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Aéropostale (NYSE:ARO)

Q1 2013 Earnings Call

May 23, 2013 4:15 pm ET

Executives

Kenneth Ohashi - Vice President of Investor and Media Relations

Thomas P. Johnson - Chief Executive Officer and Director

Emilia Fabricant - Executive Vice President of The Aeropostale Brand

Marc D. Miller - Chief Financial Officer and Executive Vice President

Analysts

Thomas A. Filandro - Susquehanna Financial Group, LLLP, Research Division

Matthew McClintock - Barclays Capital, Research Division

Adrienne Tennant - Janney Montgomery Scott LLC, Research Division

Kimberly C. Greenberger - Morgan Stanley, Research Division

Betty Y. Chen - Wedbush Securities Inc., Research Division

Janet Kloppenburg

Randal J. Konik - Jefferies & Company, Inc., Research Division

Lorraine Maikis Hutchinson - BofA Merrill Lynch, Research Division

John D. Morris - BMO Capital Markets U.S.

Dana Lauren Telsey - Telsey Advisory Group LLC

Stephanie S. Wissink - Piper Jaffray Companies, Research Division

Lindsay Drucker Mann - Goldman Sachs Group Inc., Research Division

Marni Shapiro - The Retail Tracker

Jaime M. Katz - Morningstar Inc., Research Division

Lee J. Giordano - Imperial Capital, LLC, Research Division

Jane Thorn Leeson - KeyBanc Capital Markets Inc., Research Division

Dorothy S. Lakner - Topeka Capital Markets Inc., Research Division

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

Howard Tubin - RBC Capital Markets, LLC, Research Division

Jerry Gray

Operator

Thank you for joining us for the Aeropostale conference call to review first quarter 2013 financial results. [Operator Instructions] I would like to remind everyone that this conference call is being recorded. I would now like to introduce Ken Ohashi, the company's Vice President of Investor and Media Relations.

Kenneth Ohashi

Thank you, all, for joining us this afternoon. With me here today are Tom Johnson, our Chief Executive Officer; Emilia Fabricant, EVP of the Aeropostale brand and Marc Miller, our Chief Financial Officer. We issued a press release earlier this afternoon announcing first quarter fiscal 2013 financial results. A copy of the release can be found on our corporate website.

Before we begin, I'd like to remind you that during this earnings conference call, certain statements and responses to questions may contain forward-looking information, such as forecasts of future financial performance. Forward-looking information and statements involve known and unknown risks and uncertainties, which may cause our actual results in future periods to differ materially from our forecasted results.

Those risks are described in our annual report on Form 10-K and our quarterly reports on Form 10-Q, all of which have been filed with the SEC and are available on our website. We undertake no obligation to update or revise any forward-looking statements to reflect subsequent events or circumstances. Listeners of this call are referred to those filings.

Before I turn the call over to Tom, I would like to remind everyone that an investor presentation covering our first quarter result can be found on our website. [Operator Instructions]

I would now like to turn the call over to Tom.

Thomas P. Johnson

Thank you, Ken. Good afternoon, everyone, and thank you for joining us today. As many of you saw today, our first quarter results came in largely as we expected. We reported a first quarter loss of $0.16 per share versus our previously issued guidance of a loss of $0.15 to $0.20 per share. During the quarter, we increased our promotional activity to clear through fourth quarter carryover inventories. Additionally, like many retailers, we were impacted by a weaker macroeconomic environment, as well as unseasonably cooler weather.

Since we last spoke, the entire organization has been focused on executing the initiatives we discussed on our last call. As a reminder, these initiatives included: offering teens relevant fashion for the dynamic and fast changing lifestyle; building best-in-class infrastructure to support speed-to-market; communicating our brand message through marketing campaigns that create an emotional connection with our teen; and developing our future growth drivers. The reinvigoration of our merchandise assortment is clearly our largest opportunity. During the quarter, we integrated fresh new looks into our stores, while staying true to the heritage of the Aeropostale brand.

Our goal is to capture the heart of our high school customer. As we move into the important back-to-school season, you will continue to see a noticeable change in how we provide a true lifestyle experience for our customers. You will also see a more collection-driven assortment and the expansion of new and trending categories. We are supporting these merchandising initiatives with stronger operational processes and systems. We continue to leverage our vendor base to improve speed-to-market and lead times. We're excited to have completed the integration of our allocation optimization tool and we continue to roll out our assortment planning and PLM tools. With the evolution of our product and processes, we must ensure that the brand projection is equally compelling.

Starting with summer and moving into back-to-school, you will see a marketing campaign including updated imagery, a visual collateral, capturing the teen's fun, dynamic and multifaceted lifestyle. I believe we're taking the right steps to elevate our brand experience and connect with our consumer. And I encourage each of you to preview our summer marketing campaign, #summerroadtrip, on our website.

We also continue to make progress with our growth drivers P.S., e-commerce and international. During the quarter, we opened 24 P.S. stores and introduced the brand to 8 additional states and Puerto Rico. P.S. continues to build brand recognition and we remain very excited about both domestic and global opportunity for the brand. Our e-commerce business, including GoJane, saw an increase in net sales of 13% for the quarter. Internationally, we continued to expand our footprint in the Middle East, and in the coming months, we look forward to the launch of our brand in Mexico, the Philippines, Colombia and Panama.

While we made progress to date, we need to stay focused and disciplined. We all recognize that it may take time for our customer to adapt to the changes we're making in our business, but we believe that we are on the right track to improve our profitability.

I'd now like to turn the call over to Emilia, who will take you through some of the merchandising highlights for the first quarter.

Emilia Fabricant

Good afternoon, everyone. As Tom said earlier, during the quarter, our teams did a good job navigating through a challenging quarter.

From a merchandising perspective, we continue to increase the fashion in our stores, while reducing the penetration of our Logo business. Despite a highly promotional environment, we were very encouraged with the positive trends in certain key areas, particularly woven tops, woven bottoms and denim. All 3 of these classifications in both Men's and Women's experienced increases in comps and merchandise margins. We remain optimistic with these trending classifications, as they become a meaningful part of our business in the back half.

As we move through summer and prepare for the important back-to-school season, we are focused on delivering on our key merchandising initiatives. The team is paying very close attention to the use of updated silhouettes, authentic details and soft and comfortable fabrics.

We are also expanding into new categories, such as active, lounge and intimates, under a new sub-label, Live Love Dream. We believe in the integration of these new classifications to complement the girl's lifestyles and create an emotional connection with the teen.

In addition, we are refining our processes to become faster to market and continuously stream newness in our stores. We keenly recognize that the adoption of fashion is different across the chain. We are leveraging our allocation optimization and assortment planning tools. We are making the necessary adjustments to increase both depth and breadth of fashion in certain doors and preserving our Logo business in others. Most importantly, our entire product development team is acutely aligned on understanding our teen and developing collections that are fun-spirited, accessible, cohesive, relevant for our suburban middle income high school customer.

While we still are in a period of transition with our merchandising initiatives, we are excited about the direction we're heading and we look forward to keeping you updated on our progress.

I will now turn the call over to Marc, who will take you through the financials.

Marc D. Miller

Thank you, Emilia. Total net sales for the quarter were down 9% versus last year, reflecting a negative 14% comp, which includes our e-commerce channel, partially offset by an average square footage increase of 3%. Including our e-commerce channel, our Guys business was down 11% and our Girls business was down 15% for the quarter. Our comp for the quarter was driven by a 10% decline in transactions and a 9% decrease in average unit retail, partially offset by a 5% increase in units per transaction.

During the quarter, we opened 1 Aeropostale and 24 P.S. from Aeropostale stores and closed 3 Aero stores, ending the quarter with 982 Aero and 124 P.S. stores.

Gross margins for the quarter were 22.4% versus 28.0% last year. The 560-basis-point decrease was driven by 250 basis points of lower merchandise margins and 310 basis points from the deleveraging of non-merchandise COGS.

SG&A for the quarter was 27% of sales versus 24.6% last year. However, we continue to manage our expenses carefully and SG&A dollars were down versus last year. Our tax rate for the quarter was 41.2% versus 36.0% last year. This resulted in a net loss of approximately $12.2 million or $0.16 per diluted share. We ended the quarter with cash and cash equivalents of approximately $148 million and no debt.

Inventory at the end of the quarter was $180 million, up 3% in total, but down 3% on a retail per square foot basis. Our capital expenditures for the quarter were $16 million and depreciation and amortization were $16 million.

I will now discuss our guidance outlook. While our entire organization is working to make progress against our strategic initiatives, our visibility with respect to the macroeconomic remains limited, particularly surrounding the key back-to-school selling season. As a result, we are initiating guidance at a loss of $0.15 to $0.20 per share. This guidance assumes a share count of 79 million and a tax rate of approximately 45%.

Now, I will turn the call over to Tom for closing remarks.

Thomas P. Johnson

Thank you, Marc. While our first quarter results met our expectations, we at Aeropostale strive to achieve far greater results and I believe we have the right team in place to deliver on the initiatives that will drive improvement.

With a new product development team in place, we're seeing more alignment and collaboration across the organization than ever before, refining innovative ways to approach the business and to rethink and improve processes. Aeropostale is an established, globally recognized, inclusive teen brand with a long a history of providing our customers with high-quality product at incredible values.

Operationally, we are the unit share leader in our space and remain one of the most highly productive concepts in the mall. Financially, our balance sheet remains strong. We have a solid foundation to improve our business and I look forward to sharing our continued progress with you on our next earnings call in August.

Operator, we are now ready to take questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is coming from the line of Tom Filandro with Susquehanna Financial.

Thomas A. Filandro - Susquehanna Financial Group, LLLP, Research Division

The question is about the P.S. business. Across the fleet, I was wondering, have you experienced any variance in the performance of the business across the mall types and/or are you seeing a difference in shopper profile? And if you're willing, can you maybe provide some details on the current 4-wall economics and possibly, the opening hurdle rates?

Operator

Ladies and gentlemen, we do have a technical issue please stay on the line for one moment while we reconnect our speakers.

[Technical Difficulty]

Operator

Our speakers have been reconnected.

Thomas A. Filandro - Susquehanna Financial Group, LLLP, Research Division

So my question was about the P.S. suite. I was wondering if you experienced any variation in performance between the malls at which the brand is in and/or the shopper profile. And I was hoping, if you were willing, you can give us, maybe, some details on the 4-wall economics and potentially the opening hurdle rates for that business.

Thomas P. Johnson

Sure, Tom. The shopper profile really hasn't changed much since we've opened up the brand. We've targeted, as you know, we're selling 4 to 12 and we really target the 10-year old and we feel very good about the traction that we've been making. The stores have -- had experienced slowing from the comparative sales of the Q4 to Q1 similar to what a lot of the retailers have experienced. But we still feel very good about the progress we've made to date. The appetite for fashion in that young brand is ferocious. The young girl has really responded very well to the fashion and the Boys business has actually trended somewhat better than Girls over all. And in terms of, just call it commentary, on what worked, similar to Aero actually in the woven's area, specifically bottoms, printed bottoms and colored bottoms, have been really a stronghold for the young brand and new stores are performing well. So we feel very good about the brand and how it's performing overall.

Marc D. Miller

And Tom, from a financial standpoint. While we don't break out 4-wall economics, what I'd say is our goal is to mimic the same margin structure that we have for Aeropostale stores. And as we think about new real estate investments for P.S., we look to our hurdle rates, our return on invested capital hurdle rates, of high-teens as we evaluate whether to open new doors.

Operator

Our next question is coming from the line of Matt McClintock with Barclays.

Matthew McClintock - Barclays Capital, Research Division

Lots to look forward to in the back half of this year as the merchandise changes. I was just wondering if you could provide some color and update on your updated thoughts around the marketing plan for the back half of this year. I know that when we think about it last year, there was some expense drag there, but now that you have a little bit more to look forward to, how should we be thinking about that?

Thomas P. Johnson

Sure, Matt, this is Tom. We were -- as you guys might have seen, the launch of our summer campaign, #roadtrip, we really feel -- #summerroadtrip, we really feel good about the fun and optimistic view of what that looks like. You're going to see that through the back-to-school and the fall season, kind of back to our roots a bit. And the reality of it is that we're going to hit the teen where they live. So social media will be bigger for us, grassroots efforts through our store, team members throughout the malls and in the communities, so we feel very good about how we're attacking that. We'll be approaching marketing similarly from a market spend, how we spent advertising dollars against that last year with our launch. And the look and feel of the store, which is a big component of what we're going to be doing. You'll see a different projection at the front door, really starting with summer, all the way through the fall and holiday trading period.

Marc D. Miller

And Matt, to quantify that a bit, as you know, back half of last year we invested incrementally in the Chloe Moretz brand ambassador program, which is a program that we've since ended. What we expect is to redeploy those dollars that we used towards Chloe towards some of those initiatives that Tom described, the social media, the grassroots and other. And as such, we expect the overall marketing spend rate to be flat year-over-year.

Operator

Our next question is coming from the line of Adrienne Tennant with Janney Capital Markets.

Adrienne Tennant - Janney Montgomery Scott LLC, Research Division

I was wondering if you could talk about this wonderful 53rd week shift that we have to deal with. I was wondering if you can tell us what the impact is to sales and perhaps to earnings, I don't know if it's that material, 3Q into 2Q.

Marc D. Miller

Q2 contains the impact of a shift where we pick up 1 week of August and we give back 1 week of May and, net, that has approximately a $20 million incremental positive sales impact for Q2 out of Q3. And since we're on the topic of shifts, because I know it will be an ongoing conversation throughout the year, let me speak to Q3. So Q3, following the same logic, we pick up a November week but we lose an August week, and as we do that we expect in Q3 to net lose approximately $20 million. Although there is a little bit of a net pickup from the fact that the Hurricane Sandy week winds up moving into Q3 from Q4 last year. So net answer is a positive impact of approximately $20 million to Q2, which will clearly also flow through to earnings and a negative impact in Q3.

Operator

Our next question is coming from the line of Kimberly Greenberger with Morgan Stanley.

Kimberly C. Greenberger - Morgan Stanley, Research Division

Tom, I'm wondering if you can just step back for a minute and take a look at your business and talk to us about some of the strategies to stabilize market share. And it sounds like wovens and a few other things are working or starting to gain traction in the assortment. So what were the categories that were the most challenging that are presenting the biggest headwind for you?

Thomas P. Johnson

Sure, I'll start, but I think Emilia would fill this in with a little bit more color. In the stabilization of the business, we've looked at the core of Aeropostale and the brand positioning has not changed. The reality of it is, as we've said numerous calls, that the dependency on Logo has grown to an unsustainable level. And the teenage consumer told us over and over again that they love us for their basics, they love us for our value, but they want more fashion. So as we're shifting to fashion, we are absolutely seeing some really nice reads on some fashion and in particular categories, Emilia's got better color on.

Emilia Fabricant

Yes, we definitely are seeing woven's as a strong trend across both Girls and Guys, especially in woven tops, denim and woven bottoms. And while, traditionally, wovens have been a weaker gross margin area, due to the economy scale and consumer acceptance, we're seeing an improvement in AUR and gross margins in those areas and we intend to capitalize on that on the back half.

Operator

Our next question is coming from the line of Betty Chen with Wedbush Securities.

Betty Y. Chen - Wedbush Securities Inc., Research Division

I was wondering if you can talk a little bit, perhaps for you, Emilia, you said earlier that the team continues to capitalize on speed to market. Could you remind us again what the product lead cycle had been and where is it now and where would you like to take it to. And then with the launch of the active, lounge and intimates, what would that be replacing? Is it really the Logo business? And if so, where would Logo be as a percent of the mix by the second half?

Emilia Fabricant

So as far as our speed to market, while traditionally, we used put to bed our full assortments at the same time, we are now -- well we have reduced our total lead time for each floor set but more importantly, we've been able to give design and merchandising more time to read current trends and react to business. We are foremost leaving more open-to-buy for fashion and we chase into that from 21 to 120 days, with extremely fast trigger dates. We have been able to do this with fabric contingency and vendor partnerships. In addition, we've been able to test and react and chase into, for instance, in back-to-school, in some of the testing that we did for core and our fashion basics categories in order to strengthen those for that time period. As far as Live Love Dream, some of these are categories that we've carried traditionally, with updated fabrics and look and definitely with a new brand feel to them, which emotionally will connect with the teenage girl. What will it replace? We feel that it actually picks up a part of her lifestyle that we were not addressing completely before, including active.

Operator

Our next question is coming from the line of Janet Kloppenburg with JJK Research.

Janet Kloppenburg

Emilia, I wanted to know if you could talk a little bit about the knit top business, obviously the largest percentage of your business and Logo driven. I was wondering if you'd seen any success in the business that's not Logo driven, and if there's any plans to adapt the Logo collection based on success that you may have had this spring so that Logo can still be part of the business but maybe reformatted or reconfigured. And -- because I think that's a very important contributor to your margins so I'm focused on that a bit. And for Marc, I wondered about the inventory levels. They're a bit high when you look at your comp guidance and I just wondered how we should be thinking about inventory coming out of the second quarter.

Emilia Fabricant

So first in the knit top category. We have tested and actually delivered what we call our new core knit tops, which is a short sleeve and long sleeve basic, I should say, updated basic programs, both in Men's and Women's. And we have success and we will continue to roll that out. As far as the Logo business, we are focusing on our classic Logo, which has been the most successful in the Logo bucket and making sure we're designing and producing the strongest quality and assortment possible. As far as other knit top categories, including fashion, well we are seeing some success in our non-Logo graphics and will be capitalizing on that trend for back-to-school.

Marc D. Miller

And Janet, on your question on inventory levels, we did end Q1 down 3% on dollars per square foot. Embedded in that are units that are down mid-single digits, because there's a little bit of a mix shift that plays a role there, as Emilia was speaking to. There's been a heavier investment in some higher cost categories like denim and wovens. As we look to Q2, we expect inventories to end down as well. As a reminder, there is that calendar shift, so there are some -- a little bit of shift in patterns of receipts towards the end of the quarter. But I would model it so that we have inventories down on a dollars basis somewhat similar to what you see in Q1 or Q2.

Operator

[Operator Instructions] Our next question is coming from the line of Randy Konik with Jefferies & Company.

Randal J. Konik - Jefferies & Company, Inc., Research Division

Have you guys ever -- obviously you said you're the leading unit player, I guess, in the market. Have you ever kind of thought about had the addressable market for our business started to change i.e. should we be a much smaller type of organization and be more productive that way. And along those points is there anything you can give us in terms of how variable the store base revenues are by mall type or by geography. Because it seems as if you're obviously going into a negative total sales trajectory, which has negative leverage implications et cetera. So I'm just trying to get a feel for how you guys are thinking about strategically as the revenues of the total -- the total revenues come down, what are the next steps if this continues, this trajectory in revenue?

Marc D. Miller

Randy, it's Marc. I'll take a shot at that one. So as you're aware we are still, on a productivity standpoint, one of the most productive mall concepts even with the comp declines over the past couple of years. And as you're also aware, what we have done is we took a look at the overall store portfolio and identified potential candidates for closing and as we said on the last call, we see up to 100 stores that we believe are possible candidates for closures. They tend to be a little bit more skewed towards the b and c locations and in some geographies where we just believe we're overbuilt. So we believe we're taking steps to address rightsizing the store fleet. In terms of the addressable market though, we continue to believe that we're highly relevant to this teen customer. And in fact, with some of the merchandising initiatives that Emilia's spoken to, we think we have an opportunity to embrace even more aspects of the girl's lifestyle than we have historically. So in total, we'd say that we've looked critically at our store fleet. We believe we're taking the right amount of cuts to that store fleet and we'll be in position to be healthier and profitable going forward.

Operator

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

Lorraine Maikis Hutchinson - BofA Merrill Lynch, Research Division

I understand you had some carryover inventory coming into the first quarter, and some weather challenges. Have you seen business pick up since the weather has become warmer? And I guess what are the challenges that lead you to guide the way you did for the second quarter?

Marc D. Miller

Lorraine, I'll start with that. You're correct in that there were some, certainly, weather challenges in Q1, Tom mentioned that in the upfront remarks. And as a result, what we saw was a pretty pronounced shift from March into April where the comp trend did pickup in April from where we had been all quarter long. That being said, as we're heading into May. We're seeing inconsistent traffic again and, based on that, we've initiated guidance and embedded in that negative $0.15 to $0.20 guidance our comp assumptions that we would be down high single digits to low double digits. Again, it's a back half story in Q2, so much of the month is related to returns from back-to-school. So we'll have a much better read as we move through the quarter.

Operator

Our next question is coming from the line of John Morris.

John D. Morris - BMO Capital Markets U.S.

Sort of a multi-part question relating to the performance of the fashion product. Maybe if you can talk about how -- what you're learning and seeing from the performance of fashion versus core by geography, not just physical geography but also by store type. And I'm just wondering if maybe some of the fashion is performing better in certain kinds of locations as opposed to others or how consistent or inconsistent is it. And I guess, related to that, the progress that the new team, the new merchant teams are making with respect to where they want to get to. I think in the last call, it sounded like you were probably going to begin to impact the assortment by summer. I'm kind of reading into this, it's a little bit more towards back-to-school.

Emilia Fabricant

Well, I'll start with the progress on the product. The assortments and mix will sequentially improve as we moved through summer, fall and then holiday. Summer was really a chase strategy and fill-in strategy while back-to-school was definitely more fully baked and it will progressively get better. We are implementing our assortment planning tool that we are -- that will help us better deliver the right product to the right stores at the right time, including fashion and Logo, which will help us get a better read and execution on the fashion and Logo part.

Thomas P. Johnson

Yes and I just -- John, this is Tom. I'd just like to reemphasize what Emilia touched on in terms of how we're allocating, the rigor around our analysis with fashion core and even fashion basics, to some extent. We have sliced and diced in a very finite manner and understand very well where the stores are performing. And so the top 500 stores versus balance of chain. Emilia, in her remarks earlier, mentioned about our Logo business. We know that a couple of hundred of our stores drive a significant component of our Logo business so I think that we're just much more intelligent about -- since we've had fashion in the assortment and we know what the Logo demand is, we can be much more scientific. While we're doing some of the assortment planning manually now, it will be implemented over the balance of this year and into next year and will definitely be paying dividends. But we feel very good about the progress made to date and we do know that not all 1,000 stores behave the same with fashion versus core versus Logo. So we're encouraged and we're learning and it's definitely a process.

Marc D. Miller

As it relates to fashion, amongst our store groups, we did have the best of our comps in our A mall -- A malls. And in particular, there's a subset of A malls that we focused on in our I-60 initiative, where we put forward disproportionate amount of fashion, as Tom was just speaking to, as well as really working on our projection in those stores, so that the consumer reads that fashion. And we're seeing good early reads from that.

Operator

Our next question is coming from the line of Dana Telsey with Telsey Advisory Group.

Dana Lauren Telsey - Telsey Advisory Group LLC

Can you talk a little bit about the components of gross margin, how it was this quarter and any expectations go-forward, along with how you're planning back-to-school this year? And just in terms of category performance, Guys versus Girls, what did you see on the denim side and how are you thinking about it for fall? And just lastly, pricing on clearance merchandise, how is it different in the fourth quarter?

Emilia Fabricant

I'll start with the product question. As far as Guys and Girls, they had similar performance, with strong woven tops, denims and woven bottom businesses, while lightweight tops and shorts, due to the unseasonably cold weather, were challenging.

Marc D. Miller

And Dana, on the components of gross margin, we had said in our upfront remarks that pure merch margins were down 250 basis points. It was largely driven to promotional and clearance activity. We actually had an approximately 100-basis-point benefit from lower average unit costs in those Q1 numbers. So costs favorable, the intensity of promotions and clearance were a fairly substantial drag on our merchandise margins. As we look to Q2, we do believe there will be continued heightened levels of promotional activity, as we look to get those inventory levels in line with our current run rates and finding that right balance versus -- of core versus fashion. And then the last part of your question was about pricing on clearance. And for Q1, what I'd say is the declines in AUR on our clearance and markdowns were at similar levels to the declines that we saw in Q4.

Operator

Our next question is coming from the line of Steph Wissink with Piper Jaffray.

Stephanie S. Wissink - Piper Jaffray Companies, Research Division

Just one quick follow-up to John's earlier question. Emilia, could you update us on the mix of merchandise between core and fashion? And give us a sense of where that goal should be, going into the back-to-school season. And then Tom just a question for you as you step back and think about the business and the store fleet size. As the e-com business grows double-digits, are you thinking about the store fleet differently from a total size position?

Emilia Fabricant

Sure. Core continues to be about 40% to 50% of the business. The rest is fashion basics and fashion and it flexes season to season. However, historical comparisons are difficult to speak to because we have changed our definition of core. For example, we now have programs in core like our short sleeve and long sleeve knit key items, and we will update core to remain relevant season to season. As far as core Logo, we are on track to reducing Logo penetration and as Tom spoke to before, we will be protecting the stores that are actually very profitable in Logo and feeding fashion into the stores that are performing.

Thomas P. Johnson

And as far as the store fleet, as Marc had mentioned earlier we're closing up to approximately 100 stores. We think that that's rightsizing the fleet and we're taking the appropriate action, we believe, in terms of store closures. And as a matter of fact, in a counterintuitive thought, we have stores that are still over-productive and in those cases, we're actually increasing the square footage somewhat when we turn on the 10-year renewal. And we're excited about turning those nice profit centers into even larger profit centers and then changing the perception of the brand through the new store design. So we're excited about all those changes to come as well.

Operator

Our next question is coming from the line of Lindsay Drucker Mann with Goldman Sachs.

Lindsay Drucker Mann - Goldman Sachs Group Inc., Research Division

Just a question as it relates to some of the new fashion product. Can you talk about, given the competitive dynamic that exists with fashion forward value product, how you expect to differentiate yourself versus some of the other competitors out there?

Emilia Fabricant

Well first and foremost, Aeropostale is known for the quality and value and that is what will differentiate us. Our quality is foremost in our strategy and we will continue to deliver that even though we are moving into fashion. As far as the fashion in Aeropostale, we believe that the current fashion trends and fabrications and familiar silhouettes to our customer will help us win her over in that dynamic.

Thomas P. Johnson

And I think -- just to piggyback as well, I think that the reality of who we are and the DNA of the brand remains the same. The Logo component of the business will still be a component of our brand. As you guys know, Logos tend to come into style and out of style over time and we'll ebb and flow with that. But we're still the same: fun, optimistic and inclusive. And I think that the accessibility of our brand is very, very strong. So we want to really embrace all and the focus of our assortment is really with the fashion to be a curated fashion that is very understandable and undeniable and that's kind of what we see as a differentiator, a very inclusive brand offering for a high school teen. So we're slightly younger than some of the competition and definitely broader in our assortment reach. And certainly with what Emilia and the team are bringing to include the active component, as well as, what we're excited about is some early reads and some early extensions with regard to shoes. So we think that we're going to do a nice job of rounding out this young girl's lifestyle and capturing her emotional heart.

Operator

Our next question is coming from the line of Marni Shapiro with The Retail Tracker.

Marni Shapiro - The Retail Tracker

I'd like to actually focus on marketing just a little bit because you've talked a couple of times about this new summer campaign. And I was curious, if this campaign is going to be strictly online, are you going to be doing any kind of print or billboard or anything like that? And is the spend coming all in the second quarter or will it also be in the third quarter? And how does that differentiate from last year?

Thomas P. Johnson

I'll answer the last question first. The spend is going to be similar to last year, with Q1 -- I mean, with Q2 and Q3. But with regard to this particular summer campaign, which we're kind of excited about, it is in-store as well. So if you go into the store, it's kind of fun and our customers send in their photograph of the day and we have a contest wrapped around that and you would not believe the response, it's been very powerful. So it's very engaging and it's quite interesting. We're getting a tremendous amount of response off of Instagram and some of the other social media programs. As far as the kind of the marketing, the overall view of marketing, as we mentioned last time we've engaged with a couple of different marketing services. One on the strategic level, which we're continually talking to and appropriately, looking at engaging with, to help us really create a brand kind of DNA, which would obviously be internal for the internal support for the total alignment for all members, including new members, as we add them on the team. And then from a tactical level, we have engaged with a marketing agency to help us create a buzz into the fall season. So we're looking forward to doing some differentiated marketing as we get into the back half of this year.

Operator

Our next question is coming from the line of Jamie Katz with Morningstar.

Jaime M. Katz - Morningstar Inc., Research Division

I know you guys mentioned something about getting faster to market. Can you talk about or quantify how much faster you are able to get? And then, I guess, how much inventory is kind of open to order during the quarter and how fast, maybe, you can get that into the retail stores?

Emilia Fabricant

Sure. We have been as fast as 21 to 120 days in chase and reorders, which is quite fast. The team has done an exceptional job with our vendor partners and new strategies in place. We are leaving approximately a double-digit open-to-buy for each floor set. Obviously, there are trigger dates for that and some of them have passed and we've taken advantage of that and to chase into trending areas, so we can capitalize on current successes. So it's double-digit open-to-buy for each floor set.

Operator

Our next question is coming from the line of Lee Giordano with Imperial Capital.

Lee J. Giordano - Imperial Capital, LLC, Research Division

Can you update us on the remodel program, how those stores are performing? How many are you going to do this year? And then also, how much does it cost to actually do a remodel?

Marc D. Miller

Certainly. It's Marc, I'll take that. New store format, we ended last year with 1 at Roosevelt Field, that was our first prototype. We opened up 4 additional stores in that new format during the course of Q1. We expect to do approximately 30 for the full year. So the reads that we have, of any length of time, are the ones with the Roosevelt Field store. We're very pleased on a number of levels. First of all, qualitatively, we think we're getting the response that we were looking for out of the customer set. We're seeing a return on some of the customers that we feel had walked away from our stores over the past couple of years, returning to our doors. And we're seeing the fashion that gets amplified in that new store format, really receiving positive reception. And some of the trending classifications that Emilia spoke to earlier are performing very well in the new format location. So across key metrics like relative comp to chain, like AUR relative to chain, UPTs, SPTs, the numbers are positive on a relative basis. So again, pleased with where we are. We haven't disclosed yet what the total cost of the remodel. Right now, they're running a little bit north of what the old store model was, but we continue to value engineer to try to take those costs down.

Operator

Our next question is coming from the line of Edward Yruma with KeyBanc.

Jane Thorn Leeson - KeyBanc Capital Markets Inc., Research Division

This is Jane in for Ed. I was just curious if you could explain some of the systems improvements that were just completed in order to improve the merchandising process, I guess, for the back half.

Marc D. Miller

Sure, Jane. The ones that we completed are PLM, I'll start with, the product life cycle management. We had completed a Phase 1 in P.S. last year and it's going live in Aeropostale for Q2. That's really about increasing our communications with vendors and the efficiency of our communications with vendors. So given that it's going live in Q2 of this year, we really expect the benefits to start about a year from now in summer of 2014, as it will impact the current product cycle that we're working on for next summer. Assortment planning's another big one. We're working on localizing assortments based on volumes and store clusters. What we're identifying is common characteristics as to how certain store groups behave with respect to different types of product. And as we said on the last call, we expect to see some benefits from that in the back half of 2013, but we do expect to see the full impact of that in 2014. Last is our order optimization and allocation. That's completed this quarter. This helps us communicate with vendors about how to prepack items so we can distribute sizes more accurately and that we're starting to realize benefits from already and expect to continue to throughout the year.

Operator

Our next question is coming from the line of Dorothy Lakner with Topeka Capital Markets.

Dorothy S. Lakner - Topeka Capital Markets Inc., Research Division

I wondered on -- if I understood you correctly, Tom, you said the Logo, really Logo-centric stores, were in a couple of hundred out of the total chain. So do I understand the rest of the stores are really where you wanted to store more fashion? And is there any way of kind of dividing that up a little bit more finitely. And then kind of an attached question to that, I think for Emilia, just looking at core, fashion basics and fashion, core, I think you said was 40% to 50%, can you tell us what the fashion basics and fashion were, where are you looking to kind of position the assortment there?

Thomas P. Johnson

Sure, Dorothy, yes. I can tell you the multi-permutations of store groups, but we'd probably be on the call for an hour. The teams have really taken a scientific approach of breaking them all down. But if you look at a big, kind of big numbers, there are a couple of hundred doors that just distort the Logo business. That does not mean that the balance of the 800 or so stores don't. There's just -- they're very, very different by store and store type. And clearly in the outlets it's a little bit different performance. What's interesting in -- we kind of categorize groups of stores and even in some of the highest volume stores, they are our top fashion and they are our top Logo. So they're not all in 1 bucket. So we look at them on a matrix and that's how finite we're looking at them right now without getting too caught up in it. We're trying to grab the low hanging fruit, if you will, but then we are definitely pruning the tree along the way.

Emilia Fabricant

And as for the breakout of core, fashion basics and fashion, core being 40% to 50%, we see our fashion basic flexing from 30% to 35% and our fashion from 20% to 25%. Obviously, flexing between season to season depending on what time of year it is.

Operator

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

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

First, a quick clarification, and I'm sorry if I missed it. Did you guys talk about kind of the calendar shift and the impact on the first quarter? And then my question is have you done any focus groups or customer surveys recently? And if you have, what are the findings from that.

Marc D. Miller

Jennifer, on the calendar shift, Q1 wasn't material. I did speak to Q2 being a much more material shift in terms of bringing in that back-to-school August week.

Emilia Fabricant

And as far as the focus group, we actually had one 2 weeks ago, as early as 2 weeks ago. We are committed to constantly being in contact with our target customer and being aware of any shifts and changes in their interest. So our team has developed a customer insight group and -- which regularly gives us information and feeds us information on what's happening with the teenagers.

Operator

Our next question is coming from the line of Howard Tubin with RBC Capital Markets.

Howard Tubin - RBC Capital Markets, LLC, Research Division

How do you feel about the, like, the quality of inventory now? Is there any carryover remaining? And if so, will you be kind of completely whistle clean by the time you see set back-to-school at the end of the second quarter?

Marc D. Miller

Howard, I'll take that. The quality of inventory clearly at that negative 3% dollars per square foot is higher than we would like and probably skewed a little bit more towards core than we would like at this point in time. We're going to use Q2 to work through that and end the quarter in a position where we think we're positioned to do a great back-to-school business. Of note, we did buy back half down double-digits. So we have flexibility with our open-to-buy and we will chase appropriately. But between conservative buys going forward and kind of getting that core to the right level in our existing inventory, we'll feel better about the ending Q2 inventories.

Thomas P. Johnson

And with us buying down, as Emilia said earlier, we have a nice read and react potential for the seasons with our lead times being shortened.

Operator

Our next question is coming from the line of John Kernan with Cowen and Company.

Jerry Gray

This is Jerry on for John. I just wanted to ask a question about merch margin. Given what seems to be some structural pricing changes around the mall and in your own stores, what levels do you think merch margin can recover to? And just how should we think about that on a normalized basis going forward?

Marc D. Miller

Jerry, it's Marc. Certainly, a fair question. As you've heard from all the initiatives that Emilia spoke to, it is a pretty significant change that we're making to our go-forward assortments and you'll really start to see that in back-to-school, as we get that level of fashion right versus core. Until we have clarity as to the pricing, as well as margin structure for that fashion component of the business, it's really premature to speak to where we can raise merchandise margins to. We clearly believe there's opportunity to get back margin that we've given back over the past number of years, but it's just too early to make a call to an absolute target.

Operator

We have time for 1 final question, which will be coming from the line of Richard Jaffe of Stifel, Nicolaus.

It appears Mr. Jaffe has stepped away from his phone. We'll take our final question from the line of Tom Filandro with Susquehanna Financial.

Thomas A. Filandro - Susquehanna Financial Group, LLLP, Research Division

Two quick ones. Just remind us the cash comfort level if you could. And then the other question is on the new design store at Roosevelt Field, how are you feeling about the dorm yoga business? And I was curious if the new stores that you're opening have the same format as the Roosevelt Field stores, as it relates to dorm yoga.

Marc D. Miller

Tom, quickly, on cash comfort level, we said we need to be at a 10% to 12% of trailing 12-month sales. So that would imply a cash cushion at year end of about $200 million plus.

Emilia Fabricant

As far as the new store designs, yes, the stores that will open will have a form of the dorm yoga in their format and we're excited to launch Live Love Dream nationwide in back-to-school. So we would say we were feeling optimistic about this lifestyle, additional lifestyle, that we are providing for the teenage girls.

Operator

Ladies and gentlemen, we have reached end of our question-and-answer session. I'd like to turn the floor back to management for any closing comments.

Thomas P. Johnson

Sure, thank you. And thank you for your interest and support and have a great holiday weekend. And we look forward to speaking to you in August.

Operator

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

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