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Peet's Coffee & Tea Inc. (NASDAQ:PEET)

Q4 2007 Earnings Call

February 14, 2008 5:00 pm ET

Executives

Thomas P. Cawley - Chief Financial Officer, Principal Accounting Officer, VP and Sec.

Patrick J. O’Dea - Chief Exec. Officer, Pres

Analysts

Brian Moore - Wedbush Morgan Securities Inc.

Steve West - Stifel Nicolaus & Company, Inc.

Nicole Miller - Piper Jaffray

Colin Goheen - [inaudible] and Company

Operator

Good day everyone and welcome to the Peet’s Coffee and Tea 2007 year end earnings results conference call. This call is being recorded and now at this time I would like to turn the call over to Mr. Tom Cawley. Go ahead, sir.

Thomas P. Cawley

Thank you, Operator. As we begin, I need to inform you that the information being discussed in this conference call will include forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those projected in these forward-looking statements and Peet’s can give no assurance to the affect of these statements and we assume no obligation to update them. For additional information concerning factors that could cause actual results to differ materially from those in our forward-looking statements, please refer to the section entitled “Risk Factors” in the most recent annual report on Form 10-K for the year ending December 31, 2006 filed with the SEC on April 2, 2007. It is also available on Peet’s website.

Now let me turn it over to Pat O’Dea.

Patrick J. O’Dea

Thanks, Tom. I’ll briefly highlight some key takeaways for the year and the fourth quarter before turning it back over to Tom to cover the financial performance in our outlook for this year after the first month and a half or so.

First, our full year EPS excluding stock option lawsuit expenses was $0.66 in the middle of our guidance of $0.65 to $0.67. Second, our sales grew 18.5% in 2007 and 17.7% in the fourth quarter. Our full year growth rate was about a point and a half below our 20% growth goal. This was entirely driven by lower than expected retail store sales which we indicated started at the beginning of last year in January and continued throughout the year. Third, we achieved major structural cost savings from both procurement and improved operating efficiencies during the year that helped offset unfavorable commodity costs and the impact of the lower retail growth rate this year. Fourth, we concluded the year with record distribution gains in our key channels. 30 retail stores opened during the year to bring our store count to 166 and 1300 new grocery stores were added to end the year at 5700. Finally, we completed major investments in two areas. Our new roasting facility, which cost us about $0.12 per share in EPS and 2007 and some major people investment and support functions like IT, HR, and finance. With these investments behind us, now we’re in a good position to grow and leverage them in 2008 and into 2009.

Now I’ll provide a brief overview of our top line performance during the fourth quarter. The retail channel grew 17.3%. This came from a combination of new stores opened during the past year and sales growth in our existing stores. The holiday season was a little weaker than the rest of the year as our existing stores did see a drop of about a point of growth versus their year to date trend coming into the fourth quarter. We opened 7 new stores in the quarter which brought our year to date total to 30 openings. Our specialty businesses grew 18.7% in the fourth quarter. Grocery led the pack, growing just over 25%, our highest growth of the year. This growth came in priority order from continued growth in existing western customers, strong growing performance from our New England expansion in early 2007, and the new grocery stores we added during the year. As you know, one of our 2008 priorities is to expand into 15 to 20 new grocery markets during 2008, achieving distribution in 8,000 stores by year end. We’re off to a fast start and by the end of the first quarter we will be in 1,200 new stores, bringing our total distribution to about 6,900. In addition, we are very pleased with the absolute sales volume and growth we are seeing in the lead New England market coming up on our first full year there. The food service and office segment grew nicely at 20.7% this quarter. We expect strong growth to continue in this segment driven primarily by a healthier pipeline by Peet’s licensed kiosks in captive locations like upscale grocery stores, airports, and other venues during 2008. Our home delivery business was up 6%. As we said for the last year, we expect this business to grow in the low to mid single digits going forward as a result of the increased availability of Peet’s as we expand the grocery business.

Now I’ll turn it over to Tom to talk through the financials for the quarter and how we’re looking versus our 2008 plan after the first month and a half into the year here.

Thomas P. Cawley

Okay, before I dive into the line items for the year, I want to take a step back and look at the full year margins and the change in it from last year since I believe the story behind it clearly communicates the strategy that we’ve been on. All the numbers I quote will be without the stock option review in both years. For the year we reported an operating margin of 5.2% which is down 40 basis points from last year. While there are literally hundreds of ins and outs, the change from year to year can be summarized in three points. First, opening our new roasting facility cost us 50 basis points of gross margin versus last year. This was an investment we will leverage going forward. Second, in November of 2006 we took some pricing in retail in order to offset commodity inflation. For the most part, it did, with the exception of our runaway milk prices whose impact we were able to minimize with procurement and other savings. Lastly, we continue to build retail stores that have a 4 year maturity curve and a lower margin structure as they ramp up. Today, 45% of our stores are less than 3 years old and have yet to reach mature margins. These investments offset any leverage we would have seen in areas like G&A. [Net net] we continue to invest in future growth to drive our business with 2007 being a particularly intensive investment year. This strategy has resulted in bringing down our operating margin but going forward we will leverage these costs to reverse the margin trend.

Now a more detailed look at our current results. Our EPS for the quarter was $0.23, up from 16% last year. If you exclude expenses related to our stock option review and subsequent lawsuit, EPS would have been $0.24. For the full year our earnings without stock option investigation related expenses were $0.66 versus $0.63 last year. Now remember the roasting plant in total cost us $0.12 versus last year. If we did not have that incremental cost we would be looking at a 24% increase in EPS today despite a rather challenging retail and commodity year.

Now we’d like to review our margins by line item for the quarter. Gross margin was 52.5%, up 60 basis points from last year’s 51.9%. This increase was driven by savings generated by improved procurement on packaging, ingredients, and shipping and better waste management in our stores. This more than offset our higher commodity costs, particularly in milk and green coffee, and our higher roasting costs as we absorbed the cost of the new facility. For the full year, gross margin was down 50 basis points which, not coincidentally, was the exact impact of the new roasting facility on gross margin.

Operating expenses were up 20 basis points versus last year at 32.5%. Good cost controls in our stores and leverage of our retail overhead helped to offset most of the negative impact of opening new stores. General and administrative expenses were $6.5 million versus $6.6 million last year. If I remove the costs associated with the stock option review in both years, G&A would have been $6.3 million up from $4.9 million last year. The increase in spending was driven primarily by higher head count related costs and an increase in marketing spending to expand our grocery business in the east. Depreciation in the quarter increased to 4.2% of sales from 3.8% of sales last year as we continue to de-leverage depreciation due to the lower volume new stores.

Below the operating line, interest income was $274,000 for the quarter down from last year’s $488,000. Obviously with the cash outlay for the new plant which happened in December of last year, our average cash balance dropped significantly. By the end of the year, though, we were almost flat to last year with a cash balance of $31 million versus $33 million last year.

The tax rate was 35.8% for the year. This was an improvement of 1.7 points from last year. This past year we hired a Director of Taxes and are aggressively pursuing tax benefits be earned for building a business and creating jobs in an urban environment with our plant and our stores. This includes taking advantage of a higher rate of domestic tax deduction which incents companies to keep manufacturing jobs in the US and receiving tax credits for opening stores and creating jobs in urban areas like downtown San Francisco. These are real savings that will continue and are operational in nature since they help to offset some of the higher operating costs associated with doing business in a place like the Bay area.

Looking forward, our priorities for 2008 have not changed and we continue to execute our long term strategies. First we will aggressively expand our grocery business and DSD system into 15 to 20 new markets to serve a total of 8,000 stores. Second, we will introduce a new inventory management system in our retail stores designed to help reduce unnecessary waste and improve efficiency. Third, we will continue to strengthen the organization’s capacity to grow through improved systems and training. On our last call we said that we were expecting to grow our sales 17% to 20% and deliver earnings per share of $0.77 to $0.82. As of today, day 45 of the year, we have no changes to that guidance. Through January sales were within our planned guidance and we feel good about our ability to manage the costs we control. Coffee and milk costs for the year are variables. On coffee, we’re pretty well hedged with 70% of our needs covered but fund activity has driven the market to a level well beyond the supply demand fundamentals right now. Milk is behaving better, coming down in line with our budget plans to date, and we expect it to come down further.

In 2007 there were lots of puts and calls as the year unfolded and they started early in the year. We expect 2008 to be an equally dynamic year. Now let me turn it back to Pat.

Patrick J. O’Dea

Thanks Tom. With the investments in 2007 behind us, we are well positioned to grow and begin to leverage them heading into 2008 and beyond which is good because I think the capability we’ve built is coming to fruition at just the right time. In many past calls I’ve expressed the opinion of the specialty coffee category was approaching a tipping point, the point from which the transition for mainstream coffee to higher quality specialty coffees would rapidly accelerate. There is no doubt we have reached that point as many adjacent retailers enter the predominantly beverage driven retail business and the at home market for specialty coffee beans continues to grow. As this occurs, it is natural for the category to become segmented with different players seeking to carve out an ownable and sustainable position based on what each is uniquely qualified to deliver. I want to share with you where we stand as this market dynamic plays out over the next several years. First and foremost, it is the passionate pursuit of distinctive quality Peet’s coffee and our desire to share it with others that drives everything our 3,700 Peetniks do every day and every decision we make.

It is remarkable that since 1966, nearly 42 years ago, when Alfred Peet introduced specialty coffee to America, that Peet’s coffee has not changed. The commitment to extraordinary bean selectivity, the craftsmanship of artisans roasting each bean deep by hand, and the unyielding commitment to freshness still drives us today. The result is that people come to Peet’s for the coffee and because they identify with and admire the values that created it. This is true whether it’s in a grocery store in Portland, Oregon or Portland, Maine, or Alfred Peet’s original store in Berkeley’s Gourmet Ghetto.

Peet’s coffee is our core business. While the coffee has not changed, the company’s ability to carry forward Peet’s original mission to bring truly fresh, distinctively deep roasted coffee to America, has changed dramatically. We have built a scalable artisan roast to order roasting plant, a powerful direct store delivery system, assembled a high caliber management team, and fortified the people’s support functions necessary to expand nationally. Every one of these investments has been driven by our singular commitment to produce distinctive quality coffee. They are very strategic, very intentional decisions. With the people, plants, and DSD expansions largely behind us after ’08, we are in a good position to expand the Peet’s mission and leverage this strategic infrastructure.

Consequently, I like where we stand despite the near term challenging macro economic environment. Our unyielding 42 year commitment to Peet’s original coffee quality and the system now in place to scale it come together at a time when the markets transition to specialty coffee is dramatically accelerating. This is where we want to be. Peet’s has never been an entry point for the masses and for specialty coffee but rather a brand that true coffee lovers eventually discover and graduate to. The accelerated penetration of specialty coffee will bring with it accelerated growth in our segment of the market. True coffee lovers seeking a distinct quality coffee will identify with and admire the values it took to create it. I think we’re in a good position to take advantage of this nexus over the coming years, leveraging the infrastructure we have built as you see us now doing in our eastern grocery expansion.

That’s all of our prepare comments for today, Operator. We can now open it up for questions.

Question-and-Answer Session

Operator

Thank you, sir. Today’s question and answer session will be conducted electronically. (Operator Instructions) We’ll go first to Brian Moore with Wedbush Morgan.

Brian Moore - Wedbush Morgan Securities Inc.

Good afternoon. A question, clarification on, I think you mentioned you saw a point of fall off I guess at the retail level. Could you clarify that and maybe talk about the pricing in ’07, remind us what that was?

Thomas P. Cawley

Okay. What we said is that the growth rate we had in our existing stores through the third quarter, that our growth rate was actually one point lower in the fourth quarter than it was year to date through the third quarter, so if we had reported comps, our comp would have been down one point versus what it had been year to date, so that’s to clarify what we were saying. It doesn’t mean it’s a negative number, it means it’s a less positive number.

Brian Moore - Wedbush Morgan Securities Inc.

Do you have that on a full year basis by chance? What would it have been on a full year basis for example?

Thomas P. Cawley

We don’t report that.

Patrick J. O’Dea

It would have been positive obviously, but the point is in the fourth quarter we came off of the trend year to date by about a point.

Thomas P. Cawley

The pricing that we had during the fourth quarter was one month of the final lapping of the pricing we took in November of 2006 so in November of 2006 we had raised our prices in our stores by about 4% for drinks and pastries which would be about 2% over the total business. We had one month of that pricing in October and then November and December we had [lapped] that and had no pricing impact. So our growth in our stores was traffic related, not pricing.

Brian Moore - Wedbush Morgan Securities Inc.

Okay and then if I look back to the November call and think about your guidance, it’s certainly impressive to maintain earnings guidance in this environment I think, but given I think you’ve taken additional price increase at retail, I’m wondering perhaps what’s changed that you wouldn’t perhaps raise guidance at this point.

Thomas P. Cawley

Are you referring to in January, the beginning of January, where we took pricing in our stores, but we raised prices of all of our hot beverages by a nickel. That represented a 0.7% impact across the whole business so it really was just there as an offset to some of the commodity where we didn’t see milk dropping as quickly as we thought at the beginning of the year and it really has a fairly negligible impact when we’re talking a 17% to 20% range over the full year.

Brian Moore - Wedbush Morgan Securities Inc.

Okay, and then perhaps a question for Pat, that’s very helpful. As you speak to the tipping point, strictly in specialty, the grocery channel where you really I guess consolidate your premium positioning, I’m hoping you can speak to what your experience has been with kind of the overall category pricing environment as perhaps you’ve seen in other types of packaged goods products or what you might expect at least for specialty coffee. As you look out 2 or 3 years, is there an overall decline? Is it flat? Does it go higher?

Patrick J. O’Dea

So I think I’m going to speak for Peet’s first and then what I think will happen in the category. As the category moves towards specialty coffee and we’ve shared the numbers before and I think the national number we’ve shared before was about 27% was specialty coffee but about 61% was specialty in the Bay area. In the last reports we just got, that 27% has already popped up to 29% in the last three months, so it is definitely happening. I think what you’ll see is our pricing strategy is pretty firm and we’re holding to it and it’s the highest price in the category and then there is sort of a middle tier segment and a lower tier segment. I think what you’ll find in the middle tier segment of brands, there will be a lot of price fighting back and forth because it will become competitive and we’re trying to stay and we are staying sort of above the fray there based on the fact that Peet’s is so well differentiated from a coffee product standpoint that we can afford to do that but I think that you will see some price battling in sort of the middle and lower tiers and we’re already seeing it.

Brian Moore - Wedbush Morgan Securities Inc.

Okay, great, I’ll hop back in the queue.

Operator

We’ll go next to Steve West with Stifel Nicolaus.

Steve West - Stifel Nicolaus & Company, Inc.

Hey guys. I just have a couple quick questions, kind of following on with the specialty coffee category there. It sounds like your expansion in ’08 is ahead of schedule by the numbers there, I think that’s great. But with the softest we’re seeing, you’re starting to see the traffic soften at your retail stores, consumers getting weaker obviously, do you have a concern it’ll carry over into specialty? I know you just said it’s growing and it looks like it’s taking share but do you think you’re going to see any kind of trade down going forward? I know it’s contradictory to what you said but I guess there’s still some concern about that.

Patrick J. O’Dea

Let me speak to that a little bit. So in the fourth quarter we just said the holiday season was not a particularly consumer robust holiday season and as a result at our own retail stores we came off of our growth trend by about a point in the fourth quarter, and I would say the macroeconomic environment for retail is not wind in our sails as it has been in past years so you’ve got to fight for everything you get there. Conversely, in the fourth quarter, we had our strongest grocery growth rate ever, just over 25%, and the key driver for that was the existing western US markets and the existing New England markets. It really wasn’t the new business that we had brought on, so I am not seeing the softening. If anything, and I think this is hard to prove with the data that’s available, but if anything, I think you find more people buying coffee in the grocery store and bringing it home because brewing it home and that way is even a better value than going out and picking it up already brewed in the store. So no, I don’t see that happening and as a matter of fact, I see everything in the category going the other way and for the entire US specialty coffee category to go from 27% in coffee to 29% in coffee in a three month period, that’s big movement.

Steve West - Stifel Nicolaus & Company, Inc.

I agree and so you would say that if you would equal it to like an organic growth it would definitely be a positive number there, like the FMC channels.

Patrick J. O’Dea

It would be positive and strong double digit.

Steve West - Stifel Nicolaus & Company, Inc.

All right, thank you.

Patrick J. O’Dea

In the past 12 months the specialty category by IRI data was up 15% year-over-year.

Operator

We’ll go next to Nicole Miller with Piper Jaffray.

Nicole Miller - Piper Jaffray

Afternoon. Can you give us an idea of how the first half should compare to the second half and what I’m asking I guess specifically is if you’ve talked about operating margin increases of 20 to 50 basis points, should we have a stronger first half or stronger back half?

Patrick J. O’Dea

That’s a great question and the front half’s going to be more difficult in the first half due to one big primary thing is milk cost. We’re coming into the first quarter and now we have our pricing set through March that we’ve gotten from the dairies and stuff but the class one California milk actually will average about 43% higher year-over-year than it did last year so we’re going to have most of our commodity pressure impact us in the front half of the year. By the time we get to the back half of the year we’re forecasting raw milk cost to be down about 20% so we are going to see the pressure from commodities hit us in the front half of the year. The second thing is the grocery expansion as we’re getting into the 1,200 stores that Pat talked about, most of those were not in yet and we’ll be getting into those later in the quarter and as we go into stores is when we have the initial training of the route sales people that we bring on as well as some marketing and introductory deals in the stores for consumers to learn about our brand so there’s going to be more up front spending that we’ll then realize the benefit when we get to the holiday season and we’re in those markets and we’re fully set and we have the system running in those stores so we will be more back end loaded as far as profit growth because of those two things primarily.

Nicole Miller - Piper Jaffray

There’s a lot going on right now but I’m just sitting here kind of modeling as we go. I mean it actually looks like even more specifically you could see like operating margin deterioration in the first half and then strength in the second half. Is that a fair assessment?

Patrick J. O’Dea

You’re talking total operating income or you’re talking gross margin?

Nicole Miller - Piper Jaffray

Operating margin.

Patrick J. O’Dea

Operating margin, in the first quarter our operating margin will be below last year, that is true. So you can probably [inaudible] and then it will start flattening out and start getting much stronger as you get to the back half of the year.

Nicole Miller - Piper Jaffray

Okay, that makes sense, and then just on housekeeping, is this 37.5% tax rate still good for the year?

Patrick J. O’Dea

For next year?

Nicole Miller - Piper Jaffray

For ’08.

Thomas P. Cawley

Patrick J. O’Dea

For ’08 we will actually have a lower tax rate. A lot of the things that drove our tax rate down this year as far as... What would really started to help us is we’ve gotten more into taxes and so forth and start leveraging the investments we’re making into building an area like this. There’s a lot of tax benefits that we have of doing that so building a plant in Alameda, California, while it may not be the lowest cost of doing business, actually does generate tax benefits for us because we’re keeping jobs in the United States and Congress actually likes that so they give you a tax break for it, so we’re actually looking at our tax rate next year being in the 36% to 37% range rather than 37% to 38%.

Nicole Miller - Piper Jaffray

Okay and then I think I maybe just missed it, but you talked about how many stores have opened so far this year and then what should we expect on a quarterly break out? That’s my last question. Thank you.

Patrick J. O’Dea

We didn’t mention it but we’ve opened 5 already this year so we’re off to a very good start just like we were last year. One of the things we are re-assessing or looking at on an ongoing basis from stores is right now we will be, if anything, front end loaded in our openings. With the environment out there right now, what we’re actually holding our cards a little close to the vest there because we are not seeing rents dropping, we’re not seeing landlords getting looser in their terms at all, even though what we’re hearing from every other retail out there is that they’re slowing down their building and I really think that the commercial market is going to loosen up in the next six months so we’re actually holding off on signing some leases for the balance of the year. 25 of our stores are set, we’re starting construction, we’re going and building and so forth, but we actually may pull back just to kind of see what’s going on in the market to try to take advantage of the fact that rents should come down. Everyone we talk to or hear their calls whether it’s Starbucks or [Jonnaber] or Cofeebean and Tea Leaf or other people like that, we just hear a lot of people aren’t going to building as much and right now we don’t see that in developers, that they’re reacting to it, and I think that in the next few months we’ll start to see better deals. So we are kind of holding out a little bit.

Nicole Miller - Piper Jaffray

Is the guidance 25 to 30 now? Is that fair?

Patrick J. O’Dea

I think it will be. At least 25, because those are done, and it won’t be more than 30, so I think that it’s somewhere in between there is probably going to be the answer.

Nicole Miller - Piper Jaffray

Okay, and are you still going to open a few more in the first quarter here?

Patrick J. O’Dea

Yes.

Nicole Miller - Piper Jaffray

Okay.

Patrick J. O’Dea

We were on track to end up with more than 50% of our 30 in the first half of the year so we’ll have a very good first quarter.

Nicole Miller - Piper Jaffray

Thank you.

Operator

(Operator Instructions) We’ll go next to [Colin Goheen] with [inaudible] and Company.

Colin Goheen - [inaudible] and Company

Good afternoon, guys. First question I guess is I had a little technical difficulty on my end. You said 6,900 stores would be open by the end of the first quarter. Is that grocery count?

Patrick J. O’Dea

Yes, 12,00 new stores will be added in the first quarter on top of the 5,700 that we already have.

Colin Goheen - [inaudible] and Company

Okay and I guess my question is on the sales reps, how many of those are recruited or to get to the 8,000 for this year? You’re pretty well locked in on those.

Patrick J. O’Dea

Yes, our infrastructure in terms of route sales is already in place and so that’s no issue there. For the ones we just added, right?

Colin Goheen - [inaudible] and Company

For the ones you just added. Will the incremental 1,100 or so be coming online more in the second and third quarter time frame or are they going to be more spread out through the year?

Patrick J. O’Dea

I think it’s too early to tell right now. As soon as we have an update on that we will... obviously we’re after a quick jump here because we’ve got 6,900 against a target of 8,000 and 1,200 in the first quarter so we’re out there making our presentations and building along with our capacity so our preference would be to accelerate things forward but there’s a certain capacity that we can handle in any particular quarter.

Colin Goheen - [inaudible] and Company

Okay great and then just back to the tax rate again, this is mostly all recurring benefits, not a lot of this is one time in nature?

Patrick J. O’Dea

That’s correct.

Colin Goheen - [inaudible] and Company

If anything you’ll be gaining more recurring benefit --

Patrick J. O’Dea

Actually what will end up happening, we do expect our rate to go up a little next year from the 35.8% that we’re at now because one of the other things, we’ve always had a benefit of is our tax exempt interest and because our interest line is getting smaller relative to our total profit, even though we’re still in a lot of tax exempt, the tax exempt interest will right now next year we’ll probably have about a 50 basis points less favorable impact than it did this year so that’s why we’ll be in the mid 36s versus 35.8%.

Colin Goheen - [inaudible] and Company

Okay great.

Patrick J. O’Dea

Because once you hire the people you continue to get credits for the people who are on your payroll and the manufacturing deduction as long as Congress doesn’t change the law and we continue to get the deduction for roasting our coffee in the United States.

Colin Goheen - [inaudible] and Company

Great, thanks a lot guys.

Operator

We’ll go next to Brian Moore with Wedbush Morgan.

Brian Moore - Wedbush Morgan Securities Inc.

Just a follow up, as I sit here in Southern California and look at your map online, it appears you don’t have very many units I guess in the hotbed of subprime mortgages, inland empire, and I’m just wondering on the point of fall off related to retail growth in Q4, was there any geographic disparity between northern and southern California first, and then secondly are you seeing any difference in purchasing patterns, perhaps the sale of more drip versus lattes or less bundling, and then I guess finally if you could give us an update on the speed of service initiatives and some of the remodels and refresh units you did last year?

Thomas P. Cawley

So first is there difference geographically? No and I think the way to think about that is during the holiday season, particularly in December and just after Thanksgiving, our stores are beneficiaries of the sort of shopping foot traffic that’s out buying gifts and things at major department stores and things like that and to the extent that that foot traffic for whatever reason on the street for holiday gift buying is less or concentrated in a shorter period of time right before Christmas or something like that, that’s going to affect us because we’re not going to have as much intercept foot traffic that we would have had before and I think generally speaking, that’s it. We’ve analyzed the data and there’s no geographic difference. I would say that the business just came later in December than it would normally which would be consistent with people not out shopping 2, 3, 4 weeks before Christmas. That’s the way I would explain that. In terms of speed of service, we’re crafting drinks and baristas are pulling shots and hand steaming milk and everything so we’re not the fastest in the west, but we have had a major effort in place to improve the speed within the confines of making the kind of artisan crafted drink our customers expect and we’ve seen good improvement there. So we’re feeling pretty good about the improvement in speed of service as a result of the structural changes in the store and also training.

Patrick J. O’Dea

I’d say our results on the remodel, the other question, we only did I think four and they’re anywhere from spectacular where we really on some of them, we had to really unleash capacity to it really just was something that was deferred maintenance that needed to be fix and from a consumer standpoint didn’t change much so I think that it’s not a huge sales growth strategy of ours in our retail and I think that from a remodel standpoint it’s more maintaining our customer business and maybe getting a little bump if we get some capacity constraints removed like we did in 1 or 2 stores but overall I’d say that it is not a... the ROI is to keep a very high volume store going rather than to unleash capacity.

Brian Moore - Wedbush Morgan Securities Inc.

Great, thank you.

Operator

That appears to be all the time we have for questions. I’d like to turn the call back over to our speakers for any additional or closing comments.

Patrick J. O’Dea

I think we’re all set, Operator. Thank you.

Operator

Then that does conclude today's’ conference call. We’d like to thank you for your participation. You may disconnect at this time.

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