Select Comfort CEO Discusses Q3 2010 Results - Earnings Call Transcript

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 |  About: Select Comfort Corporation (SCSS)
by: SA Transcripts

Operator

Welcome to Select Comfort’s third quarter 2010 earnings conference call. All lines have been placed in a listen-only mode until the question-and-answer session. Today’s call is being recorded. If anyone has any objections, you may disconnect at this time. I would like to introduce Mr. Mark Kimball, General Counsel. Sir, you may begin.

Mark Kimball

Thank you, Sandra. Good afternoon and welcome to the Select Comfort Corporation third quarter 2010 earnings conference call. Thank you all for joining us. I’m Mark Kimball, Senior Vice President and General Counsel. With me on the call today are Bill McLaughlin, our President and Chief Executive Officer; Jim Raabe, our Senior Vice President and Chief Financial Officer; and Hunter Saklad, Vice President of Finance.

In a moment, I’ll turn the call over to Bill. Following our prepared remarks, we will open the call to your questions. Please be advised that this telephone conference is being recorded and will be available by telephone replay. It also will be archived on our website at selectcomfort.com. Please refer to the details set forth in our news release to access the replay on our website. Please also refer to our new release for a reconciliation of certain non-GAAP financial measures included in the release or that may be discussed on this call.

The primary purpose of this call is to discuss the results of the fiscal period just ended. However, our commentary and responses to your questions may include certain forward-looking statements. These forward-looking statements are subject to a number of risks and uncertainties outlined in our earnings release and discussed in some detail in our Annual Report on Form 10-K and other periodic filings with the SEC. The company’s actual future results may vary materially.

I will now turn the call over to Bill for his comments.

Bill McLaughlin

Thanks, Mark. And good afternoon and thank you for joining us to discuss Select Comfort’s third quarter performance and long-term outlook. As we shared with you in our news release, Select Comfort’s third quarter was solid on all financial measures; top line, profit and cash. And our confidence in the long-term prospects of our business and company continues to build as we deliver sustained performance.

My remarks today will concentrate on our preparation to sustained growth by enhancing our unique core advantages and brands, distribution, and products. And Jim will focus on the third quarter and then balance of the year outlook.

Before looking ahead, I wanted to begin by emphasizing a couple of points from the third quarter. First is consistency of profit performance. Profit has now improved seven consecutive quarters despite a challenging environment. Second is sustained revenue growth. This past quarter was important as we lapped last year’s period of economic recovery and achieved absolute sales growth of 9% and comp growth of 16%. And third is continued value creation. In addition to top line growth, Select Comfort is expanding its operating margin and growing cash, which further accelerates the company’s value creation opportunities.

The third quarter not only marked an important transition in Select Comfort’s performance, but also it was a time when we advanced our focus on longer term strategies and priorities. As many of you know, our primary focus last year was to stabilize the business. Facing uncertain environment and the need to rebuild the balance sheet, we focused on our core basics. At the same time, we concentrated on better distinguishing our core points of difference in advantage in the marketplace. These efforts have positioned the company well for long-term growth.

Some of our significant advances include the repositioning of our product line to emphasize value. We have now renamed our nine bed models, which are presented across three families of good, better and best, and prices are featured in promotions that emphasize entry price points below $1,000 and values are clear to trade up through the line. Our goal and opportunity is to demonstrate the affordability and value of the Sleep Number bed to an increased number of consumers.

Another significant step was unifying our brand across key consumer touch points. And important example of this effort is our store marquees. After strategic investment, nearly all store marquees now feature the Sleep Number brand, having converted from the Select Comfort name in order to take full advantage of the Sleep Number advertising. And since early 2009, we have also successfully rationalized distribution on a market-by-market basis across the country.

We have closed 85 company stores and withdrawn from 740 specialty bedding stores. This has resulted in an increase in average sales per store of 27% to $1.25 million on a trailing 12-month basis. And this puts us well on our way towards attaining our history high of $1.5 million per store average and then will go beyond. We have also more effectively leveraged our advertising with one common campaign across the majority of our direct response and branded creative, including promotional advertising.

This combination of strong creative and the benefits from a singularly-focused brand have enabled to grow same-store sales by 24% year-to-date and 14% greater media spend. And this is in line with the strongest media productivity that we have earned in the past ten years. And we continue to improve employee engagement. Our company’s engagement scores have exceeded 70% with more 90% participation in the past two surveys, well above our historic measures and external norms. Motivated and empowered employees are critical to satisfied customers.

All of these advances in our fundamentals plus our consistent operating performance in a challenging environment are positioning us well for the future and have allowed us to improve our net debt position by approximately $150 million since early last year. We are building on this strong foundation and we are moving to the next phase of our company’s development, allocating greater organizational time and resources to the initiatives that will further enhance our unique core advantages.

These efforts, however, are not all about doing more. They are not necessarily about more distribution channels or more stores or more products, but rather they are focused on significant evolutionary advancements to our core. To use the analogy of a ten-speed bicycle, we are moving from the safe and easier second year to the more powerful fourth year with much more to learn and prove before advancing into the even more powerful higher years.

Our general philosophy has been not to discuss specifics about our strategy until they have been demonstrated and proven in the market. However, to give you a sense and understanding of our direction, we are looking at specific initiatives in three areas, all with one common purpose to cost effectively increase consumer awareness and consideration of Sleep Number beds and bedding.

First, we are evolving our marketing efforts to place greater emphasis on where to find the Sleep Number bed. Our research shows that over time consumers have become aware of Sleep Number brand and generally understand how the product is different from other mattresses. However, when they are in the market, they don’t always know where to find it.

And the solution that we are developing includes marketing messages to both highlight our unique product benefits and our unique store experience, which includes the impact of finding your Sleep Number. We intend to test and learn from our advanced creative as well as increase and further optimize our media spend to drive greater awareness and growth.

Second, we are piloting stores outside of malls to reach those consumers who don’t frequent malls or don’t consider malls when mattress shopping. This initiative also gives us flexibility in market development. As part of this effort, we opened a couple of non-mall stores in the past quarter and will open a few more in the fourth quarter.

Our disciplined approach includes strategic site selection and an updated store designed tailored to non-mall locations. Several of these stores will be replacing nearby mall locations. So we will gain important insights into their relative traffic and sales potential. Again, this initiative is important for flexibility in market development, and if successful, could help us reach new customers to accelerate sales at an equal but lower cost.

And finally, we are beginning to increase investment and product development. Over the coming years, we will seek to introduce products that both reinforce our brand positioning of personalized comfort and deliver incremental revenue. We will provide more information about this initiative as products are developed and ready for us to share.

A common objective is to increase consumer awareness and consideration of the Sleep Number brand, and we are confident that once consumers visit our stores and try our best, that conversion and customer satisfaction will follow. Again, our ultimate goal is to increase our share of the premium segment of our industry. And as you would expect, increasing our market share over time would have a dramatic impact on our overall company performance.

One point share gain would translate into 70% increase in our revenue and would carry a 20% to 25% profit flow-through and even greater cash leverage. Our go-forward strategy is aggressive, get appropriately disciplined. We intend to have proven and refined growth initiatives in place by the time the economy strengthens so that we can shift to an even higher gear without comprising our commitment to sustaining our strong balance sheet.

During the fourth quarter, we will remain focused on continued strong execution, especially during the important holiday selling season. We also continued to develop these new initiatives for accelerated growth and continued margin expansion.

Now, let me turn the call over to Jim to discuss the third quarter and our outlook for the balance of the year.

Jim Raabe

Thanks, Bill. When we spoke in July, we were cautious about the consumer, having seen some week-to-week variations in June and July sales. Improvements in consumer trends and solid execution by our sales and marketing teams led to a strong August and September. While we’ve seen positive sales growth throughout the year, we continued to see periods of consumer strength and weakness, serving as a reminder to the uneven nature of the recovery as we head into the holiday shopping season.

Sales in the third quarter were 9% higher than a very strong third quarter a year ago. Sales in our company-owned channels, which excludes the impact, the discontinuation of our retail partner program last year increased 11% on mattress unit growth of 10%. Same-store sales increased 16%, partially offset by a net decline in store count and a somewhat lower growth rate in our direct and ecommerce channels.

Our mattress sales mix has remained fairly consistent year-over-year and quarter-to-quarter. In addition, gains in bedding collections sales have been a source of strength. And we’ve also had success increasing penetration of our adjustable foundations, following the introduction of a lower price point model early in the third quarter. All in all, third quarter sales were a little better than the expectations we outlined in July.

On the profit side, our operating margins improved to 10.5% compared to 8.1% last year. And net income increased 52% to $10.5 million. The year-over-year results were a bit difficult to compare because of one-time charges last year and incremental investments in incentive compensation this year, all of which should even out on a go-forward basis. Most importantly, we have demonstrated the plus-10% operating margins are achievable in third quarter volumes.

On a sequential basis, we are pleased with our ability to generate incremental margins on increases in sales volume. Comparing second quarter to third quarter, sales increased approximately $21 million or 50%, which is a relatively normal seasonal change in historical terms, while operating profits grew by $6.8 million, representing a 32% profit flow-through on incremental sales.

On a year-over-year basis, our gross margin rate declined 90 basis points to 62.5%. While lower than a year ago, this rate is in line with the second quarter and year-to-date as well as in line with our expectations looking forward. Selling and marketing expenses were 42.6% of sales, 220 basis points better than a year.

Marketing costs were 17.6% of sales, 63 basis points higher than a year ago, while selling expenses were 25.1% of sales, 275 basis points better than last year. Both selling and marketing costs include incremental growth investments that we noted during our second quarter call. And the year-over-year improvements reflect better per-store sales productivity.

G&A expenses were 8.9% of sales, 90 basis points higher than a year ago. G&A continues to track a bit higher than our expected run rate due to incentive compensation that was higher than last year, but in line with performance as well as the incremental longer term investments we’ve referred to on last quarter’s call.

The business continues to generate significant cash with EBITDA in the quarter totaling $21.4 million compared to $17.6 million last year. On a 12-month trailing basis, EBITDA totaled $65.5 million. Our cash totaled $82 million at the end of the quarter, $40 million more than at the end of the second quarter. The increase was due to positive EBITDA, favorable working capital contributions from normal seasonality, and some timing related items.

While we’ve lowered our full year CapEx forecast to approximately $8 million, we expected third quarter period in cash is likely to be the high point for the year. As noted in our news release, we are increasing our full year guidance to between $0.52 and $0.55 per share. This increase reflects our performance year-to-date along with our expectations for the balance of the year.

While the fourth quarter is always difficult to predict because it limited visibility to consumer sentiment during the key holiday shopping periods that begin in November, we are basing our fourth quarter sales outlook of mid-to-high single-digit same-store growth on sales trends through third quarter, resulting in expectations for fourth quarter earnings per share of between $0.08 and $0.11 per share. Fourth quarter EPS will be based on the share count that’s roughly 10% higher than a year ago.

In summary, we are very pleased with our third quarter results and are excited about our longer term potential. We are confident that we are making the right investments for the near and long-term to allow us to continue to improve our year-over-year performance.

Now I’d like to turn the call over to Bill for final remarks.

Bill McLaughlin

Thanks, Jim. I’d like to wrap up by congratulating the Select Comfort team for the very important third quarter. We consistently advanced our performance despite an uneven market, taking advantage of opportunities as presented as well as working hard and smart through periods of softness.

We sustained growth while lapping a stronger period a quarter ago and we are realizing the continued efforts to control expenses and preserve cash, giving us more financial flexibility and greater value creation opportunities. These past few years, the fourth quarter has been a difficult one to predict, with many external influences.

Our agenda will be to continue to execute the proven programs of the past year with seasonal emphasis on giving meaningful gifts of sleep and personal comfort. We are also excited to advance our agenda in marketing, distribution and product. And we look forward to a cleaner comparison after this final quarter of prior year changes to the distribution base and share count.

Select Comfort is dedicated to improving people’s lives by improving their sleep through individualized sleep experiences that only we can deliver and to raising people’s expectations beyond the one size fits all solutions that others offer. By doing this, we will drive profitable growth and increased market share. And we believe this is an important time to look ahead at the company’s opportunities and value potential.

I want to thank you for your attention. And Sandra, we would now like to open the call for questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator instructions) Our first question for today comes from John Baugh of Stifel Nicolaus. Your line is open.

John Baugh – Stifel Nicolaus

Okay. That was a challenge. Congratulations on the EBIT and the cash generation. I guess if you could help me – first, what is the normal seasonality, not that’s anything normal anymore between Q3 and Q4?

Jim Raabe

Normally, as you indicated, fourth quarter is – excuse me, third quarter is one of the highest quarters along with first quarter. The fourth quarter is a little bit lower than the third quarter, and then the second quarter is the lowest seasonal point. But as a percentage of total sales for the full year, fourth quarter is a couple of points – two to three points below what the third quarter is.

John Baugh – Stifel Nicolaus

Okay, great. And you made the comment, I think it was huge and you are basing your mid-to-high single-digit comp guidance for Q4 based on what you had seen in the September quarter. I assume it also includes what you’ve seen in the first two, three weeks here of October as well. Correct?

Bill McLaughlin

Yes. I mean, obviously there is not a lot of – lot to go on yet in October, but yes.

John Baugh – Stifel Nicolaus

Okay. And it sounded like the APU is flat. Did I hear mattress units and dollars very close, 10% and 11%? Is that right?

Bill McLaughlin

Yes, that is correct.

John Baugh – Stifel Nicolaus

Okay. And how do we think about these pilot stores in general? You can talk about store count as well. I was under the impression you’re going to close more stores in the fourth quarter than it looks like. So I’d like a comment there and then how you’re reviewing these pilot stores and what that may mean to store openings in 2011 and beyond. Thank you.

Bill McLaughlin

I’ll let Jim talk about total stores. But the way to think about these non-mall stores is we are using that more as a learning experience at this point. We do think there is an opportunity to expand the awareness and consideration that customers have by getting outside of malls, getting into more high visibility, high traffic areas. But we expect them to perform equal to or better than our current store base. So I would look at that as a one-for-one substitution as we go forward. And again our intent is still to optimize markets, rebalancing stores, not a lot of store additions on a net basis. But going forward, once proven, then we will start to add in a more controlled way. You want to talk about fourth quarter?

Jim Raabe

Yes. John, so the store count, you’re right. A few, fewer store closings in Q4 than we talked about earlier, but it was really just the timing. What we didn’t close in Q4, we’re going to end up closing in Q1. So we will – early in Q1, we will get down towards 380 towards and then we will be building back over the course of the year. So by the end of 2011, we would expect to be back at kind of end of year store count – end of 2010 store count are a little bit higher.

Operator

Our next question today is from Brad Thomas of KeyBanc Capital Markets. Your line is open, sir.

Brad Thomas – KeyBanc Capital Markets

Thanks. Good afternoon, Bill. Good afternoon, Jim. I want to just follow up, Jim, on some of the comments that you had made about spending during the quarter. I remember last quarter you guys kind of talked about June and July sales being a little bit softer. I mean, have your trends tended to kind of mimic what we’ve seen out of the ISPA data? How is Labor Day? And as we think about spending during the holiday period, did you think the holidays really constitute that sort of time of need and value that historically have been the times where we’ve really seen strong mattress sales during the year?

Jim Raabe

No, I don’t know if I would necessarily say it mimics the ISPA data. What I would say is that what we have is that it continues to be a very value-oriented customer. And as a result of that, during traditional market share periods or mattress buying periods, there is much more activity both in traffic and conversion. And during those kinds of off-sale periods, things fall back a little bit from a traffic standpoint. And we’ve seen that pattern very consistently throughout the year. And I think in hindsight you kind of work in June and July, and that was a little bit of what we were seeing there was kind of between holiday period and it was a little bit softer, and once we got back towards Labor Day, it picked up pretty well.

Bill McLaughlin

And Brad, just one point of clarification on kind of strength of the holiday season. In fact, from an ISPA or industry standpoint, fourth quarter is relatively low. But for Select Comfort, it’s always been relatively high, as Jim shared earlier. And that’s primarily because of our store presence in the malls and our activities taking advantage of that traffic.

Brad Thomas – KeyBanc Capital Markets

Okay. That’s great. Thanks, Bill. Just to follow up on the marketing opportunity, it does seem like you guys have a nice opportunity to shift more of your spend online and talk to things like more local spend, especially from an Internet standpoint. Could you just talk a little bit more about where you are in that process and how quickly it could be rolled out and potentially have an impact?

Bill McLaughlin

I think you are exactly right in terms of identifying our opportunity, both on the local search type basis as well as taking advantage of our customers’ high satisfaction levels and engaging the whole social side. Admittedly, we’ve probably got started on this a year or so later because of the distractions that we had about a year ago. But we’ve aggressively been moving in the area. We’ve our agents – our agency has now been involved for about six months. So we are actively in the testing and learning, and we are kind of rolling and testing as we speak.

Brad Thomas – KeyBanc Capital Markets

Okay. And then, Jim, just in terms of housekeeping items, on the CapEx, any color you could provide behind the forward guidance? I mean, obviously you guys are just kind of bumped it up last quarter. So anything – any details you can provide there?

Jim Raabe

Yes. It’s more a timing issue than it is anything else. So I think in the middle of the year, we saw the opportunity to start doing some of this testing of some of the stores and some of the things that we were seeing and we started down that path. It’s just – a larger part of that spend is going to roll into early 2011.

Brad Thomas – KeyBanc Capital Markets

Okay. And then as a follow-up to that, this last quarter you all had outlined approximately $3 million in incremental spend for the back half of this year. Where are we on that? And will any of that spend be pushed off to 2011?

Jim Raabe

It shouldn’t be any of that that gets pushed off into 2011. The majority of it did get spent in the third quarter. There is still some of it that will get spent in the fourth quarter.

Brad Thomas – KeyBanc Capital Markets

Perfect. Thanks so much, and congratulations again.

Operator

Our next question is from Mark Rupe of Longbow Research. Your line is open.

Mark Rupe – Longbow Research

Hey, guys. Good quarter. A couple questions on the non-mall locations. Just actually [ph] how many do you have today?

Bill McLaughlin

Well, under the really the official program, we’ve got two that were opened in the last quarter, in the third quarter. We will have about four more in this quarter.

Mark Rupe – Longbow Research

Okay. So the new kind of strategy on the off-mall, it would obviously be evaluated differently than kind of the lifestyle centers of maybe five years ago when you opened some of those?

Bill McLaughlin

Yes.

Mark Rupe – Longbow Research

Okay. And then as we look at 2011, you cited kind of the rebalancing of the store base. I mean, should we assume that a lot of openings in 2011 will be off-mall?

Bill McLaughlin

I think it will be a mix, a balance between there. We are still taking advantage that it depends on a market-by-market basis. And if there are solid mall locations, then we will look there. But if there is solid non-mall, we will be going in that direction. And it looks like it could be a balance, a mix between those two. I think we talked about the fact that earlier about – I think you are right about there is a lineup, a fair amount of where we are closing and opening. Some of the rebalancing is about a little bit bigger trade areas, but it’s also about doing a little bit better job on site selection to make sure we are really finding the locations with the right target markets. And in some cases, those will be malls and in some cases, those will be off-malls.

Mark Rupe – Longbow Research

Okay. As it relates to the off-mall, give a sense if there is going to be a difference in kind of the areas where the strategy might work better than other areas, maybe density-related?

Bill McLaughlin

I think it’s too early at this point.

Jim Raabe

The other thought I was going to share with you, Mark, was that basically the cost structure is pretty similar.

Mark Rupe – Longbow Research

Okay. And then just lastly, I know you don’t want to go too deep on kind of the product pipeline for next year. But I mean, in terms of kind of magnitude relative to past kind of refreshes or product launches, any kind of sense of what the expectation might me?

Bill McLaughlin

Not at this point, Mark. I mean, for us, the key drivers of growth in the short-term are the marketing effectiveness in the store and distribution. The product has a couple of opportunities to it. One is to actually help with the marketing and all by emphasizing the unique individualization and benefits of the product. And we enhance that, that becomes a marketable event. And then the second is getting into more incremental programs. But as I said, we are really just starting to ramp up the investment. So there is going to be a lead time on real significant products.

Mark Rupe – Longbow Research

Okay. Thank you. Good luck.

Bill McLaughlin

Thank you.

Operator

Our next question is from Budd Bugatch of Raymond James. Your line is open.

Chad Bolen – Raymond James

Hi, guys. Good evening. It’s actually Chad pinch-hitting for Budd. Congratulations as well on another great quarter. A couple of questions. The last year Q3 gross margin was unusually high. Could you remind us of why that was?

Bill McLaughlin

Well, I think there were a few areas where we had some cost advantage, including there were – we were still coming off of lower oil prices or I should say our contracted adjustment license had not been fully reflected. And some of that has kind of been adjusted now since that period. There were also a few timing-related items, none of which were real significant. But there were some kind of reasons like some of those one-time items did drive some with a little bit better gross margin last year.

Jim Raabe

And I guess the important thing is we’ve been consistently running in this kind of mid-62 range now for all of 2010. And that’s the rate that we feel comfortable looking at going forward.

Chad Bolen – Raymond James

Okay. Now with input cost came in like kind of going the other way, are you seeing any pressure and how do you see those playing out over the next couple of quarters?

Bill McLaughlin

There has been a little bit of pressure, but I would say it’s more on the fringes, more within the normal range of variability that you might see. Obviously we are always targeting cost opportunities and productivity gains to offset those. So I think that we feel comfortable that we can manage those costs outside of a real spike – a real strong spike in an oil cost or an energy cost.

Chad Bolen – Raymond James

Okay. And the G&A expense did come in a little higher than we were modeling. And I know you mentioned higher incentive comp given the better performance. Can you give us a flavor of maybe what the right run rate should be in Q4?

Jim Raabe

Yes. I think more in that 12 million, 12.5 million range is more in line with kind of what we think is a more normal run rate.

Chad Bolen – Raymond James

What type of increase would you expect in terms of media spend in Q4?

Jim Raabe

We are trying to manage that media spend more variable to sales in that 11.5% to 12.0% range. So it’s more a factor of the sales number. So there is – obviously we would anticipate an increase, but it should be in line with sales.

Chad Bolen – Raymond James

Okay. And you talked about some of the working capital management items, and we noticed a pretty significant increase in payables. How do we think about modeling those going forward?

Jim Raabe

There were a few timing items in there. I think payables, in particular, were in the mid-40s this quarter, and normally that had been running in high $37 million, $38 million, $39 million. And I would think it’s more in those terms going forward.

Chad Bolen – Raymond James

Okay. I guess maybe a last question. You shared with us some thoughts on your comps for Q4. How are you guys – based on what you are hearing from customers, what you are seeing in the economy, how are you guys thinking about industry growth and your potential for comp store increases next year?

Bill McLaughlin

I think next year is one of mixed result – it's still uneven. We are not necessarily looking at a major recovery, but we are not looking at a double-dip either. And we believe that if the industry is flat to up a few percentage points, then the premium segment will be up a little higher than that. So that’s kind of the way we are starting to think about next year. The one good thing about our business is also that with the just-in-time manufacturing and all, we can be pretty responsive to wherever the industry goes.

Jim Raabe

And so I – just the one item I would add is obviously we expect to be able to grow our market share in the relative market segment. So I think Bill outlined fairly cautious outlook, but with growth next year.

Chad Bolen – Raymond James

Terrific. Well, thanks, guys, for taking my questions and good luck in Q4.

Operator

Thank you. (Operator instructions) Our next question is from Tony Gikas of Piper Jaffray. Your line is open.

Tony Gikas – Piper Jaffray

Thank you. Good afternoon, guys. I was just curious as to what you feel the gross margin potential could be over the course the next fiscal year. Also if you could comment on operating margin potential. And then just how would you characterize manufacturing capacity right now relative to the current run rate?

Bill McLaughlin

Let’s say, gross margin, Tony, as Jim said, we think that in this kind of mid-62 range, it is pretty consistently that we are comfortable there, and I would see that going forward. Obviously it depends on some ingredient costs in all, but we think that through our vertically integrated system, we can find enough flexibility to maintain that kind of margin structures. Operating margin, as we’ve said, we believe, can be in that low-double digits over time. And that’s what we are striving for, is to get that into that 10%, 12% range and then we will look beyond that. And then in terms of capacity, when we did restructuring a couple of years ago, we were very careful to preserve the infrastructure. So we can increase capacity without significant CapEx, primarily shifting labor – with adding just the labor. So (inaudible) from a capacity standpoint, drove significantly without adding any CapEx.

Tony Gikas – Piper Jaffray

What would it take to grow the gross margin another 50 to 100 basis points over the next few years?

Bill McLaughlin

Well, there is a series – I mean, some of the product work that we are doing could get us in that direction. But – and you shouldn’t take what we’ve said as that we are satisfied with it or not looking to improve it further, but from (inaudible) standpoint, that’s the range that we feel comfortable at right now.

Tony Gikas – Piper Jaffray

Okay. And then just last question, I’m sorry if you’ve said this on the call, average price points, are they trending a little bit higher or do you expect them to trend a little bit higher in calendar ’11?

Bill McLaughlin

I wouldn’t think so. I mean, we haven’t seen any significant shift in the mix, and I don’t think we’ve seen any trend that would indicate that we should expect to see a shift in the mix. And I think the other thing just is kind of a remind is we are focused on both the entry level and stepping people up. And I think we’ve done a pretty good job stepping people up, but we also, with the price points that we have, feel like there is significant opportunity for people at the entry level to just be aware of the product and buy the product. So we are kind of working both ends of the scale. And so I think all in all, we expect to remain fairly stable.

Tony Gikas – Piper Jaffray

Okay. If you don’t mind, can I just ask what’s the most difficult price point right now that you are seeing?

Bill McLaughlin

Tony, our mix – we have the good, better, best. And our mix has been about 30%, 15%, 20%, pretty consistently since we restructured the line last year. I would also say – I mean, our process is basically one that can get people into the store and then let the sales professional find the right price point. So I don’t know that I would necessarily characterize any price point as really being difficult.

Tony Gikas – Piper Jaffray

Okay. Great job, guys. Good luck. Thanks.

Operator

Our next question is from John Baugh of Stifel Nicolaus. Your line is open.

John Baugh – Stifel Nicolaus

Thank you. That’s awesome. Thank you very much. Bill, any discussions as of word level [ph] on the cash, how much will you let pile up, when do you do something, and what would you do? Thank you.

Bill McLaughlin

First of all, John, it’s a treat to even get that question. It’s been a while. But seriously, our – we have been talking about it a bit, but it’s pretty clear that our first priority building from the learning from the past is to make sure we’ve got a sufficient cash balance for our unique business model. And we feel like we’ve got some further building to do to achieve that. But then we are – as we approach the position of more flexibility, our first priority is to invest in the business. And given what we’ve gone through, we think there is some catch-up work to do in terms of stores, product, systems with the same disciplines that we’ve had. But we believe we should be able to meet those investment needs of the business and still continue to improve our cash position. And in time, I look forward to sitting down and considering with the Board other opportunities to reward the shareholders. But for now, that priority is on just profitable growth of the business.

John Baugh – Stifel Nicolaus

Any – I mean, you’ve scrapped SAP, correct? And I can’t remember, but I believe that that investment is more or less gone or not salvageable. Is that something similar to that in the systems area that you’re thinking that you need some cash for?

Bill McLaughlin

The systems are suited well at the size we are. Now that we’ve simplified the company significantly, the systems are doing well. They are going to have to be upgraded over time just for one voice of the – one look at the customer and some other things like international down the road and all of that. But we believe we can work that on a very different approach, on a more incremental basis and kind of with our four or five-year kind of roadmap of IT investments.

John Baugh – Stifel Nicolaus

Great. Thank you.

Operator

We have no further questions. So I’ll turn it over to Mr. Mark Kimball.

Mark Kimball

As there are no further questions, we will conclude the call at this time. We thank you all very much for joining us and we look forward to reporting to you again following year-end. Thank you.

Operator

Thank you for participating in today’s conference. You may disconnect at this time.

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