John T. Harlow: Our plans and strategies this year focus on close rate and basket attach. We expect, in a tougher economy with declining industry trends in packaged media, to actually see less traffic.
Our first quarter was our toughest comp. It was also our toughest traffic comp for the year last year and we have aggressive promotional calendars throughout the year around all the holiday drive times, beginning with back-to-school later this summer.
But bottom line is most of the changes we’ve made are in the home entertainment side of our store. That’s roughly half of our company’s revenue and more than half the company’s profit. We are focused on optimizing those customers from a revenue and profit standpoint.
The other driver of traffic is virtually 100% comp store growth. We do very little outside of comp store. The web business also drives traffic to our stores. We had a disappointing performance in our web business. It wasn’t without some forethought. We left some computer business on the table intentionally that we just couldn’t see a way to make money on and there are some strategies as we move forward in the year to get our web business back up to historical comp rates. This implies 50% of that web traffic ending up in our stores.

Michael Lasser (Lehman Brothers): On the CapEx guidance, it was reduced by $10 million yet the store count for new store openings has not changed. Can you rectify where the difference is coming from?

Bruce H. Besanko: We did take down our CapEx guidance and the reason is two-fold; we’ve been able to find efficiencies from a construction cost perspective in our real estate, which helps and is accretive to our new store economics. Secondly, we are just being more prudent in terms of our overall capital expenditures in other areas of the business, including information technologies and other areas of the company.
We however remain committed to profitable growth and our strategic pillars, including real estate.

Scott Ciccarelli (RBC Capital Markets): On the flat panels, can you give the outlook regarding pricing and margin in the second half as capacity comes online?

John J. Kelly: We are positioning ourselves to take advantage of just about any pricing or over-supply that the market has. Our inventories are in line with being able to take advantage of that and our selling team is in line with being able to fully take advantage of that. We are nimble from an advertising perspective. Thus no matter what happens from an industry standpoint, we are prepared to act quickly and move quickly on any opportunistic purchases that could occur due to an over-supply in the industry.

Scott Ciccarelli (RBC Capital Markets): Are you therefore expecting an over-supply?

John J. Kelly: It’s possible. We are preparing for any activity that could occur in that industry.

Scott Ciccarelli (RBC Capital Markets): If you have pricing coming down and margins probably coming down, how do you manage that and still realize a second half rebound?

John J. Kelly: We manage it through the proper inventory control and making sure that we are liquid so we can take advantage of those types of things.

Bruce H. Besanko: The issues that we face are less about the broader macro environment and anything having to do with CE dynamics. We have sufficient traffic if we can close on it. We have sufficient opportunity in terms of gross margin regardless of whether there may be an over-supply or an under-supply of televisions. There are just lots of opportunity for us to improve our performance in the back-half despite what may occur, either macro or from a CE perspective.

John T. Harlow: From the store perspective, the value of making sure we continue to make progress on rebuilding the selling culture is the traffic that might be generated through margin changes in the business. We’re positioned through better attach, better close to offset and build on that margin. The team-based incentives and the work that’s been done in Q1 and Q2 positions us to attach and build the profitability of the transactions, even if there’s some movement on the margin on the initial purchase.

Bill Armstrong (C.L. King & Associates): How do you improve your attachment rates going forward?

John T. Harlow: The selling culture discussion that we’ve been having most of the morning is how we will do that. We’ve provided very specific in-store training as well as vendor training on products. We have very specific performance tracking by associate. We work with every associate to not only continue to build their proficiency but to talk to them about where there may be gaps on how they attach and how they sell to customers, whether it’s services or accessories. We have very specific conversations around that, as well as on the merchandising end. We are collaborating to make sure that we sell bundles more effectively than we have in the past.
Adding all of that up allows us to not only sell more effectively but merchandise in a way that gets attach more rapidly than we have historically.

Philip J. Schoonover: Can you also talk about gap management and where we have stores that are performing well above the company average?

John T. Harlow: What we’ve done in terms of the management of not only the selling process but all the practices in our stores, we gap manage our stores in quartile. On a monthly basis we look at the top performing first and second quartile stores and then roll those practices into the lower performing stores across the company. That not only gives us sustainability and improvement quarter-over-quarter but it allows the lower performing stores to try and implement new practices that will build attach, margin and basket.

Bill Armstrong (C.L. King & Associates): How will the team bonus build performance?

John T. Harlow: The team bonus that was put in place was tried in 50 stores and we saw a significant improvement in not only the sales gross margin but basket. What we found is that the top performers who can earn anywhere from 25% to 40% higher levels of personal earnings by selling and attaching more effectively are also charged with training players who are either newer and bringing the bottom quartile sales teams to a different level.

Bill Armstrong (C.L. King & Associates): When was this incentive plan put in place?

John T. Harlow: June 1st. It was tested throughout the first quarter and gave us such immediate traction that we’ve rolled it to the chain and it’s again now in place and we see that building through second quarter and third quarter in time for not only back-to-school but holiday selling.

Bruce H. Besanko: Our biggest attachments come from the home entertainment area. We have a dedicated HE supervisor in all our stores now. We have a dedicated sales manager in our top 200 home entertainment sales stores. We have the team-based incentive that’s positioned around gross margin. We’ve quadrupled the level of sales training this year versus prior year. All of that together, particularly in the HE area where we have the highest levels of dollars associated with attachments, will gain us traction in the second half.