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Executives

Allison Townsend - ICR

David Jaffe - President and CEO

Armand Correia - CFO

Analysts

Anna Andreeva - FBR Capital Markets

Brian Tunick - JPMorgan

Mark Montagna - Avondale Partners

Oliver Chen - Citibank

Scott Krasik - BB&T

Alex Fuhrman - Piper Jaffray

Janine Stichter - Telsey Advisory

Edward Yruma - KeyBanc

Ascena Retail Group Inc (ASNA) F1Q 2013 Earnings Conference Call December 5, 2012 4:30 PM ET

Operator

Good afternoon. My name is Keith and I’ll be your conference operator today. At this time, I’d like to welcome everyone to the Ascena Retail Group’s First Quarter Earnings Conference Call. And I would now like to introduce Allison Townsend of ICR. Ms. Townsend, please begin.

Allison Townsend

Thank you, Keith and good afternoon everyone. Today’s call is being recorded and will be available for replay later today. Information on accessing this replay is available on today’s press release.

As a matter of formality, we would like to remind participants that remarks made by management during the course of this call may contain forward-looking statements about the company’s results and plans. These are subject to risks and uncertainties that could cause the actual results and implementation of the company’s plan to vary materially. These risks and uncertainties are referenced in today’s press release as well as in the company’s most recently filed Forms 10-K and 10-Q.

Finally in these remarks, we refer to adjusted earnings which is a non-GAAP financial measure. A reconciliation of the non-GAAP measures we discuss today to GAAP measures are included in today's press release.

I would now like to turn the conference call over to your host, Mr. David Jaffe, President and CEO. David?

David Jaffe

Thanks, Allison. Good afternoon and thank you for joining us to discuss the results of our fiscal first quarter. With me today is Armand Correia, our CFO. We are pleased to have begun the year with a strong first quarter. Our adjusted EPS grew 18% to $0.39, compared to adjusted EPS of $0.33 per share in the prior year quarter. First quarter sales increased 48% to $1.1 billion, driven by the acquisition of Lane Bryant and Catherines brands, with consolidated comp sales increasing 1%.

We are very pleased with our operating and financial results in the first quarter, and will come in the second quarter with good momentum. While the environment has been a little soft, we are well positioned for the holiday season. As we move to the fiscal year we expect to deliver results that show continued organic growth and benefits from the Charming Shoppes acquisition. We are also focused on integration. While the major projects are longer term, we've got those underway and they are smaller projects that will happen sooner.

Now I would like to walk you through each of our brands in a little detail. We are very pleased with Justice which is performing well. Sales in the first quarter were up 12% with comps up 4%. We continue to deliver trend right merchandise assortments at compelling values. Transactions were up 3% and we saw 1% increase in dollars per transaction. I'm also pleased to note that ecommerce grew 30%.

From a regional perspective, all regions delivered positive comps with the Southeast and Southwest delivering the strongest growth. We are also pleased to see how our new Canadian stores continue to perform above plan. With regard to specific categories, active tops and casual bottoms continued to be standouts. Our marketing strategy reinforces our value proposition with the right balance of 40% discounts offered to our customers through direct mail, email, customer loyalty programs and also store wide point of sale events.

The comps in the first quarter were driven by a very successful back-to-school season. Additionally, the introduction of new promos take an additional 20% off was very successful in driving business during Columbus Day. We are very pleased with the customer’s response promotion and sales lift in unit, inventory unit velocity that it generated. Justice executed four (inaudible) entire store of POS events the same as last year with 33 additional POS days during the quarter. These events were supplemented by an 8% increase in circulation direct mail kind of themes, which included three candidate emailings similar to last year and one incremental post card mailing.

For the second quarter, we’ve added 16 POS days compared to last year’s second quarter, which will include three POS events similar to last year, four [Cather] themes which is one less than last year and two [post card], the same as last year.

During the first quarter, we opened 20 Justice stores including three in Canada, and closed one store and in the quarter with 961 stores versus 917 last year. In the second quarter, we plan to open approximately 14 stores including 2 stores in Canada and we closed 19. We typically closed the most stores after the holidays.

I would also like to note that we’ve added Brothers to 15 of our stores as of the end of the first quarter and to an additional 15 stores in the month of November. The results from these stores have been encouraging and we're planning to roll Brothers out to an additional 30 stores in the spring.

Justice’s positive trend continued in the second quarter and we ran a three-day take an additional 20% of event over the Veteran’s Day weekend to great success. We also use this promotion of Black Friday and had the biggest day in our history, providing a great start to the holiday season.

Some more promotions used in the e-commerce channels were also very successful. There are several products been slated for the remainder of December to draw in customers and a new floor set to entice them once they are in the store. In general, we're very pleased with the continued strengthening of the Justice brand and it's future growth opportunities.

Lane Bryant ended the first quarter with sales of 1%. The (inaudible) was driven by new store growth and a 41% growth in e-commerce sales. This was offset by a comp decrease of 4%, primarily due to soft traffic. While the comp was down in niche region, we saw relatively strength outside of the mid-West and mid-Atlantic, with regard to specific categories and selection active separates woven tops and [gown] separate performed well for the quarter, with sweaters, jewelry and premium denim down versus last year.

First quarter marketing initiatives involved a variety of strategies, we add four main list, one less than last year with overall mailing quantities down 22%. For the second quarter we will have eight mailers, one incremental versus last year with the 5% planned increased in quantities and one gift with purchase which is new this year. I would also like to note, the penetration on private label credit cards is increased to 42% the strongest number for any of our concepts.

The Lane Bryant store count is 815 locations at the end of quarter versus 821 stores last year. During the quarter we opened 19 new stores and closed 9 stores. Two new store openings and 17 store closings are planned for the second quarter. Sales trend have been soft in November as a result of decreased is in traffic each of the weeks. We continue to manage our business considerably with inventories well controlled and down on a comparable basis. We will be carefully monitoring the holiday sales are looking towards one of our new promotions that starts today, the 12 days of Christmas with different offers daily to help drive both traffic and transactions.

While we are certainly in the learning mode; the opportunities we are seeing with Lane Bryant continue to be very encouraging. We are continuing our search for a new president and are hopeful that we will have someone in place early in the New Year.

Turning now to Maurices we had a strong first quarter. Sales grew 11% with the 3% comp gain. Our 4% increase in conversion couple with a 4% increased in average store sale was partially offset by 5% decreased in traffic. This gives us confidence that we have the merchandise assortment our customers want. Comp store sales increased in most regions lead by a 4% increase in the Midwest.

New stores and 61% growth in e-commerce sales help drive the total sales increase in the quarter. With respect to categories, many of our women’s apparels posted increase. Our first quarter marketing initiatives involved a variety of strategies. With three mailers, one incremental versus last year which was specifically targeted to plus customer with overall mailing quantities down 3%.

For the second quarter, we will have two mailers in the last year with 13% planned decrease in quantities. I would like to note that our Take Ten loyalty program now a year old has helped us substantially increase the size of our email database to $2.2 million. Additionally, the penetration of our private label credit card has increased approximately 38%.

On store basis now 840 locations at the end of the quarter versus 797 stores last year. During the first quarter, we opened nine new stores including one in Canada and closed one store. 13 new store openings including an additional four Canadian stores and four store closings are planned for the second quarter.

(inaudible) had a solid November and Black Friday weekend and we are optimistic that we have the right fashion and a competitive promotional plan for the balance of the holiday season. Our Dressbarn brand has a solid quarter. Sales were up 3% including a 1% increase in comps which was driven by a 3% increase in transactions partially offset by decrease in average dollars per transaction.

Comp store sales increased in most regions with strength in the southwest and west coast offsetting softness in the northwest and Midwest. We are pleased to see e-commerce continue its impressive growth with an increase of 88% for the quarter. We saw strength in careerwear, dresses and casual bottoms.

We continue to use a variety of marketing tools for the first quarter which helps to drive sales. Dressbarn continue to refine its customer targeting which allowed us to decrease total mailed quantities by 6% versus last year while maintaining sales and traffic.

With three mailings and two gifts per purchase promos the same as last year. Our electronic blushPERKS loyalty program continues to grow and has enrolled approximately 2.8 million customers in the first 10 months of the program. We increased this frequency of e-mails sent by 35% and our e-mail database of 3.1 million is 43% larger than the last year.

For the second quarter, we are anniversary in three direct mail pieces with a slight decrease in quantities as we further refine our customer targeting and maintaining a two gift with purchase promotions consistent with last year.

Finally, our private label credit card market share is now at 32% of sales. At Dressbarn, our store base is 840 locations as of the end of the quarter versus 836 last year. During the first quarter, we opened 16 and closed three. For the second quarter, we plan to open one and close 10 stores.

November was a challenging month due to the impact of severe weather in the northeast during the first two weeks of the month in addition to product mixes in our key sweater categories. Sweaters is having a difficult season and we've added additional promos and markdowns to clear to the fall inventory and we continue to evaluate our promotional opportunities for the remainder of a holiday selling season.

Now Catherines, sales grew 2% in the first quarter with comp sales up 4%. Comp store sales increased in all regions except for the southeast which was flat, strong business in the northwest. We also benefited from a 24% growth in e-commerce sales. Merchandise categories performed well for the quarter include knit sweaters and casual woven.

First quarter marketing initiatives include nine mailers, the same as last year with million quantities of 2%. For the second quarter, we will have eight mailers in line with last year with a 4% planned decrease in quantities. The penetration of our private label credit card has increased to 41%.

Catherines stores accounted for 417 locations at the end of the quarter versus 444 stores last year. During the first quarter, we closed five stores. 16 were closings are planned for the second quarter. We're pleased with our continued positive sales trends and are optimistic that this we maintaining to the holiday season. Customers continue to respond positively to Catherines’ merchandise offerings, particularly improvement in this fashion assortments and tops and bottoms.

In summary, after a solid first quarter, our brands have positioned their inventory considerably for the holiday season due to concerns about the strength in consumer spending while also having contingencies in place to maximize business.

At the same time, our shared service group has been diligent in reducing our duplicable overhead structure and continues to work to realize synergies. We're on track with these efforts and we will update you on our progress on our future calls. Thank you. Now I would like to turn the call over to Armand.

Armand Correia

Thank you, David and good afternoon everyone. Before we bring our first quarter results, it's important to note that this year’s quarterly earnings include certain cost related to the acquisition of Charming Shoppes. The company believes these costs are not indicative of ongoing operations for period-to-period comparisons. This year’s results discussed on this call are adjusted to exclude these items.

In addition, our comment on last year’s quarterly financial results have been adjusted to include Lane Bryant, Catherines and Charming Shoppes corporate overhead cost for pro forma comparison purposes. Total quarterly net sales increased to $1.1 billion.

Adjusted last year’s reported sales to include Lane Bryant and Catherines, year-over-year sales increased 7%. Comp store sales increased 1%, coming in below expectations and primarily traffic related. This represents the 15th consecutive quarter of comp sales increases.

Average dollar sale was up 2.5% with selling AUR of 5% while UPTs were down 2.5%. On the other hand our e-commerce business continues to be strong and well ahead of expectations increasing 42% year-over-year to $83 million.

Moving down to income statement, adjusted gross margin dollars excluding the impact of purchase accounting of approximately $20 million grew to $676 million in a rate of 59.4% of sales, this compares the last year’s adjusted quarterly of $612 million or 57.7% including Lane Bryant and Catherines.

The dollar increase of 10% and a 170 basis points rate improvement year-over-year was primarily due to higher realized marked up from the tailwinds of lower products, in addition to a $6 million favorable mark down reserved carried into the quarter. As to buying occupancy and distribution cost, they came in at $206 million or 18.1% of sales pretty much in line with last year as percentage sales with Lane Bryant and Catherines included.

Adjusted SG&A was $333 million or 29.3% of sales. This excludes approximately $6 million in acquisition and integration cost and compares to last year’s adjusted $300 million or 28.3% of sales to include Lane Bryant, Catherines and Charming Shoppes corporate overhead costs.

The rate increase of 100 basis points was due to deleverage below our comp sales tipping point of approximately 3.5%, along with the added corporate overhead costs from combining both shared service groups. We remain confident that we can drive down our tipping point over the next few years. As we complete a number of ongoing strategic projects, as well as reducing the combined corporate overhead cost through a number of integration initiatives already underway.

Operating income from continuing operations on an adjusted basis increased 18% to $99 million or 8.7% of sales. This again excludes the effect of purchase economy adjustments and the acquisition cost related and compares to an adjusted $84 million or 7.9% of sales last year.

Let's now review our brands’ operating income performance, which is net of fully allocated corporate overhead and excludes the impact of the one-time items previously mentioned. Justice led the way with operating income increasing to $56 million or 15.7% of sales. This compares to $54 million or 16.8% of sales last year. Lane Bryant had an operating loss of $2 million compared to an operating income of $1 million last year. This year’s results were also impacted by increased allocation of combined corporate overhead costs and excludes the $15 million in purchase accounting adjustments.

Maurice’s operating increased 23% to $30 million or 13.2% of sales compared to $24 million or 11.9% of sales last year. This was driven by gross margin increases. Dressbarn’s operating income increased to $9 million or 3.6% of sales compared to $5 million or 2% of sales last year. The increase was also driven primarily by gross margin. Catherines’ operating income increased to $6 million or 8.3% of sales compared to last year’s $1 million operating loss. This increase was due to the $6 million favorable markdown reserves carried into the quarter.

Moving on, the company's effective income tax rate for the first quarter was 32.5% and compares to 38.5% last year. This year’s rate was favorably impacted from the resolution of various income tax matters that added approximately $0.04 to earnings per share. For modeling purposes a 37.5% rate is more appropriate going forward. Adjusted net income from continuing operations increased 21% to $63 million or $0.39 per diluted shares. This compares to last year’s adjusted net income of $52 million or $0.33 per diluted shares.

Now turning to the balance sheet; we ended the quarter with $137 million in cash and cash equivalents. Of this amount approximately $115 million is overseas. Long-term debt ending the quarter was $305 million, which included approximately $300 million outstanding under our term loan which is currently at $285 million, following a $15 million prepayment and no outstanding debt currently under our $250 million revolver.

During the beginning of the second quarter, we have further reduced our long-term debt by paying off an $8 million mortgage on our Greencastle, Indiana distribution facility. In the near term, we will be using excess cash to pay down debt. Our inventory levels ending the quarter reflected continued strong inventory management and we're pleased and well positioned beginning our second quarter. Total inventory at cost were $604 million, down 4% versus a year ago $628 million which includes Lane Bryant and Catherines. Inventory per average stores was down a similar percentage, year-over-year.

CapEx for the quarter was approximately $60 million for new stores additions, [storage] models and technology projects. But fiscal 2013 CapEx spend is planned at $325 million, that includes approximately $130 million for the following two major projects. The expansion of our Columbus, Ohio distribution facility to process merchandize ships to all our stores. And last, the retrofit of our Greencastle Indiana distribution facility to bring e-commerce fulfillment in-house to handle all brands.

All in all, we were pleased with our above planned earnings results for the quarter, that were driven by increased gross margins. Looking ahead to our second quarter holiday season, we remain cautiously optimistic that we can delivered to our plan, despite some impact on our business in the northeast regions from hurricane sandy during the first two weeks of November. This primarily impacted our Dressbarn due to its concentration of stores and has required world aggressive promotions to clear excess inventory from the loss sales. We estimate sandy’s impact on loss sales for November to be approximately $12 million or 3% on a monthly comp sales, with most of this impacting our Dressbarn brand.

At this time, we are reaffirming our fiscal 2013 adjusted earnings per share guidance in the range of a $1.45 to a $1.55 excluding one-time acquisition and integration cost along with purchase accounting adjustments. This estimate is based upon various assumptions including achieving mid-single digit increased in comp sales and store openings of approximately 200 with stores closing of approximately 100.

We will revaluate this guidance following the upcoming holiday season and plan to issue holiday sales results at the beginning of January. Thank you, operator we will now accept questions.

Question-and-Answer Session

Operator

(Operator Instruction) Our first question comes from the line of Anna Andreeva with FBR Capital Markets. Please go ahead.

Anna Andreeva - FBR Capital Markets

I was hoping you could perhaps talk about the quarter to-date trends and send for quantifying the impacts from sandy, but have you seen improvement in the business I guess post Sandy into December and sounded like by division you are very pleased with Justice and Catherines, a little bit less so and Maurice’s a little bit less so obviously with Dressbarn if you can maybe talk about that.

My second question was about Lane Bryant just maybe a little bit more color what happened during the quarter with a negative 4% comp. I think you guys talked about being difficult traffic trends out there. Is this something that's self inflicted with some of the fashion [misses] maybe just share a little bit more color there.

David Jaffe

Sure. Let me start off by saying the holiday season has got a lot of green in front of us. Hopefully, it will be a very strong holiday season for us and for the industry. I think there's a lot of noise in the numbers. So we are not going to really provide any color on just the timing of this call being just the first week or so after Cyber Monday.

You know its just I think I’ve said in my last call it’s a little choppy out there and given whether its severe weather in early November some of the uncertainty going on now with the fiscal cliff, the sales that may have been brought forward by Black Friday and Cyber Monday, the fact that we have an extra weekend for Christmas. So I don't think it’s indicative to throw numbers out. So we will just hold off giving any more color on this limited time period and try and wrap it all together after the holidays down at the ICR conference we will be able to give a lot more color after the fact rather than try and give a data point now that may not really be indicative of how the season is going to play out. I'm sure you understand.

Anna Andreeva - FBR Capital Markets

And on Lane Bryant?

David Jaffe

Lane Bryant is first and foremost struggling with sales, with traffic which is impacting sales directly because all things being equal you are just getting less footsteps in there. So certainly we have opportunities in our marketing campaigns and I touched on some of that and we have a new woman that's come in less than a year ago. It’s kind of rethinking all of our marketing approaches and the rebranding you may have seen with the new Lane Bryant logos, it’s just the start. So while there was certainly some misses in certain product categories no question. Sweaters also here were pretty tough, knits weren't great, it seems to be that there were a couple of issues, not just the traffic and the merchandise together led to kind of disappointing results and as I mentioned we are watching that very carefully and making sure that we don't get back on inventory and there's new promo the 12 days of Christmas we are pretty excited about and we will be watching that carefully.

Operator

Your next question is from the line of Brian Tunick with JPMorgan. Please go ahead.

Brian Tunick - JPMorgan

So I guess two questions, I guess first as we try to think about the current quarter and we try to think about maybe the gross margin puts and takes, any thoughts on A, do you have another mark down reserve that you are carrying into this quarter and sort of what are your views of how much you think the sourcing benefits will help you and if you could give us maybe last year’s gross margin rate from Q2 to try to think that through and then secondarily just trying to think through the Justice, the segment margin pressure here. You know, was there anything you were seeing from Target or Wal-Mart or J.C.Penney as we move through Black Friday. What cause you guys to think about adding an additional 20% off? And are you seeing more pressure from pricing from those big competitors?

David Jaffe

Let me start and Armand can jump in. I will start first with Justice. We, as you may know, Brian, we saw continue to take market share. Justice is now the number one player in this seven to 12 year old growth market. So we feel really, really good about how this brand is performing. They are really doing a great job down there and very, very impressed with how they continue to build the brand and they are operating as they see fit not in response to any of the other retailers, whether it's Big Box, small box.

So the whole idea of the incremental 20% off, internally we're calling it a flash sale, is just a way to create a little bit more excitement. Maybe get a little bit more action and maybe some new customers perhaps that say my gosh, look at this, it's an extra 20% off today only. Let’s try it and it really drove volume. So while the gross margin was down because the incremental mark down, the gross margin dollars was way up.

So as you hear me say, we did a few times in the fall and very, very pleased with the results. We will see as we digest the results for the rest of the season if we pull any business forward and also as we do on e-commerce, we will be understand a lot better but right now, I would say that the initial results were extremely favorable, very, very pleased with how it drove volume and therefore further market share gains we believe. So we will wait and see and when that does settles.

Secondly, going back to your question, we really haven't seen the sourcing benefit yet. So while we have the vast majority of our sourcing at Justice and Lane Bryant and Catherines being done through our own vertical model, not the case with Dressbarn and Maurice’s and all we are building that capability Dressbarn is still very, very small kind of around and Maurice is little further ahead but not much. So I don't think we would credit any sourcing benefit to margin, there is probably a little bit carry over from the high comp last year that we are still seeing play out in the second quarter, and in general while we have these contingencies and we certainly carefully monitoring our inventory levels over the next three to four weeks.

Right now, there is no reason to expect with the exception of Justice which I just talked about, their margins would be significantly lower than last year, Armand do you want any color to that?

Armand Correia

Yeah, I think just to add a little color, I think well, I think coming into second quarter, I believe there was margin opportunity from our reduced comp cost, but again at this point given some of the uncertainty going on, I am not as confident at this point in time.

Brian Tunick - JPMorgan

And can you give us the gross margin rate from last year’s second quarter?

Armand Correia

Yeah, on a pro forma basis Brian and again this includes Lane Bryant and Catherines last year second quarter, our gross margin rate was 53.3%.

Operator

Your next question is from the line of Mark Montagna with Avondale Partners.

Mark Montagna - Avondale Partners

Just a question about retail prices. You had mentioned in the past that you had taken retail prices up across the board. Is that just the legacy brands and if so when was that and then how much was that increase?

David Jaffe

So Mark if I just look at average unit retail which is what we call our ticket price, we saw an increase across all our brands in the first quarter. So it varies from negligible to maybe 5% and if you want more detail we can give it to you. The interesting thing is that when you look at it on average selling price basis again depending on the brand we were able to maintain in some cases even increase that delta so we were, the stock price the out of the door price. So we were pleased in our mark down control which in all but the Justice case was pretty much flat or down to last year.

Mark Montagna - Avondale Partners

What I'm trying to understand is I think when you had your Investor Day in October you had mentioned across the board prices, trying to understand if that was taken last spring, just so I understand when we start the anniversary stuff like that if the magnitude was just low single digits.

David Jaffe

Yeah, I mean its certainly winding down. I'm not sure you are going to see much of an increase for the second quarter.

Mark Montagna - Avondale Partners

And then second question.

David Jaffe

The other part Mark that you got to be clear on what we are reporting is the total AUR for all categories. Really if we want to drill on it much of this increase in many cases is due to merchandise mix, not due to prices going up. So I'm giving you the global and if you want call Armand back later and he can really drill on it with you to get you an understanding of how much was price increase and how much was merchandising mix. In general I would say it’s a combination.

Mark Montagna - Avondale Partners

And then just lastly just digging into the additional 20% off at Justice, was that the sole reason for the gross margin going down at Justice.

David Jaffe

Not the sole reason, but the majority of the reason. As I mentioned we did more point-of-sale days, so if you look at the number of days or if you look at the maybe a better way to look at the number of transactions that were done with this 40 off handle, it went up. So I think its now I don't have at my finger tips but I think it was about 96% of our transactions were at the 40 off. So when you think of it that way, if it were say around 90 last year again I'm sorry I don't have the number in front of me but order of magnitude to your quote that increase would obviously increase your markdown rate, so you've got both that as well as the flash sales.

Mark Montagna - Avondale Partners

So do you think that the plan going forward is to keep distorting around traffic periods of that 20% because to me I just kind of view that as a potential slippery slope and I would hate to see you guys Justice becoming the Joseph Bank of kids retail.

David Jaffe

Well, its always a good call out, and I think that we are going to study this very carefully. The numbers were very impressive and while, I don’t want to say we're going to do this or do that because right now it has been formulated for spring. It was a very successful strategy, and while it is a slippery slope, it did create incremental volume.

Operator

Your next question is from the line of Oliver Chen with Citibank. Please go ahead.

Oliver Chen - Citibank

Earning your comments around the environment being soft and your decision to reaffirm your MS decomp, it sounded like traffic came in a little bit later than you expected. So are you expecting other comp levers to offset what happened in Q1. And then secondly, your inventories look quite attractive at that negative 4 on an adjusted basis. What do you think is going to trend going forward? One of your earlier comments was potential over inventory on the sweater side and our final question is just can you elaborate on how you evaluate promotional opportunities like how should we think about that comment? Thanks a lot.

David Jaffe

Sure. So, again I will try and go on reverse. The promos are already established for the season and we have kind of in our pocket, additional promos if they become necessary. So depending on other brand, depending on the situation, it maybe a very focused promo or it maybe a broader based promo. So I think we feel pretty good about our plan right now and I think it's just a prudent business to have a back up plan or plan B in case things stay soft for competitive reasons or just through economic reasons.

So going back to your first questions, we can let ourselves allow inventory to get out of control, and the issue with the sweaters was really at Dressbarn and little bit at Lane Bryant and we were very aggressive in doing what we need to do hit those very hard to get the unit velocity which enable us to bring the inventories back under control, and those are things that each brand does spend a lot of time in monitoring, so we don't wake up in January with more inventory or more old prior season inventory that we want, and that's a key that goes hand in hand I would say with the promos.

Your first comment was about other levers that we have to drive the business, and clearly as I answer to the question correctly, it really ties back to your last question about promos that's really the best lever we have at this time. You can always some more marketing, certain types of marketing like email or mobile text or what have you, its much harder when during December to do say a direct mail piece because its too late just being on the lead time.

So hope I covered everything if not you ask a clarifying question for me.

Oliver Chen - Citibank

Just a follow up, thank you that is extremely helpful. Regarding sweaters do you think it was in relation to weather or specific product choices or the category in terms of the difficult nature of the season, and I know weather has been a little bit mix?

David Jaffe

I really do think even though we had sweaters issues in several of our brands. I think it may have been as best a combination weather and style and at worst it was primarily our own style issues. So I think at the end of the day if you have the right products even if its warm the customer is going to want it. So I think we've got a take the head on this at least to a large extent that we didn't have the products to want it. And unfortunately this is a fashion business and you are never going to get all the categories right and for Dressbarn and sweaters happens to be a very, very important category so its disappointing to have some misses in that area as I mentioned also with Lane Bryant but we learned a lot and certainly will be back next year.

Operator

Your next question is from the line of Scott Krasik, with BB&T. Please go ahead.

Scott Krasik - BB&T

Just a question on a couple of you know you look at December and I think you comp up 12% in December for the quarter last year it was about eight in the quarter so maybe talk about how you are thinking about the business and whether its realistic to see improvement relative to the trends that you've been on ex-Sandy?

David Jaffe

Well, I think my comment earlier to Anna about the holiday sales is pertinent here as well. We are up against big numbers. We think that it’s going to be a challenging holiday season and I have been at Dressbarn for 21 Christmases and I say the same thing every holiday season. So let's wait and see. We are optimistic and we feel good about our inventory. We feel good about our marketing and at this point I tell everybody around here its nail biting season because everything is done in place and you know these last whatever two and a half weeks we've got left we just have to hope we have the good weather and the consumer confidence to come in and shop.

Scott Krasik - BB&T

And then in regards to the 20% flash sales I mean did you see just really a transference of sales through those days. Did you beat your plan, meaningfully at Justice? It seems like it was probably sort of inline.

David Jaffe

Well, that’s earlier we believe based on the analysis we've done that we created incremental sales by doing a flash sale. So there can be a lot more analysis done and we are thinking a lot more about it and we will see how the whole season plays out but the excitement of that event for that customer was tremendous and the numbers that it generated were tremendous. So it’s a very exciting for the Justice customer and the Justice business.

Certainly, we've done similar purchases in other brands and haven't had the same impact frankly. So we are going to spend a lot of time studying and learning from it and seeing where we go from here both for Justice as well as seeing it through learnings for the other brands.

Scott Krasik - BB&T

And then just two quick on gross margin. One, are you thinking about the 80, I think it was 40 basis points of gift card breakage in this Q2 margin last year?

Armand Correia

That's correct.

Scott Krasik - BB&T

Okay so that plus what you said about some of these promotions. I mean will gross margins see more pressure in Q2 than in did in Q1?

Armand Correia

You know again Scott, I will repeat the answer to the question, I was more optimistic going into the quarter and you know because we did have certain opportunities, I am little less cautious and I don't think it's meaningful that gift count breakage on the overall quarter.

Scott Krasik - BB&T

Okay, then just do you have that inventory reserve included in the 59.4% Q1 gross margin, the inventory reserve reversal?

Armand Correia

Yes, we do.

Operator

The next question is from Alex Fuhrman with Piper Jaffray. Please go ahead.

Alex Fuhrman - Piper Jaffray

You wanted to talk a little bit about the private label credit cards, you know, thank you for providing those metrics by the individual brand. I am curious to how those rates have trended over the past year just generally speaking or if there any big callouts by brand and then as we think about the private label credit cards from a marketing perspective, is the new credit customers, is that primarily a new customer to each of the brands or is that more likely to be an existing core customer, you get across over into that. Credit card and then as you look at the transaction data, there is a substantial difference in the purchasing frequency or the average ticket size that’s done on that private label credit card?

David Jaffe

Okay, lot of questions there but first, the trends at all the brands has been up slightly over the last year. So it continues to grow, you know, some a point or two, some a little less but it's been up. Armand can give the specifics that you are interested in it. We are pleased the way that it continues to grow because these are your best customers. In many cases, the new our cardholders are new to the brand and many cases the customers that want the open to buy that private label credit card gives them. So it’s a mix and as we look out and we really see this is a great marketing opportunity because these customers do spend more because they are your best customers and forget the exact numbers and a various by brand, but if you use rough numbers and say that 30% of your customers have private label cards that may account for or use their private label cards and those transactions account for 40% of your business that's the kind of the range that you will see to pick up that you get on the private label credit card.

So it’s all good and we got lots of programs in place at all the brands with the exception of Justice which has the private label credit card, but it’s not emphasized, it’s a very piece of their business.

Alex Fuhrman - Piper Jaffray

Right, that's very helpful, and then wondering if you could just touched very briefly on the sales transfer efforts that you have in place to try to capture some of that Fashion Bug revenue obviously I would image that Lane Bryant and Catherines had been working on these plans ever since Charming decided to continue Fashion Bug and probably Dressbarn and Maurice’s maybe a little bit later to try to step of their efforts but can you give us an update on really what the brands are doing to market the Fashion Bug customer?

David Jaffe

Sure, at a high level, it falls into three different buckets. So the first thing, we have been able to do is enable the Fashion Bug private label credit cards to be used at Dressbarn and Maurice’s in additional Lane Bryant and Catherines. So if you walk in and just use your Fashion Bug cards, when they go out that Fashion Bug has still got value, and second because it’s a Fashion Bug customer getting our statement with the store closed, we are going to be able to message them whether its inserts, whether its email, whether its on statement printing to go to Dressbarn or Maurices or Catherines or Lane Bryant.

And then finally, we just put in a bag stuffer that offers them discounts at the four different brands. And we will be doing some other things a little bit more aggressive as we get further down the road towards our closings and also in markets where we've got complementary stores in the same market. We are looking at doing more store level marketing with the other brands. So its very early in the game, but we've got a lot of ideas going, those are a taste of some of them and we are optimistic that we will be able to pull over about we believe that we should be able to capture 10% of those sales of the fashion bug sales, and as you know if we can pull over 10% and that's incremental about 37% or so of that drops to the bottom line.

Operator

Your next question is from the line of Janine Stichter with Telsey Advisory.

Janine Stichter - Telsey Advisory

I was wondering if you could just talk a little bit about the cadence of sales throughout the quarter, it seems like things are off to a pretty good start in August, maybe slowed a little bit in September and then when we look at the Analyst Day it seemed like they were pretty much in line with where you had wanted them to be but it seems like maybe slowed in the last two weeks of October, so I need you to comment on that and then just any other commentary on accessories at Dressbarn. It seems like not as good of a holiday season as you had all year and that's kind of been the weakling and could be a big opportunity for this holiday season.

David Jaffe

I will start to begin at the end there. Accessories with Dressbarn are doing okay. They are one of the stronger categories. Actually I'm looking here its one of our top three categories for the first quarter. So we agree that that's a great opportunity and we love to see that continue to grow. One of the old adage is in retail is that if a woman is doing economic pressure and she can't afford to go out and buy a complete outfit should go out and buy some accessories or jewelry to accent and update the one she’s got. So we would like to see that strength continue from the first quarter into the holiday season. And so Armand?

Armand Correia

Yeah I'll take the cadence of the quarter on as far as sales are concerned. We came into the first quarter with a solid August performance, mid-single digit comp increases. September, obviously was a challenging month. We believe weather obviously had a lot to do with it as well, and as we said at our recent investor call September was indeed disappointing and comps were negative, low-single digits. October came around, got a little bite of cool weather at the beginning of October and the first half of October our comps have returned back to mid-single digit increases. However as the month progressed towards the tail end of October, comps once again fell off. So that's kind of giving you the cadence of the quarter.

Operator

Your next question is from the line of Edward Yruma from KeyBanc.

Edward Yruma - KeyBanc

Wanted to drill a little bit in the improvement in Maurices operating margin. Do you think at this point you've kind of stabilized the business and they are on the road to kind of margin improvement going forward or was just a quarter where I think seem to be a little bit better than maybe quarters past?

David Jaffe

Well, certainly I would like to think that (inaudible) than the later. There is nothing lurking out there that we have concerns about. I think as we mentioned at the Investor Day, Maurice’s is looking for a CMO but the team there is doing a job of keeping the business on the track and on trend. So, we feel pretty good about what's going on there and we just brought on a new divisional in our accessories area which have been struggling. So we're thrilled to have him on board and we feel this business is performing nicely and in a good place and no reason for us to think that there is anything that’s going to change that.

Edward Yruma - KeyBanc

Got you and sorry if missed it earlier. Did you guys give an update on Brothers? I know this is one of the first Christmases where you had a reasonable number of stores kind of maybe early learnings and you know, maybe if you revisit your plant for next year?

David Jaffe

Sure it was in my comments and basically I assume we got 30 stores open for holiday and then we got plans to open up another 30 stores in the spring. So what we said is results so far had been encouraging and we're going to continue with the rollout.

Operator

(Operator Instructions) Gentlemen, it looks like you have no other questions.

David Jaffe

Alright, thank you everyone. I appreciate your support and I would like wish everyone a very happy holiday season and we look forward to seeing you in January in [ICR]. Bye, bye.

Operator

Ladies and gentlemen, that concludes today's conference. Thank you very much for joining us. And you may now disconnect. Have a great day.

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