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ALCO Stores (NASDAQ:ALCS)

Q1 2014 Earnings Call

June 14, 2013 11:00 am ET

Executives

Royce L. Winsten - Chairman, Chairman of Strategy, Budget & Planning Committee, Member of Audit Committee, Member of Compensation Committee and Member of Nominating & Governance Committee

Richard E. Wilson - Chief Executive Officer, President, Director and Member of Strategy, Budget & Planning Committee

Wayne S. Peterson - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

Analysts

Benjamin I. Rosenzweig - Privet Fund Management LLC

Adam J. Peck - Heartland Advisors, Inc.

Jeff Geygan

Operator

Good morning, everyone, and welcome to the ALCO Stores First Quarter Fiscal 2014 Earnings Call. At this time, I'd like to inform you that the conference is being recorded. [Operator Instructions] We would like to also remind you that this conference may contain forward-looking statements as referenced in the Private Securities Litigation Reform Act of 1995. Any forward-looking statements are made by the company in good faith, pursuant to the Safe Harbor provisions of the Act. These forward-looking statements reflect management's current views and projections regarding economic conditions, retail industry environments and company performance.

Actual events or results may differ materially from these described in this the conference call due to a number of risk and uncertainties. Factors that could significantly change results include, but are not limited to: sales performance; expense levels; competitive activity; interest rates; changes in the company's financial condition; company's high operating leverage in an environment of flat or declining consumer spending; the economic viability of small rural towns the company serves; and macroeconomic factors affecting and potentially affecting the retail industry in general, such as a decline in the value of the U.S. dollar against the currencies of countries from which U.S. retailers import product, the introduction of a national sales tax or value-added tax, continued high levels of unemployment, rising fuel prices and a high level of consumer indebtedness.

Additional information regarding these and other factors that could cause actual results to differ materially from these contained in the forward-looking statements set forth in this conference call are included in the company's 10-K and 10-Q filings and other public documents, copies of which are available from the company on request.

Your speakers for today's call are Mr. Royce Winsten, Chairman of the Board; Mr. Richard Wilson, President and Chief Executive Officer; and Mr. Wayne Peterson, Senior Vice President and Chief Financial Officer.

At this time, I would like to turn the call over to Mr. Winsten. Please go ahead, sir.

Royce L. Winsten

Thank you very much, operator, and good morning, everyone. Thanks for joining us on the call. As the old Chinese curse goes, "May you live in interesting times." Well, these are interesting times at ALCO Stores. While this quarter's numbers don't show it, the board feels the right steps are being taken to continue the improvement in financial performance seen in recent periods.

The move to Dallas is progressing. Some employees are already working from that location. The rest will follow over the next 6 to 8 weeks. Recruitment of new employees is going well. A few holes have developed in the organization, as people who are not making the move peel off for other opportunities. We thank them for their service and wish them all well -- wish them all success in their new endeavors.

Filling these holes has been primarily the responsibility of our new Senior VP, Ricardo Clemente, who is doing a fantastic job.

Inventory grew in the first quarter. That was the result of a few factors conspiring together. Rich will speak more about this in his comments. Reversal of that situation has already begun. More progress will be seen over the next few months. Rich and Wayne will speak about the progress they're making with margins. Additionally, Rich will describe new efforts to reduce shrink that are beginning to show some modest results. Rich will speak about updating the warehouse management system. And of course, Wayne will detail financial results for the quarter.

I would like to comment briefly on the Shareholder Rights Plan the board implemented in May. I have said since becoming Chairman that the board will consider all strategic options in order to maximize shareholder value. The board carefully considered all relevant factors in adopting the Rights Plan. It allows the company to pursue its financial goals and does not prevent the board from considering any offer or taking other actions it believes to be in the best interest of shareholders. What the board wanted to do was to deter anybody from using opportunistic tactics to develop -- to deprive our shareholders from realizing full and fair value for their shares. The board's central focus is, has been, and will be to maximize the company's value for all shareholders.

In terms of the broader economy, money continues to be tight unless, of course, you're in the money business. Washington continues to maintain that GDP has grown since 2009, it is actually higher today than it was before the financial crisis began. There are so many indicators that put the lie to that fallacy, I won't try to mention them, but 2 are very timely and should suffice. First, as the New York Times noted last Saturday, there are 2.1 million fewer jobs in the economy than there were at the peak in 2007. It's hard for me to imagine an economy larger than it had been while there are fewer jobs existing. Additionally, the jobs that there are, are deteriorating in quality. Diane Swonk from Mesirow Financial observed, in an article last Friday, that jobs that are being created in the U.S. today are primarily in the hospitality categories and through temp agencies, neither of which tend to be particularly high paying. Second, the St. Louis Fed compiles data on a host of things, including the total number of vehicle miles driven in the economy. Given the fact that mass transit has never been a priority in the U.S., total vehicle miles driven tends to be very closely associated with general economic activity. After declining sharply from 2007 to 2009, total vehicle miles driven has flatlined at that lower level. On a per capita basis, they have declined steadily. I find it very hard to believe that the economy is now larger than it was in 2007, in spite of data from the Bureau of Economic Analysis showing that it is, while total vehicle miles driven is significantly smaller.

Total vehicle miles driven also directly relates to transaction counts at retailers, since fewer miles equals fewer shopping trips.

Tight money and uncertain economic fortunes tends to make consumers more conservative in their expenditures. Our customers may be even more conservative than average. This results in less trips to the store, much less splurging on desired but unnecessary items and buying much closer to need than U.S. consumers did in the past. All this makes the job of retail chains such as ALCO more difficult.

In light of those difficulties and in the face of relocating the company, Rich and his team are doing an excellent job. This quarter notwithstanding, EPS is beginning to move in the right direction. ALCO franchise is growing stronger again. Once the dust settles on the move, the bar for performance will again be raised. Being able to recruit from and to a major metropolitan area, which is a center for retail corporate headquarters in the United States, will create a phase change in the capabilities of the company. World-class talent makes a world-class enterprise. Senior management are all well advised and excited about the challenge. The board and everyone involved with the company is energized by the opportunity.

With that, I'll pass the call to Rich. Rich, go ahead.

Richard E. Wilson

Thank you, Royce, and good morning, everyone.

Sales for the first quarter were disappointing and were a result of a much cooler weather pattern that negatively impacted sales in key seasonal businesses; primarily, Outdoor Furniture, Lawn and Garden Products, Horticulture, Sporting Goods and key warm-weather classifications within the men's apparel business. These businesses represented 80% of the decrease in our Q1 sales performance.

Commensurately, Q1 earnings were also impacted due to the reduction in sales, resulting in a loss of $1.7 million, compared to a loss of $1.3 million for the first quarter of fiscal year '13. Margin dollars for the quarter were flat at $34.4 million. On a rate basis, Q1 results decreased 20 basis points to 29.3% compared to 29.5% last year. Margin compression was a result of higher outbound freight expense during the quarter as we built additional inventory to accommodate for the pending move of the company headquarters during the second quarter.

Had freight rate levels remained the same, margin would have been 30.2% or an increase of 70 basis points.

Based on the different timing of receipts this year, we anticipate Q2 freight expense to be reduced. I will address overall inventory levels later in the presentation.

SG&A for Q1 was 28.8% of sales compared to 28.6%.

Heading back to the top line, we have changed sales reporting to a quarterly basis from monthly. However, I am pleased to report that same-store sales performance for Q2 has improved, as warm weather has now arrived.

As Royce discussed in his opening remarks, the overall economic backdrop for U.S. retailers remains challenging. We, however, remain optimistic that the company's drop in first quarter sales will be mitigated as a result of the difference in timing due to this year's late spring season, especially in comparison to last year's unusually warm first quarter.

Moving on to key initiatives for fiscal year '14. Before I start, I'd like to point out, for reference, we have posted on our website a presentation from our shareholder meeting last week in Dallas. The presentation can be found in the investor section of our website at alcostores.com in the Presentation tab.

Our first priority is gross margin expansion. Clearly, delivering improved returns to our shareholders is anchored in achieving improved gross margin performance. As previously announced, our price optimization initiative, supported by our partnership with Revionics, is on track. Implementation is now complete, and the merchants are starting to work with the data that will result in a more dynamic pricing architecture and improved margins. We anticipate minor benefit in Q2, with a larger contribution in the third and fourth quarters.

Reducing inventory and improving turnover is our second initiative. Slow inventory turn has plagued ALCO for many years, leading to higher debt and expense levels. First, it starts with people. We're focused on hiring the best talent; most specifically, Mike Smith, our new VP of Supply Chain. Next is supporting the team with new technology. As previously announced, we are also in the implementation phase of a new partnership with Microsoft Dynamics, which will replace our existing ERP platform, streamline purchase order management and will foundationally support a new demand planning and forecasting system that will drive unproductive inventory out of the system and link up with our existing space planning software to ensure assortments are built by store productivity and managed to specific turnover and sales expectations.

In addition, we are riveted to identifying and clearing unproductive inventory in an organized and profitable manner. New clearance strategies are in place, and specific markdown cadences have been developed by merchandise category that will reduce existing and future carryover levels. Our goal is to reduce inventory in the bottom tier, or what we refer to as our C and D locations, by 15% to 20%, while increasing levels in our larger A and B stores be approximately 10% to 13%, resulting in a material overall net inventory reduction.

As stated, inventory reduction is a major focus of the company. That said, it is important to note that inventory levels at the end of Q1 were significantly higher than last year at the same time. This is a result of 3 inputs: First, the decision to build additional safety stock as we prepared to move the central offices later this summer. Second, higher inventories in key seasonal areas, which were affected by the cooler weather in Q1. And third, an increase in apparel inventory, which is a result of investments made in new brands at a higher average ticket.

In summary, even with higher inventory levels in Q1, we are planning on ending fiscal year '14 with less total inventory than last year and are on track to do so.

Our third initiative is to grow higher-margin businesses that improve the overall mix of the business. As discussed previously, our initial to grow -- initiative to grow the apparel business is well under way. We are encouraged by recent trends in the business and are confident our new brand partners, store presentation and pricing architecture will deliver results.

Some of the exciting new brands just introduced at ALCO are John Henry, Links Edition and English Laundry in men's; and One World, Sag Harbor and Lee Jeans in women's. And we are also pleased to announce the addition of Reebok Footwear in August and Reebok Active Apparel in September.

Our fourth initiative is reducing the profit erosion cost by shrink. Higher-than-industry results have also been a legacy problem for the enterprise, which we remain committed to reducing. To that end, we're totally changing the structure of our loss prevention team and reporting alignment. In addition, we also believe better inventory management and planning and execution will also yield results.

Lastly, we are investigating presentation changes in high-theft departments that we believe will yield results, specifically in the Health & Beauty and Electronics categories.

Next is updating our warehouse management system, also within the scope of Microsoft Dynamics implementation. Once complete, we will be able to add a second distribution center, reduce outbound freight miles and lower cost.

And finally is a transformational event, the move in the company's headquarters from Abilene to Coppell, Texas, a suburb of Dallas. The office construction is underway. Hiring is proceeding according to plan, with an anticipated move-in date of August 2.

Once again, while we are grateful for the commitment and support from the company's hometown, Abilene, Kansas, our new home in Dallas provides a more convenient location for our vendor partners and a deeper pipeline of talent needed to deliver the return on equity that is expected of us.

Thank you. And I will now turn the call over to Wayne to walk you through the financial details. Wayne?

Wayne S. Peterson

Thank you, Rich. Good morning.

As you know, yesterday afternoon, we reported operational results for the first quarter, which ended on May 5, 2013. First quarter net sales from continuing operations increased 0.9% to $117.5 million. Excluding fuel center sales, first quarter net sales from same stores decreased 2.2% to $112.4 million.

As the company has noted, extended winter weather conditions impacted our first quarter sales, primarily in our outdoor businesses. The majority of the decline is attributable to Outdoor Living, Horticulture, Sporting Goods and Menswear categories.

First quarter of 2014 gross profit margin was 29.33%, decline of 18 basis points compared to the prior year. The decline in gross margin is attributable to an increase in outbound transportation cost; that is, the cost of transporting goods from the company's warehouse in Abilene, Kansas to our stores across 23 states. Increases in number of miles driven and increasing fuel prices have contributed to this increase in cost.

Adjusted SG&A, which is defined as SG&A excluding share-based compensation expenses and a gain or loss in the sales of fixed assets, was 28.71%, representing a 10-basis point increase when compared to the prior year. The increase in adjusted SG&A is attributable to the expenses associated with new stores, partially offset by declines in corporate overhead expense and same-store operating expenses.

No expenses associated with the office relocation were recorded during the first quarter. At this time, the company continues to estimate the expenses associated with the relocation of employees and the separation expenses for those employees not relocating will range between $2 million and $2.5 million before tax. These expenses associated with the office relocation will likely be recorded during the second and third quarters.

First quarter net loss of $1,668,000 was $384,000 greater than the prior year net loss of $1,284,000. The increase in the net loss compared to the prior year is attributable to a decline in same-store sales, the net increase in adjusted SG&A and the increase in interest expense.

On a per share basis, the first quarter net loss per share was $0.51 compared to a net loss per share of $0.34 in the prior year. Of the $0.17 in additional net loss per share, approximately $0.08 is attributable to a lower weighted average number of shares outstanding.

The balance under the working capital revolver at the end of the first quarter was $71.6 million, representing an increase of approximately $8.2 million compared to fiscal year 2013 year end. The increase in the revolver balance is attributable to an increase of $23.9 million in inventory and capital expenditures of $1.4 million, partially offset by an increase in accounts payable of $19 million.

As we have stated, the company will continue to evaluate low-volume, low-productivity stores for potential closing. As such, the company currently plans to close 8 stores during the year upon the natural expiration of their respective leases.

During the first quarter, the company began the closing process of 4 locations, which was completed during the first 3 weeks of the second quarter. Additionally, on June 6, the company announced the closing of 4 more stores, which are expected to close by the end of August.

During this fiscal year, the company is anticipating the opening of 5 new stores. Currently under construction are new stores in Watford City, North Dakota and in Sidney, Montana. 3 additional stores are in various stages of development.

Thank you. And at this time, I'll turn the call back to Rich.

Richard E. Wilson

Thank you, Wayne. Operator, now I'd like to open the call up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And we'll go to our first question from Ben Rosenzweig with Private Fund.

Benjamin I. Rosenzweig - Privet Fund Management LLC

I wanted to focus on inventory. You guys talked about it a good bit. How do you reconcile, I guess, the progress you're saying in your inventory initiatives with the fact that it's -- you ended the quarter with an unbelievably high amount of inventory on an absolute basis and for going into Q2. Can you kind of explain why it's so high?

Richard E. Wilson

Yes, I mean, really, Ben, it's -- a timing issue is really what it is. The majority of it is the fact that we accelerated some Q2 receipts into Q1 in light of the fact that we were going to have disruption in the central offices as we moved the central offices from Abilene to Dallas. So it's merely a function of timing is a majority of -- the vast majority of the swell in inventory. There is some swell in the fact that we dropped sales in Q1, especially in the seasonal categories. We did flow additional goods in Q1 in those seasonal categories based on how well they performed in Q1 last year. And then when we cycled that, clearly, everyone in the industry had a tough Q1 in seasonal categories because the weather pattern completely went the other direction. So it's those 2 issues. But primarily, it's a timing issue and some safety stock we built into the system to accommodate for the move. In addition, I would report that we've already chewed through more than half of that inventory that we ended Q1 with that was heavier than last year.

Benjamin I. Rosenzweig - Privet Fund Management LLC

Okay. But isn't the first half of the year traditionally not really heavy on inventory on a relative basis? Like so -- I mean, what I'm saying is, if you're finishing Q1 -- or not even finishing, I mean, if you're ever really carrying that much inventory Q1-Q2, I mean, what's going to happen when you're building out for Q4? I mean, are we going to see $225 million of inventory going into Q4?

Richard E. Wilson

No. Let me just rephrase my comment around the timing. What you're going to see at the end of Q2 is the inventory reverting back close to last year, in a much closer level. In Q3 and Q4, as I've already stated, by the end of the year, we will have absolutely less inventory than we had a year ago.

So it's a onetime event in Q1, and the majority of the issue was the timing of receipts as it relates to the move of the enterprise.

Benjamin I. Rosenzweig - Privet Fund Management LLC

Okay. And so for not just reducing inventory on an absolute basis, but trying to improve the inventory turn, I know you said you're going to realign it in terms of the tiers of stores that you kind of laid out and try to move it around a little bit. Although, I mean, I guess I could see how that might reduce inventory on an absolute basis, but how is that really going to improve your turn? I mean, it just, it feels like just the low -- the turn issues stem from the nature of the stores in general, not the fact that some stores are good and some stores aren't quite as good. I just -- I'm not sure how that does anything other than kind of moving inventory around.

Richard E. Wilson

Sure. Let me put some color on it for you. So when I state that we'll remove roughly 20% of the inventory in the C and D locations but grow the inventory in the A and B locations, the question is, what is the net of that? Not prepared to give a specific number today and from a guidance perspective on what that net reduction will look like, but as we've run through the math with the number of C and D locations we have and the number of A and B locations we have, what that looks like, at the end, it will drive a net reduction in overall inventory and improve turn. Part of that will come from SKU rationalization as we take some unproductive items out of the C and D stores. And I might, at this point, put a broader stroke on the entire enterprise in the following manner: Now where ALCO is today, we're stable from a general top line perspective, pretty much in the hopper with where the rest of the industry is. We've improved earnings over the past 2 years, but we have not delivered the type of return on an ROE basis that we need. There's really 2 levers now to pull, and that's price optimization, which is going to grow margin, we discussed it on the last 2 calls, which will be very accretive to overall bottom line; and second is inventory optimization. So those are the 2 most important levers that we can pull and get in place in order to drive better shareholder returns. And we know that we are committed to getting there. The additional technology that we've invested in, in Revionics, as I stated, is in play now. And the additional technology as it relates to Microsoft Dynamics and a better, more robust planning and allocations system will come online in the third quarter. It will take us time over a period of time to chew through some of that inventory we'll be taking out of the C and D stores, so I'm willing to commit to and we will deliver a net inventory reduction by the end of the year. But I would also anticipate that, that inventory reduction will be further enhanced as we get into Q1 of next year and Q2 and there beyond in the next year. So what you're seeing is taking the company and optimizing now margins by Revionics and inventory with better systems.

Operator

And we will now take our next question from Bruce Winter [ph], private investor.

Unknown Shareholder

Why was your acquisition of property and equipment in fiscal year 2013 so much higher than depreciation? And why was -- and what is your plans for this year?

Wayne S. Peterson

The majority of the CapEx, in terms of stores in fiscal 2013, related to new stores, one in particular in Tioga, North Dakota. Historically, the company has done developments where we've leased all our locations. In that particular town, we own the location. So that was significantly more. And the depreciation in terms of our stores was approximately $8 million last year. And so, like I said, typically, we tend to lease most of our locations. And in that particular case, that caused our CapEx to be higher. In terms of this year, we've stated that capital expenditures will be in that $10 million to $15 million range.

Operator

And we will now take our next question from Blair Lambert [ph], private investor.

Unknown Shareholder

A couple of questions. You talked about the price optimization project. And it's going to start to kick in here in Q2 and more in Q3 and 4. Could you give us some kind of a feel for, directionally, what you're hoping to get out of that in terms of margin improvement?

Richard E. Wilson

Sure, Blair [ph]. We've said on a couple of previous calls we feel that it will add 100 to 150 basis points in overall margin to the company

Unknown Shareholder

Beautiful. Thank you very much. Sorry I didn't pick that up last time. And then, talking about your inventory, I think what you were basically saying is put less inventory into low-volume stores and more of inventory into higher-volumes stores, which is really -- I think you're saying less markdowns, to have fewer markdowns, and just be more efficient in your inventory overall. Can you give us some kind of a sense of the spread of gross margins throughout your stores? Because I agree it's an allocation question, but I'd love to understand the spread that you have within your store base because that really speaks to the magnitude of the opportunity. I mean, are you talking about -- do you have 10-percentage point spreads or are you talking about 2- to 3-percentage point spreads between the high and low store? And within that, I'm really curious about -- putting in a system is one thing. But before you put in a system, you have to have the procedures and processes in place, or else you can't be successful. People have to understand how to use it. The system doesn't solve the problem, it's the people using the system.

So do you have those capabilities in-house to really take advantage of the systems? Or are you going to be out looking for people who are experts in allocation and price management?

Richard E. Wilson

Sure. Okay, let me take the first question. In regards to the spread of productivity -- or, excuse me, profitability, from our, say, our larger stores, the A and B stores to our C and D stores. There is a profitability difference in that the C and D stores are typically more driven off of ad items than they are off of just general traffic. So there is a profitability differential between the larger-volume doors to the smaller-volume doors. On average, it's going to be somewhere in the 0.75 basis point to 1.25 points, somewhere in that range. So the A and B stores are more profitable by that factor. As it relates to your allocation/systems question, and do we have the right bandwidth here in the company with to change processes and to not only install the system but know how to work with it? Yes, I'm highly confident. Most specifically, as I mentioned, we hired a gentleman by the name of Michael Smith from Harbor Freight. And prior to that, Michael was at Meyer, up in Grand Rapids. Mike's got experience in supply chain, brings a wealth of knowledge to us. We had initially brought Michael in to run -- to be a divisional merchandise manager in the merchandise category in the home business. And then just recently, in February, promoted him to be the DMM -- or, excuse me, in charge of commodities and be the VP of Supply Chain. So between Michael's experience as well as one of the side benefits and, obviously, the intention, I should say, of moving to Dallas, we're also been able to acquire a number of replenishment analysts and planning individuals from other major retailers in that market that are also bringing a more robust skill set than what we might have had here in Abilene.

Operator

[Operator Instructions] And we will now take our next question from Adam Peck with Heartland Fund.

Adam J. Peck - Heartland Advisors, Inc.

What was Apparel and Accessories as a percent of sales in the quarter?

Richard E. Wilson

For the Q, it was about 15%, 15.5%.

Adam J. Peck - Heartland Advisors, Inc.

Okay. So, comparable to last year?

Richard E. Wilson

Yes.

Adam J. Peck - Heartland Advisors, Inc.

And what has to be a good target? I'm sorry, what was that?

Richard E. Wilson

Apparel did perform slightly better than the total enterprise, though, in total Apparel. One comment I wanted to make sure I made.

Adam J. Peck - Heartland Advisors, Inc.

And what would be a reasonable target, say, 12 to 18 months from now, as a percent of sales?

Richard E. Wilson

Good question. We would like to get Apparel back towards 20% of the mix.

Adam J. Peck - Heartland Advisors, Inc.

Did you say freight hit -- hit us by 70 basis points in the quarter?

Richard E. Wilson

Yes, it did. Because we accelerated so much receipts into Q1, as we moved that inventory through the system and out to the stores, the outbound freight went up that much. So merch margin, if, in fact, the freight rate would've been the same, would have improved by 70 basis points to last year. Which is material in light of the fact that we've shown margin enhancement over the past several quarters, and that's without the benefit of Revionics yet. So we already have a base that's moving in the right direction. When we layer on the technology of Revionics, that's why we believe we can get an 100 to 150 basis point improvement in our overall enterprise gross margin.

Operator

And we will now take our next question from Jeff Geygan with Milwaukee Private Wealth Management.

Jeff Geygan

Just a couple of quick questions for you here. With respect to Tioga, Wayne, I think you mentioned that the company owns that property. Are there other properties that you own outright?

Wayne S. Peterson

We own 3 retail locations: 1 in Utah, 1 in New Mexico and now 1 in North Dakota. And of course, we own the distribution center and the corporate office here in Abilene.

Jeff Geygan

Are the Utah and New Mexico locations relatively recent purchases, owned versus leased properties?

Wayne S. Peterson

No, they've been around for quite a while. 10 years, maybe. About 10.

Jeff Geygan

Royce, what was the thinking at the board level to shift strategies to owning Tioga versus leasing, as you have done predominantly?

Royce L. Winsten

It was a question of the relative cost.

Richard E. Wilson

I was just going to add, Jeff, that from a mortgage perspective, the sale leaseback would've cost us a lot more. And we feel as though that was a good investment, in addition to just from an accretive perspective.

Operator

And we will now take another question from Bruce Winter [ph], private investor.

Unknown Shareholder

Yes. Could you please put your software in broad context for me, starting with the Mr. Dale era? They did a lot of software then, and now you're adding a lot of stuff. Are you replacing Mr. Dale's software with new stuff? Or -- and what do you plan to do in the next 3 years? And is this all software going to be integrated and work together, or how is that going to work?

Richard E. Wilson

Okay. Sure. I can put some color on that. The company spent significant capital on software, to your point, a number of years ago. At that time, most specifically, we engaged with Oracle to run our financials and payroll elements. Those -- that system will continue to be maintained. So from a baseline financial reporting and overall finance mechanisms, Oracle will remain our software of record, in addition to payroll. Our ERP system is a homegrown legacy system that's referred to in the enterprise as ALCO Information System. So the Dynamics -- Microsoft Dynamics platform will replace that. The reasoning by behind that is it gives us one platform that will enable us to lever other platforms against. So it cleans up a lot of a legacy process that's very inefficient. So as we hire new people and we try to streamline the overall enterprise, we really are trying to install what we think is a baseline ERP system that we can grow with, and we'll grow with that as we can take different systems onto it. So the main issues that were -- or the main investments that were made in Mr. Dale's era were Oracle, and there was also some POS technology that was invested in. Most specifically, a contract with Tomax out of Salt Lake City, and Tomax is our POS provider. At that time -- prior to that time, during Mr. Dale's era, we weren't getting item selling. So there really were 2 big initiatives in Mr. Dale's era: POS management and item selling as well as the Oracle financial process. What we are doing today is investing in a new ERP system, which runs our item file, will run our warehouse management system and integrate with a supply chain. Our existing replenishment module is also a homegrown module. So it's -- our existing allocation systems were also written by programmers here. So they're not as sophisticated as what we could get today with other service providers. So we're really building on what the initial investment that the board made with -- during Bruce's time, not disassembling what was invested in at that point.

Operator

And we'll take a follow-up question from Blair Lambert [ph], private investor.

Unknown Shareholder

Two quick ones. One, on the store closures, are these stores that are losing money on a four-wall basis, so just by closing them, you'll get a pickup in earnings, or not? And then the other question is, have you had any more conversations with Everbright since their 13D filing?

Wayne S. Peterson

In terms of the closed stores, yes, when they're fully allocated for outbound transportation expense and some incremental warehouse expense, they're marginally negative. They're low-volume stores, and we just don't see a long-term viability for them. They're not hugely negative, but they're right around that breakeven to slightly negative. Royce, you want to...

Royce L. Winsten

Yes. I'll take the question about Everbright. When the filing was made, I reached out to them and -- to greet them and welcome them and see what their plans were and what they wanted to do. They have not shared any of that with me. A representative from the Everbright group was at the annual shareholders meeting. He introduced himself to me, but when I asked him what their plans were, he was still closemouthed about it. So that's been the only -- those have been the only contacts we've had with them since the filing.

Operator

And we will now take a follow-up question from Adam Peck with Heartland Fund.

Adam J. Peck - Heartland Advisors, Inc.

My question was along the lines of Blair's question on the closed stores. Just to continue that, when you break out the A and B versus the C and D, are the A and B buckets larger than the C and D?

Richard E. Wilson

In unit volume, they are similar. In average volume, obviously, A and B are typically 50% higher in volume.

Adam J. Peck - Heartland Advisors, Inc.

Total unit volume, is that a similar -- 50% higher by units? I'm sorry, by stores?

Richard E. Wilson

Yes.

Adam J. Peck - Heartland Advisors, Inc.

Okay. And the numbers were, you would reduce inventory at C and D by 15% to 20%, and increase A and B, did you say, by 5% to 10%?

Richard E. Wilson

10% to 13% is what we're looking at today. Mainly in the key volume items that generate a lot of volume in those stores, those stores are turning those key volume items a little faster than we think they should, so that's where we look to seed some additional inventory in these locations. But in aggregate, it will drive a net decrease for the company in total.

Adam J. Peck - Heartland Advisors, Inc.

All right. And then any update on the metro stores?

Richard E. Wilson

Yes, again -- not really, I should say. Two of the 3 stores are performing adequately, and 1 is a subperformer. Pasadena, in the Houston market, and Grand Prairie are performing well, and the Houston location is not. We continue, and the board continues, to challenge us in terms of refining that model. I would say, right now, we're maintaining those stores. We think that Revionics will help us mine additional volume out of those locations. I would suggest, in those markets, we have to be priced a little sharper. And in the outlying markets, obviously, we can be priced higher. We do -- so we think that the Revionics process will help us there, as well as better receipt and inventory management in those locations as it relates to some regional opportunity. So they're still a work in progress. I hoped we would've been further down the road and make that an opportunity for us to duplicate that effort in other markets, but still have more work to do.

Operator

And we will now take another follow-up question from Ben Rosenzweig with Privet Fund.

Benjamin I. Rosenzweig - Privet Fund Management LLC

Yes. On the margin optimization, it was just a little confusing to me in the presentation, where you talk about some of the apparel initiatives to drive margin from a stocking and a merchandising perspective, as well as when you're talking about the commodity business driving transactions in the frozen and refrigerated foods expansion. I was under the impression that some of these commodity items, if you will, would be -- would have the opposite effect, the effect of lowering margins for the benefit of transactions. And, I guess, the apparel initiatives are kind of opposite to that. So can you kind of talk about where the main focus is? Is it on the commodity or the apparel?

Richard E. Wilson

It is actually both, okay? So let me explain. The greater impact will be from optimizing prices on the bigger parts of the business. So commodities is a big business for us. So as we optimize price and grow margin in commodities, that will be materially more impactful to the total. However, as we grow Apparel, as Jeff asked a few minutes ago -- or Adam, I'm not sure which one -- about what penetration Apparel represented and where we'd like it to get to, we're currently roughly 15% of the enterprise. We would -- we're targeting to try to get it towards 20%, and the Apparel margin carries margins that are significantly higher than the overall enterprise margin. So that's a mix benefit. So there are really 2 strategies to drive margin: Revionics, around optimization, raised impact there is going to be a lot on the commodity side. To give you a granular example, is we sell 100-ounce ties at $11.99 in a competitive market, in an uncompetitive market, we could sell it for $13.99, so you're making $2 a unit more. So that's the type of pricing analytics that will -- and structure that Revionics provides us. So it's very accretive on -- especially on the fast-turning items.

Benjamin I. Rosenzweig - Privet Fund Management LLC

Okay. So from a -- when you add in the commodity, like the frozen and refrigerated foods and stuff like that, I guess, maybe shifting a little bit back to inventory, it seems like you're adding a good amount of SKUs -- even when you're kind of pushing some of these new Apparel brands that you highlight, whether it's department store brands or private brands, it just seems like a broadening of the SKU base. Are you eliminating a significant number of SKUs as you're doing this? If not, I just don't really understand how that lowers your inventory.

Wayne S. Peterson

Overall, we will reduce SKUs, to answer your first question. As it relates to, as an example, frozen and refrigerated expansion, that replaced other SKUs that were eliminated to make room for that product. So in the grocery aisle, to give you some graphic on it, we didn't expand grocery to accommodate for the addition of freezers and refrigerators. We actually took SKUs out of those aisles to make room for the refrigerated and frozen items. I'd also add that refrigerated and frozen items drive about 500 basis points more margin than the dry grocery does, so there's a margin benefit to that, as well. As it relates to the new brands in apparel, they are replacing other brands that are nowhere -- or nowhere near as had as much brand equity as what we're presenting today.

Operator

And we will take a follow-up question from Jeff Geygan with Milwaukee Private Wealth Management.

Jeff Geygan

I actually have 2 questions here. One relates to the frozen food addition to the store, which my recollection is, this was done in the last, say, 12 to 18 months, probably $3 million, $4 million CapEx. There was an expectation at that time of an impact on the stores. And now that, that's clearly in place, can you self-appraise how that change has worked out versus expectation?

Wayne S. Peterson

Sure. We actually started the installation of the freezer, refrigeration program in the fourth quarter. So it's still very new to us. We actually got about 60, 60-or-so stores set up in November. We put the balance of the 156 stores that we now have set up on hold for December, obviously, because we didn't want to be disruptive at Christmas time, and then started rolling the balance of those out in the January and early February time frame. So we've not even been fully set in the 156 stores that we operate today for 6 months. It's only been really effectively about 3 months. Early indications, we have some stores that are really terrific sell-through and seems to be helping drive some additional traffic. There are some other stores that are still struggling a bit. So early indications, though, we're very positive about the decision. It does look as though it's driving a -- clearly a new trip, because it's product we weren't into in the past. I fully anticipate, as we continue to market the product in those 156 stores, as well as refine some of the assortment that we currently have in those doors, the freezers themselves, that business will continue to grow over time.

Jeff Geygan

All right. And second question, which is 2 parts, and 1 is a follow-up to this. I don't recall during this call that you gave us any data on the traffic, basket size, et cetera, which you have in the past. I don't know if you discontinued that. And second, your ROE goals, per your proxy, are 7.5%, which would imply you make $7.5 million, divided by your 3.2 million shares, you're making a couple of bucks. Is that a real number, your 7.5% ROE? And if so, how are you really getting there? I am having a hard time seeing that.

Richard E. Wilson

Is it a real number relative -- is that what the target is? The first hurdle rate? Yes. That's what management is incented to and, yes, I firmly believe that there's an opportunity to drive a 7.5% return as the first hurdle. It is not by any stretch what we think the end goal is for the enterprise over the long term. But we think within a reasonable period of time, that 7.5% return is achievable. And it is going to be achievable, Jeff, on price optimization and inventory optimization.

It's really going to drive it. We don't need a lot of top line growth in order to deliver that type of return based on what we believe those initiatives that we -- I have been talking about will deliver. That's really what -- we feel we can do that. We are confident we can.

Operator

We have no further questions in queue at this time. I will turn the conference back over to Mr. Winsten, the Chairman, for any closing remarks.

Royce L. Winsten

Thank you, operator. And thank you all very much for joining us on this call. We appreciate your interest in the company, and we look forward to speaking with you again next quarter.

Operator

Thank you. If you wish to access the replay for this call, you may do so after 1:30 p.m. today, Central Time, by dialing 1 (888) 203-1112 and using the replay passcode 2271713, or you can visit the company's website 4 hours after completion of the call and go to www.alcostores.com and visit the Investors page.

This concludes our conference for today. Thank you for your participation, and have a nice day. And all parties may now disconnect.

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