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Executives

Jean Fontana - Senior Vice President

Brian P. Woolf - Chief Executive Officer and Director

Thomas W. Stoltz - Chief Financial Officer, Chief Operating Officer, Executive Vice President and Treasurer

Analysts

Stephanie S. Wissink - Piper Jaffray Companies, Research Division

Sharon Zackfia - William Blair & Company L.L.C., Research Division

Mark R. Altschwager - Robert W. Baird & Co. Incorporated, Research Division

Edward Plank - Jefferies LLC, Research Division

Jeremy Hamblin - Dougherty & Company LLC, Research Division

Pamela Nagler Quintiliano - SunTrust Robinson Humphrey, Inc., Research Division

Michael Richardson - Sidoti & Company, LLC

Body Central (OTCQB:BODY) Q2 2013 Earnings Call August 1, 2013 4:30 PM ET

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Body Central Corporation's Fiscal Second Quarter 2013 Earnings Release Conference Call. As a reminder today's conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Ms. Jean Fontana of ICR. Please go ahead.

Jean Fontana

Thank you. Good afternoon, everyone. Thank you for joining us today for Body Central's Second Quarter 2013 Earnings Conference Call. Hosting the call today will be Brian Woolf, the company's Chief Executive Officer; and Tom Stoltz, the company's Chief Operating Officer and Chief Financial Officer. You can access a copy of today's press release on the company's website at www.bodycentral.com or by dialing (203) 682-8200.

Before we begin, let me remind you that certain statements made on today's call during our prepared remarks and responses to your questions may constitute forward-looking statements and are made pursuant to and within the meaning of the Safe Harbor provisions of the Private Security Litigations Reform Act of 1995 as amended. Such forward-looking statements are subject to both unknown and known risks and uncertainties that could cause results to differ materially from such statements. Those risks and uncertainties are described in the company's reports and registration statements filed with the SEC. Investors should not assume that statements made during this conference call today will be offered at a later time. Body Central undertakes no obligation to update any of the information discussed on today's call.

With that, I will turn the call over to Brian Woolf.

Brian P. Woolf

Thank you, Jean, and thank you all for joining us. On today's call, I will briefly review our second quarter results and provide an update on the progress we have made to improve our business. Tom will then take you through details of our second quarter financial results and give you some business updates.

Before I review our second quarter results, I want to emphasize that we have made important advances in our key strategies and we strongly believe that we are moving our business in a direction that will enable us to recapture our core customer and deliver healthy long-term sales and profitability.

A recent customer research has given us great insights into whom our customer is, how we need to be communicating with her and most importantly, what merchandise she is looking for from us. The wheels are in motion with a new marketing program, a back-to-school assortment that we believe will resonate with her, enhanced visual merchandising and a brighter and more appealing store environment. Our associates are very excited about what we have put in place, and we believe our customers will also respond favorably as well.

Before I provide more details, let me review our second quarter results. As I said to you before, we expected the first half of the year to be tough, and the second quarter proved to be tougher than expected. In our stores, comp sales were down 13% in the quarter, primarily because we aggressively pushed out the slow-moving merchandise from spring and summer.

While these hurt our sales and margins, it allows us to bring Back-to-School in early during July to get all stores set for the August back-to-school season. This led to an increase on our inventory levels on a per-store basis by approximately 9% or 7% on unit basis, and we are confident that it is the right product assortment for our customer and gives us a meaningful statement in key fashion trends like denim. Tom will speak more about this later.

Our direct business fell short of our expectations as we are transitioning the look and content of our catalog to better align with our brick-and-mortar customer. Our catalog customer is more conservative and has a higher income. Our core store customer is younger, sexier and driven to buy fashion and trend.

Over the past year, we have cut back circulation to the more conservative base in order to align with our brick-and-mortar, fashion-oriented customer. Thus, we are giving up volume from that more conservative customer which does not match our core customer. In order to become a true omni-channel retail, our customer assortment must be consistent across our e-commerce site, in stores and through the catalog. This has led to some customer dislocation during the transition periods. In addition, we lost some of our fashion customers over the last year as our assortment wavered. We firmly believe that fashion and trend is where our niche is, and we need to win her back.

Our marketing strategies are key to reaching out the fast fashion customer and getting her to come back in our stores. We believe this will take longer than originally anticipated to get traction and to see improving sales results. We are firmly committed to our strategies and believe that longer-term, we will build a very successful business and brand.

Now looking ahead, our priorities include building a brand, improving the merchandise assortment, developing a new store prototype and becoming a true omni-channel retailer. I'll start with our branding effort.

We have recently completed extensive research and evaluation of our customer. These efforts include quantitative customer research, customer focus groups and store manager surveys. Based on these findings, we believe we have better insight into both current and potential customers and how we might broaden our customer base. While we have completed consumer research in the past, we believe the more recent data has given us a better understanding of how the consumer differentiates the competitive marketplace. At the core of the research was the affirmation that we are known for nightlife, sexy attire at affordable prices. Going forward, we intend to play to this strength, while also broadening our appeal to the trend savvy customer.

As part of our branding project, we plan to roll out new marketing and communications initiatives to our customers in the second half of the year. We are excited about progress being made within the 4 walls of the store and must now make sure we have the means to bring customers in the door to experience the new and improved Body Central.

Our CRM initiatives will be key to communicating better with our core customer, a 20-something, sexy, edgy, fashion-conscious young lady, and we have dedicated resources to driving the development of this system during the fall. We have broadened fresh merchandise and new styles to prepare for the Back-to-School season.

In the past, our purchasing practices tended to fragment and limit on our assortments, but now we are focusing on chain-wide buys that we feel made compelling fashion statements, such as a meaningful denim presentation and an expanded shoe program in most stores.

Next we have put an emphasis on visual merchandising that we believe will begin to better resonate with our customer. This refined approach takes into account product adjacencies, color, visual marketing and merchandise density. With respect to our -- the store design initiatives, we are focused on making the store environment cleaner, more organized and easier to shop. Our most recent 4-set change reflects our initial steps. Additionally, we are lowering fixtures and wall displays to improve sidelines within the store. These refinements, along with many others, will be integrated into a more comprehensive store retrofit we are working on in the Jacksonville market. We expect this prototype store will be completed in November and are anxious to track results and consumer reaction.

As mentioned previously, our fourth major initiative is becoming a true omni-channel retailer. This initiative includes a number of components and complexities related to both our stores and our direct business channels. For us, we have been increasing the understanding of our customer base and creating a consistent experience across all of our channels.

Next will be to engage our customer at every touch point and harness the value of each interaction. We will carry out these steps to the ongoing visual redesign of the website, the ongoing improvement of mobile device to website interconnectivity, the alignment of assortments and the development of a robust customer relationship marketing program. We also plan to launch a loyalty program within the next year, which will help us to offer greater incentives to our customers, as well as provide valuable information on her shopping behavior that will enhance our ability to connect with her. We continue to make progress in the omni-channel arena, but fully expect this initiative will be ongoing for the better part of the next 18 months, as this requires enhancements to our system and will be deployed in stages until completed.

And finally worth nothing. In addition to our strategic initiatives, we are committed to improving store level results across the organization. These efforts include a recent store operations convention that included all district managers and top management from all functions of the company. The event focused on the rollout of an enhanced customer experience program, combined the training on customer conversion that will be supported by our recently-installed traffic counters and related product reporting.

The focus of all of our initiatives is the objective that merchandise assortments be fresh, stylish and trend-driven. We continue to enhance our planning tools, vendor resources, market intelligence and consumer understanding. We believe these changes will reflect positively over time with our customers as they recognize the many positive changes taking place.

In summary, we are very confident about the strategic direction we are taking and setting a foundation to rejuvenate the Body Central brand and driving improved performance across our channels. While we fully expect our initiatives to take hold, the interim business will likely remained challenging and require a more promotional environment on our stores. And finally, I would like to thank all of our associates for their hard work to help implement the various initiatives and improve the business.

I would like to now turn the call over to Tom to cover the financial results in more depth and to give several additional business updates.

Thomas W. Stoltz

Thank you, Brian. First, a review of the financial results for the second quarter and year-to-date. Net revenues decreased 5.3% to $75.1 million for the second quarter of this year from $79.4 million last year. Store sales decreased 2.1% to $6.9 million for the quarter and from $68.3 million last year. This decrease was driven by net new store unit growth of 29 stores or an 11.3% increase, partially offset by 13.2% decrease in comparable store sales for the quarter. Our comparable store sales decrease for the quarter was driven primarily by a decrease in a number of transactions per store.

Direct sales, which include catalog, e-commerce, shipping and handling fees totaled $8.3 million for the quarter as compared to $11 million last year, a decrease of 25%. This decrease was driven by a 27% reduction in catalog distribution and a decrease in revenue per catalog. Simultaneously, we have expanded e-commerce efforts, which primarily includes email, display ads, pay-per-click and affiliate programs. The revenue growth in these new marketing channels has more than doubled in the second quarter of 2013 compared to the second quarter of '12.

As Brian has mentioned, our objective now is to grow our efforts on the e-commerce side, focusing on more relevant message of communicating with our core customers. Due to the continued underperformance of the catalog component of our direct sales channel, the company determined that the fair value of this division is now less than its carrying value and therefore, has resulted in an impairment charge of $10.4 million.

The Q2 or second quarter direct business performance and impairment are partially attributed to our realignment of the merchandise offering and customer focus between the direct business with stores. As we pursue our omni channel strategy and our merchandise content, branding and messaging will be geared towards a core customer that matches more closely with our store customer.

Gross profit for the quarter decreased 16.6% to $20.6 million from $24.7 million last year and as a percentage of sales decreased 380 basis points to 27.4%. A majority of the gross profit rate decline resulted from the underperformance of our direct business. Additionally, we increased markdowns to clear slow-moving seasonal merchandise, which was partially offset by higher initial margins on new inventory purchases.

Selling, general and administrative expenses increased 28.4% to $23 million for the quarter and as a percent of sales was 30.5%. The increase in total expenses was primarily due to an increase in store operating expenses related to the growth of new stores and in corporate expenses related to key employee hires within the past year.

The company incurred approximately $570,000 in the quarter related to severance, relocation and recruiting expenses associated with the strengthening of the organizational structure. As a percentage of store sales, store operating expenses increased 320 basis points to 21.1%, resulting from deleveraging against negative comparable sales in the quarter.

Corporate cost increased 460 basis points to 11.7% of overall sales. SG&A expenses increased as a percentage of sales by 800 basis points, including corporate costs.

Depreciation and amortization expense increased to $2.5 million as compared to $1.4 million in the same quarter of last year, primarily from the addition of new stores and new systems. As a result of these factors and before the impairment charge for the direct business, operating income decreased to a loss of $4.8 million from $5.5 million in income last year, and operating margin was a negative 6.4% of sales this year compared to a positive 6.9% last year.

After the impairment charge for the direct business, operating income decreased to a loss of $15.2 million from $5.5 million in income last year. Finally, net loss for the quarter was $12.8 million or $0.78 per diluted share and based on 16.3 million weighted average shares outstanding. This compares to net income of $3.4 million or $0.21 per diluted share on 16.4 million shares outstanding last year. Excluding the impairment charge, the net loss this year was $2.4 million or $0.15 per diluted share.

Reviewing the first half, excluding the impairment charge, net revenues decreased 3.4% to $156.6 million from $162 million last year. Store sales increased 0.2% to $139.5 million, as a result of an 11% increase in store count, offset by our same-store sales decrease of 11.7%. Direct sales decreased 25.2% to $17 million as a result of decrease in catalog distribution from the prior year and a decrease in revenue per book [ph].

Gross profit contracted 250 basis points primarily as a function of the sales and gross profit rate declines in the direct business. We realized an operating loss this year to date of $946,000 and have net income of $287,000 or $0.02 per diluted share, again, before impairment charges.

Now turning to our balance sheet. Cash and cash equivalents and short-term investments were $38.8 million with no debt at the end of the quarter, compared to cash and cash equivalents of $42 million and no debt in the second quarter last year. This reflects cash from operations of $4.4 million and CapEx of $6.9 million for the first half of the year. Our total inventories were $25.2 million and $18.1 million at the end of the quarter last year. On an average store basis, inventory increased about 9% at cost and 7% on a unit base compared to last year as we began flowing Back-to-School and fall receipts earlier for the Back-to-School floor set.

Now looking at the makeup of inventory. Based on our customer research, we are building categories that our customers are asking for, including denim and footwear. In order to provide her a really more balanced assortment, we have moved through the legacy product at this point and believe our inventory position is well balanced as we head in the back-to-school season.

Looking forward to the last half of this year, new product did not hit the stores until the end of July, so we currently have very little visibility of the customer's acceptance of this new product assortment. Sales trends remained challenging in July. Given that, we believe that our transition is likely to take longer to positively impact results and that we're shifting the direct business away from the catalog to e-commerce, we believe there will be little improvement in our third quarter sales performance as compared to our second quarter.

As Brian mentioned, we will continue to deploy our key strategies for the focus on communicating the many positive changes to our core customer. While we hope to get a better read of the customer's reactions to our new product assortment during the fall, we expect to increase our marketing and promote more heavily to attract our customer back in our stores. Based on changes to trends, we aggressively continue to evaluate our inventory position and open to buy plans accordingly.

Next, I'd like to update you on several key projects we have been working on. We are continuing to invest significant capital in strategic systems and the build-out of our new D.C. and office facility. This systems development includes inventory management and merchandising, merchandise planning, distribution, accounts payable and general ledger accounting. Also, we are developing a customer relationship database to focus marketing to our core customer.

We anticipate the several components of these systems will be implemented this fall, with the total project completion aimed at mid 2014. There will be many benefits of these new systems and processes that would include a unified direct in-store inventory management system, the ability to manage and plan merchandising in a much deeper level of detail and the ability to financially analyze the overall business in greater depth and detail. We will be able to improve regular price sell-throughs and increased gross margins.

And as Brian mentioned, the new store prototype project is underway. Our real estate and construction team is executing the rollout of this prototype. In addition, we plan to open appropriately 22 stores this year. If the test of this prototype goes well during 2013, we will open new stores under this format beginning in 2014.

We have opened 14 stores in the first half of this year, with 4 store closings. We expect to continue to evaluate new contiguous markets for expansion, such as the Southwest and Midwest and the backfill in existing markets where appropriate. We also continued to expand our openings in alternative venues like power strips, lifestyle centers and outlet malls based on the success we've had today.

Finally, we are in the process of constructing our new office in D.C. complex. Landlord construction is substantially complete and our build-out will begin over the next 30 days. The office may be ready for occupancy late this year and the D.C. will be in test phase until mid 2014. Again, we believe this facility will give us increased capacity and efficiencies in our distribution operations, and our new office will give us the room to work together more effectively.

And now, operator, please open the call up for any questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from Steph Wissink with Piper Jaffray.

Stephanie S. Wissink - Piper Jaffray Companies, Research Division

Just a couple of questions for us. Brian, I know -- and Tom, you both mentioned that you don't necessarily have an indication or read yet quarter-to-date. I'm just wondering [ph] if you can just share with us some of the key milestones you're looking for over the next 2 to 3 months during the back-to-school selling season, that the product is actually being well received. And then the second question related to your direct business, if you could just share with us how you think about that demand curve or horizon curve developing as you put some of these key strategies in place. Is that something that you're looking at taking 6 to 12 months, 3 to 6 months? How should we think about that curve starting to develop around alignment with your stores enterprise?

Brian P. Woolf

Okay. So businesses complex, as we all know, in the sense that we positioned our stores and our inventories and our assortments, pretty much what we wanted to do. We have a very aggressive and very strong denim position in our stores right now. We're putting shoes in virtually all stores, we think that's a huge opportunity for us. We're definitely back in the fashion and trend business. And in my career, and we seem to be going through this again, you can almost reposition great assortments and exciting merchandise quicker than the customer gets the messaging. And I think we're in a little bit of time lag, certainly in terms of the way we market and message to the customer what we are actually doing. In the sense that we're probably very behind our -- in our competitors when it comes to e-com, texting, mobile, social media, we've been concentrating over the past few years and really continually driving our catalog business, which, in a way, is somewhat antiquated compared to the way our customers shops. So we feel very good about the assortment going forward and the position we've taken in these new businesses. We feel very good about the position we've taken in terms of fashion and trend, now it's the marketing and message piece that we really have to get across to our customers as quickly as possible. And we are in the process of doing that. We're calling in a texting company that we're going to be working with next week; we're going to be working our loyalty program in the next 2 to 3 weeks; we're getting aggressive signage into our stores in terms of commercial activity; we have set the floor set, but without an effective messaging in our stores with the signing, which will be hitting this week. So we'll have to see what happens. But have we been disappointed in the second quarter in terms of results? Yes. Is this acceptable? No. Do we feel very good about the assortment going forward? Yes. Now it's all about changing the perception of the customer and becoming more right in our marketing and messaging campaigns. In terms of when do we think the business is going to turn around, I can't tell you that. I wish I could, but we think that we're doing so many things right, that when the correct marketing and messaging starts to kick in, we can't believe that the customer won't change their perception of the old Body Central and realize that we're really in the fashion business now.

Stephanie S. Wissink - Piper Jaffray Companies, Research Division

Brian, if I may just add in one follow-up, in those new markets where you maybe don't have an established customer that has a perception or has that history with the brand, are you seeing any distinction in the resonance with the new products in those markets relative to your established heritage market?

Brian P. Woolf

No, it's pretty consistent. We don't see that yet. Again, it's -- July is a tough time to really get a read. I mean, so much of the business that we could see has been promotionally driven, it's been markdown driven, has been clearance driven. Everybody is just really getting set now. And so it will be interesting to see what happens over the next 3 to 4 weeks as we experiment with some offers that our customers seems to want in terms of promotional activity, as well as what the new denim and shoe presentation will do, plus tax-free weekend should start to pick up traffic in the malls. So we'll see, but we feel very good, very, very strongly about our merchandise positioning. And what's interesting, what I'm really happy about is probably our biggest critics in terms of merchandise assortment has been the field organization and they're behind it 1,000%. They think we've never looked better. So we'll have to see what all of this means.

Operator

We'll take our next question from Sharon Zackfia with William Blair.

Sharon Zackfia - William Blair & Company L.L.C., Research Division

A couple of questions, I guess, on the margin profile because it's kind of difficult to figure out what's related to the clearance of the old product versus, I guess, what might be more ongoing, higher promotional levels here in the third quarter. So can you -- I mean, if you -- if presuming you do a comp that's not that much improved from what you just put, I mean, what is kind of the normalized merchandise margin hit that we would expect on a negative double-digit comp from here on forward? And then secondarily, it looks like SG&A is up a lot. I mean, it's accelerating in terms of looking at it on a per-store basis or however you want to look at it. Are we are at point now where that's going to start to normalize and become a little bit less dramatic on the year-over-year growth rate in terms of dollars?

Thomas W. Stoltz

Okay. I'll take those 2 and Brian can chime in. As far as gross margin and what we might expect going forward, again, I think until we see a meaningful turn in the business, if the comps stay negative, it's -- we're going to have to stay promotional. So I would expect that we'll see the same level of gross margin rate that you saw in the second quarter until we see improvement in sales and don't have to be as promotional. In terms of the SG&A expense, I think you will see it level off now. We did have roughly $0.5 million of sort of one-time expenses related to severance and relocation and recruiting. In the second quarter, we will still have perhaps a little bit of that in the third quarter. But I think the $22 million to $23 million pace is sort of where we'll be. The fourth quarter will be a little higher because store expenses ramp up with the increased volume in the fourth quarter. But otherwise, I think we're sort of in a leveling out point there.

Brian P. Woolf

I think the -- I'm sorry, the executive committee is now complete. A gentleman by the name of Fred Lancer [ph] has joined us today. It's his second day as Senior Vice President of Human Resources. And the executive committee is now fully staffed. And we think we definitely have the talent in the organization to take the company wherever it wants to go and needs to go. So I think we're trying to see how much promotional activity needs to take place in order to drive the volume. The marketplace, as we see it, is very competitive. Our competitors are out there slugging away on price. It's been the history of the company here that the everyday value was good enough to drive the business. We think we're going to have to be more aggressive. We compete in terms of the market share gain, which we are prepared to do. And luckily, our IMU continually increases, so that should take some pressure off of the markdown, so we'll have to see to what degree.

Sharon Zackfia - William Blair & Company L.L.C., Research Division

I guess, a secondary question. I mean, why denim and footwear? I mean, why is that the focus initially in terms of -- I mean, it seems as if that's where we've seen the most change in terms of the product assortment at least at this point. I mean, can you give us any insight and why those 2 categories?

Brian P. Woolf

We have never been in the denim business. In fact, last year, when everybody was very, very successful with colored denim, we weren't aggressively positioned in that. We feel that's a huge opportunity for us and it's been a void for a couple of years. We think we see the business right now is being more of a bottom-driven business than tops in terms of what the customer wants. There seems to be more fashion and trend in the bottom piece of the business. We were very successful in leggings, we were very successful in maxi skirts. As the customers seems to be telling us now, she's tired of so much color and new washes in denim is a big opportunity for us, and we see that is a very competitive advantage that we been taking advantage of in the past. So we look to our stores' organization for a lot of information in terms of consumer insight. And so this is the information we've gotten from them. And also when we gone through our customer research, for the past 2 years, the big void in terms of classifications is they want denim and we don't give it to them. So now we're going to give them what they want. And we'll so now we're going to give them what they want and we'll see how they respond. The shoe business, as you well know, is very key competitive advantage for one of our big competitors. And again, our customers are asking us for footwear, our customers are asking us for boots. So a lot of what we are doing in terms of the assortment, whether it be classifications, whether it be trends, whether it be fashion, it's not something that we're doing on our own. We're reacting to what our consumers are telling us they want.

Thomas W. Stoltz

And I would say, to those 2 areas, bottoms and footwear shoes are a couple of the better performing categories that we...

Brian P. Woolf

Right now.

Thomas W. Stoltz

Yes, right now.

Operator

And we'll take our next question from Mark Altschwager from Robert W. Baird.

Mark R. Altschwager - Robert W. Baird & Co. Incorporated, Research Division

I just wanted to talk a little bit about more about inventory. As you look at the mix of inventory today, what percent would you consider carryover inventory versus that which reflects the new vision of the product assortment? And along those lines, and you commented you're expecting [indiscernible] to remain very promotional, and does that reflect older inventory that still needs to be cleared or just being more aggressive to drive traffic into stores?

Brian P. Woolf

In terms of the way we promote that, those are new receipts that we are prepared. We've actually planned to promote a lot of these classifications and styles. So we bought them advantageously, and we are very well prepared and we'll start executing that promotional strategy starting next week. What we sense is because we've only put traffic counters into our stores right now, we don't have a good sense of traffic, but we feel the traffic in Body Central has been under pressure over the past several weeks, so we haven't really seen that pick up since we really like the assortment, but we haven't seen the result that we would've expected. Therefore, the marketing and messaging, whether it be signage or getting more aggressive in terms of emails and reaching out to our customer to bring her in is going to be key from here on in. We feel that if we get the traffic in our stores now, the business is going to improve dramatically. So a lot of the promotions were planned. And so we'll see where that takes us in terms of the newness or we've got to be pretty new most of the [indiscernible]

Thomas W. Stoltz

Yes, in terms of -- and in terms of how the inventory breaks down between spring and summer clearance and fall, the new fall goods, we certainly flowed a lot of new fall goods in right at the end of the quarter, that's why the inventories were up. Our clearance levels are sort of normal for this time of the year, even though it is more of a clearance time of the year. Relative to this time last year, clearance was not certainly any greater percentage of our business than it was last year. So hopefully, that answers your question about that.

Mark R. Altschwager - Robert W. Baird & Co. Incorporated, Research Division

That's helpful. And then just focusing back on the sales trends for a moment. I know you said it's a little early to get the initial response on the assortment, but I believe you mentioned you don't expect much improvement in the sales trend, Q3 versus Q2. But at the same time, you sound very excited about the new fall assortment, and that's hitting stores in Q3. So just maybe help me reconcile that a little bit and why there isn't more confidence that the comp rate would be improve from here.

Brian P. Woolf

Well, again, we feel it's traffic. Again, we don't have any specific proof because there's no comparison between this year and last year. But again, fashion is an emotional business. And when you have a whole organization including the field, which as I said before, are very critical of the merchandise assortment that we used to present, really excited and 100% pumped about the way this season is starting, that tells us something. And there's no secrets in this business the way merchandise really performs. A lot of the key resources we shop, our competitors shop and we feel, for the first time, we are as well positioned in terms of fashion and trend as anybody else out there. But again, we've been marketing to our customers through a catalog that is no longer catalog-driven, hence you see the terrible catalog results we've had over the past 6 to 12 months. And that's one of the reasons we did what we did in terms of the impairment. The catalog business is not performing. Really, when you have 25% decrease, that's not good. So how quickly we get this business back on track is going to depend on how quickly we can switch our marketing and messaging to the customers so that she understands that we've got these brand-new assortments. That's the key, how quickly we can now refocus our efforts in terms of this messaging campaign and talk to her the way she wants to be talked to as opposed to a catalog, which spoke to a totally different customer base than the core customer who's in our stores right now.

Operator

We'll go next to Randy Konik from Jefferies.

Edward Plank - Jefferies LLC, Research Division

This is Eddie filling in for Randy. Just a quick question. It seems like you're juggling a lot with all of those strategic initiatives you have in place. I guess, how should we think about which area we could see the most noticeable change and sort of how quickly that could happen?

Brian P. Woolf

Well, we've spoken to, since I've here really, the 3 big brand initiatives. One is the branding effort, which is ongoing and starting to take place. We're working on new icons and labels and signage and -- that we just finished really, a total evaluation, a reevaluation of consumer research, which is giving us tons of insight into where we were and where we need to go. So that was finished by the middle of July. Now we're crunching through the numbers, the quantitative and the qualitative piece, and now we're going to make determinations about what the customer is really telling us. I do have to say that at the top level, when the company was its most successful in '11, we were for fashion, great fashion and great prices. And last year, the perception of Body Central as a great fashion leader really came down dramatically. And that's why we think that giving the customer what she wanted when we were very successful is key. We also talked about a new store prototype. Some of the feedback we've got from our customers is that they don't like our stores physically. They're crowded, they're not kept up well, the fixturing is antiquated, everything is too black. So we always thought that, and now we're getting confirmation, again, from the customer perception of where we want to go. Merchandise assortments always is key, and so they want fast fashion and we have not really been giving that to them. So I think everything that we're doing again is not because we want to do it, it's because this is the information we're getting back from our customers about where they want us to go.

Operator

And our next question comes from Jeremy Hamblin with Dougherty & Company.

Jeremy Hamblin - Dougherty & Company LLC, Research Division

I wanted to see if I could follow-up on understanding your comps a little bit better. Tom, I think you had said that transactions really drove the decline in comps. Can you just speak a little bit to the AURs and kind of units per transaction as well?

Thomas W. Stoltz

Right, well, our AURs, a tale of 2 stories, I guess. The new product coming in has a higher unit retail, but because we were more promotional. What we're selling oftentimes was a little lower priced. So when it's all said and done, there wasn't much of a lift in selling AUR that we saw for the quarter and likewise, the number of units in the transaction, I think, was up slightly, but transactions clearly were down a lot as the traffic was down. And that was really the primary driver of the comp.

Jeremy Hamblin - Dougherty & Company LLC, Research Division

But AURs were up?

Thomas W. Stoltz

If you look at it on a basis of the new products flowing in, the AURs were up. But again, because we were taking more markdowns to sell clearance goods, the selling AUR was actually only up slightly. I hope that makes sense.

Jeremy Hamblin - Dougherty & Company LLC, Research Division

Okay, and then -- yes. No, I think I understand. And just in terms of, Brian, you've spoken to the customer responding better to the fashion items in the store and in kind of your better and best price points, and that's what they were buying at the beginning of the year. Are you continuing to see that? Where are you really having the problems on the merchandise side?

Brian P. Woolf

Well, again, it's a C-level kind of issue. When traffic is difficult, most departments are not performing to where they should. We do have strength in shoes and we do have strength in the bottom piece of the business. We think that as we have been transitioning to our omni-channel goal, which is one of the key strategies, then in the short term, we are experiencing some customer dislocation, since the customer who's in our stores is not the same customer that's been on our catalog. And when -- in the past, if you have been sending out 22 million to 24 million circulars, the catalogs, and you dramatically cut back on the circulation because you have to because it hasn't been profitable, I think it's putting pressure on x number of customers that are not coming into the store and we don't have the traffic that we did as we go through this transition state. We are very comfortable with our positioning in terms of fashion and trend and the price point. But again, until we get the signage in the stores and we get our marketing geared up and we see what our email campaigns are going to do, can't really speak to the results yet. I think we'll have a much better indication as we get into the third and fourth week in August where everything is set and we've got some tax-free holidays behind us and we see what's a normalized traffic looks like.

Jeremy Hamblin - Dougherty & Company LLC, Research Division

How many catalogs were set in the quarter?

Brian P. Woolf

No. In its peak, I think we sent as many on an annual basis as 24 million probably in the '11.

Thomas W. Stoltz

That's correct. And in the second...

Jeremy Hamblin - Dougherty & Company LLC, Research Division

No, I understand that. I'm asking about...

Brian P. Woolf

And now that we get your back [ph]...

Thomas W. Stoltz

Yes, and in the second quarter...

Brian P. Woolf

That's $0.27, but...

Thomas W. Stoltz

Yes, we sent out 5.5 million versus 7.5 million last year in the quarter.

Jeremy Hamblin - Dougherty & Company LLC, Research Division

Okay. And then just -- I just want to get into -- so in terms of geographically, were you seeing any -- as we kind of -- the cadence through the quarter, did you see geographically anything noticeable between kind of mid Atlantic, Midwest versus the South?

Brian P. Woolf

Midwest has been tough. Business has been better in Texas and Florida around a comparative basis.

Operator

Your next question comes from Pamela Quintiliano with SunTrust.

Pamela Nagler Quintiliano - SunTrust Robinson Humphrey, Inc., Research Division

So I actually have a few of them, and I'm sorry if I missed this, but can you remind us the timing of the Back-to-School floor set last year versus this year? And also just with denim and footwear being emphasized this year, what is it replacing on the floor?

Brian P. Woolf

It's not really replacing anything. The SKU counts totaling in apparel was down 38% to what it was a year ago. It doesn't mean the units are that much less because we put more focus and more depth on a per-style basis back into our stores. But the -- one of the reasons that we are up 9% at cost is because of the denim and the shoes. And we just got much more productivity in the way we set the floor and the way we're using our walls if you go into our stores. And you know what guys, let me tell you something, I urge all of you to go into our stores and just see how you think we look in terms of fashion and trends. It will be interesting. I know it's not easy for all of you guys to do it, but we're proud of the way the stores look. And I'd like you, if you can, to get into our stores as quickly as possible. So it's not really displacing anything. We are fine with more depth, so we've been able to use the tables more effectively and certainly, the walls more effectively.

Pamela Nagler Quintiliano - SunTrust Robinson Humphrey, Inc., Research Division

And just the timing of the Back-to-School set this year versus last year.

Brian P. Woolf

I think it's very similar.

Thomas W. Stoltz

Yes, it's pretty similar. We might have been a week earlier this year, but I'm not certain of that. We'll check on that.

Pamela Nagler Quintiliano - SunTrust Robinson Humphrey, Inc., Research Division

And then also, just when I think about the new product that you guys are clearly very excited about, why didn't you have that marketing campaign in place to support it and educate your customer right away on it? And is there any shift in the timing if you think about what you had originally planned to do? Or would it always be that you would flow it in first and...

Brian P. Woolf

No. I think, again, in terms of our brand-building thought process, we wanted to do an extensive amount of consumer research. We've only been getting all of this information back between the end of June and July 8. So when we saw the magnitude on a quantitative basis of the amount of pressure that is on the direct piece of the business and certainly, on a percentage basis, how many customers have dramatically left the catalog over the past 12 months and are now shopping between online, responding to emails and certainly, texting in mobile, I don't think we realize the magnitude of the switch and how quickly it was taking place. It has been a dramatic 12 months switch certainly from the Body Central customer to the way she used to shop compared to the way she wants to shop right now. So it's difficult to make those evaluations in terms of degree, because we didn't know it. So now that we have all of this information, we are rapidly and dramatically shifting as quickly as we can.

Pamela Nagler Quintiliano - SunTrust Robinson Humphrey, Inc., Research Division

And then in terms of, you had mentioned that you had a lot of planned promotions in place, but there's also going to be incremental promotions as well that were unplanned just based on the environment, the competitive environment, correct?

Brian P. Woolf

That's correct. Yes, that's correct. There will be planned and some unplanned depending on the business.

Operator

We'll take our last question from Mike Richardson with Sidoti.

Michael Richardson - Sidoti & Company, LLC

I just want to follow-up on a couple of things before. The first one has to do with inventory. I'm wondering if you might be able to quantify the increase in inventory that would be attributed to inventory that was brought -- merchandise that was brought in early, compared to maybe a more normalized level? And then Brian, if you could speak, would you elaborate a little bit of some of the newer marketing initiatives for the second half? I would appreciate it.

Thomas W. Stoltz

All right, as far as the inventory levels, if you look at it on a per-store basis, the early flow and the fact that we were building a shoe presentation and a denim presentation in the stores really accounted for all of the increase. So I think we've been closer to flat level -- store-level inventories had we not been taking on those 2 initiatives.

Brian P. Woolf

In terms of marketing, we're definitely going to shift the emphasis away from the catalog and concentrate more in terms of the digital side of the business, as well as e-com. In e-com, we've got a new navigation system on our side, which we think makes it much more easy for the customer to navigate, compared to the once was. Again, we are investigating texting as quickly as possible and hopefully, we'll get that up and running this season. We're going to continually deemphasize the catalog, shift a lot of funding from the catalog into digital. We are working with our marketing partners in New York to come up with some more aggressive campaigns and how we've worked with Google Search and Instagram and how we can, again, give our customer marketing campaign the way she wants to shop. So there's a lot of transition and change taking place very quickly on the marketing side.

Operator

That does conclude today's question-and-answer session. At this time, I'd like to turn the conference back over to Mr. Brian Woolf for any additional or closing remarks.

Brian P. Woolf

Yes. It's -- we've been looking at the business and trying to understand it and the changes that are taking place that seem to be so quick. We do think it's this change in terms of becoming an omni-channel retailer, which all great brands are, and I think that change in terms of marketing campaign, which was really taking about 90% of our marketing spend to the catalog, that's the dramatic shift that we see right now, the magnitude of which I don't think we realize until we got back a lot of the consumer research that we have.

So we're taking this information, we will be an omni-channel retailer, that's part of the hurt of the business is of that more conservative, higher-income customer is not shopping with us the way she used to, but that was a down trending piece of the business that was taking place even before we started to make a lot of changes, it's just being accelerated now.

So I think we're going through somewhat of a time lag in terms of the strength of the merchandise assortment that we feel is terrific versus the customer really understanding how quickly we are moving. So that's our challenge. Our challenge is one of marketing and messaging and really speaking to our customer the way she wants to be spoken to. So we're on it, and we'll see what the results are going to be over the next 3 to 6 months. Thank you.

Operator

Ladies and gentlemen, this does conclude today's conference. We thank you for your participation.

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