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Ascena Retail Group (NASDAQ:ASNA)

Q2 2013 Earnings Call

March 04, 2013 4:30 pm ET

Executives

Allison Townsend

David R. Jaffe - Chief Executive Officer, President and Director

Dirk A. Montgomery - Chief Financial Officer and Executive Vice President

Analysts

Janet Kloppenburg

Scott D. Krasik - BB&T Capital Markets, Research Division

Anna A. Andreeva - FBR Capital Markets & Co., Research Division

Neely J.N. Tamminga - Piper Jaffray Companies, Research Division

Brian J. Tunick - JP Morgan Chase & Co, Research Division

Oliver Chen - Citigroup Inc, Research Division

Luke S. Whorton - KeyBanc Capital Markets Inc., Research Division

Mark K. Montagna - Avondale Partners, LLC, Research Division

Janine M. Stichter - Telsey Advisory Group LLC

Steven Louis Marotta - CL King & Associates, Inc., Research Division

Dennis C. Van Zelfden - SunTrust Robinson Humphrey, Inc., Research Division

Operator

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

Allison Townsend

Thank you, Regina, 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 in 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 plans 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 R. Jaffe

Thank you. Good afternoon, and thank you for joining us to discuss our fiscal second quarter. I'd like to welcome Dirk Montgomery, our new CFO, to his first Ascena earnings call. We're pleased to have the benefit of his leadership and experience in retail.

On today's call, I'll recap our second quarter highlights. Dirk will give you a detailed financial review, including guidance, and then I'll update you on our strategic objectives.

The backdrop for the second quarter was a tough one for specialty retail in general. As you know, traffic, especially in the Northeast, was hurt by significant weather events, including Hurricane Sandy. Economic concerns, including budget policy issues and tax increases, took a toll on middle-income consumers impacting their behavior. We expect those concerns to continue into spring. In the holiday selling season, it was generally soft.

So with that in mind, let's look at the overall financials. Ascena had softer-than-expected holiday sales, with total comp sales of plus 2%. A consolidated decline of 1% in our store comps reflected the external backdrop I just described, with sales plan misses at dressbarn, Lane Bryant and maurices, partially offset by a strong 27% increase in e-commerce, which continues to become a more important part of our business. Our sales growth of 44% to $1.2 billion in the quarter was driven largely by the inclusion of Lane Bryant and Catherines.

Adjusted earnings per share for the second quarter were $0.26 compared to $0.40 per share in the same quarter last year. Some of this year-over-year decline will be addressed as we eliminate redundancy and integrate Lane Bryant and Catherines over the next 2 years. Our biggest profit miss across the brands was in dressbarn, which had merchandising issues, which have been addressed.

I'd like to walk you through each of our 5 brands in a little detail. First, Justice, which has remained trend-right and performed well for holiday. Sales in the second quarter were up 9%, with store comps up 4%, e-commerce up 24%. Transactions were up 5%, and we saw 1% increase in dollars per transaction. With regard to specific categories, denim, woven tops and lifestyle pieces were standout performers.

We took the cadence of promotion up versus last year at Justice with a marketing strategy that continues to focus on communicating value through both targeted loyalty programs and storewide point-of-sale events. Justice executed additional POS events during the quarter, including slash sales, in which an additional 20% off was offered for a short period of time on top of the 40% off the entire store promotion. The 3 slash sale events during the quarter generated incremental sales and margin dollars. Combined with increased circulation of direct-mail catazines, these marketing strategies were very successful in driving business during the quarter.

We opened 7 Justice stores, including one in Canada, and closed 10, ending the quarter with 958 stores versus 917 last year. New store performance for Justice is in line with our expectations and generating attractive returns. I would also like to note that we added Brothers to 15 stores in November, bringing the total dual-gender store count to 30. The results from these stores continue to be encouraging, and we are planning to roll Brothers out to an additional 50 stores in the spring. We are very pleased with the continued strengthening of the Justice brand and its future growth opportunities.

Turning to Lane Bryant. As we announced, we are very fortunate that Linda Heasley has joined Lane Bryant as President and CEO. We couldn't be more excited to have such a talented and experienced leader for this brand. Linda brings with her a strong track record of performance from her time as President and CEO of Limited Stores, as well as her previous senior leadership roles at Timberland, Limited Brands and CVS. I look forward to working with her as she and her team revitalize the Lane Bryant brand.

In the quarter, Lane Bryant felt the traffic decline from the soft retail environment and ended the second quarter with sales down 2%. Comps were down 5%, offset by new store growth and 17% growth in e-commerce sales. With regard to specific categories, our selection of active separates, denim and panties performed well for the quarter, with sweaters, bras and knits separates down versus last year.

During Q2, we adapted a more focused promotion strategy, and we reduced the level of overlapping offers that individual customers receive. This strategy, combined with lower seasonal inventory levels and improved initial markups, allowed us to grow Q2 gross margin dollars over last year despite the lower comp. We'll continue to refine those improvements and promotion strategy in the spring. I would also like to note that the penetration of our private label credit card increased to 40%.

The Lane Bryant store count is 789 locations at the end of the quarter versus 802 last year. During the second quarter, we opened 2 new stores and closed 28. We are very excited about our new flagship that opened last week on 34th Street in Manhattan. Initial customer feedback has been very positive, and we encourage you to visit the store.

Turning now to maurices. A traffic decline of 6% affected the business, while total sales growth was 7% due to new stores and strong e-commerce growth of 51%. Store comps were down 1% in the quarter. With respect to categories, our plus-size woven tops, branded denim and dresses performed well. With respect to marketing, we replaced our post-Christmas mailer with the November prospect mailer. Our Take Ten loyalty program continues to grow, and we've increased the size of our email database to 2.9 million. Additionally, the penetration of our private label credit card increased over last year and is now at approximately 37%.

Our store base is now 850 locations at the end the quarter versus 803 stores last year. During the second quarter, we opened 13 stores, including 4 in Canada, and closed 3 stores. New store performance for the first half was in line with sales and profit targets in aggregate and generating healthy returns.

Now to dressbarn, our most challenging business in the quarter. Total sales were down 4%, including a 6% decrease in comps. Even so, e-commerce continued to be the bright spot in the business with an impressive increase of 60% for the quarter. Given its high concentration of stores in the Northeast, this is where Hurricane Sandy had the greatest impact.

From a merchandising perspective, the majority of our sales and margin dollar miss was driven by weak sweater performance. Fall sweater assortment had a higher fashion penetration that did not resonate with our consumers. We have adjusted the fashion mix for the spring and next fall and are confident we'll have the right sweater offering. On a positive note, dresses, knits and casual bottoms performed well in Q2 and are all key departments for the spring season.

With regard to marketing, we ran similar programs to last year, but we have refined our customer targeting and improved our mailer response rates despite soft sales. Additionally, enrollment in our blushPERKS loyalty program, now a year old, has increased substantially to 4.6 million customers. I'll note that our private label credit card market share is now at 31% of sales.

At Catherines, our smallest brand. Sales grew 3% in the quarter, with store comps up 6% and 19% growth in e-commerce sales, partially offset by fewer stores. Merchandise categories that performed well for the quarter include sweaters, knits, sleepwear and bras. The Catherines marketing program was focused on driving key items and novelty tops. The direct-mail program had one additional event this year, with 8 in total, and the penetration of our private label credit card has increased to 42%.

The Catherines store count is at 409 at the end of the quarter versus 435 last year. During the second quarter, we closed 8 stores.

Before I turn the call over to Dirk for a deeper dive on the numbers, I'll just say that this was obviously a challenging quarter. We know we have opportunities to improve our merchandising, marketing and promotion strategies to drive top line and are aggressively addressing those opportunities. I am pleased that we responded to the challenges we faced quickly once we saw the problems and transitioned well to spring assortments. Our brands are well positioned for this economic climate by offering attractive fashion at a value to consumers who will continue to be under pressure.

Now Dirk will provide an update on financial highlights.

Dirk A. Montgomery

Thank you, David, and good afternoon, everyone. I'm delighted to be joining the call today as the new Ascena CFO and looking forward to interacting with all of you in Ascena and the Ascena investment community.

Before reviewing our second quarter results, it's important to note that this year's quarterly earnings include certain acquisition and financing-related costs. We believe these costs are non-indicative of ongoing operations for period-to-period comparisons. Results discussed on this call are adjusted to exclude those items, which are more fully described in the earnings press release we issued today. In addition, my comments on last year's quarterly results have been adjusted to include Lane Bryant, Catherines and Charming Shoppes overhead cost for comparison purposes unless otherwise noted.

Total quarterly net sales increased 44% to $1.24 billion. Of this amount, Lane Bryant and Catherines accounted for $333 million or roughly 90% of the growth versus last year. As David mentioned, soft holiday sales and a challenging external environment resulted in comp store sales trends below our expectations at down 1%. Average selling price was down slightly, and UPTs were up slightly versus last year. In terms of sales by region, clearly, the Northeast was significantly impacted by weather, including the impact of Hurricane Sandy. There were no other significant regional sales variances for the quarter.

Moving down the income statement. Gross margin was $662 million or 53.5% of sales. This compares to last year's adjusted Q2 of $664 million or 53.8% of sales. The 30-basis-point decline was primarily due to increased markdowns and promotional activity associated with softer-than-expected sales results. Total buying, occupancy and distribution costs were $198 million or 16% of sales compared to last year's adjusted second quarter of $195 million or 16.3% of sales, reflecting modest leverage on our higher sales volume.

Total SG&A was $349 million or 28.2% of sales. This compares to Q2 last year of $329 million or 27.5% of sales on an adjusted basis. The increase of 70 basis points was primarily due to the duplicative overhead structure created by the acquisition, and we expect to significantly reduce our overhead over the next 3 years.

Adjusted operating income from continuing operations decreased 9% to $75 million or 6.1% of sales. This compares to the prior year adjusted second quarter of $83 million or 6.9% of sales. Adjusted quarterly operating income results by brand, fully loaded for corporate overhead costs were as follows: Justice's operating income increased 18% year-over-year to $91 million or 20.6% of sales. This compares to prior year Q2 operating income of $77 million or $18.9 million of sales. The increase was due to comp sales above the tipping point and flow-through from improved gross margin versus last year.

Lane Bryant came in with an operating loss of $15 million compared to an operating loss of $14 million in Q2 of last year. Improvements in gross margin were more than offset by increases in SG&A due to the additional layer of corporate overhead structure driven by the acquisition.

maurices' operating income increased 5% versus last year to $28 million or 11.5% of sales compared to prior year Q2 operating income of $26 million or 11.8% of sales. This was primarily driven by gross margin dollar increases from sales growth.

dressbarn came in with an operating loss of $25 million or 11.4% of sales compared to a prior year Q2 loss of $3 million or 1.5% of sales. The incremental loss was driven by a decrease in sales and gross margin rates due to higher markdowns and promotional activity. The dressbarn profit decline was the major driver in our total overall decline in operating income versus last year. As David mentioned, while some of this decline was driven by weather and environment, we've addressed the merchandising issues and feel confident that we are in good shape for spring.

Catherines' operating loss was $3 million or 4.0% of sales, flat compared to the prior year operating loss. Catherines grew both gross margin dollars and rate above last year, driven by solid top line growth. Similar To Lane Bryant, the additional layer of allocated overhead from the acquisition offset gross margin dollar growth to result in a flat loss versus last year.

The company's effective income tax rate for the second quarter was 39.4%. This compares to a rate of 36.7% in last year's second quarter. The rate for the period was in line with our expectations. The higher rate compared to last year reflects the absence of higher tax benefits relating to a higher level of the accounting for discrete items last year.

Adjusted net income from continuing operations decreased 33% to $43 million or $0.26 per diluted share. This compares to last year's net income of $64 million or $0.40 per diluted share.

Turning to the balance sheet. We ended the quarter with $326 million in cash and cash equivalents. Of this amount, approximately $130 million is overseas. We ended the quarter with long-term debt of $277 million, all under our term loan, with no revolver drawdown. During the quarter, we prepaid approximately $20 million of the outstanding principal balance of the term loan. After the quarter, we prepaid an additional $16 million in principal under the term loan, reducing its balance to $260 million currently.

Due in part to favorable credit market conditions, in February, we launched an initiative to explore alternatives to our existing credit agreements, including a potential increase in the size of our ABL facility from $250 million to $500 million. If we implement this increase, we will prepay the term loan using cash on hand and by borrowing under the new facility. If successful, we anticipate that this transaction will lower our combined borrowing cost well in excess of the anticipated fees to complete the transaction while providing greater flexibility.

Our inventory levels ending the quarter reflected responsive inventory management and solid January sales that cleared fall goods to acceptable levels. Our fall goods sell-through rates in February were in line with expectations, and we feel our inventory mix is well positioned as we head into the key spring selling months.

Total inventory at cost was $499 million, up 1% versus last year's adjusted balance of $494 million. Total units increased 5% year-over-year. The increase in inventory dollars and units is largely related to an earlier shift in the timing of receipts for spring inventory, primarily at Justice.

CapEx for the quarter was approximately $37 million. Full year fiscal 2013 CapEx is projected at $350 million, which includes approximately $130 million for the major multiyear projects we noted previously: the Etna, Ohio distribution facility; our e-commerce fulfillment center in Greencastle, Indiana; and our IT transformation to a common platform across all brands. In terms of unit development, we expect to finish the year with new unit openings in the range of 180 to 200 openings and expect to close between 100 and 150 stores.

I'd now like to provide some thoughts on our outlook for spring and full year 2013. We expect the challenging external environment for middle income consumers that we saw in the second quarter to continue into spring. We agree with industry experts, including a recently published National Retail Federation report, that the middle income consumers' behavior has been impacted by the payroll tax increase, uncertainty about the labor market and the general unease created by federal budget and tax issues.

February was softer than we expected, but we're hesitant to put too much importance on this. Traffic was down, driven by unseasonably cold weather and some significant winter storms. We were also up against tough comparisons from 2012 when weather was warmer. As a result, our total quarter-to-date total comp sales for Q3 were up slightly. March and April make a disproportionately large contribution to spring sales and margin dollars across all our brands, particularly our missy brands due to big Easter and Mother's Day shopping occasions. Although we only have early reads on spring assortment performance, we are encouraged by solid selling results on spring receipts.

Given that backdrop, we have reduced our sales plans for spring and are now expecting comps store sales of flat to 3%, and e-commerce sales were approximately at 25%. In response to our revised sales plans, we have adjusted spring inventories to be well positioned for the sales range and are implementing tightened expense management and accelerated productivity programs.

Based on these assumptions and actions, we are reaffirming our fiscal 2013 earnings guidance of $1.20 to $1.30 per share, which excludes onetime acquisition-related integration, restructuring and purchase accounting costs as a result of the Charming acquisition.

That concludes my financial comments, and I'll now turn it back over to David.

David R. Jaffe

Thanks, Dirk. Beyond the season and seasoned management of the business, we're intently focused on moving forward our strategic priorities for driving sustained long-term sales and profit growth. We've already talked a lot about top line trends today, and I'd like to close the call with an update on our plans to drive margin improvement and our progress on building talent to drive higher performance.

As we noted in October at our Investor Day, we have 3 major strategies for achieving our long-term goal of operating income margins of 12%. First, we continue to see $50 million in overhead reduction opportunities from the Charming acquisition. Based on progress for the second quarter, we're confident we will meet or beat our fiscal 2013 goal and are working toward continued savings in 2014.

Second, we identified synergy opportunities across the brands of at least $37 million annually in logistics, services and technology. We have 6 major initiatives underway to achieve those savings that are progressing well and should begin to generate savings late 2014.

Third, we are making progress from the early stages of creating a global sourcing organization to leverage scale across all brands. The first stage of this effort is adding talent, and we've been phasing design resources at both dressbarn and maurices. We also recently announced that Ronnie Robinson will lead our Ascena global sourcing team, and he is in the process of building his team.

In summary, we're making very good progress on our efforts to improve margins. None of this gets accomplished without leadership and talent, and we've strengthened our executive leadership team over the last 6 months in a number of positions. While we've talked about Dirk and Linda, and I just mentioned Ronnie, our sourcing leader, we've also filled other key roles. We announced a new CIO, David Johns, last week, a top talent with great experience. At dressbarn we have also recently recruited a number of highly talented leaders in merchandising, marketing, design and real estate. I look forward to seeing a very positive contribution from these seasoned leaders to our growth t as they transition into their new roles over the coming months.

Our leadership team is looking forward to growing the business and driving higher margins. We're very encouraged by the opportunities we have to create superior shareholder returns over the long term.

Thank you. And I'd now like to open up the call to your questions.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question today comes from of Janet Kloppenburg with JJK Research.

Janet Kloppenburg

David, I just wanted to ask you and Dirk a little bit about the spring trends. It sounds like you're doing a little bit better. Your comp is up slightly right now. I think maybe you were down 1% for the second quarter. Does that up slightly include the Internet? Or is that just the store -- is that the store and Internet combined or just the store comp?

David R. Jaffe

Thanks for asking that question, Janet. What we've done is segue over to a view of total comp sales, including brick-and-mortar and e-commerce, and on a quarterly basis, we do break it out for you. And I would just say that the general waiting hasn't changed much in terms of e-commerce's impacts. So on a total basis quarter-to-date, which for us is a 4 weeks of February and the 8 days of fiscal March, were up slightly.

Janet Kloppenburg

Okay. And then have you seen the trend improve as we've started to approach the Easter season? Or has it been sort of up-and-down and no real trend?

David R. Jaffe

Well, I think we can all acknowledge that the beginning of February was tough across the industry. I think we all read the same articles and saw the Wal-Mart leak and all had the same weather issues, et cetera. So I wouldn't say that our trends were any different than I'm sure what you've seen out there.

Janet Kloppenburg

Okay. Just a couple more. On the synergies that you talk about, the $50 million -- I'm sorry, the $50 million in overhead reductions, you said that you might -- I think that's for this year. Is that right?

David R. Jaffe

No. Actually, Janet, it's over a 3-year period.

Janet Kloppenburg

Over a 3-year period. Okay. But is there an opportunity for better-than-expected results for your plan this year, David?

David R. Jaffe

On the overhead reduction?

Janet Kloppenburg

Yes.

David R. Jaffe

We hope so. It won't be dramatic. But the $10 million is out there, without Dirk kicking me under the table here, but I'd say we're tracking slightly above that number right now.

Janet Kloppenburg

Sorry, Dirk. And then Dirk, this one's for you. On the consideration of a new ABL, when would you make that decision? And would that have impact on your capital cost for the second half of fiscal '13?

Dirk A. Montgomery

Yes, it absolutely would. We're in the process of trying to get the deal done. So we're hopeful that we can get it done as soon as possible. Obviously, it's subject to a lot of market conditions. But we're optimistic, and we actually think it's going to generate an accretive interest expense save this year.

Janet Kloppenburg

And that's not included in your guidance at this time?

Dirk A. Montgomery

Yes, I would say, as part of our confidence in maintaining the $1.20 to $1.30 guidance, frankly, we're expecting that we're going to get a benefit from the refinancing.

Janet Kloppenburg

Okay. So some of it is, and I wasn't sure if that meant that maybe guidance could improve once the ABL was complete.

David R. Jaffe

No. I think we consider that as an offset to the softer sales.

Janet Kloppenburg

To the sales change, to the tick down and the comp estimate. Is that fair?

David R. Jaffe

Yes.

Janet Kloppenburg

Okay. And then I just have one more question on dressbarn's outlook. It sounds like things are going better there here in the spring season, and I know just how big the Easter season is to that brand. I'm wondering if we should expect a forecast that margins would improve year-over-year for dressbarn, the operating margin in this season versus last year?

David R. Jaffe

I should hope so, Janet. Jesus. It was such a disaster in the fall. And while we've talked about that ad nauseam, I've seen no reason why we can't have a more normalized spring. It's very early in the season for dresses as we start approaching Easter. We are looking at the tea leaves of the early selling and don't see any warning signs. Obviously, Janet, you and I have been in this game long enough. If there's a blizzard the Easter week, that would not be good for dressbarn's dress sales, as well as the other brands.

Operator

Your question is from Scott Krasik with BB&T Capital Markets.

Scott D. Krasik - BB&T Capital Markets, Research Division

Welcome, Dirk.

Dirk A. Montgomery

Thank you.

Scott D. Krasik - BB&T Capital Markets, Research Division

Sure. So you didn't call out Justice as a negative on the gross margin. So is this -- were you able to leverage even in your merchandise margin rate the flash sales? And is that something that we can expect going forward if you continue them?

Dirk A. Montgomery

Well, why I don't speak to the margins and David can speak to the flash sales and how it works into their overall marketing strategy. Justice did see a slight improvement in gross margin rate. And obviously, they had improvement in gross margin dollars for the quarter, and I think we were happy that those promotions specifically drove incremental sales and gross margin dollars.

David R. Jaffe

So Scott, to the second part, we are planning more flash sales very surgically for spring, and we believe that we'll see the same results that we saw this fall, this spring. And we're being very thoughtful about how many days or when to position it and watching our gross margin carefully to see the impact, both in dollars and rate. But so far, we've been very pleased. And if rate were to shrink just a touch as you would expect with the additional 20% off, we feel we're going to more than make up for it in terms of total dollars.

Scott D. Krasik - BB&T Capital Markets, Research Division

Okay, that's helpful. And then I think you were shutting down Fashion Bug at the end of January or early February. Shouldn't there have been -- wasn't there supposed to be a big benefit to S&GA just from that and taking down their mainframe and a lot of that? Have we seen that play out yet in the P&L?

David R. Jaffe

Scott, that's discontinued operations.

Scott D. Krasik - BB&T Capital Markets, Research Division

Okay. But even from a corporate standpoint, wasn't there a corporate overhead associated with Fashion Bug still?

David R. Jaffe

There is and there was. And if it's not in discontinued, you'll see it as part of our overhead reduction, and that's all baked into our numbers.

Scott D. Krasik - BB&T Capital Markets, Research Division

Okay. And then just last. Dirk, you mentioned the refi sort of contributing to the guidance. What were some of the other programs that you accelerated to be able to achieve the same guidance?

Dirk A. Montgomery

Sure. Well, it's really 3 key items. One, we actually did a little bit better than we had thought at the close of the second quarter. January sales were a little bit stronger than we thought, and we were able to actually clear fall goods at higher rates than we had originally anticipated. The -- as David mentioned, we're anticipating some, although we need to determine how much, upside on the overhead reduction in synergies from the acquisition and some of the other programs we have going in place. And then thirdly, really just ongoing productivity improvement and expense management, and that would be in addition then to the ABL saves.

Operator

Your next question is from the line of Anna Andreeva with FBR.

Anna A. Andreeva - FBR Capital Markets & Co., Research Division

Congrats on building out the leadership team.

David R. Jaffe

Thank you.

Anna A. Andreeva - FBR Capital Markets & Co., Research Division

I had a few questions. So 2Q comps coming in better-than-expected. Could you guys maybe talk about what you saw in January? I think you did say you were able to clear through some of the product at better rates. But just talk about acceleration by division? Second, I was hoping you could talk about any new sales target for 2013, given that you reined in expectations for 3Q. And I'm not sure if you did quantify what is the refinancing contributing to EPS and maybe just a little bit of color about the new initiatives to drive productivity and expense control?

David R. Jaffe

Okay. Well, that's a lot.

Dirk A. Montgomery

Yes, we just wrote all those down.

David R. Jaffe

I'll take the first one. January, as Dirk said, it turned out to be a pretty good month for us for all our brands, for the industry, too, and maybe that was before reality set in with the payroll tax. There was maybe a little bit of good weather in there. Can't really tell you why, but we were able to clear a little more inventory than we expected at better rates than we had budgeted, so that was all good news. And that's why the guidance that we gave you back at -- just before ICR was improved by the $0.03 that we just reported today. So that's why we feel comfortable. As Dirk said, we're holding on the $1.20 to $1.30 because we're coming in with $0.03 right there, and I'll let him go talk further about that. In terms of the new initiatives, and then I'm going to turn it over to the Dirk on the 2 other issues, I wasn't quite sure which ones you're referring to, Anna, so help me there?

Anna A. Andreeva - FBR Capital Markets & Co., Research Division

I guess, you were talking about additional expense controls, as well as new productivity improvements?

David R. Jaffe

Yes, I don't think I would say they're new. I think what we said was that we're just accelerating some of them. They're coming in a little bit faster than we had originally anticipated. So that's given us a little bit of wind at our back to help us achieve that $1.20, $1.30. It's another one of those factors, but I wouldn't say there is anything new that we are doing or that we are putting into place. Then Dirk, you want to talk about, I think, the first question was about your -- the sales for the year? Anna, do you want to go back and say it again?

Anna A. Andreeva - FBR Capital Markets & Co., Research Division

Right. Just curious about the new sales goal that you guys have for the year. You had talked about $5 billion previously?

Dirk A. Montgomery

Yes, $5 billion. Well, in term of the spring -- the revised spring guidance range of 0% to 3%. If you just roll that to full year, the total would be in the range of low 2s close to 4% in terms of the total comp, including e-commerce.

Anna A. Andreeva - FBR Capital Markets & Co., Research Division

Okay. And just curious if you guys have quantified what is the refinancing contribution to EPS in that guidance range?

David R. Jaffe

So what we think for the guidance for spring or for the balance of the year, the spring impact, assuming that things go as we project, it will probably be about $0.01. So that's another $0.01 to the good on that $1.20, $1.30 goal that we've got to set.

Operator

Your next question is from the line of Neely Tamminga with Piper Jaffray.

Neely J.N. Tamminga - Piper Jaffray Companies, Research Division

Great. David, you've been making some great acquisitions in talent, not just brands and companies here of late. Just wondering if you could remind us if there's some other major holes within your organization that we need to be look out for in terms of the team? Or do you think you're kind of there at this point?

David R. Jaffe

Almost, almost. At our maurices brand, we've been working with kind of an interim Chief Merchandising Officer. And we'd really like to get that figured out and get a permanent solution there. And we've got some irons in the fire there and hope to have an announcement sooner than later. But you know these things, you're never sure. So that's really the one other kind of major hole that I'd say we have right now, maybe 1 or 2 at the kind of VP level that we're working on but nothing that, I think, will be a game changer the way a CMO at maurices could be.

Neely J.N. Tamminga - Piper Jaffray Companies, Research Division

You certainly want to give Linda Heasley the leeway that she's going to need to kind of turn Lane Bryant around. I think you've indicated there's just some legacy issues of changing the overall direction of that brand year-after-year. But I am wondering to what extent you think that she can actually road map a little bit more of a turnaround in that business. Can she affect some of the fall receipts at this point in time? Are we looking into early spring for her real ability to impact the business is on deck? Any guidance there would be helpful.

David R. Jaffe

I think that there will be some impact on the fall business even if it's just to think through product distortions or fine-tuning colors or what have you. I'm sure that she will have some impact, but I think it's going to be at least spring until she's really able to start putting her stamp on the business and maybe after. So it's an evolution. I think she's got to study the business and learn it, and many of the members of her team are relatively new within the last year or 2. So I think they've got kind of come together and work at the repositioning of the brand. So we're being very careful and thoughtful as we project out that business. We were just as anxious, of course, as everyone is to see that business start performing better. But at the same time, we don't want to rush it and make a rash move, so I think we want to give Linda a little more freedom to study it and determine the best course of action and do a lot of testing along the way.

Neely J.N. Tamminga - Piper Jaffray Companies, Research Division

That's helpful. And I just have one final question on dressbarn. As we think about their road map, I think you were indicating that side of the ICR exchange, very appropriately talking about the volume of the business shifting from sweaters into dresses as we think about the spring season. It sounds like you're talking about some positive indications here on some of those early reads for dresses. And of course, weather can always be a wrench in anyone's plan in retail land. But I guess what I'm trying to understand is, are the comparisons actually eased as we look into March and April relative to what we saw in the difficult comparison in February? Could dressbarn's comp actually overall end up being in that overall company comp average range of flat up 3%. I'm just trying to figure out the possibility of that.

David R. Jaffe

Well, last year, dressbarn's March comps were up 11%. So certainly, we're going to appreciate having that early Easter to help drive against that March business from last year. As you may recall, it was a warm March. So I don't really know, Neely. We're certainly not going out there and projecting any big numbers. You saw that we took our comps down for the spring from 3% to 5%, to 0% to 3%. We think that's very realistic, and we think dressbarn is well positioned like all the other brands for spring. We don't see any of the challenges that we had in the fall season that dressbarn carrying over to spring.

Operator

Your next question is from the line of Brian Tunick with JP Morgan.

Brian J. Tunick - JP Morgan Chase & Co, Research Division

David, so I guess we were looking at the analyst marketing materials you guys had at your big day a couple of months ago. And it looked like Lane Bryant had about 55% of sales from a gross margin basis, looked pretty in line with, I guess, other apparel retailers out there. To us, it looked like you're buying distribution and occupancy line at, I think 21%, of sales. That actually looked pretty high. So I guess, first question, we were wondering if It's Lane Bryant's more of a productivity or expense story than we originally thought and it's less about a full price selling opportunity. If you could you just maybe comment, do you see significant merchandise margin opportunity even though they're apparently already at the mid-50s?

David R. Jaffe

I do think it's a little of both, Brian. The other thing that you may not be seeing as clearly is we're hitting Lane Bryant and Catherines with 2 overheads, so they're getting their share of the Ascena overhead, and then they're getting their share for Lane Bryant. That's 80% of the Charming overhead. So that factors into it. The gross margin, I think, is not unreasonable. But we need to look at that because one of the challenges there is that the sales per square foot productivity is below what we'd like. And one of the ways to deliver that, we believe, is to provide more value to the passerby versus the customer. So the regular customer is getting all these mailings, I talked a little bit about, overlapping offers. And we're slowly backing away from that because there was a big spread in the out-the-door price that the customer would pay versus the passerby. And so when we did our surveys, we got a lot of feedback saying, "You're prices are too high." So we need to bring those in line and create a little more consistency between the passerby and the consumer or the customer. And I think that will help drive up how are comps, our productivity. And if we can keep our margins in good order in the mid-50s and then work on controlling our expenses through some of the things I mentioned earlier, overhead reduction, synergies, et cetera, there's no reason why this can't be a very solid strong performing brand in the next few years.

Brian J. Tunick - JP Morgan Chase & Co, Research Division

Okay, great. And then -- and the second question, relative to the consumer out there, how do you rank, I guess, your brands relative to the payroll tax issue or income taxes or anything like that? How do you think about the brands being most vulnerable to being least vulnerable if this is the consumer tenor as we move through the spring season?

David R. Jaffe

Well, I'd like to say that all our brands are well positioned and I think they are because we're -- all the brands and however they market or promote to it are value brands. So we're not the fancy high-end brands that sell or attempt to sell at full price in the mall and as a result, in many of the cases, we'll get trade-down, and we've seen that -- saw this back with Lehman [ph] 4 years ago, that customers from the higher-end specialty stores or department stores were now shopping at our stores. So that's one thing. The other thing is I think our brands are more niche-oriented than many of the retailers, especially apparel retailers, out there. So if you want large size or -- as in Lane Bryant's case or pure play or extended large size as in Catherines case, you don't have a lot of choices. So yes, you can go to the department store. But if you want to have that specialty store experience and the service that we provide, I think that we have a little bit of a protected niche. Now having said that, if the tide goes out, all the boats are going to drop a little bit. So what we've got to do is market aggressively, make sure that we're doing a good job on fashion and service, et cetera, to try and continue to take market share as we've done so well at Justice and maybe have an opportunity to do a better job at it at our other brands.

Brian J. Tunick - JP Morgan Chase & Co, Research Division

And just a final one for Dirk. On the flat to up 3% comp guidance for spring, are you assuming all businesses are flat to positive? Are you assuming any businesses are negative?

Dirk A. Montgomery

No. We're assuming that they're all kind of in that range. So I mean, obviously, we're going to have some variation within the brands, but I think we're all expecting them to be up.

Operator

Your next question is from the line of Oliver Chen with Citigroup.

Oliver Chen - Citigroup Inc, Research Division

Just a question regarding what you're seeing in the marketplace with regards to product cost inflation and if this presents incremental risk or an opportunity with how you think about your pricing kind of leeway and within your banners?

David R. Jaffe

We really haven't seen much pressure. We have cycled through the cotton issue. If you remember from a couple of seasons ago, cotton shot up and then it shot back down again. Chinese labor is going up, there's no question. But the labor as a percent of the product isn't dramatic, and our vendors have been fairly aggressive at either holding the cost or possibly, in some cases, moving locations or what have you. So we haven't seen any dramatic pressure, and what small amount we see generally balance out. And where we've needed to increase our prices by brand or by category within the brands, we've, for the most part, been able to do it and pass that on to the customers.

Oliver Chen - Citigroup Inc, Research Division

Okay. And regarding your earlier statements and your outlook for an improving or a comp that's flat to up slightly, what's happening with the Lane Bryant and dressbarn comp in terms of the 5 and negative 5 to negative 6 currently versus the forecast? Like which are the comp levers that we should expect to see improve in order for you to make your revised algorithm?

David R. Jaffe

Oliver, who knows what's going to happen this spring. But what we -- what Dirk just said, what we believe is that for spring season, all the brands should be up in the low-single digits. Now obviously, as the season plays out, some may outperform others. But we believe all of the brands, including Lane Bryant and dressbarn, that have the most challenging second quarter should still be able to have a positive comp. And as I mentioned earlier, the challenges we saw at dressbarn in particular are behind us. And going into March, with Easter just, whatever, 4 weeks away, we feel pretty good that we are well positioned to do well.

Oliver Chen - Citigroup Inc, Research Division

Okay. And our final question is just a modeling question. When we think about the SG&A dollars in the third and fourth quarter, should we model a sequentially -- a sequential increase off of the 2Q number? It's a little more challenging, given that we don't necessarily have the pro forma year-over-year.

Dirk A. Montgomery

Yes, on a GAAP basis, I think for full year, I think you can expect SG&A percent, as a percent of sales, to be more or less in line with second quarter.

Operator

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

Luke S. Whorton - KeyBanc Capital Markets Inc., Research Division

This is Luke Whorton in for Edward Yruma. Revisiting on Justice and the opportunity at Brothers, it seems as though things have kind of gone according to plan and you're up to about 30 stores and maybe a slight acceleration up to 50 stores in the spring season. Is that any indication that things are maybe going potentially better-than-expected and kind of what learnings have you had there and what potential that headwind -- or tailwind, I should say, to comps and possibly gross margin expansion?

David R. Jaffe

Well, we are pretty excited about Brothers, and it's not a huge increase from original plan. But yes, it's an increase, and I think that speaks to the learnings, some of which really aren't quantified. It's just we've learned what the boy or the mom buying for the boy is looking for and price points and style, et cetera. But specifically, what was very, very encouraging is that when we did the analysis, we found that the Justice, the girls business, was not impacted by the addition of Brothers, so that's huge. So what that means is even though we took square footage away from girls, it did not hurt the girls business. So the girls comp traded in line with the rest of the chain. So clearly then, the Brothers business became completely incremental. So we think that's very, very bullish. And we think in the future, there's no reason why all our stores can't have a Brothers component to it. So we'll get more productivity out of that box, both in terms of your sales per square foot and, obviously, from your gross margin perspective as well. So very good news, and it will certainly take many years to roll it out completely. We see that to be incremental business increasing year-after-year.

Luke S. Whorton - KeyBanc Capital Markets Inc., Research Division

Yes. Is the comp kind of -- I don't if you can break this out but the feel you've gotten from Brothers, is it comparable to the comp you have for the rest of the Justice girls business?

David R. Jaffe

Well, it hasn't comped yet. This is our first year.

Luke S. Whorton - KeyBanc Capital Markets Inc., Research Division

I should say -- sorry, the contribution to sales, is it at productivity level that's comparable to the girls business yet or it's just simply accretive to -- it's kind of an addition on top of your productivity with girls?

David R. Jaffe

It's an addition on top of that, but it's a brand-new business. And obviously, we have been doing Justice for a long time so not a surprise, and we see lots of opportunity to continue to grow the top line, the productivity of that, as well as to improve the margins.

Luke S. Whorton - KeyBanc Capital Markets Inc., Research Division

Great. And then one last follow-up question on Justice. With the rollout of your stores in Canada, are you continuing to see higher productivity levels there than your U.S. stores as you previously noted?

David R. Jaffe

On average, that's correct.

Operator

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

Mark K. Montagna - Avondale Partners, LLC, Research Division

A follow-up on the Brothers topic. David, how come it will take multiple years for Brothers to roll out? Because when you put in plus-sizes over at maurices quite of years ago, I think you did that all in 1 calendar year.

David R. Jaffe

We actually did it as a big bang. And it's very different because if you've seen one of our Brothers stores, or we call them dual-gender stores, you'll notice that we've built out a little shop within the store. And that's critical because you don't want the girls feeling that we've now made it a dual-gender store. We don't want to become PS, where they're all mixed together. So we have this little shop, depending on the store, either in the back corner or maybe in the front corner, but it's completely isolated. And that way, the girl still has this big store, and the Brothers is only about 20% of the selling square footage. But we build it out so it looks like a boy's tree fort. And therefore, it is isolated. It is unique to boys. And to build those out costs money and takes time, so we can just snap our fingers and convert the chain.

Mark K. Montagna - Avondale Partners, LLC, Research Division

Okay. Yes, I've seen a couple up in Columbus, and I thought it looked really good. So then expense leverage, what is -- looking at the third and fourth quarter, what comp would you need to leverage expenses for say BDO and then also for SG&A in the third and fourth quarter?

Dirk A. Montgomery

Yes, well, certainly, it would probably be in the higher end of the revised guidance range, Mark. This is Dirk. I can work with you offline to give you a more refined answer on that after the call.

Mark K. Montagna - Avondale Partners, LLC, Research Division

Okay. And then just lastly, it sounded like -- I think I heard this correct, the February comps were a little behind where you want it to be. But when you adjust...

David R. Jaffe

No. I mean, sure. Let me -- I didn't mean to cut you off. So finish your question, then I'll answer it.

Mark K. Montagna - Avondale Partners, LLC, Research Division

Yes, but, I mean, the weather and the social security tax and all that. I mean, everybody's behind. So a little behind where you want to be but you've adjusted spring inventory. So is it fair to say that you do not have an inventory backup, that you're okay with where you are with inventory?

David R. Jaffe

Overall, I would say that's absolutely right. Within 1 or 2 of the brands, there's a pocket or 2 of category or whatever that they're still working on frankly. I think we'll be fine. I don't anticipate problems, but it's something that Dirk and I kind of watch and just keep an eye on because you just don't know if the business is going to continue on plan or if it hiccups and you don't want to be stuck with extreme inventory, of course.

Mark K. Montagna - Avondale Partners, LLC, Research Division

Okay. So you were going to correct me. Was I -- did I hear you correct, that you were just a little behind?

David R. Jaffe

Well, I mean, I think what we said earlier was quarter-to-date, we're up slightly. So given the disaster that we all read about in early February, I think we're in good shape. And then there were some comments, "Oh my gosh, everybody saw the Wal-Mart email and whatnot." So while, certainly, we did not make our plan for February. There was just some feedback, "Oh this was a disaster month." And I just want to make sure everybody understands that up slightly isn't up as much as we'd like it to be, but it sure wasn't down, what was it, 32% as some other people may have been?

Mark K. Montagna - Avondale Partners, LLC, Research Division

Okay, yes. All right. Well thanks for that correction. And then when you talked about adjusting the spring inventories, were you able to, I don't know, cancel orders? Because it seems like you typically would own the entire supply chain. Or how did you adjust spring inventories?

David R. Jaffe

It varies, Mark, by brand. Some of it is canceling orders, some of it is putting out deliveries for a later date or transferring orders from a May delivery to a June delivery or not making quite as many and saving those piece goods for another style that will be delivered later. Every merchant, every buyer has got their little tricks to control inventory.

Operator

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

Janine M. Stichter - Telsey Advisory Group LLC

Just a couple of questions. I know you were hoping to transfer some of the sales from Fashion Bug as you closed it to some of the other brands, and particularly dressbarn. I was wondering if you saw any of that during the second quarter and if there was still any opportunity there? And then also on Lane Bryant, just curious what kind of productivity you're seeing from some of the stores that had migrated off-mall compared to those that are on-mall?

David R. Jaffe

Sure. So with the Fashion Bug transfer, I would tell you that we just closed the stores at the end of the quarter, so we didn't expect to see much until spring. So everybody's in Fashion Bug getting great deals on the last remnants at crazy prices and getting the bounce back to shop our other brands. So the next big shopping event is Easter, so that's when we'll probably start seeing the coupons coming in. And we're tracking it. And I'm sure by the next call, I'll have a better sense of how successful that effort was based on what we were able to track. Right now, it's anecdotal, and that's it. On the Lane Bryant, I don't have any new numbers to share with you, although we do track it. The number that is of interest when we transfer a store from -- or relocate a store from a mall to a strip, we typically get a nice pop in our sales, our store -- it's more productive, and we get a nice reduction in our occupancy costs. So together, the 2 drive a more profitable model for us. Let us dissect things and gave Dirk a call in another few weeks, and we'll be able to follow up and give you more specific numbers for that, Janine.

Operator

Your next question is from the line of Steve Marotta with CL King & Associates.

Steven Louis Marotta - CL King & Associates, Inc., Research Division

David, in your prepared remarks, you mentioned that Lane Bryant gross margin in the fourth quarter benefited from the reduction in overlapping promotions versus a year ago. Can you talk a little bit about the runway or a similar strategy that may benefit Lane Bryant gross margin dollars over the next quarter or 2 or 3?

David R. Jaffe

Sure. What we've done is just take a look, as I mentioned earlier, about this disconnect between the great deal that the customers get with these stackable coupons versus the passerby that didn't get any of those coupons because she's not on the mailing list or the e-com list or what have you. So what we're trying to do is look at all our promos and make sure that they all stand alone, as well as provide in-store promos to the passerby. So we're not necessarily looking to reduce our markdown rate. We just want to spread it out a little bit differently. So we heard earlier, the margin rate is not too bad. We just want to make sure that we're attracting new customers into the store and converting them, as well as giving our existing customers a reason to come back.

Steven Louis Marotta - CL King & Associates, Inc., Research Division

Great. Can you talk also about proportionate sales breakout by month in the third quarter? Again, not on a dollars basis but on a proportionate basis, how much is done in February, March, April?

David R. Jaffe

I don't know if Dirk's got that at his fingertips, but just let me remind you that March is a 5-week month. And Easter comes at the end of March. And February is still really clearance month. So Dirk's scrambling. Why don't you give him a call later.

Dirk A. Montgomery

Yes, we got that. I can get back to you with that. But I mean, obviously, Mar-full [ph] is much more significant. Those 2 months are much more significant than February. So I'll get back to you offline on that.

Steven Louis Marotta - CL King & Associates, Inc., Research Division

No problem. And lastly, I just want to verify that I heard correctly, assuming a potentially refi and the timing that you guys are anticipating that would benefit the current year to the tune of $0.01, is that accurate?

Dirk A. Montgomery

Yes. Obviously, that's $0.01, when we can get it closed and if it's what we think it's going to be, but we think that's a reasonable expectation.

Operator

Your next question is from the line of Mitch Van Zelfden with SunTrust.

Dennis C. Van Zelfden - SunTrust Robinson Humphrey, Inc., Research Division

On dressbarn, aside from the weather issues in the Northeast, is there any way you could comment in terms of how the division performed in the smaller markets versus the larger markets?

David R. Jaffe

Good question. I can't answer it for you. We don't slice and dice it that way. But we can, and so I'd ask you to follow up with Dirk.

Dennis C. Van Zelfden - SunTrust Robinson Humphrey, Inc., Research Division

Okay. And second, how are accessories trending at maurices and do you feel that's an opportunity this spring?

David R. Jaffe

Oh man, you set me up on that one, huh, Mitch? We have a new divisional for accessories at maurices who is terrific. Man, he's just been onboard now for, I don't want to say, 2 months or 3 months. He is going to make a huge change and has really started repositioning the accessory business. And I think you will see the change this spring. I think he's going to have a really positive impact, so I'm very excited to see how that business develops.

Operator

Ladies and gentlemen, this does conclude the question-and-answer portion of today's event. I'd like to turn the call back over to management for any closing remarks they'd like to make.

David R. Jaffe

Well, thank you, everyone, for your interest, and we look forward to speaking to you at the end of our third quarter. Have a good evening.

Operator

Ladies and gentlemen, with that, you may now disconnect. Have a good day.

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