Apr 26, 2012
Operator
Good day, and welcome to the American Greetings Corporation Fourth Quarter Fiscal 2012 Earnings Call. Today's conference is being recorded.
At this time, I would like to turn the call over to Mr. Gregory Steinberg.
Please go ahead, sir.
Gregory M. Steinberg
Thank you, Brandy. Good morning, everyone, and welcome to our fourth quarter conference call.
Joining me today on the call are Zev Weiss, our CEO; Jeff Weiss, our COO; and Steve Smith, our CFO. We released our earnings for the fourth quarter fiscal 2012 this morning.
If you do not yet have our fourth quarter press release, you can find a copy within the Investors section of the American Greetings website at investors.americangreetings.com. As you may expect, some of our comments today include statements about projections for the future.
Those projections involve risks and uncertainties that could cause actual results to differ materially from forward-looking statements. We cannot guarantee the accuracy of any forecasts or estimates, and we do not plan to update any forward-looking statements.
If you would like more information on our risks involving forward-looking statements, please see our annual report or our SEC filings. Previous earnings releases, as well as our 10-Qs, 10-Ks and annual report, are available on the Investors section of the American Greetings website.
We will now proceed with the comments from both our CEO and CFO, followed by a question-and-answer session. Zev?
Zev Weiss
Thank you, Greg, and good morning, everyone. Today, I will cover 3 main topics.
First, I will share a few thoughts on our fiscal 2012 results; second, I will comment on the greeting card industry and how American Greetings has performed in this environment; and third, I will share a few comments on our outlook for fiscal year 2013. So let me start with our results.
I am pleased with our overall performance. We achieved a 6% revenue increase for the year as we remain focused and disciplined within our product leadership strategy, as many of our customers performed better than our expectations.
We also achieved cash flow from operations less capital expenditures in line with our revised plans and guidance for the year. Finally, we took many steps forward at our product leadership strategy.
We accomplished these goals, despite changes during the fiscal year that caused us to absorb unanticipated events and costs. There were many mixed signals in the global economy which made it harder than usual to plan this year.
Initially, we expected revenue growth of 5%. Then mid-year, based on market conditions at that time, our overall view of revenue growth softened.
As it turned out, we exceeded our original revenue guidance. During the second half, we decided to make incremental investments in marketing to support our product leadership strategy, including our enhanced online portfolio.
Around that same time, we also launched a multi-year investment into our information technology systems refresh project, which although at early stages received more investment than initially planned. Finally, we incurred some incremental costs when we refinanced our debt to approve the overall debt maturity profile and reduced our total cost of debt.
All of these unanticipated events and costs added to the unpredictability of the year and the volatility of our earnings. I will now discuss the high-level review of the greeting card industry, including shifts in consumer shopping patterns, the effect they've had on both market share and pricing and the way we are addressing them.
The industry has been undergoing subtle channel shifts over the last few decades, as consumers had been slowly shifting their shopping patterns towards mass retail, and over the last decade, towards the value channel. In an effort to support our retailers, we enhanced our focus on our product leadership strategy.
That product leadership strategy is based on continuous consumer research and the development of innovative and relative products -- relevant products that address greeting card consumer needs everywhere they shop. This product leadership focus is also required to continue to drive the mature but evolving industry.
Because of this focus, we now sell more cards in more places than any other greeting card company in North America. We believe we have established the industry-leading portfolio of products, which is evidenced by both retailer and consumer feedback, by our point-of-sale productivity and by our card unit leadership in North America.
We work strategically with retailers to execute their product mix and pricing strategies, which are supported with our differentiated products. We have some retailers expanding their focus on our premium product and some retailers focused on value products.
Because of our ability to meet the needs of the consumer and the retailer throughout the price spectrum, we have been awarded more stores and more incremental space than our competitors. The mix of new stores and new space awarded each year impacts our overall mix and average prices.
As a result of our product leadership strategy in the incremental space we won during fiscal 2012, we were able to increase our greeting card sales by over 5%. The economic environment has also impacted the performance of our retail partners.
As the global economic volatility continues, we have seen retailers modify their own strategies. While we all hope that the economic conditions improve, it's important to realize that retailers are achieving different levels of success, which potentially exposes us to volatility and commercial challenges domestically and internationally.
There are many ways in which we've been changing to adapt to the current market environment, changes that have been happening for many years and have brought us to where we are now. Those changes include the strategic emphasis on product leadership, as well as a continued focus on efficiency within our operations and through our many suppliers.
When the focus on product leadership was initiated many years ago with our winning card strategy, we enhanced our culture of innovation. When the efficiency effort began nearly a decade ago, we enhanced our process around cost out activities.
Over the past decade, our focus has primarily been on cost reduction efforts mainly within our supply chain. More recently, however, we shifted this focus to aggressively target process improvements across all areas of the company, including back office and the overhead light functions.
As a result of both the product leadership and efficiency efforts, it became more apparent that we have a need for new information technology systems to support redesign processes. And so we have embarked on our systems refresh project.
We are also operating more globally than before. We are pleased with our acquisition of Watermark in the U.K.
and how it has complemented our international product portfolio. Just like Recycled Paper Greetings and Papyrus, Watermark brought us a unique product line, originally focused on a specific market.
What we are learning with all 3 brands is how to leverage our broader portfolio of brands on a global scale. For example, we are doing a better job of sharing our brands across international boundaries, including the recent successful introduction of the Papyrus brand into the Australian market.
A vital example of an area where we have adapted our business model is in our digital space. Our investments in Cardstore.com demonstrate our continued commitment to provide consumers superior solutions for one-to-one greeting cards regardless of the channel of distribution.
This slowly emerging channel distribution, which is in its infancy and may or may not grow to become relevant, requires a very different approach on how we reach consumers, attract them to our website and transform them into loyal customers. However, despite the difference in the channels of distribution, we are able to leverage many of the competitive advantages we have established, including extensive understanding of our consumer base, the ability to leverage our creative studios to develop innovative products and our scale.
We've had great consumer feedback to our website and plan to compete aggressively as we continue our momentum into fiscal 2013. While I'll comment on the fiscal 2013 in a moment, let me note here because this is relevant, that we expect to continue investing in our digital space during at least the first half of fiscal 2013 at a pace similar to the second half of fiscal 2012.
We will likely continue spending into the second half of fiscal 2013, however, the timing and the amount of spend will depend on consumer response during the first half. Let me now shift to our capital structure.
During the fourth fiscal quarter, we completed the refinancing of our public notes, extending the maturity to 2021. And we refinanced our revolving credit facility.
We are very pleased with the net results of these transactions as we substantially extended the maturities of these instruments with better terms and conditions at a lower average cost. Our balance sheet continues to remain solid, which gives us the ability to execute our strategies and make investments where appropriate.
You may recall that we also announced a new $75 million share repurchase program in early January. During the quarter, we repurchased about 2 million shares.
We will continue to evaluate our different potential uses of capital, including the continued repurchase of our old shares. Finally, I would like to share a few thoughts about our outlook for fiscal year 2013.
I will remind you that key differences in this fiscal year from historical patterns are continued investments in product leadership in the Cardstore.com business model and the information technology systems refresh efforts and in our world headquarters project. We expect our revenues for fiscal year 2013 to be essentially flat versus the prior year as we've lapped the accelerated growth we had in 2012.
Also we expect our full year cash flow from operating activities less capital expenditures to be between $45 million and $65 million. This cash flow estimate includes a modest source for the combination of working capital, deferred costs and taxes.
We expect our capital expenditures will be between $85 million and $110 million. The increased level of capital expenditures and the wider range around the estimated level of CapEx is driven primarily by the incremental investments in our information technology systems refresh project, as well as some capital associated with the new world headquarters project.
The majority of the capital for the new world headquarters project is not expected to occur until fiscal year 2014. Over the next few years, our goal will be to balance our momentum in achieving leadership in the greeting card market with cost reductions over time, supported by the systems refresh investment.
By continuing to focus on efficiency and cost reduction within all areas of the corporation, but especially within our supply chain and overhead areas, our goal is to maintain annual operating margins of around 10%. However, our operating margins may vary in the near term due to expenses in projects, such as our world headquarters, systems refresh effort and Cardstore.com distribution model.
Now let me turn the call over to Steve, who will provide a detailed review of the quarter. And then we'll take your questions.
Steve?
Stephen J. Smith
Thanks, Zev. I have 3 components to my prepared remarks today.
I will start with a few brief comments on our consolidated results this quarter, move to a review of our reported segments, and then cover a few key components of our financials. After those 3 components, we will open the line for questions.
Our consolidated revenue was up $32 million or about 7.5% from last year's fourth quarter revenue of $425 million. Included in this quarter's $456 million of revenue was a benefit from foreign exchange of about $1 million versus the prior year's fourth quarter.
The remaining $31 million revenue increase or 7% improvement was driven by 4% organic revenue growth in both our domestic and international business units, as well as a 3% increase in our revenues due to our acquisition in the U.K. Our consolidated operating income was $30 million compared to $40 million in the prior year's fourth quarter.
A $10 million decrease was primarily driven by a $27 million goodwill impairment in the current year. In addition, during this year's fourth fiscal quarter, we had scan-based trading conversions that reduced operating income by about $3 million, and we incurred severance costs of about $4 million.
Holding aside these items, operating income for this year's fourth fiscal quarter was approximately $64 million. During last year's fourth quarter, we had scan-based trading conversions that negatively affected the operating income by $6 million.
We incurred severance costs of about $4 million, and we had costs associated with the integrations of Recycled Paper Greetings and Papyrus that negatively impacted the operating income by about $1 million. Holding aside these items, operating income for last year's fourth fiscal quarter was approximately $50 million.
Therefore, holding aside the items I mentioned for this year and last year, our operating income improved by about $14 million. The improvement was driven primarily by the revenue growth I mentioned, as well as lower variable compensation compared to the prior year's fourth quarter.
Up until now, I've been addressing only the fourth quarter. Let me now share with you a summary view of our full fiscal year.
Full year revenue of $1.695 billion was $97 million higher than last year's fiscal year revenue of $1.598 billion. Foreign exchange was a benefit compared to the prior year of about $22 million.
Holding aside the benefit from foreign exchange, revenue was up $75 million or nearly 5%. Our operating income was approximately at $150 million this year.
Included within these full year results are few large items that I would share with you. This year, we recognized approximately $27 million of goodwill impairments worth about $0.47 per share.
Second, we incurred about $12 million of costs associated with the set up of new stores primarily in the value channel, which was worth about $0.19 per share. Third, we incurred $6 million of charges related to scan-based trading conversion, and that was worth about $0.09 per share.
Fourth, we recognized about $5 million of severance, which was worth about $0.08 per share. Fifth, we recognized the benefit of $4.5 million associated with the sale of a portion of our portfolio of intellectual property, and that gain was worth about $0.07 per share.
Holding aside these 5 items, operating income during fiscal 2012 was approximately $196 million. Below the operating income line within the interest expense, we recognized about $31 million of expense related to the refinancing of our debt, which equated to about $0.47 per share.
Therefore, starting with our full year earnings per share, as reported at $1.42, and adjusting for the items just described, our earnings per share were about $2.55. Having walked through the revenues and operating income on both the reported and adjusted basis, now, I will turn exclusively to the fourth fiscal quarter to discuss our segments' results.
Our North American segment revenues of $326 million were up about $11 million compared to the prior year's fourth quarter. The revenue increase was driven by both seasonal and everyday greeting cards.
Note that revenue in last year's fourth quarter was negatively affected by about $7 million of scan-based trading conversions, while revenue in this year's fourth quarter was negatively affected by about $3 million due to scan-based trading conversions. Our North American segment's earnings of $37 million were down about $14 million versus the prior year's fourth quarter of $50 million.
The lower segment earnings were primarily the result of the goodwill impairment, of which $21.3 million was recognized within this segment. Scan-based trading conversions also negatively affected the segment earnings by about $3 million.
Holding aside the impairment and the scan-based trading conversions, this year's fourth quarter segment earnings were about $61 million. Last year's fourth quarter segment earnings also included scan-based trading conversions, which negatively affected those earnings by $5.5 million.
In addition, the segment incurred integration costs of almost $1 million. Holding aside the effect of these 2 items, last year's fourth quarter segment earnings were about $57 million.
Driving the segment's improvement of about $4 million in adjusted earnings quarter-on-quarter was lower variable compensation and the margin benefit from the revenue growth, partially offset by increased investment in product leadership, including incremental marketing expense of approximately $4 million. Switching now to our International segment.
Revenues for that segment were about $98 million for the quarter compared to about $69 million last year, an increase of about $29 million. About 1/2 of that increase was from the acquired Watermark business, while the balance was mostly driven by organic revenue growth, supplemented by a small benefit of about $1 million from foreign exchange.
Segment earnings of about $5 million for the quarter were down slightly compared to the prior year. However, the current period included the goodwill impairment of about $6 million.
Holding aside the impairment, segment earnings improved about $5 million with the increase driven by the current quarter's revenue growth. Our Interactive segment's revenues of $19 million were about $3 million lower than the prior year.
The reduction of revenues was driven by lower advertising and the continued effect of winding down our PhotoWorks website earlier this year. As a result, earnings for the segment we're down about $0.5 million versus the prior year's fourth quarter.
Let me shift from the segment analysis to briefly comment on the status of our licensing performance. Licensing revenue, which is reported on our income statement as other revenue, was about $10.6 million for the fourth quarter, which is roughly flat compared to $10.4 million in the prior year's fourth quarter.
Licensing expenses were about $10 million, which is up about $1 million compared to last year's comparable quarter. So for the fourth quarter, the company's net licensing effort, or revenue less expense, was down about $1 million compared to the prior year's fourth quarter.
Now looking into the third component of my comments today, a review of several of the key components of our financial statements. The company's manufacturing, labor and other production costs were up about $15 million compared to last year's fourth quarter.
As a percentage of total revenue, these costs were 42.7% this quarter compared to the prior year's fourth quarter of 42.3%, an increase of 40 basis points or about $2 million. The remaining $13 million increase was primarily the result of higher unit sales volume.
Selling, distribution and marketing expenses were up about $9 million versus the prior year's fourth quarter. Roughly $5 million of the increase was the combination of merchandiser, freight and distribution costs as a result of the higher sales volume, driven in part by the expanded distribution, both domestically and internationally.
In addition, increased investments in product leadership including incremental marketing expense of approximately $4 million were incurred during this quarter. Administrative and general expenses were down about $10 million versus the prior year's fourth quarter.
The primary driver for the decrease was lower variable compensation expense of $9 million this quarter. We recognize goodwill impairments during the fourth fiscal quarter.
In connection with the preparation of the fiscal 2012 financial statements, we determined that the decline in our stock price and market capitalization was an indicator of potential impairment in goodwill, requiring us to complete an impairment test. As a result of the testing, we recorded the noncash goodwill impairments of $27.2 million during the fourth quarter, of which $21.3 million was in the North American segment and $5.9 million was in the International segment.
Interest expense was about $29 million higher compared to the prior year's fourth quarter. As Zev mentioned, we completed a refinancing of our public notes in our revolving credit facility.
As a result, we recognized a noncash charge of $22 million for the write-off of both a remaining unamortized discount and deferred financing costs related to the notes we redeemed. In addition, we incurred about $9 million of expenses for the consent payments, tender fees, call premium and other fees associated with these refinancings.
These increases to interest expense were partially offset by lower interest expense associated with the new debt instruments. Moving on to other nonoperating income.
This year's fourth quarter was $4.8 million lower than last year's fourth quarter. You may recall that last year, we recognized the benefit of $3 million associated with the sale of a building in our international operations and we recognized the benefit of $1.3 million from a dividend we received due to a minority investment in another company.
The next item I will cover is taxes. Our effective tax rate for the quarter was a negative 32.6%.
The difference between our ETR and our statutory rate was principally driven by the nondeductibility of a portion of our goodwill impairment. Let's now shift gears from a review of the income statement to a brief look at one item from each of our balance sheet and cash flow statements.
Inventories were about $29 million higher compared to the prior year. Approximately $9 million of the increase was driven by our need to build card and fixture inventory for expanded customer relationships.
About $6 million of the increase was associated with the Watermark transaction. The bulk of the remaining portion of the increase is the inventory beyond our planned levels.
Shifting to our cash flow statement. One item I would like to mention is accounts payable and other liabilities, which was $17 million less of the use compared to the prior year.
As we shared previously, we had accrued additional variable compensation 2 years ago in fiscal 2010 due to our better-than-anticipated performance that year. That accrued variable compensation expense from fiscal 2010 was paid during the first quarter of fiscal 2011.
That pattern was not repeated during fiscal years 2011 and '12. That concludes our repaired comments for today.
I would now like to turn the call over to the operator to handle our question-and-answer period. Brandy?
Operator
[Operator Instructions] And we will go first to Carla Casella with JPMorgan -- or actually, we'll go to Jeff Stein with Northcoast Research.
Jeffrey S. Stein
A couple of questions here for you. First of all, I'm wondering, just from a high level, when you started the year, you did say 5% revenue growth.
You did beat that. That would've produced $80 million to $100 million of free cash flow.
So I'm wondering, if you could just kind of reconcile for us where the shortfall came from because it looks like the real number, after you adjusted for the loss on extinguishment of debt and having exceeded your capital investment plan by about $20 million on a high side, it looks like your pre-cash flow number was $35 million, so there's about a $45 million delta there. I'm wondering if you could just walk us through the key factors that accounted for that shortfall.
Gregory M. Steinberg
Hey, Jeff, it's Greg. A couple of things.
As you mentioned, we did spend more CapEx than initially planned at the beginning of the year. The balance sheet didn't come in exactly as we had planned at the beginning of the year.
And from that new business ramped up, there was some additional investments in the balance sheet, including inventory. And then also there was some other things going on with respect to some incremental marketing that we had spent this year.
So a combination of all those items is really what drove the major points of the deviation.
Jeffrey S. Stein
Got it. And I recall on the third quarter, you did call out the fact -- as you just did in your prepared comments here, the fact that you did have some excess inventory at year-end, wondering if you could talk a little bit about that.
What exactly is the nature of that inventory, and is there some markdown risks associated with that as we look ahead?
Zev Weiss
I think if you look at some of the positive volatility that we've had around rolling out of new programs, rolling out of additional space, you got to predict where you think there's is going to -- the needs are going to be and then execute according to it. And whenever you see that kind of volatility, if you want to make sure that you keep the service levels up for our retailers, you might bump your inventory up.
And I believe that there is ways to bring that down, as some of that volatility comes down, and I don't think that there's markdown issues around that.
Jeffrey S. Stein
Got it, got it. And with regard to your outlook for the year, Zev, on 0 revenue growth, it would seem to me that there would be some additional carryover benefit from rolling out new doors in the value channel since those did not all happen on the first day of the fiscal year.
And in addition, you're continuing to invest heavily in Cardstore.com. I assume, albeit, that's a small business, but still it should generate some positive revenue growth.
Are you guys losing any accounts that would account for your expectation of flat revenue growth, or is there something else that we should know about?
Zev Weiss
No, I don't--. It's not from a thought of potentially lost business.
I think it's just as we look at the outlook for the year and balance everything out and say "Okay. Now where do we see things based on where we are today?"
That's the way we see it. Clearly, we hope that we'll be able to drive some positive performance along the lines of the ideas that you raised, and we'll see how the year plays out.
Jeffrey S. Stein
Got it. I know you guys -- you typically don't comment on new account activity, but JCPenney has indicated that they plan to carry greeting cards under their new operating model, and I'm just kind of curious if you could just at least tell us if you're bidding on that business.
Zev Weiss
Jeff, as you know, it would not be appropriate for us to make any comments along those lines on this kind of a call.
Jeffrey S. Stein
Okay. Can you share with us any progress or any initiative you've undertaken to strip out costs in the value channel to improve your returns there?
Zev Weiss
Yes. We're looking at the costs really across the whole business, and we talked about it in the prepared remarks, and then we talked about this as well that there's been a focus around the supply chain cost in the business, going on for many years now.
That focus continues going forward. We're also putting a lot more attention around areas like SG&A and overall payroll costs, trying to find savings there as well.
And we believe that the IT investments that we're making are going to help support all those costs, supply chain and the SG&A, but probably the SG&A even more, to find savings there. And then the combination of that effort ought to make us really profitable everywhere we operate, including the value channel.
Jeffrey S. Stein
Okay. Final question for you.
I'm wondering if you could comment on kind of what's been going on with Cardstore.com. I think your competitor in that space has kind of indicated that they're not investing nearly as heavily in the launch of their new website Treat.com as you are, and wondering if perhaps -- maybe you could talk to us a little bit about the economics, and when -- how long you would plan to deficit spend in that business.
Zev Weiss
Well, let me really, I guess, respond to the overall environment that we see and then I think how we plan going forward will probably depend on how we see things playing out. But our impression is that it is a very competitive environment, that we have competitors who are investing quite aggressively in that space, and it's something that we need to make sure that we have an important position in as we do in the rest of the card business.
So I think our -- obviously, we'll keep our eyes open, and we'll see if there's any shifts in that going forward. But right now, our feeling is that an area that's very important for us and that we need to aggressively invest in.
In terms of how we will operate going forward on the other part of your question, it's really going to depend on what we see in the competitive environment, how we see the consumers reacting. And I don't think it's anything that we could respond to today and say here's exactly how you would see us play out our investments.
I think we're going to continue to look at the business and see if -- if we believe there's a good return on the investments, we want to continue to make those. If we think there isn't a good return, then we need to reevaluate those.
Jeffrey S. Stein
So it would seem to me, Zev, if I'm understanding this correctly, that your plan currently is to invest, let's call it about -- roughly about $15 million in the marketing during the first half of the fiscal year into Cardstore.com, whereas last year in the first half, you didn't invest anything. So that's an incremental spend at least in the first half.
So your cash flow guidance of $45 million to $65 million, are you assuming, at this point, a similar investment in the back half of the year in marketing? Or how should we be thinking about that in terms of tying -- in tying that into your operating free cash flow guidance?
Zev Weiss
I think you have to go back to the prepared comments and look at what we said in that we we're looking to spend in the first half of the year similar to last year's second half of the year, and then we're going to look at how we see the marketplace playing up, and then we're going to evaluate the second half of the year as we see it coming. So it's difficult, I think, for us to tell you exactly how we're going to play out in the second half of the year right now until we see how things play out over the next few months.
Jeffrey S. Stein
Okay. But in the terms of being able to tie that into your $45 million to $65 million, would that range encompass some flexibility for increased spending for Cardstore.com, or decreased spending for Cardstore.com?
Or is that separate and apart from the $45 million to $65 million that you've laid out?
Zev Weiss
No, I think right now, our $45 million to $65 million has encompassed in that our full view of overall marketing spend for the company throughout the entire year.
Operator
And we will go next to Carla Casella with JPMorgan.
Carla Casella
I'm wondering if you could just talk about whether there was any shift in the quarter related to the timing of Easter and if that is going to hurt the upcoming quarter.
Zev Weiss
Yes, I don't think it affected anything, really, in our fourth quarter. In the last year, it didn't really have any effect on us.
Carla Casella
Okay, great. And then the higher inventory levels, did you -- I may have just missed this, did you say when you expect it to come back down to normal levels?
And if there's any specific type of inventory that's raised or an inventory for a specific channel?
Zev Weiss
No, we didn't get into the specifics of when we think it will get back to a more normalized level, but I will tell you it's something we are very focused on, something we understand how to get our arms around, and we understood. But when we raised the levels, it was something that we were aware of.
We did it because we thought it was the right business decision to make, and it's something that we believe we can get our arms around and bring back to a more normal level. We did not share exactly the timing, but it's not something that I would call extraordinary, but what we did share was we didn't think that we needed to execute markdowns in order to be able to do that.
Carla Casella
Okay. So it's not a season-specific inventory?
Zev Weiss
No, no.
Carla Casella
And then why did you decide to raise level? Was it a cost decision or a purchasing decision?
Zev Weiss
No. The biggest reason was, when you look at the revenue increases from last year, it came from a number of different sources, and as we were anticipating where that revenue was going to come in and the service levels that we needed to make sure that we maintained in order to satisfy our retailers, we felt that adding a little bit more safety stock was appropriate to deal with some of that volatility.
And we believe we have the ability to bring that safety stock set back down.
Carla Casella
Okay, great. And then you mentioned the 2 spend -- there's some scan-based trading conversion in the first quarter.
Will that continue the next couple of quarters? Or do you have any other big conversions coming this year?
Zev Weiss
Well, what we shared in the past is that scan-based trading, when we incur scan-based trading costs, they're more episodic in nature. And it's difficult to say and predict exactly how it's going to roll out, and they sort of happen when they happen because it depends on the relationships that we have with retailers and their ability to execute it.
So it's difficult for us to tell you exactly how to predict that on a quarter-by-quarter basis.
Carla Casella
Okay. Can you give us a sense of where you are in terms of the penetration of different channels of scan-based training -- trading, meaning is it that the dollar stores is low-penetrated scan-based trading but the drug versus the supermarket versus mass, any color you can give there?
Zev Weiss
No. We have not shared in the past, and I think we also don't intend in the future, to share exactly how that plays out by channels or by accounts.
Carla Casella
Okay. And I think you said it on past calls that your card margins don't vary dramatically by channel, and I think, though, last quarter, the margin pressure you have seen was not that one channel was seeing a lower margin, but it was consumers buying a lower-margin card.
Can you just update us there on whether your margins there are still staying relatively the same by channels or if one channel has a lower margin?
Zev Weiss
Yes. I don't think there's anything new to share on that.
So I think everything that we've shared in the past plays out in the future. I think what we had shared was given all the volatility that we saw coming through, particularly on the revenue side, that there were going to be -- that, that was going to cause volatility on the earnings side as well.
And that is the reason why, I think, you saw the results play out in the third quarter where we were a bit down and in the fourth quarter you see it's a bit up. But I think overall, not a whole lot has changed from that perspective.
Operator
And we will go next to William Reuter with Bank of America Merrill Lynch.
William M. Reuter
I don't know if you could help us with any understanding of the 4% organic growth that we saw in the quarter. How much of this would've been units versus how much of this would have been pricing even if it's just on the qualitative basis?
Stephen J. Smith
Sure. So we historically don't come in great detail until our K comes out or until we publish next week.
But we would tell you, we had a solid quarter on a units basis, and you'll get the elements of that broken out in about a week in our K.
William M. Reuter
Okay. I guess I'm trying -- it sounds like the increase in your selling and distribution expenses of $9 million was largely based upon higher volumes, and I guess I'm curious as to whether this year, if we see continued trade down or move to the value channel and maybe increases in volume, whether those expenses should be up kind of in concert with that?
Zev Weiss
Yes, I -- actually, I think some of the increases that you saw may have been more around marketing. I mean, there was some of it related to volume increases as well, but there were some of it related to marketing, and I think you want to keep in mind probably both of those components and then therefore, how they play out last year and for this coming year as well, particularly based on the marketing comments that we talked about with the previous caller.
William M. Reuter
Okay. And then in terms of this year, just thinking about the increase in sales maybe in the discount channel, do you guys continue to believe that there will be pressure on your gross margins from kind of trading down?
Or are we kind of done with that at this point?
Zev Weiss
I think it's hard to predict where trends go, but I think our view is that probably the way historical trends have been, where there's been some slight shifts in channels, that those slight shifts could continue into the future, and it's not just value channels. There's other shifts that are happening in the marketplace, particularly around specialty and specialty in the mass.
And our best view today is that it probably will continue, those slight changes will continue into the future, and that's a reason why it's important to continue to take costs out of the business and make sure that we can continue to maintain our margins and still provide the right product leadership and service levels that we need to do for our retailers. But I could see -- our best view is it would be similar to the way it has been in the past.
William M. Reuter
Okay. And then the last time I had chatted with you guys, I don't think we had a firm budget for how much the world headquarters might cost.
I guess, do you have a firm budget at this point? And then if you could remind us maybe how much you will be funding this, and then how much will be funded by state grants or loans.
Zev Weiss
Yes. So let me touch on the overall piece of it, and then, Steve, if you could touch on how that all bets out.
But our view right now is still -- it's a general view of $150 million to $200 million from a gross perspective. It is not a firm budget yet.
We're still working on firming that up. We have made progress, but we're not at a point yet where we could share anything that's more firm than that.
And Steve, if you want to maybe just touch on how that falls on...
Stephen J. Smith
From an overall perspective, sure, Zev. So Bill, if you take the gross of $150 million to $200 million again, because the design is not complete, we can't narrow it any further for you.
The incentives that we've spoken to historically and still anticipate receiving, both from state and local municipalities, are in the neighborhood of $90 million -- a little bit higher than $90 million. We anticipate not having to face some maintenance on our current building over the next half a dozen years or so, we felt that was in the neighborhood of around $30 million.
The sale price of the current building, we haven't given a specific figure because we're working on that currently, but we have something that's going to be in the 8-digit range. And then you sum all that together, you'll have about $135 million against roughly, let's pick a midpoint of $175 million.
And we said historically that we believe the net is in the low 30s. Against that, to your question of funding, we currently have in place or are anticipating, I should say, funding that's less than 2% for 5 years that's going to pay for at least half of the gross amount, if not more.
And then for the additional funding, if any, that we need, we'll borrow against our current facilities.
William M. Reuter
Okay. And the $90 million that you're going to be getting from the state or state funds, does that money have to be paid back or is that money a grant?
Stephen J. Smith
The vast majority of it is grant, job retention tax credits. And there are some loans that are a smaller component of it.
William M. Reuter
Okay. And then my last question is, in terms of your CapEx guidance, can you help us better understand how much of this might be?
I know that there's a wide range, and there's moving parts, and you guys don't exactly know, but even if it's like 25% is for maintenance, how much might be for the IT system refresh and how much would be for the headquarters?
Stephen J. Smith
Sure. We'll help you with some guidance there.
So for this past year, we had about $71 million of capital, and we believe that there'll be roughly a $30 million-ish increase. A vast majority of it will be the systems refresh effort.
Around that $30 million figure, $0 million to $15 million might go, on a capital basis, toward the world headquarters. And then their base business, if you will, the machine and equipment, we believe, will come down from the prior year, which was in the neighborhood of $40 million to more like $30 million.
So you're looking at something that's in the $20 million to $35 million increased range, and the vast majority of that is the systems refresh.
Operator
[Operator Instructions] We will go next to Michael Schechter with Mentor.
Michael Schechter
The investment in marketing on Cardstore was -- I know it was $10 million in the third quarter. Was it $5 million to $6 million in the fourth quarter the way it was called out earlier?
Stephen J. Smith
$4 million, Michael.
Michael Schechter
Okay. So we're looking at another $14 million in the first half of this coming year?
Zev Weiss
More or less, correct.
Michael Schechter
Okay. And are we driving any revenue at this point?
Stephen J. Smith
Well, first of all, I just want to share that's overall marketing costs. So there's a number of different areas that we're -- tried looking at from a marketing perspective.
Digital is one of them. And so we're talking about marketing in general.
We should talk about it digitally, as well as things that we're doing on the physical side. Thank you.
And on the revenue, we're driving -- we are driving revenue. We're also driving new customer acquisitions.
We're seeing, I think, very positive signs around our new customer acquisitions, as well as repeat customers. And overall, seeing a lot of very positive activity from our marketing, both on the digital side as well on the physical side.
Michael Schechter
Okay. So the digital side is starting to drive revenue?
Stephen J. Smith
The digital side is starting drive revenue, yes.
Michael Schechter
Okay. You talked about the fourth quarter comp being less than last year.
Is it a timing issue between quarters or was there some change between the 2? Is it a one-time event or is it just something normal versus where we are these days?
Zev Weiss
You're talking about the compensation?
Michael Schechter
Yes.
Zev Weiss
On how it was in the comp, I wasn't sure what you meant. I think there's nothing unusual.
Last year, we were above our expectations, so the comp is higher. This year, we were very much in line with the compensation, and our view is it was a very normal year from that perspective and nothing unusual.
Michael Schechter
Okay. And I'm not sure I got it completely, but what part of your business base is now on scan base?
I mean how much more do we have to go in these conversions?
Gregory M. Steinberg
Hey, Michael, it's Greg. About 40% of our total consolidated net sales is operating under the scan-based trading model.
And as Zev mentioned, it's very episodic on how and when these things change, so I'm not sure that we could predict it going forward for you, but that's where we're at today.
Michael Schechter
Could it be 100% or are there just accounts that are too small to utilize that type of --?
Zev Weiss
Well, it can't be 100% because there's parts of our business that don't operate in that model at all. So for sure, it can't be 100%.
And then the question that goes forward is the discussions about it with retailers or about whether it makes sense for them. In some cases, it does make sense.
And in some cases, it doesn't make sense. And so it's hard to tell in the future where that will play out, but surely it couldn't be 100% because our business doesn't operate that way.
Michael Schechter
Okay. And the IT spend, the last time we had talked about this, it was something on the order of, I don't know, $150 million, if I remember correctly, and it sounds like you spent a little more upfront.
Is it just an upfront or has the cost gone up?
Zev Weiss
We don't believe the overall cost has gone up, and what we believe is some of that has shifted, so it's been more of a timing issue. We still believe that the number is at least $150 million.
It's hard to say where it will exactly end up, but at this point, we're still comfortable with that number.
Michael Schechter
Okay. If we would to take a look at either the saves that you think you can drive from the IT or the return on investment at the IT, what do you think it is going forward once it's fully implemented?
In other words, we're going to be out of pocket $150 million of cash if we do it ourselves? What's the cost benefits since, obviously, driving the cost down seems to be a big concern here?
Zev Weiss
What I would tell you is, I believe that when you look at the incremental savings that we can get beyond our supply chain savings, which we've been very focused on over the last number of years, we believe that there's about $50 million of overall payroll in SG&A savings, that we believe we can achieve over a multi-year period. And what I would say is that I believe and we believe that the IT investment will support that savings.
So a lot of folks, particularly from the financial side, would say is there an exact IRR or an MPV that you could run, where the 2 are exactly tied in, and it's difficult to be able to do that because the question is, could some of that savings have happened if you didn't invest in the IT? And the answer is yes, surely you can get some of that savings.
But because we are changing the processes significantly and investing in the IT significantly, we believe that IT supports the savings in a significant way. So from our perspective, the best way to look at it is to say that we believe that there's $50 million of savings there, we're working on getting that as quickly as we can, it will happen over multiple years and that, that $50 million of savings is supported by the $150 million of investments.
Michael Schechter
And that $50 million is an ultimate run rate when you come out the back end?
Zev Weiss
That is correct.
Michael Schechter
Okay, so -- and how long a process do you think the IT is at, a 5-year process, a 3-year process?
Zev Weiss
Right now, it's multi-years. It's going to be more than 3 years.
And from an IT perspective, it's probably more than 5 years. And we're going to try to get the savings as quickly as we can.
And again, we're not always linking them, so in some cases, the savings may even come before the IT investment, and then later on, the IT investment will support the savings.
Michael Schechter
Okay. I mean $50 million of savings is a huge number on the base you're talking about.
It's ...
Zev Weiss
It is. I want to remind you, it's over a multi-year period, but it is a big savings, and we're very focused on getting it.
Michael Schechter
Have you started to achieve any of that, or is that going to come as these investments start rolling through?
Zev Weiss
Some of that has already been in some of our run rates. So if you look at, for example, in the fourth quarter, there was some severance that was announced in the fourth quarter, so part of that has to do with the savings that we were getting.
So it has started. The majority of it, though, is still in the future.
Michael Schechter
Okay. And let's apply the same analysis to the headquarters.
We're going to spend -- I hear the numbers, but some of it is, the recapture of the $90 million from the state is going to be over a longer period of time, so we're going to have some money up front. What kind of savings do you drive, what kind of return on investment do you drive from dropping an oversized and antiquated headquarters and moving into a modern, appropriately-sized headquarters?
Zev Weiss
We don't yet know those numbers. We clearly expect and believe that running a building that, first of all, is much newer -- we're not running a 60-year-old building, and we're sized appropriately for our space, where we have a significantly larger building today that was originally built as a distribution center.
And when you build a building, a modern building focused on just office, and sized appropriately, there ought to be significant operating savings. We do not yet know what those are.
Michael Schechter
And the costs of running the building are running through the P&L as opposed to the CapEx front at this point?
Zev Weiss
Yes, I believe so. I mean, there is some -- we talked about the maintenance fees, which may have been in the CapEx line, but we think there's savings really on both sides, that there was a significant amount of deferred maintenance in this building.
In some cases, previously, we were spending on that maintenance. Obviously, as we were thinking about the move, we're not doing that.
But before we were thinking about the move, we were spending that, and then you got the operating costs as well.
Michael Schechter
And the base CapEx for -- which is dropping to $30 million from $40 million, how much of that $30 million is for the old building? I don't have the carryover.
Zev Weiss
I don't know exactly the significant piece of it.
Michael Schechter
Okay, fair enough. Fair enough.
If we look at what you're talking about, the shifts in the business, and -- so with revenue flat, volumes are going to be up next year, I assume, and so it's a shift from specialty to low-price stores, the dollar stores, I assume the price point drops significantly. But the shift from specialty to mass retail, are -- is the price point holding or is there any shift downward as well?
Zev Weiss
I think the price points, it depends on the retailer, but they're relatively similar. And remember, in our case, when that shift happens, we're predominantly not in specialty retail.
So when that happens, it shifts towards where we are in mass retail, and it's really an incremental pick up.
Michael Schechter
And you're getting your fair share of specialty retail?
Zev Weiss
We believe that we're getting there our fair share of that market shift, yes.
Michael Schechter
And mass? Okay.
And are you trying to catch -- are you running to catch up to the change in price point, or are you getting ahead of it at this point in terms of getting your cost structure in line?
Zev Weiss
Look, if you look at how our performance was this past year and really this is not a new thing, this has been going on for a long time. I think we've demonstrated our ability to take costs out.
What we're talking about is related a new cost out effort, there is some shift from it being more supply chain-focused to a being supply chain-focused and the overall payroll. But overall, for us as a business, that's not really that new, and we've demonstrated our ability to do it in the past, and I think we can do it in the future.
Michael Schechter
And last question. If I take all your puts and calls from the fourth quarter, I drove down to something like $0.84 of recurring earning, is that...
Stephen J. Smith
Do you want to talk about it in EBIT or in EPS, Michael?
Michael Schechter
Let's talk EPS.
Stephen J. Smith
Sure. $0.84 is correct.
Michael Schechter
And which drove to like pro forma operating of $64 million, I think, operating income?
Stephen J. Smith
Correct. Yes.
Michael Schechter
Which, in those numbers, along with the cash flow that you -- it looks like you did in the fourth quarter were much better than you had indicated in the third quarter for the fourth quarter.
Stephen J. Smith
[indiscernible] fourth quarter.
Michael Schechter
Yes. I mean, it really looked pretty decent.
Did something shift? Were you just being very conservative given the environment?
Zev Weiss
I think there were a couple of things going on. I think overall, we were very pleased with our seasonal results.
So we didn't know in the third quarter how Christmas and Valentine's would play out. Christmas and Valentine's Day are very big holidays for us, and so for our year, we -- it depends a lot.
Our year depends a lot on how we do for Christmas and Valentine's Day. In both cases, we were very pleased with the results.
I'd also credit the team on the everyday card side of our business and other product areas, that our overall product leadership strategy drove strong sales. And then I think on the savings side, the groups did a very good job of making sure we were operating efficiently.
When you add all that together, we had a good fourth quarter.
Michael Schechter
And it looked pretty good. I mean, your shares outstanding are down to what, about 36 million?
36.5 million?
Stephen J. Smith
Diluted or basic?
Michael Schechter
Basic.
Stephen J. Smith
The actual number of shares outstanding at the end of the quarter was about 37 million.
Michael Schechter
Okay. And you got another 42 million left to buy, which would be, at last sale, about 3 million shares.
I mean, you're shrinking these thing so fast, there may be not much left at the end of the day.
Stephen J. Smith
There's about 47 million on the repurchase program left at the end of the quarter.
Michael Schechter
Right. I mean, even with the excess -- even with the investments you're making, you still seem to have enough room to buy back stock.
Stephen J. Smith
Well, we've got -- we have 47 million left on the availability, and we shared in the prepared comments that repurchasing shares is something that we've been focused on and that we will continue to look at in the future.
Operator
[Operator Instructions] And at this time, there are no further questions on the queue. I would like to turn the call back to Mr.
Steinberg for any additional or closing remarks.
Gregory M. Steinberg
Thank you, Brandy. That concludes the question-and-answer portion of today's conference call.
We look forward to speaking with you again in our first quarter conference call in late June. Thank you for joining us this morning.
Operator
And this concludes today's conference. We do thank you for your participation.