empty month, if you will, we do feel better than when we look at what we have planned in July compared to what we did in April, because we are setting that Q3 presentation earlier. So we’re optimistic, but I would be lying if I told you we figured out all of the malaise that affected a lot of retail in the month of April. But everything we see right now supports the guidance that we just provided.

[Charles Sonsteby:]

I want to tack onto a little bit of what Chuck said. The volumes are so low for us in the second quarter - literally a million dollars. It’s more than 10 basis points [indiscernible], so a 50 basis point move in comp really doesn’t have all that much impact on net income. So while it may seem that we are moving down in Q2, and we are, it doesn’t take that much in the other quarters to make that up.

[Christopher Horvers:]

Understood. Thanks very much.

[Operator:]

Thank you. Our next question comes from David Magee of SunTrust. Your line is now open.

[David Magee:]

Hi, good morning. Just curious whether you’re seeing the same sort of volatility in the ecommerce business, or is that still too small to [indiscernible]?

[Carl Rubin:]

David, it’s Chuck Rubin. It’s too small. You know, we’re seeing very nice growth in the ecommerce business, but it’s such a small part of the business. We still believe that ecommerce is a nice addition to our overall offering, and when it comes to the Darice part of our business, which is B2B related and they have an opportunity to sell to not-for-profit groups - church groups, things like that, it becomes even a little more interesting. But overall, ecommerce still for us, we believe is going to be in the long term a single digit penetration kind of piece of our business. So yes, we’re seeing very nice growth out of it, but it’s on such a small base that it’s not a meaningful mover to our overall numbers.

[David Magee:]

Thank you. Then secondly, could you give a little more color regarding the affinity plan, the loyalty plan in terms of how does greater engagement manifest in store business or ticket?

[Carl Rubin:]

Well you know, we are continuing to develop some good capabilities around CRM - customer relationship management. The smarter we get at being able to segment our communication to our customer, the better we believe our business will be. So we’ve talked before about the portfolio nature of our business - we carry everything from yarn to jewelry to art supplies to home décor, et cetera. If we can customize our marketing in a more finite way, then we believe customer response will get better. Offering a loyalty program, we believe will incentivize the customer to provide us their information so that we can track them that much better. We track a lot of customers today, but not as many as we believe we have the opportunity to do, so for our purpose it will give us better data to analyze that over the long term we believe will help our top and bottom line as we focus our communications and focus our promotions based on customer behavior. For the customer, it’s not a point-based program like so many other programs are. It is a program that has a number of softer benefits - you know, receipt-free returns, advance notice of promotions. Sometimes those will be price promotions, sometimes they will be introductions of new product. There may be a live chat with some blogger that is really important in the maker community. So I can tell you that we’ve launched it in the DFW market. It’s only a couple of weeks old, and our sign-ups are exceeding the highest expectations that we had, so we’re quite excited about what it will be. It will roll out later this quarter.

[David Magee:]

Great, thanks Chuck. Good luck.

[Carl Rubin:]

Thank you.

[Operator:]

Thank you. Our next question comes from Mike Baker of Deutsche Bank. Your line is now open.

[Mike Baker:]

Hi, thanks. A couple questions. You quantified the impact of the timing of inventory flows on the second quarter - as Chris said, I think it’s about $0.03. Can you quantify the impact of some of the investments that you talked about in terms of sourcing, how that impacts the first and second quarter earnings?

[Charles Sonsteby:]

Yeah Mike, that’s about a penny. So again, what we’re doing, and we’re really excited about this project, we’ve been working on it for a couple quarters now and you’ll start to see some of the benefits as we get into the last part of ’16, but we think you’ll start to see some real nice benefits as we get into 2017. So we’re actually going back and pressing vendors and seeing a lot more detailed analysis on our first cost. For us, we had not bought product in that way. We’re now going in and actually determining the component pieces and the component parts of our major purchases, and we think there will be some opportunities there to help us get better first costs than we’ve seen in the past. Unfortunately, this being a long-tail business, it takes a while for that to flow through. You’ll start to see it hit inventory first, so you’ll start to see inventory values come down as we come through back half of the year. Then as we start to sell that product with lower first costs, you’ll start to see the benefits in gross margin as we get to the latter half of this year and particularly into 2017.

[Mike Baker:]

So if that’s not necessarily a margin benefit this year, can you sort of articulate again why in your guidance, I think the back half--implied for back half margins is somewhere up between 15 and even, like, 70 basis points at the high end after being down in the first half, what in particular are the drivers or is it just the better comp and leverage on that, that you expect?

[Charles Sonsteby:]

That will be part of what we see as we get in the back half of the year. We’ll start to see some of the benefits, particularly in the fourth quarter for that, and then we’ll get the majority of that benefit as we get into ’17 and then even some into ’18.

[Mike Baker:]

Okay, then one more clarification. You said a penny negative impact - is that a penny to the first half, or a penny to the second quarter?

[Charles Sonsteby:]

A penny to the second quarter. We also had some drag in the first quarter as well - we had a penny drag there, so it’s about $0.02 for the year in terms of the expense, because it hits down SG&A, and then you’ll start to see the margin benefit flow through gross margin.

[Mike Baker:]

Understood, okay. Thank you.

[Operator:]

Thank you. Our next question comes from Seth Sigman of Credit Suisse. Your line is now open.

[Seth Sigman:]

Thanks, good morning, and Chuck, congrats on the new role.

[Charles Sonsteby:]

Thanks Seth.

[Seth Sigman:]

I wanted to just follow up on sales. So when you guys talk about the consumer issues that you’re seeing, obviously that’s not specific to Michaels; but how does that translate into your business? Is it a traffic issue that you saw in April and may continue to see? Is it a basket issue? Is it more isolated to certain higher ticket categories, like custom framing? How should we be thinking about that?

[Carl Rubin:]

Overall for the quarter, I don’t think we called it out, but we did see transactions and ticket value up, transactions actually a bit more than ticket value for our comp that we had for the quarter. The month of April, we didn’t see that increase, so the month of April was a bit of a drag down on most of our business. So you know, it was an air pocket that we, along with a lot of retailers, hit. Clearly we do see continued challenge in our custom frame business. You know, it hasn’t worsened from where it was, it just hasn’t improved dramatically. We talked before that that’s our version of a luxury business. The average ticket in our custom frame business is in the $170, $180 kind of range, which is pretty high ticket for our company. So the month of April saw us slowdown across the board. We had a couple of exceptions to that, but generally it was pretty tough, and it evidenced in all metrics.

[Seth Sigman:]

Okay, understood. Then regarding the 75 stores with the new flexible merchandise space in the front, can you give us a sense of how those are performing relative to the rest of the base, and any other details around the roll-out plan? Thanks.

[Carl Rubin:]

Not a lot that we’re going to provide. Clearly we saw encouraging results - that’s why we’re expanding it for the back half of this year, so we’ll talk about that, I’m sure, as we get into that a bit further. We’re generally a company that talks about things as we’ve done them, as opposed to long before we’ve executed them, but we are encouraged by what we see and the customers responded really well. We had adjusted some of our buying for the back half of this year to reflect that expansion, and again it’s part of the reason we feel good about this back half of the year improving compared to the first half.

[Seth Sigman:]

Got it, thank you.

[Operator:]

Thank you. Our next question comes from Steven Forbes of Guggenheim. Your line is now open.

[Steven Forbes:]

Hey guys.

[Carl Rubin:]

Good morning.

[Steven Forbes:]

Looking at the 1Q SG&A expense, excluding the integration for Lamrite and one-time costs, can you just provide some color on the various drivers underlying the 50 basis points of leverage? The reason I ask, it would imply some proactive cost reduction, given where the comp came in for the quarter.

[Denise Paulonis:]

Steve, this is Denise Paulonis. I can help you answer that question. As Chuck had communicated on the call, we are lapping $4 million of legal fees from Q1 of last year, which is a good news item for this particular quarter that just closed. We also got some reimbursement against those legal fees in Q1. Finally as you mentioned, in our fuel for growth world, we do continue to make strides there across our P&L to try to help things. We did see a bit of an offset to some of those savings. That savings was really a shift in our advertising expense in Q1. It was a little larger than what we would have spent in Q1 last year, which was in support of our TV campaign, so that was part of the trade-off of what we invested in.

[Steven Forbes:]

Just a follow-up on the new store openings for the year, can you just talk about the cadence? I mean, you mentioned three new stores in the second quarter. Are there any changes for the full year, or is there a particular quarter that is concentrated with a lot of openings here?

[Denise Paulonis:]

The full-year number has not changed. Q2 this year is a little lighter in store openings than what we would have done Q2 last year. We ramp back up in Q3. That’s really due to kind of available real estate timing for when we can get into the stores. So no change for the year.

[Steven Forbes:]

Thank you.

[Operator:]

Thank you. Our next question comes from Simeon Gutman of Morgan Stanley. Your line is now open.

[Simeon Gutman:]

Thanks, good morning. Just a quick clarification on the top line guidance. I think in the press release and then when Chuck Sonsteby in his remarks said the range of 2.2 to 2.7, is the ex-currency the 2.8 to 3.3 still on the table?

[Charles Sonsteby:]

2.8? Yeah, it’s going to depend on what the currency--what the FX rate is. I think what we’re trying to do is just calculate--we calculated it for the year and we sort of left it there. We haven’t gone in and updated it for [indiscernible].

[Simeon Gutman:]

Got it, okay. I mean, I guess going back to the same issue, and it was mentioned earlier then the back half implies an acceleration, I guess on a constant currency basis relative to the original guidance, it looks like it would imply a comp that’s even above the high end of that constant currency range. So my question was going to be how--I guess, you know, we heard from Chuck Rubin about some of the sales initiatives, but just wanted to acknowledge that it looks like it’s an acceleration above that high end, and I guess how you could get there unless you’re basing it off the 2.2 to 2.7.

[Denise Paulonis:]

Simeon, it’s Denise. We are basing it off of the 2.2 to 2.7 - that is the core number that I’d be looking at. When we look at the back half and our full-year guidance, we would still be within the top end of our range.

[Simeon Gutman:]

Okay, that’s helpful. My follow-up, different topic, thinking about the sourcing piece, can you tell us what percentage of the business is directly sourced from factories today, and then the focus--I don’t want to say it’s all of a sudden, but it seems like it’s a heightened focus on direct sourcing. What triggered it? Was it the Lamrite deal that made you look more closely at the sourcing side of it? Any color there? Thanks.

[Carl Rubin:]

So first, our direct sourcing is a small portion of our business today. We’re not going to quantify that. Secondly, over the past few years we have been working on a lot of things. We did know that sourcing likely provided an opportunity for us over time. Part of the attractiveness of the Lamrite deal when we looked at them about the acquisition was the fact that they had an infrastructure in China that would allow us to scale our direct sourcing capability faster than we would have on our own. So this has--since the day I walked in here three and a half years ago, this has been on the road map, it was just a question of when we could get to it to do it successfully. There is a lot of work. There is investment that needs to be made to do it successfully. Lamrite gives us an opportunity to accelerate that.

[Charles Sonsteby:]

It also provides a de-risking. I think one of the toughest things to do is just setting up the China office, and so with this acquisition came, as Chuck said, an office that was already up and running, so it merely became a way that we could strengthen that office versus trying to go out and build it from scratch. So this provides a much faster, an acceleration of that strategy than we had originally planned.

[Carl Rubin:]

Additionally--again, back to the [indiscernible], we haven’t talked about it publicly necessarily but the sourcing opportunity of, again, becoming a bit more sophisticated in our sourcing process and breaking out commodity costs and doing bottom-up cost building, that has always been on the road map but it’s taken some development of internal skill sets that we may not have had before. So we’re getting to it now, and the timing is appropriate for us because we’ve made a lot of progress on some of our customer-facing efforts. Still more to be done, but now there is opportunity to - and we believe it’s material opportunity - to improve our product costing, which again given our scale and our size in the industry, will give us an opportunity to both flex our muscle a bit more with customers, we think, in providing really good values to them in addition to providing additional value to shareholders.

[Simeon Gutman:]

Okay, thanks.

[Operator:]

Thank you. Our next question comes from the Dan Wewer of Raymond James. Your line is now open.

[Dan Wewer:]

Thanks. Kind of hate to belabor the point on the second half same store sales guidance, but just to follow up on that, are you anticipating significantly better third quarter growth than you would in the fourth quarter, given the year-over-year comparison is so difficult in the fourth quarter?

[Carl Rubin:]

Yeah guys, I’m not sure we’re prepared to give out third versus fourth quarter. We’re not going to get into that habit of breaking out the quarters, so I think what we’ve said so far is to the extent we’re going to comment right now.

[Dan Wewer:]

The reason I was asking, it would imply that your two-year stack comp would return to the levels back when Rainbow Loom was enjoying such momentum. Let me ask you this - if the same store sales were to fall short of that second half guidance, what are the levers that you could pull on expenses or in cost of goods sold to maintain your targeted profitability?

[Charles Sonsteby:]

I think we’ve had a very active process in our fuel for growth, and we continue to see benefits from that. In fact, we believe that we have more fuel for growth that we’ll see in the back of the year. We did talk a little bit about the sourcing initiative and some of the timing benefits that we’ll get related to the procurement costs on a year-over-year basis. We think that some of those things will help buffer if indeed we did run into issues on top line. It will still help us deliver within the range.

[Dan Wewer:]

Then just the last question I have is to support this accelerating same store sales growth in the second half of the year, will you anticipate building inventory by the end of the second quarter?

[Charles Sonsteby:]

No, actually for us, inventory as we go through the year will actually be lower on a year-over-year basis. Some of it was we had brought inventory in and it was in the DCs, so actually in-store inventory will be up but you may not see what’s in the total system be up on a per-store basis. We also will have reduced costs, as we talked about on the sourcing initiative. That will drive down the cost, which may mean we’ll have more units, we just won’t pay as much for the units, and that means that inventory levels will be down.

[Carl Rubin:]

On a cost basis.

[Charles Sonsteby:]

On a cost basis, yes.

[Carl Rubin:]

On a per-store basis.

[Charles Sonsteby:]

Yes. So if you look at units in each store, we’ll have more units in each store, we just will not have paid as much for them.

[Carl Rubin:]

And the retail value of them--we’re a cost inventory company, but the retail value of that would be higher, but the cost on our books in fact is lower due to the sourcing initiative.

[Dan Wewer:]

Okay, thank you.

[Kiley Rawlins:]

Candace, I think we have time for one more question.

[Operator:]

Thank you. Our final question comes from the line of Alan Rifkin of BTIG. Your line is now open.

[Alan Rifkin:]

Thank you very much for taking my question. With respect to Lamrite, Chuck, what do you think are the long-term opportunities with respect to sourcing and expense savings there?

[Charles Sonsteby:]

I think in sourcing, what it does, it gives us additional volume. I think what’s really exciting is we’ll be buying about a billion dollars through this sourcing initiative as we go into next year. I mean, that’s huge dollar volume, so having the additional volume from Lamrite West combined with what we already buy at Michaels gives us the opportunity to get better first cost, not just for the Lamrite West purchases but also for the Michaels purchases. Then in terms of expense savings, I think for us right now, we’re making investments. We’re actually growing that China office so that we can get that billion dollars worth of product flow through there. I think the thing we’re most excited about is just the opportunity to build the revenue. Those cost savings and those expense savings are nice, but I think the ability to get into B2B for us is really a big thing, to be able to expand some of our ecommerce activities and build off the Pat Catan and Darice names will give us other opportunities to grow top line, not just get expense and sourcing savings.

[Alan Rifkin:]

Okay, and as a follow-up, I mean, obviously the sourcing opportunities are--you know, you’ve spoken about it. At the store level in the early days, are there any takeaways that you’re seeing from maybe the Pat Catans that are applicable to the legacy stores, and as a follow-up with respect to TV advertising, is that incremental advertising over and above the typical budget? Thanks a lot.

[Carl Rubin:]

So Alan, I’m going to kind of cut you short on a little bit. So the--it’s too early to comment on the Pat Catan stores. We’ve had them for a few months. They have 30-odd stores, they’re a different box than ours, so there are learnings that we’re getting from them at Michaels, and there are Michaels learnings that are benefiting Pat Catan, so I’m sure we’ll talk about that more. On the TV advertising, some of the TV advertising we have done has been incremental spend that’s been funded through our fuel for growth effort. We do believe long term there is potentially an opportunity for us to reinvest some of the fuel for growth savings to communicate with the customer in a more aggressive way than we have before, so that’s what I would say on that. Thanks Alan, I appreciate it. I’m going to kind of wrap us up since we’re running a minute or two over. Let me thank everyone for participating today. Also, I want to be sure to thank our 55,000 team members across all of our brands, our distribution centers and our support centers for working together to deliver this quarter for our customers, our team members and our shareholders. We are the leader in this industry, and we will continue to remain focused on connecting and inspiring the customer in new ways as we work to achieve our Vision 2020 strategy. Again, appreciate everybody joining us today, and we’ll look forward to talking to you later this year on our second quarter call. Thank you.

[Operator:]

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Have a great day, everyone.