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Ascena Retail Group (NASDAQ:ASNA)

Q3 2013 Earnings Call

June 05, 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

Taposh Bari - Goldman Sachs Group Inc., Research Division

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

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

Alex J. Fuhrman - Piper Jaffray Companies, Research Division

Oliver Chen - Citigroup Inc, Research Division

Edward J. Yruma - KeyBanc Capital Markets Inc., Research Division

Michael Richardson - Sidoti & Company, LLC

Matt Temple - Avondale Partners, LLC, Research Division

Janet Kloppenburg

Operator

Good afternoon, my name is Beverly, and I will be your conference operator today. At this time, I would like to welcome everyone to Ascena Retail Group's Third Quarter Earnings Conference Call. I would now like to introduce Allison Townsend of ICR. Ms. Townsend, please begin.

Allison Townsend

Thank you, operator, and good afternoon to 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 Form 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.

At this time, I would 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 third quarter. A challenging external environment characterized by continued economic pressure on middle-income consumers, coupled with an unseasonably cold and long winter, had a negative impact on traffic. Sales improved across all brands in Q4-to-date compared to Q3. However, the late May and early June comps were choppy, suggesting that the improved trend may have been driven in part by pent-up demand from the cold spring. With that background, let's look at the overall financials.

Total comp sales for the third quarter were down 1%, reflecting a store comp decline of 4% and e-commerce sales increases of 37%. All of our brands, except Catherines, had negative comps driven predominantly by the environment I just described. The Lane Bryant and dressbarn were further impacted by merchandising misses.

Adjusted EPS for the third quarter were $0.26 compared to $0.34 in the same quarter last year, driven primarily by the disappointing sales results.

I'd like to walk you through results for each of our 5 brands in a little more detail. At Justice, total comp sales were down 2% in the third quarter, with store comps down 4% and e-commerce up 27%. The store comp decline was driven by soft traffic and transactions. However, total revenue was up 4%, driven by new store growth.

With regard to specific categories, accessories, denim and casual pants were standout performers. Warm weather merchandise such as shorts, tank tops and warm weather footwear are key elements of spring sales and underperformed during Q3. However, trends on this merchandise, as well as total Justice brand sales have rebounded in early Q4.

Driven by new store growth, total Justice revenue was up 4% for the quarter. We took the cadence of promotion up versus last year, with a marketing strategy that continues to focus on communicating value through both targeted loyalty programs and storewide point-of-sale events. Justice executed 3 additional point-of-sale events during the quarter, including 2 flash sale events in which an additional 20% off was offered. Recent consumer research indicates that Justice continues to be the market leader in the tween girl space.

We continue to be encouraged by our progress on the Brothers roll out, which will be in 80 locations by August. Locations opened to date have seen no decline in the girls business and are generating promising incremental boy sales to date. We will continue to roll out this brand to additional locations in 2014, and we'll provide more detail on specific plans this fall.

We opened 12 Justice stores, including 2 in Canada, and closed 9, and ended the quarter with 961 stores versus 920 last year. The Justice expansion into Canada is also progressing well, with 25 stores targeted by the end of the spring season. On average, the Canadian locations are outperforming the U.S. locations in terms of both sales and profit.

Turning to Lane Bryant. Q3 total comp sales were down 1% to last year, driven by soft traffic and product assortment misses. Store comps were down 6%, with traffic and ADS down versus last year, partially offset by higher conversion. E-commerce continued to be strong at 39% growth versus last year.

Although weather was a factor in traffic declines, product assortment was also an issue. We believe the assortment was overly broad and that was overweighted toward casual wear occasions. In addition, the fashion assortment was too basic and not on trend in a number of departments, including knits. Underperforming categories, in addition to knit tops, were premium denim and jewelry. Intimate apparel and active wear performed well relative to other departments.

Fourth quarter comp sales trends to date have improved compared to the third quarter, reflecting positive consumer reaction to new merchandise, a more wear now assortment and a more customer-friendly approach to merchandising the floor to support outfitting. We're seeing strong builds in intimates, knit tops, crops and pants. In addition, Lane Bryant has adjusted its promotional strategy toward category focused and occasion promotions aimed at increasing conversion and trial compared to their historical strategy of providing layered discounts to regular customers.

We revised promotion and marketing plans to ensure that we end the season with the appropriate level of spring goods. While those exit strategies will impact fourth quarter margins, we expect to show a better balance of fresh inventory as we start the fall season.

The Lane Bryant store count was 788 locations at the end of the quarter versus 801 last year. During the third quarter, we opened 18 new stores and closed 19.

maurices' total comp sales were flat for the quarter, with strong e-commerce growth of 37% and store comps down 3% due to store -- soft traffic. In addition, total sales growth increased 5%, driven by new store openings. Cooler weather merchandise categories performed well in the quarter, including our woven tops, footwear and wear-to-work blazers and vests. Warmer-weather merchandise generally underperformed nonseasonal goods in Q3, but have improved their selling rate in Q4-to-date.

With respect to marketing, we had a comparable level of direct mail versus last year, with 2 mailers in the quarter and an increase in key item promotions to drive traffic and conversion. For the fourth quarter, we are adding one direct-mail piece, a postcard specifically directed to activate low-frequency customers. Our Take Ten loyalty program continues to grow, and we've increased the size of our e-mail database to 3.1 million. Additionally, the penetration of our private label credit card increased over last year and is at approximately 36%.

We are very excited about the hiring of our new Chief Merchandising Officer, Erin Stern, during the third quarter. Erin is an outstanding merchant with a deep understanding of the maurices customer. She has over 2 decades of retail experience, including Chief Merchant for Juicy Couture, President of BEBE SPORT and several senior merchandising positions at Old Navy.

Our store base is now 862 locations at the end of the quarter versus 813 last year. During the third quarter, we opened 14 new stores, including 2 in Canada, and closed 2.

dressbarn's total comp sales were down 6%, including a 7% decrease in store comps. However, the e-commerce channel remains strong, continuing its impressive growth with a 50% -- 56% increase for the quarter. The cooler weather patterns, specifically in the Northeast where dressbarn has a high concentration of stores, clearly affected our results and drove traffic down. Our outerwear, blazers and Jones sportswear categories all performed well in Q3, all showing increased sales versus last year, reflecting the continued purchase of apparel for the cooler weather trends.

Underperforming departments were centered mostly in warmer weather items, in knits, bottoms and dresses, and the misses were larger in cooler weather regions. dressbarn responded to the sales decline by reducing inventory levels and cutting discretionary expenditures for the season. Q3 ending inventory was down 4% versus last year and will be managed conservatively into the fall.

With regard to marketing, the major differences in Q3 compared to last year were the launch of the April fashion book earlier to support Easter, and additional key item promotions to stimulate demand. Enrollment in our blushPERKS loyalty program is now at 5.5 million customers, up significantly from last year. In addition, our private label credit card market share is now at 30% of sales.

The dressbarn store count is at 833 locations at the end of the quarter versus 838 last year. During the second quarter, we opened 17 and closed 13 stores.

And an organization note, dressbarn's Chief Merchandising Officer, Keith Fulsher, announced his retirement recently, after 18 years with the company. I want to personally thank Keith for his outstanding leadership and contribution to dressbarn's growth over the years. We began a search for Keith's replacement in April, and Keith will remain with dressbarn until his successor is onboard to ensure a smooth transition.

Catherines continued its strong performance with total comp sales growth of 10%, with store comp sales of 8% and 28% growth in e-commerce sales. Merchandise categories that performed well for the quarter include casual wovens, denim and sweaters. The Catherines marketing program was largely unchanged versus last year and stayed focused on frequent mailers, 9 this year and last. We did extend our Catherines cash balance back program, which was successful at generating increased sales. The penetration of our private label credit card has increased to 40%.

The Catherines store count is at 402 locations at the end of the quarter versus 430 last year. During the third quarter, we closed 7 stores.

Before I turn the call over to Dirk for a deeper dive in the numbers, I'll just say that this was obviously a challenging quarter due both to the external environment and what we recognize as opportunities to improve our merchandising and marketing strategies. I'm pleased that we responded quickly to the near-term top line challenges by adjusting promotions in Q3 and Q4 to stimulate sales and clear inventory so that we will be well positioned for late summer and fall, and have also cut expenses to partially offset sales declines. We continue to build talent and infrastructure to support improvement in these areas as part of our overall strategy to drive sustainable long-term sales and profit growth.

With that, now Dirk will provide an update on financial highlights.

Dirk A. Montgomery

Thank you, David, and good afternoon, everyone. Before reviewing our third quarter results, it's important to note that this year's quarterly earnings include certain financing and restructuring costs related to the Charming acquisition. We believe these costs are not indicative of ongoing operations for period-to-period comparisons. The results discussed in this call are adjusted to exclude those items, which are described more fully in our press release. In addition, my comments on last year's quarterly results have been adjusted to include Lane Bryant, Catherines and Charming Shoppes overhead costs for comparison purposes, unless otherwise noted.

Total quarterly net sales increased 46% to $1.142 billion. Of this amount, Lane Bryant and Catherines accounted for substantially all of the sales growth versus last year. As David mentioned, cooler-than-normal weather and a challenging external environment resulted in comp store sales below our expectations. Due primarily to soft traffic, comp store sales were down 4%.

In terms of sales by region, all regions were negatively impacted by cooler-than-normal weather patterns, other than the West Coast, which had a positive store comp versus last year.

Our e-commerce business continues to be strong, increasing 37% year-over-year to $98 million, with lots of future growth opportunity. On a combined basis, total comp sales decreased 1%.

Moving down the income statement. Gross margin was $658 million or 57.6% of sales. This compares to last year's adjusted gross margin of $665 million or 58.8% of sales. The 120-basis-point decline was primarily due to increased markdowns and promotional activity associated with the challenging environment.

Total Q3 buying, occupancy and distribution costs were $208 million or 18.2% of sales compared to last year of $195 million or 17.3% of sales, reflecting deleverage on our negative comp sales.

Total SG&A was $332 million or 29.1% of sales. This compares to last year's $323 million or 28.6% of sales. The increase of 50 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 decreased to $73 million or 6.4% of sales. This compares to $109 million or 9.7% of sales last year.

Adjusted quarterly operating income results by brand, fully loaded for corporate overhead costs, were as follows. Justice's operating income decreased 11% year-over-year to $21 million or 7% of sales. This compares to prior year Q3 operating income of $23 million or 8.1% of sales. The decrease was mainly due to the deleveraging of operating expenses, particularly in buying and occupancy.

Lane Bryant came in with operating income of $5 million compared to $19 million in Q3 of last year. The decline in gross margin was driven by increased markdowns and was coupled with an increase in SG&A due to the duplicative corporate overhead structure.

maurices' operating income decreased 8% versus last year to $35 million or 14.8% of sales compared to prior year Q3 operating income of $38 million or 16.9%. This was primarily driven by a deleverage of SG&A.

dressbarn came in with operating income of $6 million or 2.5% of sales compared to prior year Q3 income of $24 million or 8.9% of sales. The decline was driven by a decrease in sales and gross margin rates due to higher markdowns and promotional activity, along with the deleverage of buying and occupancy expenses.

Catherines' operating income was $6 million or 6.7% of sales compared to operating income of $4 million or 5.4% in the prior year, reflecting very strong performance for the quarter.

The company's effective income tax rate for the third quarter was 39.6% on an adjusted basis. This compares to a rate of 37.5% in last year's third quarter.

Adjusted net income from continuing operations decreased 21% to $42 million or $0.26 per diluted share. This compares to last year's adjusted net income of $54 million or $0.34 per diluted share.

Turning to the balance sheet. We ended the quarter with $206 million in cash and cash equivalents. Of this amount, approximately $150 million is overseas. We ended the quarter with long-term debt of $156 million. Under an amended revolver agreement completed in March, we expanded our borrowing availability from $250 million to $500 million, and extended the maturity date to June of 2018. We subsequently prepaid the remaining $279 million outstanding principal balance of the term loan. This new facility will result in lower interest rates and greater flexibility. Combined with our strong cash flow generation, this new facility should comfortably meet our liquidity needs.

Total inventory at cost was $538 million at the close of Q3, up 2% versus last year on an adjusted basis. However, we have adjusted promotional and clearance plans in the fourth quarter to position ourselves for a clean inventory position going into fall, with targeted total inventory dollars below last year.

CapEx for the quarter was approximately $75 million. Full year fiscal 2013 CapEx is projected at $350 million, which includes the major multi-year projects we noted previously: the centralized store distribution facility, our e-commerce fulfillment center and the ongoing IT transformation.

In terms of unit development, we expect to finish the year with approximately 200 openings and expect to close approximately 160 stores.

A quick update on Charming Shoppes exit strategies for Fashion Bug and the Figi's sale. We have essentially completed the liquidation of the Fashion Bug business, including the resolution of credit card liabilities, inventory liquidation and lease terminations at roughly breakeven. We have a small number of leases outstanding as the only remaining exposure, which is immaterial. The Figi's marketing process is ongoing, and we have no further updates at this time on the status of the sale.

I'd now like to provide some thoughts on our outlook for Q4 and full year 2013. We are encouraged by improved May results across all our brands compared to Q3. Q4 quarter-to-date total comp sales were up low-single digits. However, the late May and early June comps were choppy, suggesting that the improved trend may have been driven in part by pent-up demand from the cold spring. We also believe that macroeconomic trends are negatively impacting apparel segment traffic.

All of our brands are focused on adjusting promotional activities to ensure that we end the fourth quarter with appropriate levels of spring carryover merchandise, and we are conservatively positioning inventory for the fall season. We've also reduced expenses, where possible, to offset the soft sales trends.

We are reducing our fiscal 2013 earnings guidance of $1.20 to $1.30 per share to $1.10 to $1.15 per share, which excludes onetime financing and restructuring costs related to the Charming acquisition. Note that this assumes total comps for the balance of the fourth quarter in June and July, in the range of flat to up low-single digits.

That concludes my financial comments, and I will now turn it back to David.

David R. Jaffe

Thanks, Dirk. As we look toward 2014 and beyond, we feel very good about our ability to achieve sustainable top line and bottom line growth at all of our brands. I'm encouraged by the progress both the Lane Bryant and dressbarn teams are making on their broader repositioning plans. While this will happen incrementally, over time, we are confident that we're on the right path for long-term improvement in both brands.

We have been focused, first, on talent. And as we find Keith's successor as CMO at dressbarn, this will be the last senior-level position in our executive ranks to be transitioned.

In terms of margin improvement. We previously identified a $90 million long-range opportunity through overhead reduction and cross-brand synergies. We are making solid progress toward that goal and expect to see benefits from those efforts ramping up over the next few years.

In closing, we have a view of the future that is very compelling, and our leadership team is looking forward to growing the business and achieving that vision, whilst generating superior shareholder returns. Our brands and shared service leadership teams look forward to providing a more detailed update on our long-range growth plans at our Annual Investor Day on October 9 in New York.

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

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Taposh Bari with Goldman Sachs.

Taposh Bari - Goldman Sachs Group Inc., Research Division

I guess I just wanted to start with the comp progression. So last we heard from you, you were running flat through the end of March, which I would have imagined was the worst of retail. It sounds like things got worse in April. If you could just elaborate on that? And if you could just provide some more color as to what's happening in May just to start?

David R. Jaffe

Well, without giving the specifics, April was tough, and I think we've all followed the weather patterns and the reports from all the other retailers. And you see our final numbers for the quarter, which was clearly disappointing. And then May, you just follow the weather again. The first 3 weeks in May were perfect. And for those of us that struggled through Memorial weekend on the East coast with sweaters on, it was a tough weekend. And as we said, that last week in May, and so far in June is -- the word we're using is choppy, which means in our vernacular, that it's been up and down, and it's been inconsistent among the brands for various reasons that are specific to each brand. So we're not seeing that strong trend continue that we saw in the first 3 weeks in May, which, frankly, is disappointing. But there are reasons for it, and I don't -- I hate to keep using the weather. But certainly, Memorial Day weekend was not great. And as we look out, we feel we're in good shape and well positioned, but it's hard to see what the consumer is doing. One of the things that we've seen on a global level, and I'm sure you read the same reports, is that there seems to be a trend towards more durable good purchases and less consumer discretionary. So as auto sales are up and home sales and home furnishing sales are up, we're seeing the apparel segment, particularly at the moderate level, suffer a little bit. And one report I just saw on consumer debt formation showed it at lower levels than expected, and the vast majority of that, interestingly, was for auto loans and only a tiny bit was for credit card or private label credit cards. So I think we're seeing some trends out there that may be shorter-term in duration, but it's certainly playing a little bit of havoc with our results. And we're going to be watching those really carefully as we round the corner and start heading into back-to-school in the fall season.

Taposh Bari - Goldman Sachs Group Inc., Research Division

Okay. As you've progressed here into post-Memorial Day, have you seen promotions throughout the industry ramp-up? Because it sounds like, looking at the way that things evolved for the first quarter, a lot of companies missed on their sales plan given the weather. It seemed like promotions were fairly rational, but now that we're entering, call it, this clearance period, are you seeing an increased level of markdowns across the space?

David R. Jaffe

We saw a bunch during Memorial weekend. I'm sure there is always someone who's doing something, but it wasn't that pervasive. You walk down the mall and everybody during Memorial weekend had these crazy sales. We're not seeing that to the same extent. So I'm hoping that people got their inventories in line, and we're not going to see that heavy promotional environment, which isn't good for anybody.

Taposh Bari - Goldman Sachs Group Inc., Research Division

Okay. And last one I have for you guys is the SG&A line. Obviously, a lot of wood to chop there, when should we start to see some leverage on SG&A as you work through some of these overhead opportunities?

Dirk A. Montgomery

Yes, Taposh, I would say, into next fall and then over the next 12 to 24 months. I mean, as we've said before, some of the overhead reduction opportunities will just take time to implement, and we see them ramping up over the next 12 to 24 months.

Taposh Bari - Goldman Sachs Group Inc., Research Division

Okay. So are you saying next fall is when we should start to expect SG&A leverage on a comparable basis?

Dirk A. Montgomery

We'll give a lot more detail on that when we talk about next year's guidance in the fall. But I think we certainly see, as we talked about last year, ongoing opportunities for overhead reduction as we head into '14 and '15.

Operator

Your next question comes from the line of Scott Krasik with BB&T Capital Markets.

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

Just want to drill down on Justice a little bit. If you combine Q3 with what you expect to do in Q4, maybe sort of low growth on a comp basis. I'm not sure exactly what you've implied in your guidance for the operating margin in Justice in the fourth quarter. But maybe talk about what your expectations are going forward from here? Is this business just a low comp business at this point? You talked about expanding margins in the past, but you're probably going to be sort of flattish for the year relative to last year, so how do you think about that now?

David R. Jaffe

Well, I think there have been some unique issues in the Justice business. We've talked, Scott, about how Easter is so important to the missy customer, at dressbarn and Lane Bryant. Well, Easter is right around spring break, and if that customer isn't going somewhere warm or it's not warm at spring break, those sales suffer, as we saw in that third quarter. I think the business there is still very strong. I think that they've developed some new tools like this flash sale, which has been able to drive high levels of engagement with the customer, as well as attract new customers. So they've added another tool to their kit. And then finally, we're rolling out Brothers. So there'll be 80 stores for back-to-school. And what that does is, as you heard me say earlier, is create incremental volume. So we'll tell you more about the specifics on that in October. But as I look out, there's no reason why every store -- maybe have to be relocated to expand, but there's no reason why every store can't have a Brothers shop in it. And if we continue to be as successful in adding Brothers volume without impacting the girls volume, that is going to be a very strong comp driver.

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

You said that's historically what, a mid- to high-single-digit lift from Brothers on the comp?

David R. Jaffe

You did say?

Dirk A. Montgomery

Yes, we did.

David R. Jaffe

Okay. Yes.

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

Okay. And so in terms of rolling it out, you've seen that as you've gone from 0 to 25 to 50 to 80, no change there?

David R. Jaffe

Yes. The point though is that, remember that we only have a handful of those stores that are truly comped. So you get the initial incremental and then we're watching them comp on themselves. So we see that business not just at an initial incremental, but also as we continue to refine the merchandising and improve the word of mouth and other marketing that we're doing to support the building of the brand, we see that growing and becoming a very important addition to our business at Justice.

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

Okay, that's interesting. And then just last Dirk, in terms of incentive compensation, I don't know if it moves the needle or not, I assume with a second guidance cut this year, that's probably going to be a lot lower year-over-year in the fourth quarter. Is that a meaningful number we should think about for Q4?

David R. Jaffe

FY '14.

Dirk A. Montgomery

Yes, it's worked into our guidance numbers. We actually adjust it as we go and true it up as we go. So I wouldn't say that necessarily year-over-year it's going to show you a significant benefit as we head into the fourth quarter. Although, I don't have my facts handy on what the actual expense was in the fourth quarter, but I mean, certainly, with our results being what they are, the overall incentive expense is going to be lower than it was last year.

Operator

Your next question comes from the line of Brian Tunick with JPMorgan.

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

Two questions, David. I guess at the Analyst Day, the Lane Bryant business, I guess you guys said the lifestyle casual was 40% and wear-to-work was 20%. And then on the fashion level, core was over 50%. So I guess I was just wondering, what's the timing for Linda to make meaningful changes to those mixes? And how do you think about doing that without walking the core customer? And then the second question, maybe for Dirk, at the Analyst Day, lot of discussion of the SG&A and the corporate overhead opportunities, but can you talk a little about the gross margin opportunities that you guys think, longer term from a direct sourcing perspective or leveraging of the vendor base, how big of an opportunity do you think that could be as you talk about that 12% EBIT margin goal that I think you guys have put out there?

David R. Jaffe

Well, while Dirk is working his calculator magic here. On the LB side, Linda has already gotten in and has rolled up her sleeves, and I think it's more important to think about the selection of the merchandise rather than the balancing between various categories. So it may be -- and Linda will talk more about this in October, that she doesn't change the breakdown that you just laid out. But within that breakdown of, say, casual or wear-to-work or whatever, the product selection changes significantly. So one of the things that she's doing is going out and talking to the consumer and doing a segmentation study to make sure we understand exactly who our customer is, and not go off of some old research or old assumptions, and then make sure we've got the appropriate products and styling that appeals to her. So it may be that there are a few customers that we walk, but by providing more of what our core customer wants and less of, as you heard me say earlier, of basic goods, which really are not fashion compelling, I think we are going to attract a much stronger customer base, as well as give that customer more of what she's looking for. So with that, let me turn it over to Dirk. I'm sorry, go ahead Brian.

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

I'm sorry, David. Are you doing that survey work now? Is that something you've done before? And where are those customers shopping today that you're trying to bring into Lane Bryant or even reactivate?

David R. Jaffe

Well, we don't have the final results, so I'll give you kind of top-of-mind and then let Linda give you more detail on that in October. But conceptually, it's about taking customers that left the brand. Unfortunately, in any retailer, you lose a lot of your customers year-over-year. So we want to get those customers back, reactivate them. We want to get greater share of wallet from our existing customers. And as I say, if we offer more fashion that's attractive to her, I think we'll be successful in that. And then there are a lot of other retailers that sell large size women's clothing that do a pretty good job of it. And we happen to own a couple of those other brands in dressbarn Woman and Catherines and maurices plus, so it's very competitive out there. Large size apparel isn't as neglected as it was 20 years ago. So we need to make sure, as being the icon in the industry with the #1 specialty store market share, that we continue to build on that and bring those customers that may have migrated away from us, to go to a big box or a discount or what have you, back into the fold.

Dirk A. Montgomery

So Brian, to answer your second question, in terms of, I think, your question was aimed at, as we think about the overall overhead reduction and synergies potential that we talked about last fall, including the direct sourcing opportunity, where do we see that impacting the P&L. I mean clearly, the direct-sourcing opportunity would impact gross margin. As we talked in the fall, we need to get into the implementation of that to really, truly determine what the upside is. But certainly, we feel like there is a lot of upside as we fully implement that opportunity over the next few years. If you consider the list of the other ideas that were in the brand synergies list that we unveiled in the fall, many of those items, particularly the DC consolidation and logistics opportunity, will actually hit lines other than what goes into gross margin. BD&O, obviously, would be impacted by the DC and the logistics benefits. We had estimated a long-term potential in that category in the range of $25 million to $30 million, which is significant, and it's the most significant idea that was on that page. Many of the other initiatives that we have ongoing will also affect SG&A. So I think it's going to be spread pretty evenly across the P&L, and our plan is to provide an update on our specific savings plans for 2014 as we head into fall.

Operator

Your next question comes from the line of Alex Fuhrman with Piper Jaffray.

Alex J. Fuhrman - Piper Jaffray Companies, Research Division

Curious to talk a little bit about some of the other ongoing initiatives that you have, particularly the bringing e-commerce fulfillment in-house, especially with e-commerce up as much as it was during the quarter. I mean, are you seeing e-commerce growth accelerate more or less than you would have thought over the past year? And as it becomes so much of a bigger part of the business, how does the ability to bring that in-house from a fulfillment side really change your ability to interact with the stores and the e-commerce side, and really create a multichannel experience for the customer?

David R. Jaffe

Well, first, I'm pleased that e-commerce is outperforming our plans at virtually all the brands. So continues to do well in all regards, and we're excited about the outlook for those businesses as we continue to invest in them, both in terms of people and systems and whatnot. The opportunity to bring e-commerce fulfillment in-house is primarily a cost-saving opportunity, as well as it gives us more control and flexibility to deliver the level of service that we think is appropriate for our customers, which in some cases, frankly, is a little bit higher than what we're currently doing through third parties. So that's going to start rolling out brand by brand beginning next spring. And the fact that things are strong there in the e-commerce business does not impact the timing or our ability to take on this function for the brands. What it does also do is, as we start centralizing our e-commerce, our distribution, start migrating to more common platforms, it gives us the ability to implement more omnichannel initiatives, such as store ordering, delivering to stores, being able to use the stores as a fulfillment center. All those things are very exciting. Some of the other retailers out there are maybe a little further ahead of us, but we are very focused on that, and I think we'll be catching up quickly.

Operator

Your next question comes from the line of Oliver Chen with Citibank.

Oliver Chen - Citigroup Inc, Research Division

Regarding your comp guidance for the flat to low-single digit. Was the improvement pretty evenly split across your banners? Or were there any characterizations you could provide there? Also with the merchandise misses you called out at Lane Bryant and dressbarn, could you just help us prioritize how we can get a little bit more comfortable that you're on the right track with respect to the improvement in merchandise? That would be great.

David R. Jaffe

Sure. I'd probably say that a rising tide lifts all ships. So while some of them in the third quarter were down more than others, the amount of improvement kind of was relatively the same. So the guys that were still a little bit of a laggard, stayed a little bit -- like dressbarn had a tough third quarter and their business is still a little bit tough, not as tough as it was. And that was seemingly consistent among all the brands, with a little bit of exception, Lane Bryant got a little bit better. So we'll see how the rest of the season plays out. On the second point, I think, Oliver, this is one where we've been spending a lot of time with -- the focus at dressbarn and Lane Bryant has been to drill down on the merchandise based on the past misses, or in Lane Bryant's case, the addition of Linda, to be focusing on products with maybe a fresh eye. And there have been changes made. There's been product that's been moved out quickly at aggressive prices to clear it, and there is other product that maybe we've said, "Gee, this isn't going to work for us, let's not cut it, let's make it into something else." And the reality is, that as you bring on new products, it's always a risk. You don't know. We feel much better about it. And the customer is going to tell us whether or not she likes it. So we're watching it very carefully. And where we can, we're out there testing product to get a read on it, and then we can go back and bring it in or in a big way for the -- later in the season, or the next season and react to those trends that we're seeing on a test basis.

Oliver Chen - Citigroup Inc, Research Division

And just as a follow-up, you mentioned in your press release that you're adjusting your promo plans to ensure the spring inventory balances are in good shape. How do we triangulate that with how we think about gross margin? Is the run rate that you experienced here sort of the range at which we should expect it to be next quarter?

David R. Jaffe

Well, I think what you heard Dirk say earlier is that, and myself here, we're going to have some gross margin impacts from clearing some of the products, like I just mentioned, at Lane Bryant. So yes, you will see an impact on margin. We can't quantify it for you, but I think we are going to have a little bit of a hit there overall. And the result is going to be that we're going to have clean inventories, that's the most important thing. But all our best guesses have been factored into the guidance that Dirk gave you a minute ago.

Operator

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

Edward J. Yruma - KeyBanc Capital Markets Inc., Research Division

You indicated that weather weighed on the quarter. You also indicated pressures on the middle-income consumer. Are you adjusting your buy plans for the remainder of the calender year, should some of this weakness be a little bit more permanent than perhaps weather?

David R. Jaffe

Yes, I think that's a really good question, Ed, because as we look at the pressures, and I don't want you to think that we believe that the middle-income consumer is economically constrained. If that was the impression we gave, I want to correct that. I think it's a shift out of discretionary or, like, out of apparel into durables. And we've seen this in a number of areas, and I mentioned some of it on one of my earlier questions -- responses. And I think consumer confidence is at a 5-year high, credit is in -- consumer credit is in a good position. So I think that this trend to durables may last for a little while. And as we look at fall, we have not finalized our budgets, but we are certainly looking at those trends in light of our fall expectations. So what I would tell you is, as is in the past, where there have been apparel slowdowns either due to a shift or due to tough economic times, we tended to have done reasonably well because of the trade-down effect. We are a middle or moderate retail -- group of moderate retail chains and we are promotional. So a lot of times we get the benefit of people shifting out of the department stores or the mall specialty stores. And as much as we lose some of our customers down another notch to a lower level or they shop a little bit less from us, we have tended not to get the big ups and downs in a tough economic cycle or a durable shift. So we'll certainly look at it very carefully, but I would -- I'm not expecting that we're going to be planning our comps negative for fall at all.

Edward J. Yruma - KeyBanc Capital Markets Inc., Research Division

Got it. And one follow-up. I believe you said that you were relatively pleased with the performance at Catherines. I think initially you had characterized this as kind of a gift with purchase. How do we think about the longer-term strategic positioning of the brand? And does that work -- kind of dovetail with the work that you're doing at Lane Bryant?

David R. Jaffe

They're actually in very different positions. I would say Catherines is a year or so ahead of where Lane Bryant is going just because they started the process earlier. I am very pleased with what is going on at Catherines and the leadership from Joan and Brett. They're doing a wonderful job. The team has really come together and focused on this customer in a way that's producing really terrific results. So as you may recall, after the recession, as a result of the recession, they had dropped from $750,000 a store -- $750,000 a store to about $600,000. They are well on the way back up there, but they have still a couple more good years to go. So they are clearly focused on getting back to that $750,000. And when they're able to do that, it will be another discussion about whether or not we should be rolling the chain out or expanding it or what have you. But clearly, that's something that's on hold for now until they're able to execute their 3-year plan of getting back to the $750,000 level.

Operator

Your next question comes from the line of Mike Richardson with Sidoti.

Michael Richardson - Sidoti & Company, LLC

Just 2 real quick questions. The first one is, can you remind us where you see the store count by brand for this year? And the second one would be, obviously, you guys paid down some debt the last couple of quarters, just how should we be thinking about that going forward?

Dirk A. Montgomery

Sure. So as far as the store counts by brand, I can give you all that offline after the call, just because it will be a little bit detailed. Can you repeat your second question, was it around our anticipation of a debt pay down?

Michael Richardson - Sidoti & Company, LLC

Yes. Just how we should be...

Dirk A. Montgomery

Yes, so I mean, I think our plans, as we have done historically, we want to have a conservative balance sheet with low debt in an effort to allow us to actually be opportunistic for future opportunities, and really to just make sure that we have ample liquidity as we go through this next -- really the next full year of significant infrastructure investment on some of these projects that are going to drive synergies. All of that said, as we have excess cash, the priority for us will be to pay down debt over the next year or 2 as a top priority for excess cash.

Operator

Your next question comes from the line of Matt Temple with Avondale Partners.

Matt Temple - Avondale Partners, LLC, Research Division

This is Matt for Mark. I just wanted to touch on your e-commerce business now that it's becoming kind of a larger portion of total sales. And specifically in the quarter, when you guys look at such a big increase in such kind of a difficult weather environment, how do you guys think of -- was that inflated by the fact that consumers stayed home and did more shopping online? Or do you look at that as a suppressed number as well, with potential to grow higher, kind of like your in-store comps?

David R. Jaffe

Well, certainly, Matt, e-commerce has got a wonderful upward trend, and we see that continuing at all brands. So was it boosted or suppressed by the weather? Historically, people would tell you that in bad weather, people do shop more online or via catalogs because they don't want to go out. In this case, I'm not so sure because in spring they're buying to wear now, and it was cold so there was no big demand to wear now. So I don't think you saw a distorted number one way or the other. But as we look out, again, let me emphasize that I see continued double-digit growth in e-commerce at the brands.

Dirk A. Montgomery

Yes, Matt, as we look into Q4, the trend of the e-commerce growth versus last year is very much in line with the year-to-date average so far. So I think we feel very good about our opportunities to continue to grow it.

Matt Temple - Avondale Partners, LLC, Research Division

Okay. Have you guys given like a long-term goal for, like a potential e-commerce penetration?

David R. Jaffe

We haven't given one specifically, but what I would tell you generically is that in our brands where e-commerce is more established and been around for a longer time, such as Lane Bryant and Catherines, you're in the mid-teens. So it's a very healthy number. Whereas the brands that are newer to e-commerce, dressbarn is only 2.5 years, maurices 3.5 years, it's got a much lower penetration, but it's got wonderful ramp-up. So down the road, can they all be a certain number? I'm not going to sit here and try and give you a projection for each brand, other than to say that we're not sure. Given the existing technology, we're not sure where that limit to growth is. But clearly, the consumer likes e-commerce. And as we talked briefly a minute ago about omnichannel, she likes the ability to be able to buy online and deliver in the store, or if she's in the store, and we don't have her size or color to be able to order in the store. So that's back to what we had talked about in the last call, where it starts getting blurry, and where we start looking at comps for brick-and-mortar and e-commerce, and they get a little gray as to which one is which. And over time, I think that you're going to see that continue.

Matt Temple - Avondale Partners, LLC, Research Division

Okay. I have one last one on your flash sales. When do you send those out in relation to when the sale begins?

David R. Jaffe

The night before.

Matt Temple - Avondale Partners, LLC, Research Division

Okay. And those are for store only? Or is that e-commerce as well?

David R. Jaffe

Yes, it's both.

Matt Temple - Avondale Partners, LLC, Research Division

And did those drive incrementally higher profit dollars this quarter?

David R. Jaffe

Yes.

Operator

Your next question comes from the line of Janet Kloppenburg with JJK Research.

Janet Kloppenburg

I got on a little bit late, you guys, but I was looking at the performance at dressbarn, and I know that weather was -- I have great appreciation for what weather did to business in this quarter. But I was just thinking about the performance of the brand over the last several quarters, and it seems to be having some difficulty. And I'm just wondering if you could help me better understand in what categories of business that might be. And if the modernization of the brand is on the course you expected it to be or if you need to tweak that positioning a bit?

David R. Jaffe

I think that's a fair call out. We were not thrilled with our business at dressbarn in the third quarter. There were not a lot of standout categories, and we think that there is some tweaking to our positioning and we started that work, Janet, and we'll see over the next 3 to 6 months a lot of soul-searching as to who are our customers. What's she's looking for? How she wants to be spoken to? Styles that she likes. What level of fashion? Types of promos, types of communications. So we're really kind of starting with a blank slate. And Jeff has assembled, primarily, a brand-new team at the executive leadership level, and he's really encouraging a rethinking. So as we mentioned earlier, we're looking for a CMO, and that will be the last link that we need. In the meantime, the work continues, and we have 2 strong women that have come in, one Head of Marketing, one Head of Creative, that are working very well together with Keith, for now, and then with his replacement at the right time, that are beginning this process of rethinking dressbarn's merchandise and positioning. So I feel very confident that they're on the right track. It's not going to happen overnight, but I was, as an example, just at a style out for fall sweaters, which as you may recall, was a real problem last year, and I feel much, much more confident in what they're going to have on the floor this upcoming fall versus what we had last fall. So I think they're doing the right things. They're going slow and steady, and that's what we need to win the race here, similar to what we've seen at Catherines and their wonderful turnaround, and what I think is going on at the same time at Lane Bryant.

Janet Kloppenburg

Okay. And I just had a follow-on. I know that Justice's operating margins for the year, I think they're up year-over-year, but maybe ticked down a little bit in the third quarter. I'm just wondering if the plan is for Justice's operating margins, I mean, if you think it's realistic that they can stay as healthy as they are? Or because of the competitive situation, that we should think that they may be under a little pressure going forward, David?

Dirk A. Montgomery

Sure, Janet, it's Dirk. The third quarter was clearly negatively impacted by sales being down. I think we feel like they actually ought to be able to maintain their margins over time, as we head into the future. So not a big concern.

Janet Kloppenburg

Okay. So more weather-related than competitive-related as far as the Justice, yes. Okay. Go ahead David.

David R. Jaffe

The one sidebar I'll add to that is that the flash sales have been very, very successful. But as we've talked before, you're benefiting gross margin dollars at the slight expense of gross margin percent. So when we look at operating margin dollars, we'll see continued growth. And although you're getting more dollars that will leverage the other expenses, your gross margin is going to get a little bit of a hit and those are going to play off of each -- against each other. So while we're very pleased in the growth...

Janet Kloppenburg

But the operating margin leverage should be -- the operating -- the expense leverage should offset that gross margin percent?

David R. Jaffe

Yes.

Janet Kloppenburg

Yes. Okay. I got it.

Dirk A. Montgomery

And despite the poor third quarter, I mean their margins actually are still hanging in there relative to last year.

Janet Kloppenburg

No, they're -- I think they're up on a 9-month basis, right?

Dirk A. Montgomery

Yes, they are.

Operator

Your next question comes from the line of Taposh Bari with Goldman Sachs.

Taposh Bari - Goldman Sachs Group Inc., Research Division

Just a quick follow-up. Dirk, can you give us the pro forma gross margin, buying -- BD&O and SG&A rates for 4Q '12?

Dirk A. Montgomery

Yes.

David R. Jaffe

Call him back.

Dirk A. Montgomery

Yes, we can handle that on the debrief call after this, Brian -- or Taposh, sorry.

Taposh Bari - Goldman Sachs Group Inc., Research Division

Okay. Just one other one, just to follow-up on Janet's question while I have you. These flash sales at Justice, I think some of the anxiety out there I would say is that 20% off of 40% and then 30% off of 40%. So is this a slippery slope in your opinion? And then secondarily to that, are you driving these flash sales from a position of defense? Or are these more kind of aggressive actions on your part?

David R. Jaffe

Well, I would say that it does both, so we use it as an offensive tool because, as we've mentioned before, it's an opportunity to attract new customers and get greater share of our existing customers. So it's offensive in that way, and it can be used defensively, as we just did a promo, a flash sale last weekend, and it was more defensive there in that, as you see the numbers here, we're a little behind plan after the tough Q3, and so this is an opportunity to use it to clear inventory. So it can be used both ways because it does drive that consumer in the store. I do not think it's a slippery slope. I think it's something -- it's a tool in your kit, and it's something that Mike and his team are using very thoughtfully. In addition, they're looking at other tools so that they don't have to wear this one out. So in July, you'll see another offer early in the month that we're pretty excited about, and it's the first time we've done it in brick-and-mortar, and we'll see what the results are. We're optimistic about it, but I think the challenge is to make sure that we keep coming up with new tools, new handles to attract that customer, create a call to action both for our existing customer, as well as the passerby. You may remember that the average Justice customer, because it's a tween-focused business, isn't a customer for very long before she grows out of it. So we're constantly losing customers, on the other hand, we're constantly getting new ones in. And so we've got to make sure to attract those new ones in, and there's nothing like a big event, point-of-sale event in the store window to get them to cross the threshold.

All right, operator, I think we're out of time. Operator?

Operator

And we have no additional questions in queue.

David R. Jaffe

Great. Well, I want to thank everyone for their interest. We'll have our end-of-year call in late September. And then again to remind you, just a week or 2 after that, on October 9, we'll have our Investor Day, and we hope to see all of you there. In the meantime, everyone have a very enjoyable summer. Thank you.

Operator

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.

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