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Saks Incorporated (NYSE:SKS)

Q4 2012 Earnings Call

February 26, 2013 9:30 am ET

Executives

Stephen I. Sadove - Executive Chairman and Chief Executive Officer

Kevin G. Wills - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Ronald L. Frasch - President and Chief Merchandising Officer

Analysts

Deborah L. Weinswig - Citigroup Inc, Research Division

Matthew R. Boss - JP Morgan Chase & Co, Research Division

Barbara Wyckoff - CLSA Asia-Pacific Markets, Research Division

Kimberly C. Greenberger - Morgan Stanley, Research Division

Paul Swinand - Morningstar Inc., Research Division

Lorraine Maikis Hutchinson - BofA Merrill Lynch, Research Division

Jennifer M. Davis - Lazard Capital Markets LLC, Research Division

Robert S. Drbul - Barclays Capital, Research Division

Paul Trussell - Deutsche Bank AG, Research Division

Dana Lauren Telsey - Telsey Advisory Group LLC

Michael B. Exstein - Crédit Suisse AG, Research Division

Operator

Greetings, and welcome to the Saks Incorporated Fourth Quarter and Year-End Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Steve Sadove, Chairman and CEO of Saks Incorporated. Thank you, sir. You may begin.

Stephen I. Sadove

Good morning. This is Steve Sadove. I'm joined on the call today by Ron Frasch, our President; Kevin Wills, our CFO; and Julia Bentley, our Senior Vice President of Investor Relations. I'd like to thank each of you for taking the time to join us.

First, let me note that some of the comments on the call today, as well as some of the information presented in our release related to future results or expectations, are considered forward-looking information within the definition of the federal securities laws. The forward-looking information is premised on many factors, and actual consolidated results might differ materially from projected information if there are any material changes in our assumptions or in the various risks related to our industry and our company. For a description of the risks and assumptions related to these projections, please refer to the release in our filings with the SEC, including our most recent Form 10-K/A.

Today, we're going to discuss the financial results for the fourth quarter and fiscal year ended February 2, 2013, our outlook for 2013 and update you on certain other business matters. At the end of the call, we'll be glad to respond to your questions.

Before I turn the call over to Kevin to discuss the financial results, let me take a couple of minutes to give you my overall assessment of the quarter and the year. We posted a modest comp store sales gain of 0.7% for the 13 weeks ended January 26, 2013. The performance was essentially in line with our expectation of relatively flat comp store sales for the quarter and was on top of a solid 7.7% comp store sales increase in the fourth quarter of 2011. Our comp increase for the 52 weeks totaled 3.2%, which was on top of a very strong 9.5% comp store sales increase in 2011.

As we discussed on last quarter's call, our fourth quarter sales were negatively impacted by Hurricane Sandy, which caused significant disruptions to our very important northeastern markets and to saks.com. For the year, sales and earnings were somewhat below our initial expectations. In addition to Hurricane Sandy, continued macroeconomic concerns and election and fiscal cliff distractions weighed on our results, particularly in the second half of the year. Even though 2012 was a challenging year due to the external factors I just mentioned, it was also a year of meaningful progress and transformation for Saks. We continue to execute our core merchandising service and marketing strategies while building critically important omni-channel capabilities to position us for the future. We made headway on several important initiatives.

We began work on Project Evolution, our multiyear transformation of an investment in our information technology systems to facilitate an omni-channel shopping environment for our customers.

We began expanding the omni-channel experience for our customers by adding iPads to our stores; testing buy online, ship from store; and adding select store-only inventory items to our saks.com offerings.

On the marketing front, we began using our enhanced consumer analytics and insights to drive marketing effectiveness through targeted and personalized initiatives. In January, we relaunched our SaksFirst loyalty program, expanding the benefits and eliminating the spending threshold to participate in the program. We made meaningful year-over-year improvements in our in-store customer service scores and continued to receive high marks for our online service.

We identified several key Saks Fifth Avenue stores with high growth potential and supported their growth initiatives with strategic capital investments, including the expansion of 10022-SHOE in the New York flagship; renovations in Chevy Chase, Troy, Bal Harbour, St. Louis and Beverly Hills; and the addition of over 100 vendor shops throughout the country. We continued the rationalization of our Saks Fifth Avenue real estate, closing 3 additional stores in 2012, bringing the total close since 2010 to 10. We have since announced 2 additional planned closings. At OFF 5TH, we accelerated our growth strategy by opening 5 new stores and 1 replacement store and renovating 2 locations. And we meaningfully grew saks.com by adding to the breadth and depth of our product offerings, further improving our website shopping experience, enhancing our digital marketing initiatives and enriching our mobile experience. We improved the efficiency of our saks.com operations with a midyear opening of our state-of-the-art robotic fulfillment center in Tennessee.

We have a lot to be proud of, and the progress we've made on these initiatives in 2012 has laid a strong foundation for the future. Let me ask Kevin to provide more color on our 2012 operating results and our balance sheet.

Kevin G. Wills

Thanks, Steve, and good morning, everyone. For the fourth quarter, we recorded net income of $20.4 million or $0.13 per diluted share. Those results included net after-tax charges totaling $8 million or $0.04 per share related to asset impairment charges, store closing expenses, a noncash pension settlement charge and debt extinguishment. Excluding these items, we recorded net income of $28.4 million or $0.17 per share for the fourth quarter. This compares to net income of $29 million or $0.17 per diluted share for certain items in last year's fourth quarter.

For the full year, we recorded net income of $62.9 million or $0.41 per share. Those results included net after-tax charges of $9.5 million or $0.05 per share related to asset impairment charges, preopening costs associated with the company's new fulfillment center, store closing expenses, the aforementioned noncash pension settlement charge, the aforementioned loss on debt extinguishment and the reversal of state estimated income tax reserves deemed no longer necessary. Excluding these items, we recorded net income of $72.4 million or $0.46 per share for the fiscal year. This compares to net income of $72.8 million or $0.44 per share before certain items for the prior fiscal year.

All the numbers we will discuss today exclude the call-out items which I just mentioned and that are outlined in detail in today's release. In addition, all the current year income statement numbers that we will discuss, with the exception of the comparable store sales, are based on a 14-week fourth quarter and a 53-week year. We estimate that the extra week in fiscal 2012 added $0.03 to earnings per share for the current year fourth quarter and the fiscal year.

As Steve noted, we posted a 0.7% comparable store sales gain for the 13 weeks ended January 26, 2013. On our third quarter earnings call, we commented that over time, we expected the impact of Hurricane Sandy to dissipate and that sales trends in December and January would return to more normalized levels, similar to what we had experienced in the third quarter. This was what occurred as the combined December, January sales trends were significantly above those in November.

Several merchandise categories showed sales strength during the quarter, including women's contemporary apparel, advanced European designer apparel and shoes; men's contemporary apparel, shoes and accessories; handbags; and fragrances. As we expected, the New York City flagship store sales lagged the company-wide performance for the quarter, due in part to the impact of Hurricane Sandy. Additionally, we experienced a slowdown in tourist traffic in the New York store during the quarter.

For the fourth quarter, our gross margin rate increased 10 basis points to 37.7% over last year's fourth quarter rate of 37.6%. This improvement modestly exceeded our gross margin rate expectation of flat to a 50 basis point decline on a year-over-year basis. For the full year, the gross margin rate was 40.6% compared to 48 -- 40.8% last year. This annual decrease was due in part to our previously disclosed underperformance of certain classic women's apparel vendors, combined with our outside inventory investments in key high potential growth areas like women's shoes. We knew these investments could create some near-term gross margin pressure but believe they were the right long-term strategic decisions for the company.

As a percent of sales, excluding certain items, SG&A expenses were 23.8% in the fourth quarter this year compared to 23.7% in the prior year fourth quarter and 25.7% for the full year compared to 25.3% last year. The year-over-year deleverage in the fourth quarter exceeded our initial expectations as we incurred incremental marketing expenses to drive fourth quarter sales and to maximize our omni-channel opportunities.

In addition, with the outsized growth of saks.com, we incurred increased fulfillment and shipping expenses. The full year SG&A deleverage was primarily driven by incremental expenses to support our omni-channel and Project Evolution initiatives as well as the additional marketing expenses. Additionally, I would note that we are experiencing some SG&A rate pressure due to the outsized growth of saks.com. Saks.com has a higher SG&A but a lower depreciation and rent structure compared to our traditional store base. The direct model, by definition, has a lower fixed asset investment but a generally higher selling and marketing base due in part to free shipping, search engine expenses and site development and maintenance. We expect the penetration of saks.com to continue to increase over time and this will create some natural headwinds in our ability to leverage SG&A.

Inventories at fiscal year end totaled $822.9 million. This represents a 14% increase over the prior year on a total basis and a 12.2% increase over the prior year on a comparable stores basis. Year-end inventory levels were distorted due to the later year-end driven by the 53rd week, with more receipts in the first week of February this year than in the last week of January last year. It is not uncommon for merchandise receipts to be more concentrated early in the month. Then consequently, due to the 53rd week in fiscal '12, we may report higher levels of inventory at each quarter end as we go through 2013. Adjusting for this receipt timing, our comparable store inventories would've increased by approximately 5.7% at year end. The 5.7% increase is above our fourth quarter sales trends, but recall that our fourth quarter sales were impacted by a depressed November performance due to Hurricane Sandy. Based on our December and January sales trends and our go-forward sales expectations, we remain comfortable with the overall level of content and currency of our inventory.

At fiscal year end, we had approximately $80.4 million of cash on hand and no direct outstanding borrowings on our revolving credit facility. During the quarter, we repurchased $88.3 million of common stock, approximately 8.5 million shares at an average price per share of $10.35. For the year, we repurchased $167.4 million of common stock, approximately 16.5 million shares at an average price per share of $10.13.

Also during the quarter, approximately $28.8 million of our original $120 million, 7.5% convertible notes was retired after being converted to equity by holders. The conversion resulted in the issuance of approximately 5.2 million shares of common stock and the outstanding balance of the notes was reduced to $91.2 million.

Funded debt including capitalized leases, senior notes and the debt and equity components of the convertible debentures at February 2, 2013, totaled approximately $373.9 million, and debt to capitalization was 24.8%, and this is without giving effect to cash on hand. We remain very comfortable with our capital structure, our liquidity position and overall financial flexibility.

Net capital spending for the fiscal year totaled approximately $114.8 million, in line with our expectations. This amount is net of tenant allowances and represents our net cash outlay. For financial reporting purposes, the gross cash outlay will be shown in the statement of cash flows as tenant allowances are reflected in the changes in working capital.

Let me now turn the call back over to Steve. Steve?

Stephen I. Sadove

Thanks, Kevin. The change that's occurring today in the retail industry is quite extraordinary, and the rate of change seems to be accelerating. We have spent and are continuing to spend considerable time and resources in evolving to an omni-channel organization and believe we have the right strategies and personnel in place. The evolution to an omni-channel model requires much different capabilities than we've had in the past and increased near-term investments. Those investments include information systems, people and marketing, to name just a few. We fully expect to generate increased growth and profitability in the future, but the required omni-channel foundational investments will place pressure on our near-term profitability growth. We're managing the business for the long term and are committed to making investments that best position our company and Saks Fifth Avenue brand for the future.

As we look ahead to 2013, we expect the external environment to remain somewhat volatile. There are several macro factors such as higher tax rates on the more affluent and the unknown resolution of pending fiscal matters that could create additional uncertainty, particularly in the first half of the year. We view 2013 as another transformational year in which we'll enhance our omni-channel capabilities while also continuing to focus on our core strategies and improving the prospects of each of our business channels. In 2013, specifically our primary areas of focus, will be our omni-channel transformation, the successful implementation of our first phases of Project Evolution, delivering outsized growth in saks.com, evolving our merchandise assortments by modernizing our selection to making them more relevant to today's customers, improving our marketing effectiveness, further enhancing the service experience of our customers and increasing the productivity of our Saks Fifth Avenue store base. Ron and I will spend a few minutes talking about each of these focus areas.

In terms of omni-channel and technologic -- technology investments, we're well on our way to offer seamless omni-channel shopping experience to our customers. As you know, Project Evolution will deliver new merchandising, finance and human resource systems and capabilities on an integrated application suite for the entire business and will supply us with a modern technology platform to support omni-channel for the future. Project Evolution will transform our business from a people, process and systems perspective to provide our customers with any channel, any device, anytime shopping. We're implementing the systems conversions in a very methodical, phased approach through 2016, and we're progressing with the conversions on schedule.

In the fall of 2012, we began testing buy online, ship from store functionality. This enables us to fulfill online orders for items sold out online but in stock in our stores. Last fall, we also began putting select store only styles on saks.com to increase assortment selection online and sell-throughs of existing products. We've been very pleased with the results, and these tests are continuing -- and we are continuing to expand these capabilities. We're doing this by leveraging the technology investments we're making. Over time, this will lead to increased sharing of inventory across channels, which should result in higher inventory productivity and efficiency as well as improved reporting and analytics. We've also recently made some important organizational changes to support our omni-channel approach to the business, appointing key merchandise managers, planners and marketing staff to roles with both store and saks.com oversight. The structure will better allow us to execute a collaborative merchandising and marketing strategy. Since this is a multiyear project, it will take some time before we realize the full benefits from the investments. We anticipate some benefits in the second half of 2013, with more expected to be realized in 2014 and beyond.

In terms of saks.com, we expect that our outsized growth will continue, especially as we further embrace omni-channel. Over the last several years, we've invested a substantial amount of resources in the dot-com organization: infrastructure, site design and site content. These investments are generating and should continue to generate dividends. We're continually striving to elevate and expand our product offerings and drive key opportunity merchandise categories such as contemporary apparel, shoes and handbags. We're constantly working to enhance the product information on our site and improve our website shopping experience to increase conversion and average order and lower return rates. We're focused on expanding our digital marketing initiatives and our successful tests conducted in 2012, elevating our creative and editorial features and further personalizing the online shopping experience. The percentage of sales generated from mobile and tablet devices is growing steadily, and we're enhancing and have further upgrades planned for these mobile capabilities. And we shipped to well over 100 countries, and this piece of the business continues to expand.

Let me now turn to OFF 5TH, where we'll continue to focus on growth through our real estate expansion and renovation strategy. We continue to be presented with many attractive opportunities for new OFF 5TH stores throughout the country, but we remain very selective in our expansion process. We've also widened our reach to locations outside of conventional outlet malls into neighborhood center locations. We have plans to add 7 new stores and 1 replacement store and to renovate 4 others in 2013. All new and newly renovated stores are designed in our innovative "luxury-in-a-loft" format. Currently, 27 of our 65 stores are in this format. In the aggregate, our new and newly renovated stores continue to outperform the remainder of the OFF 5TH store base. We see opportunity to drive sales in our existing OFF 5TH stores by growing our pillar brands, adding new categories of merchandise and further expanding our private brands, which now comprise about 25% of the business. We will also continue to execute more targeted marketing efforts and to drive our MORE! loyalty program, which was just introduced 3 years ago and now has nearly 4 million customers enrolled. And we're continually elevating our service levels at OFF 5TH.

Let me ask Ron to talk about some of our merchandising, marketing, service and store initiatives for 2012.

Ronald L. Frasch

Thanks, Steve. As Steve noted, we've made some important organizational changes in the merchandising and marketing areas that will facilitate our omni-channel approach to the business. As we drive our merchandising, marketing service initiatives, omni-channel is top of mind in becoming part of our DNA in how we think, manage and execute. Our store and online marketing teams are collaborating with each other and working with our vendors differently as an omni-channel retailer. We remain committed to driving sales and expanding our gross margins over the long term through the execution of our merchandising strategies.

We are further strengthening our powerful signature businesses like shoes, handbags and women's and men's contemporary apparel, both online and in our stores. Core brands are still an important part of our business, and our focus is to continue collaboration with these brands so that their offerings will move in the direction of our customers' needs. Our customers are gravitating towards special, fashion-forward product and away from more classic merchandise. We are continually introducing new emerging designers, further driving the uniqueness of our offerings and making our assortments more relevant to today's customers. Several designers we considered emerging just a short time ago have definitely emerged. We're still using the "9-box" grid process as we seek to deliver the right balance of "Good, Better, Best" merchandise to each store and for saks.com. And our assortments have been carefully edited with the Saks point of view. And of course, we are continuing to focus on increasing our overall assortment of differentiated and exclusive merchandise. Our private brands remain a part of our long-term differentiation strategy and are a good complement to our branded offerings.

On the marketing front, we've been working on a number of important initiatives, but first let me briefly highlight some fourth quarter adjustments that we made to our promotional calendar. Due to Hurricane Sandy's impact on our business, we extended our November SaksFirst Triple Point event from 3 to 14 days to give our customers a chance to shop our event. Conversely, we reduced the level of our promotional activity during Black Friday and decreased our door buster discount from 70% off last year to 60% off this year. Overall, we've made few changes to our promotional calendar during the quarter and stayed the course during what we saw as an increasingly competitive promotional environment.

Our big news is our SaksFirst loyalty program. Last month, we relaunched SaksFirst in order to broaden our membership reach and add new benefits to drive greater customer engagement, loyalty and spend. By removing the $1,000 threshold previously required to enroll in the program, we expanded our SaksFirst program to all Saks cardholders and tripled the number of SaksFirst members. In the spirit of omni-channel, we also expanded the program to our OFF 5TH customers for the first time and added free ground shipping from both in-store and online to all SaksFirst members. The relaunch has been supported by associate training and a comprehensive media advertising and in-store campaign. SaksFirst has long rewarded our best customers with more points and higher value gift cards than other retailers. Now by enhancing the offering and expanding our reach to a more broader base of customers, SaksFirst has clearly become one of the most rewarding loyalty programs in the entire world of luxury retail.

To celebrate our SaksFirst launch in our New York flagship store, we executed a week of firsts to drive increased excitement and awareness of the program. We offered a week of daily in-store promotions, including a SaksFirst launch celebration that we communicated via newspaper advertising, PR, e-mail, social media, in-store displays and on our website. We are now rolling out a week of firsts in other markets as well. We're very excited about our new SaksFirst program and believe it can have an impact on customer engagement in 2013 and beyond.

We are continuing to leverage our customer analytics and are testing a number of targeted marketing programs using our customer database as well as the databases of our external partners. We are also further evolving our digital marketing programs, including an expansion of our reach through mobile and social media in order to drive our traffic, both online and store. We saw strong response to our targeted and personalized e-mails in the fourth quarter, and we launched a number of holiday social campaigns that generated high level of engagement and buzz from our social community.

Local marketing continues to be an important focus in stores responsible for their local market business development and customer growth plans. Local business development plans and the local marketing concept have become part of every store's growth strategy, and the stores now have more data, tools and analytics to effectively drive this process. And as we continue to explore and embrace newly differentiated marketing concepts, we are very excited about Saks' participation in the second season of NBC's Fashion Star, which debuts next month.

On the service front, our goal is to provide a distinctive shopping experience to all of our customers, no matter what channel they choose to shop. We are very focused on elevating our customer's in-store service experiences. Our sales associates have embraced our selling initiatives and know they're offering consistent personal and memorable experiences, builds loyalty and that loyal customers spend more. We are always striving to elevate the service experience that we offer our customers.

Year-over-year, our customer service scores have seen steady improvement. Over the past few years, we have made substantial investments in providing our associates with the right resources, including technology, extensive training and the associate business development process to deliver on our service promise. We want to build personal relationships, create excitement and fun and derive special moments with memorable experiences to all of our customers, with particular emphasis on our top and high potential customers. This year, we have created many memorable experiences for our very best customers, deepening our relationships, building loyalty and increasing share of wallet. Of course, we also will continue to enhance our website shopping experience to improve conversion and drive sales into our stores. Our site continues to rank among the very best in customer service.

Turning to the stores, our focus over the last few years has been to improve the productivity of our best stores through targeted capital investments and to exit underperforming locations as promptly and economically as possible. We have made significant progress on all fronts, and the overall health and quality of our real estate portfolio is much improved. Since 2010, we have closed 10 stores and have announced the planned closings of 2 more over the next year. These closings allow us to simplify the business, reduce working capital and capital spending requirements and to more effectively focus our resources.

Going forward, we will continue to focus on maximizing the productivity of our most productive stores and to increase market share and to look for additional opportunities to rationalize our store base where it makes sense. We've had, and continue to have, several exciting store renovation projects in the works. This year, we will relocate our Chicago men's store, which is in a separate space across the street from our main store, into our main store. This space will occupy the sixth and seventh floors of the store and the space with merchandise assortments will set us apart in this important market. And we are just putting the finishing touches on our Beverly Hills men's renovation. This space will include the largest men's shoe offering in the West Coast, an impressive denim bar and several new renovated vendor shops. We will renovate handbags and men's in Boca Raton and the women's designer floors in Boston and Atlanta and finish up renovations in Chevy Chase, Bal Harbour and Troy.

In addition, by the end of the year, we will have completed the addition or renovation of over 100 vendor shops and other stores across the country, providing an enhanced shopping experience for our customers. For example, in ready-to-wear alone include Alexander McQueen, Celine, Proenza, Helmut Lang and Phillip Lim shops in several locations. Of course, many of our renovations and new vendor shops will continue to focus on our main 4 signature businesses of shoes, handbags and accessories. We will expand our presence in Sarasota by opening an 80,000 square foot store at University Town Center in 2014, and we're still on track to open a store in San Juan in early 2015. Steve?

Stephen I. Sadove

Thanks, Ron. We outlined our assumptions for 2013 in this morning's press release. Keep in mind that variation from the sales trends, up or down, could materially impact our other assumptions. Let me go over a few of the highlights. Comp store sales are expected to grow in the 3% to 5% range for the full year. Comp store inventory levels are expected to be up in the 3% to 5% range throughout the year. As Kevin previously noted, the quarter-end inventory levels may fluctuate due to the timing of receipts early in each month.

Based upon current inventory levels and composition in our promotional calendar and permanent markdown cadence, we expect the gross margin rate for the full fiscal year to be 20 to 40 basis points above the 40.6% rate achieved in 2012. We expect year-over-year gross margin rate improvement to be realized in both the first and second halves of fiscal year. As a percent of sales, year-over-year SG&A expenses, excluding certain items, are expected to increase by approximately 30 to 50 basis points for the full fiscal year. We expect that the deleverage will be concentrated in the first half of the year, with more deleveraging expected in the first quarter than the second quarter.

SG&A dollar increases are expected to arise primarily from the incremental variable costs associated with the planned sales growth, principally sales associate commissions, increased marketing and investment spending to support the company's saks.com growth and our omni-channel initiatives. We'll be adding additional personnel and expanding other capabilities, like our photo studio capacity, in order to support the growth and increased demand associated with our omni-channel efforts. We began to ramp up these investments in 2012, and we expect this incremental spending to continue into 2013. All of the required saks.com and omni-channel investments that we've discussed will limit SG&A leverage in the short term. However, we're confident that this is the right long-term strategy for the company as it will enable us to improve the customer experience and optimize the efficiency of our inventory investment.

Other operating expenses, rent, depreciation and taxes other than income taxes, are expected to total approximately $336 million to $340 million for the full fiscal year. The increase over the prior year primarily will be driven by higher depreciation on incremental capital spending, increased rent expense related to Project Evolution and the new OFF 5TH stores and higher taxes other than income taxes, primarily payroll, sales and use taxes and property taxes. About $5 million of the year-over-year increase relates to Project Evolution.

Net capital expenditures are expected to total approximately $140 million to $150 million for the full year. Approximately $75 million relates to Saks Fifth Avenue store renovations and new vendor shops and approximately $55 million relates to Project Evolution and other information technology enhancements. The balance primarily relates to OFF 5TH and maintenance capital. The planned increase over the 2012 spending level of approximately $115 million is principally driven by incremental Saks Fifth Avenue and OFF 5TH store renovations and information technology spending. This increased level of capital investment reflects our confidence in the business and the belief in the potential return on investment of these opportunities.

We continue to be optimistic about the future of luxury retail and about our business. We remain committed to executing our core strategies, but we're also remaining nimble and responsive as we evolve to an omni-channel organization in order to meet the rapidly changing demands of our customers. I'm confident that we have the right team, focus and strategies to achieve our long-term goals.

Operator, we'd now like to open the call up to questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Deborah Weinswig with Citigroup.

Deborah L. Weinswig - Citigroup Inc, Research Division

So you talked a little about a slowdown in tourist traffic during the quarter. Can you talk if that was a broad slowdown or just from specific countries? And then are you experiencing an increase in e-commerce traffic and sales in international markets as the consumers are traveling a lot?

Stephen I. Sadove

I think you're saying part of it was driven by Hurricane Sandy and people just were stymied during that early part in November. But I think you've seen a general slowdown. If I were to look across the board and I'm looking largely at our MasterCard, Visa data, but what you saw was a growth that was in the high-single-digit range internationally earlier in the year. And it went down towards a lower single-digit growth rate in the latter part of the year. You still saw very outsized growth being driven by China, Russia, some of the Latin countries like Brazil. But the European tourism slowed down quite a bit and I think you are in the negative range in a large number of the European countries. So overall, I think that it was -- you're still seeing some growth but it was -- and I think the primary area that you saw the slowdown was in New York, more so than other markets. If I were to look at Southern Florida, for example, you had very robust tourism and a few of the other gateway cities were stronger than New York. If I look at the dot-com side, you clearly see a growth in the international side of that business. We've seen rapid growth. We're shipping to over 100 countries right now and you're seeing off of a relatively lower base. You're seeing a very robust growth there. But overall, I feel okay about where things are, but I do certainly see a slowdown on that international tourist business.

Deborah L. Weinswig - Citigroup Inc, Research Division

And then Steve, you mentioned the rate of change accelerating in omni-channel. How are you staying on top of the competitive environment? And how do you think about online versus off-line with regards to competitors?

Stephen I. Sadove

Well, look, I think the environment is changing and if omni -- there's no question in my mind that omni-channel is the future of where retail is, that there's a brick-and-mortar play and a dot-com play. The customer who shops both channels still remains much more productive than either channel. And I think omni-channel, whether it's the more productive use of inventory with the buy online, ship from store, being able to move inventory across channels, that's continuing to grow. I think that you're seeing a consumer who is very savvy. They're moving across channels. They're looking in terms of not just from a shopping perspective, but they're using information while we're running a blog or an editorial. Our video online is having an impact in the stores. And the consumer is getting information from a whole series of sources. So what's happening here is it's very important to be able to actively play in the multiple channel space. And one of the reasons why we're so intent on continuing to make the evolution, the Project Evolution investments is that we need to have the technology platform that's going to allow us to move that inventory around to be able to understand and take advantage of that customer. And it means you have to be able to react. I think that the -- each competitor is looking differently at how they're playing in the space. We think that the combination of brick-and-mortar and the Internet is the place to -- it's a winning strategy, and being able to seamlessly understand the consumers' needs and market to them that way is going to be the right place for the longer term.

Deborah L. Weinswig - Citigroup Inc, Research Division

Okay. And then last question, you mentioned that in-store customer service scores are increasing. What -- I don't know if you had the key drivers behind that.

Stephen I. Sadove

Well, I think that we've had enormous focus on how do we improve the customer experience in the stores. And about 2 years ago, we put into all of our compensation, from me on down to the lower levels of the organization, a component of our compensation tied to improvement in the service scores, which are blind, anonymous customer ratings on a store-by-store basis. And we've seen some remarkable improvements in terms of the customer experience. So it's training, it's focus, it's making it -- it's discipline, it's making sure that the customer comes first and that we continue to train and set high expectations and standards relative to service. And it's not just in the store. I would say the same thing in terms of online. Even though service is defined differently, we have a very, very high level of focus on how do we provide the best possible experience for our dot-com customer also.

Operator

Our next question comes from the line of Matthew Boss with JPMorgan.

Matthew R. Boss - JP Morgan Chase & Co, Research Division

So it's -- on that, excluding the hurricane, early in the -- excluding the hurricane early in the quarter, your comps rebounded to basically mid-single digits December, January. Can you talk about the cadence for the quarter, what you're seeing at the high end? And also, what's the best way to think about the market wealth effect versus higher taxes here?

Stephen I. Sadove

Well, there's no question, if we look at the fourth quarter, that November was a tough month. And it was not just because the hurricane had us closed and we were probably hit harder than most retailers because we have so much of our business tied to the Northeast and to the Florida markets, and our customers were going back and forth. We estimate it was more than 50% of our business was affected by the hurricane. And then it also affected our supply chain because our vendors didn't have product, and in terms of the flow of product, came at a different timing. So you clearly have that November impact, and we did see a rebound in December and January relative to the business. I think as we look to the guidance that we've given for 2013 of the 3% to 5% type of a growth rate, that's more in line with what we were seeing pre, as well as after the November -- the hurricane period. I think your question as it relates to the fiscal -- in terms of what the impact, clearly, there's a little bit of a malaise out there in terms of what's the impact of the tax rate increases, the fiscal -- the sequestration, what's it all mean. My estimate, it's nothing precise. If you look at our customer and it's an affluent customer and you look at the tax rate increases, I'm guessing that for our core customer, they probably saw an 8 to 10 percentage point increase in their tax rate. Having said that, they are still very much focused on their net worth, and the stock market's held up quite well. So you have a number of buffeting factors that are -- affect, some going positive, some going a little bit negative. But when you pull them all together, that's the kind of expectations that we have for the course of '13.

Matthew R. Boss - JP Morgan Chase & Co, Research Division

Great. And then -- your door-to-door omni-channel technology goes live in 3Q. You talked about the expenses particularly weighted to the front half of the year. How should we think about the expenses after the launch? Should we expect to see a return on the top line leverage, more so if spending moves from infrastructure to maintenance? And also, can you speak to any potential efficiency opportunities with the changes that you're making?

Stephen I. Sadove

Yes, Matt, I think it's an important question, and we're actually already live. We said we'd be fully implementing -- implemented by the third quarter. We actually started the process late in the fourth quarter of last year. And we're up and running. We're adding large numbers of -- I'm not going to give specific numbers but we're adding online capabilities from ship to ship from store, a number of items every week. We're adding the photo studio capacity because we've got to shoot more items. So you're going to be starting to see the benefits of that, and it's going to be an increasing rate of benefit as you go through the year. I think that it's, just call it fully implemented by the third quarter is accurate, but we're actually in the implementation and ramp-up phase right now. And the early results that we're seeing are extremely encouraging, and we know that some of our competitors have been doing that through the course of 2012 with good results. And for those of you who aren't quite close to it, imagine -- I used the example, if we buy 10 ties that I'm wearing online and 100 of them in the store, we ran out of it online and now we'll have the capability of shipping from the store and it has both the revenue impact potentially because that store item might not have sold at full price. So you may have a revenue impact, as well as gross margin impact, because it may not be a markdown that you have to take in the store. So we're already doing it, we're seeing very good results. And I think that it's going to materialize as a gross margin benefit as we go out throughout the course of the year. And I think that longer term, it has a meaningful impact on the gross margin. As it relates to, Matt, your question relative to cost, we're investing a lot of money in this omni-channel initiative, and I'd love to be able to say, hey, we're going to leverage SG&A in the very near term but isn't happening because we're making what we think are the right foundational investments. We needed to move to a platform. This Oracle platform that we're moving to is requiring a lot of time investment, dollars, people. We have a lot of the organization focused on it. I think that once we're through the hump, and this year is a big hump, last year and this year are the 2 big hump years in terms of the spending, we're going to be able to -- there's still spending over the next couple of years, but the bulk of it is now. There's going to be efficiency. There's going to be duplication of effort. We'll be able to start saving on both -- on resources, whether it's external resources or people resources that can be reallocated. So you're going to see that starting to benefit over the next couple of years. But I think that we ought to assume that this year, we've got to get through this relative to investing to give us that longer-term capability.

Operator

Of our next question comes from the line of Barbara Wyckoff with CLSA.

Barbara Wyckoff - CLSA Asia-Pacific Markets, Research Division

I have a question. Can you hear me?

Stephen I. Sadove

Yes, we hear you.

Barbara Wyckoff - CLSA Asia-Pacific Markets, Research Division

Okay. I have a question for Ron about the accessory business. Can you talk about handbags and shoes strength? Can you talk about the performance of the eighth floor since you expanded the square footage in the assortment there? You didn't mention jewelry and watches in fourth quarter. Could you talk about the penetration about the various categories, the accessories, jewelries, cosmetics bucket, the women's shoe bucket? And then just -- I'd love to really have some kind of a sense in terms of online, how big it is to your total business shift and then also OFF 5TH.

Stephen I. Sadove

Okay. Barb, before Ron jumps in, I mean, some of the -- we're not going to break out the online sides of the business. We just don't give it. We look at it at an omni basis, especially if you're sharing inventory, moving products back and forth. It just doesn't make sense for us to be breaking out the numbers. Ron can comment on categories overall. We're not going to break out specific numbers of the New York shoe expansion. But Ron, why don't you give a flavor for -- in the categories?

Ronald L. Frasch

Yes, I'll start with jewelry because it's one you called out. The fourth quarter for large transactions, the number of large transactions, which we identify as transactions over $75,000, began to slow down. We saw a decrease in the pace of them, although for the first 3 quarters of the year they were quite strong. In terms of overall accessory business, between our concession and owned handbag business, we had a very favorable -- we got a favorable fourth quarter and felt good about it. But know that we've got to -- we're very challenged in space allocations in stores. And so we're spending enormous amount of time making sure that the brands we have are hitting our productivity expectations. And if they're not, we're moving to make decisions about their future presence in the stores. Eighth floor shoes, I saw really nice development of a much more contemporary "modern designer" shoe area, which was the one area I always felt on the eighth floor shoes that we haven't really gotten our arms around as well as we should. So we are very pleased with how that developed. And also realized that we're not done with that floor yet. We probably have at least 2 more significant projects that will be going on hopefully by the end of the spring season, opening an Alexander McQueen accessory shop on the eighth floor and opening up a Christian Louboutin accessory shop on the eighth floor. And we're continuing to look for other enhancements that we can make to the floor due to its productivity.

Operator

Our next question comes from the line of Kimberly Greenberger with Morgan Stanley Smith Barney.

Kimberly C. Greenberger - Morgan Stanley, Research Division

Steve, I'm wondering, as you look out to 2014, do you think that that's the year that we might start to see some SG&A leverage? And then if you can just remind us about your long-term margin goals, I think they're around 8%. And what are the drivers that are required to get you to that long-term goal?

Stephen I. Sadove

Yes, thanks a lot. We're not giving -- going to give specific guidance for 2014 yet. But I think you're going to start to see the SG&A leverage improve as you go into '14. We're over that -- '13 will be the crunch year relative to the investments that we're -- the incremental investments that we're having to make. I'd still hold that the 8% operating margin is our target and it's in the cards. Clearly, to get there, you've got to have top line growth. And whether it's in the mid-single-digit type of range, you're going to have to see some decent level of top line to get us there. I think that there's substantial gross margin improvement -- all of -- everything that we're seeing, for example, in the area of buy online, ship from store, better productivity utilization of the inventory, are leading us to believe that there's a good opportunity there. As we look towards development of exclusive brands, our own brand, we look at the editing of the portfolio, we look at the hold and flow initiatives. All of these are supportive of what we see as gross margin opportunity. And if you couple that with what we think is the SG&A management of expenses after we're over this comp, I think that there's going to be good SG&A leverage that we can get. Kevin's point relative to the natural -- again, it's geography, but the SG&A, because the expense structure is a little different on the direct and we're seeing such rapid growth on the direct side of the business, on a reported basis, it'll limit a little bit the SG&A leverage. But I do think that over time, you're going to be able to see it.

Operator

Our next question comes from the line of Paul Swinand with Morningstar.

Paul Swinand - Morningstar Inc., Research Division

On the CapEx line, you gave some details about the incremental spend and you've also talked about some humps in spending in the upcoming year. The $140 million, $150 million rate, is that lumpy, too, in the next 2 years? Was that -- what's the -- I'm trying to drive at what's the long run CapEx rate. Are the store renovations ongoing and so you always have some and the online spending is just going to just -- every year the theme? Or how do we think about that long term?

Stephen I. Sadove

I think that the part of the $140 million to $150 million is a little bit -- some of it was a flow out from a -- a little bit of it from '12 to '13. I don't think that you're going to see $140 million to $150 million on a long-term basis. I think that you're probably -- again, I'm not going to give specific numbers. If I had to guess, it'd probably in the $120 million to $130 million number. But in my -- that's just a ballparking it right now. We have some major projects. The Chicago men's store renovations is a major project that we have. Ron outlined several of them that are on the docket. I think that the technology investments last year, this year, are the 2 biggest CapEx years relative to Project Evolution. That's close to $100 million CapEx over time. And we'll have, by the end of this year, we'll have been well over half of that spend has been -- will have taken place. So if I were modeling this out over time, I would not expect to see the level of spend that you're seeing this year.

Paul Swinand - Morningstar Inc., Research Division

Okay. Great. That's very helpful. And then you mentioned that -- you think the SaksFirst program, you talked a lot about it. You mentioned that you thought it was the best in the business. Can you give us a little more color on -- everybody's doing more loyalty with their online programs right now. Can you compare and contrast it maybe to some of your competitors and why you think it's better?

Stephen I. Sadove

Well, the loyalty -- there's a lot of ways of looking at the loyalty program. First of all, it is -- it's -- we believe it's an extremely strong program. It has a tiered redemption rewards card for the consumer. So if you spend more, you get more. It's predicated on a 2, 4, 6 type of model. So our very high-end spenders are getting 6% of their purchases back in a -- in the form of a gift card. So at a high spending level, that's relatively rich compared to some other program. It also has exclusive benefits relative to early access and exclusive experiences that consumers can have. The change that we made really relates to what I call more of the entry level. We've always had a very, very strong program for what we would call our diamond, platinum customers. The -- what we didn't have was as robust a program for the entry-level peers. So what we're doing is, by eliminating that entry threshold, offering some of the benefits to that lower level tier customer, we think we're enhancing it also by adding free shipping to all of the cardholders and that's the benefit of being part of the program. We used to have it so that if you were buying from our dot-com business and were a cardholder, you would get free shipping. But if you were in the stores, you didn't. And as we move to omni-channel, that just didn't make any sense. So by bringing the programs together and making a core benefit of the card, being free shipping anytime, we think that that's a major benefit also.

Paul Swinand - Morningstar Inc., Research Division

Great. And real quick, could you tell us the start and finish dates in Chicago?

Stephen I. Sadove

The timing on Chicago?

Paul Swinand - Morningstar Inc., Research Division

Yes.

Stephen I. Sadove

I'm not so sure that we've announced the timing. I think it will be later in the year.

Kevin G. Wills

It is already underway though.

Stephen I. Sadove

Yes, we're in the midst of construction right now. I don't think we want to announce exactly when it's going to be open.

Operator

Our next question comes from the line of Lorraine Hutchinson with Bank of America.

Lorraine Maikis Hutchinson - BofA Merrill Lynch, Research Division

Steve, what was the driver of the fourth quarter gross margin upside versus your expectations? And then what are the factors that will -- that drive your higher gross margin guidance in 2013?

Stephen I. Sadove

Yes. I think we had a little -- I think it was a little bit better than we had expected, largely because we're a little less promotional than we thought we would be. As Ron mentioned in his remarks, we had to extend the point event because of Hurricane Sandy but we decreased the amount of the after-Thanksgiving promotion. And we held pretty true to the year ago in our overall promotional cadence. So I think the fact that we're a little bit less promotional than we had -- we're estimating as we went into the quarter was the primary driver. Kevin, you want to make any comments?

Kevin G. Wills

Yes, Lorraine knows that, obviously, forecasting gross margin performance is not an exact science because a lot of factors go into it. It includes what Steve mentioned, promotional impact, a little of vendor support and mix in the business. And when you factor it all in, we just wound up doing a little bit better than we'd expected for the fourth quarter. And as it relates to next year, if you recall, we pointed out this year, in 2012, that we saw some gross margin rate pressure associated with some of the more classic, traditional ready-to-wear areas and we're trying to adjust and modify that on a go-forward basis, as well as we've made some significant investments in some of our high-growth areas like shoes, which put some pressure in 2012, and hopefully we will not be up against next year. So that, combined with what we talked about, some ok [ph] systems enhancements, increased productivity and inventory leads us to expect some gross margin rate expansion in 2013.

Operator

Our next question comes from the line of Jennifer Davis with Lazard Capital Markets.

Jennifer M. Davis - Lazard Capital Markets LLC, Research Division

A couple of clarifications regarding comp guidance. Should we assume higher comps in the second half given the easier compares? And Ron, I had a clarification on a comment you made about the over $75,000 sales. Was that a trend that you just saw in jewelry or was that overall?

Stephen I. Sadove

Jennifer, let me first -- in terms of the comps, on the 3% to 5%, I think you'll probably see a little bit stronger comps in the second half of the year than you will in the first half of the year. I don't know if that's going to be meaningfully different but it's, I think, probably a little bit driven because we had Sandy and that we know the impact that that had. So there's going to be a natural benefit in the second half of the year coming off of Sandy. Ron, did you want to comment?

Ronald L. Frasch

No, the -- I'm sorry, Jennifer, the question about jewelry was -- could you say it again?

Jennifer M. Davis - Lazard Capital Markets LLC, Research Division

Oh, you talked about a little bit of a slowdown in the fourth quarter of the over $75,000 sales. Was that just jewelry that you were referring to or was that in general?

Ronald L. Frasch

Right. Yes, just referring to jewelry, yes.

Jennifer M. Davis - Lazard Capital Markets LLC, Research Division

Yes. Okay. All right. And then I was wondering if you guys can talk about comp metrics a little bit, maybe just looking at December and January or excluding Sandy, was it -- how would you break out the comp metrics in terms of maybe ticket and traffic? Are you still seeing kind of the rotation towards higher price point items? Is that what's driving the comp?

Stephen I. Sadove

Jennifer, basically, it's a trend that you've been seeing over the course of the year. It's being driven largely by ticket going up, in terms of the average price, in terms of people gravitating towards a little bit higher price points. The units wouldn't be seeing the increase.

Jennifer M. Davis - Lazard Capital Markets LLC, Research Division

Okay. I just thought maybe you might have seen a larger increase in that, I guess, towards higher price points if you've seen a slowdown in tourism. But anyway, also one last one, sorry, the growth of direct and maybe some of the slowdown in the New York flagship store, are you seeing -- is direct becoming your -- or is it your largest store yet or will it be next year? Do you want to give metrics around that?

Stephen I. Sadove

No, I don't want to get into the specifics. First of all, it's not the largest store today. So I'll -- [indiscernible] New York store is bigger than our direct business, certainly, when you look at net sales. But it's critically important and growing very quickly. And it's much, much -- certainly much bigger than our #2 brick-and-mortar store. So if you were to look at it that way, I think that the opportunity there is enormous but I -- back to your question on ticket, you wouldn't -- you really didn't see a major shift going on with -- as it relates to the tourism impact affecting the ticket and units. Essentially, the trend that you were seeing earlier in the year has continued through the end of the year, which is it's being driven by some price, average ticket price and that units are not the driver.

Operator

Our next question comes from the line of Bob Drbul with Barclays.

Robert S. Drbul - Barclays Capital, Research Division

A couple of questions. Just on the store closures, has the omni-channel business really changed or altered your ideas and hurdle rates around store closures? And how far into the store rationalization program do you believe that you guys are now?

Stephen I. Sadove

Bob, I think that we're well into the program. Does omni-channel affect your thinking at all? Yes, maybe a little bit. I think that you still have to look at each store on a one-off basis in terms of the profitability, its prospects, what does it do for you, how hard is it to manage and we -- I think that, as we said in the -- the perspective that Kevin provided, we've closed 10 stores. We have announced another 2 that are going to close. That's a pretty substantial number off of our store base. People always ask me if we are starting this from 0, how would you do it? And the number would probably start in the 30s as opposed to where we are today. If you're doing this all over again, it wouldn't be 1 store or 5 stores. We have a lot of very important profitable stores. Omni, I think, and the direct business enhances the experience. We have some very small stores where we're getting an enormous play out of the omni-channel and the iPads and the utilization of technology, and the stores are very profitable. So there's no reason to shut them down or close them. Store closures, and we've been we're working very hard at this over time, it's really a combination of profitability but it's also the lease term and working with the developers. And we have good relationships with the development community and we partner with them, and in most cases, we're able to find mutually beneficial solutions to getting out of underproductive or unprofitable stores.

Operator

Our next question comes from the line of Paul Trussell with Deutsche Bank.

Paul Trussell - Deutsche Bank AG, Research Division

Steve, you are opening 7 stores, 7 new OFF 5TH stores in 2013. I believe that's the most you've added in one year since 1997. Could you just give us how you view the longer-term opportunity in the outlet channel? And as OFF 5TH becomes a bigger percentage of your overall business, how will that impact the various line items from a margin standpoint?

Stephen I. Sadove

Thanks, Paul. Look, we feel very good about the growth opportunities for OFF 5TH. If we looked at 2012, we opened up 5 new stores. We did 2 renovations, 1 replacement. As we look at '13 right now, we're looking at 7 new stores and 4 renovations, 1 replacement. And we think there's a lot of opportunity there. We have about 65 stores today. I don't know what the longer-term number ought to be. We think that we have competitors in the outlet space that are -- have a lot more than that. We're going to be measured in terms of how we approach it. We do think that there are 2 different kinds of opportunities, one's the traditional outlet center like the Woodbury Commons or the Sawgrasses of the world. And then there's the neighborhood center like the Westbury one that we've opened in Long Island that are highly successful. And this "luxury-in-a-loft" format, as we said in the remarks, are outperforming the more traditional heritage stores. And so we think there continues to be opportunity. Are there going to be a certain -- we don't have a specific number that says by x year, we're going to have y number of stores. We're not looking at it that way. As long as we continue to see good opportunities, probably have a run rate -- 7 is the most we've done, as you appropriately said. And if we continue to see great opportunities, then we'll keep going after that kind of a number. But it's really going to be predicated on finding the right kind of opportunity. I don't think it's going to have a material impact on a line item look at the P&L. We don't break out the profitability, but I don't think it's going to have a meaningful shift on the line items.

Operator

[Operator Instructions] Our next question comes from the line of Dana Telsey with Telsey Advisory Group.

Dana Lauren Telsey - Telsey Advisory Group LLC

As the discussion around omni-channel becomes more important, how are you thinking about fulfillment costs? How will it change? And any update on mobile flash sales, what you're seeing? And then just lastly, how do you adjust inventory buys for these new channels?

Stephen I. Sadove

No, I -- good questions, Dana. I think that mobile continues to be an increasingly important part of the business. We're seeing very rapid growth in both mobile and tablets. We don't break out the specific numbers but tablet is -- we're -- if you were to look at other competitors that have mentioned it, our numbers aren't going to be out of whack with that. So it's becoming an important part of the business. And I would say that within mobile, tablet is the core of where we're going relative to the business. Yes, I think that omni-channel is affecting how we think about the buys. We just announced the reorganization and Ron and the merchants at the senior level, the GMMs are now thinking in an omni perspective overall strategy. We're keeping buying organizations that are separate between the full line and the direct business because we think we need to have individual focus. But there's going to be a lot more synergy, collaboration across the channels and an opportunity to have focused buys by channel. I think that it will naturally lead to a -- an evolution of what we put into each of the channels. But I think the beauty of omni-channel and ship from store is, basically, you can let the consumer tell you what you want it to be because you have the ability to put it online and ship it from store so you don't have to put the inventory in the warehouse. And we're seeing much more in the way of thinking through "Where is the best place to put the inventory?" And some of it might be in the store. Theoretically, you could take the New York shoe assortment and take elements of it and ship it on -- ship it from the store to the online customers. So I think the consumer over time will tell us and dictate how we want to adjust the merchandise buys. What was the -- was there another piece to your question?

Dana Lauren Telsey - Telsey Advisory Group LLC

Flash sales, how do you --

Stephen I. Sadove

Fulfillment cost. I think one of the things that you're flagging, especially as we've done the changes with the loyalty program, is that free shipping is becoming -- we're already largely in free shipping and it's becoming an important component of -- is part of the cost structure. We're close to being free shipping anyway. In terms of the overall cost of the impact, was not material in terms of going to the free shipping when we went to the SaksFirst program. But I think that's just the cost of doing business in terms of the free shipping.

Kevin G. Wills

And over time, Dana, you mentioned considerable costs go up. And as Steve pointed out, to the extent we're more productive with the inventory, filling out of the store, et cetera, then you would hope that we'd have less residue at the end of the season. You'd save on the gross margin rate on that side.

Operator

Our next question comes from the line of Michael Exstein with Crédit Suisse.

Michael B. Exstein - Crédit Suisse AG, Research Division

Steve, I really have 3, and I'm sorry it's run long. But very quickly, can you give us an expectations for credits contribution as a counter account in terms of the SG&A? Is that a factor? Number one. Number two, can you sort of give us a feel for what the sales like x the New York area, what the sales trends was outside the New York area? And finally, can Kevin give us a little tutorial in terms of share count? Because we're real confused as to how to think about that going forward.

Stephen I. Sadove

All right. Let me start. I'll talk about New York credit and let Kevin talk about the credit and on the share count. I think that the reality is that up until the last, let's call it, the latter -- as we went into 2012, New York had been an outperforming store. And we had seen that for quite a long period of time. I would characterize New York as we went into -- through the fourth quarter, especially because of the impact of Hurricane Sandy, was an underperforming store that we have to deal with. And that's something that's different than we've had to deal with in the past. So we're dealing with it. But New York, partly tourism, partly just the -- what happened with the closure, maybe there's some elements of Wall Street fiscal cliff, it's hard for me to determine. But I think you have a little bit weaker business in New York than you'd see in some of the other markets.

Kevin G. Wills

Michael, on the question on the credit contribution, we don't break it out separately in detail, but there was not a material change year-over-year in the credit contribution.

Michael B. Exstein - Crédit Suisse AG, Research Division

And how about your expectations for this year when you talked about the pressure on SG&A?

Kevin G. Wills

Yes, we would expect '13 credit contribution to be in line with the '12. It's going to depend on interest rates as well as credit penetration, but we would not expect a material change year-over-year. Your question on share count. In the -- it can be somewhat confusing. We tried to break it into 3 different pieces. One, as you probably know, anytime we have a loss in a quarter, we use the basic share count and traditionally, we've had a loss in the second quarter. In the other quarters, if net income is above $16 million, you should basically assume that that the 2 converts will be dilutive and, therefore, they will be included in the share count. And on an annual basis then, if your net income is [indiscernible] than about $64 million, the 2 converts will be in the share count. As we noted earlier on the 7.5% converts, almost $29 million of that was converted last year. So you've only got about the $90 million of par value left on that convert. The 7.5% convert matures in December 1 of this year, '13. The convert process on that is $5.54 a share. Given where our share price is today and our outlook for 2012, while we can't say exactly what the stock is going to be but based on where we are today on our outlook, we're assuming that the remaining par value of that convert will convert to equity. So that -- those shares will be included post December 1 on a fully diluted basis.

Operator

Mr. Sadove, we don't have further questions at this time. I would now like to turn the floor back over to you for closing comments.

Stephen I. Sadove

Thank you very much, operator. I want to thank all of you for joining us on this fourth quarter call, and we'll look forward to talking to you at the end of next quarter. Thanks very much.

Operator

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time this time. Thank you for your participation, and have a wonderful day.

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