Wet Seal Management Discusses Q2 2013 Results - Earnings Call Transcript

Aug.27.13 | About: The Wet (WTSL)

Wet Seal (NASDAQ:WTSL)

Q2 2013 Earnings Call

August 27, 2013 4:30 pm ET

Executives

Christine Greany

John D. Goodman - Chief Executive Officer and Director

Steven H. Benrubi - Chief Financial Officer, Principal Accounting Officer, Executive Vice President and Corporate Secretary

Analysts

Eric M. Beder - Brean Capital LLC, Research Division

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

Janet Kloppenburg

Jeffrey Wallin Van Sinderen - B. Riley Caris, Research Division

Elizabeth O. Pierce - Ascendiant Capital Markets LLC, Research Division

Marni Shapiro - The Retail Tracker

Stephanie S. Wissink - Piper Jaffray Companies, Research Division

Peter Mahon - Dougherty & Company LLC, Research Division

Operator

Greetings, and welcome to the Wet Seal, Inc. Fiscal Second Quarter 2013 Earnings Results Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Christine Greany of The Blueshirt Group. Thank you, Ms. Greany, you may begin.

Christine Greany

Good afternoon, everyone. Thank you for joining us today. Presenting on today's call will be John Goodman, Chief Executive Officer; and Steve Benrubi, Chief Financial Officer. Before we begin, I would like to remind you that today's call may contain forward-looking statements. Information and factors that could cause our actual results to differ materially from the forward-looking statements, as well as reconciliations of non-GAAP to GAAP financial measures, are included in today's press release, as well as our most recent annual report on Form 10-K. These documents are available on our corporate website, wetsealinc.com. The company assumes no obligation to publicly update or revise our forward-looking statements to reflect subsequent events or circumstances. With that, I'd now like to turn the call over to John to begin.

John D. Goodman

Thanks, Christine, and good afternoon, everyone. Our second quarter results reflect a great deal of progress under our turnaround plan and represent significant year-over-year improvement across all of our key financial metrics. We generated comp store sales growth of 3.7%. We delivered an improvement of 470 basis points in merchandise margin, reflecting the strength of our assortment and substantially lower markdown levels. We carefully managed costs, reducing SG&A expense versus a year ago; and we achieved profitability, reporting earnings of $0.01 per share, which was in line with our financial guidance. We feel very good about the results we're generating at a time when softness in traffic and pricing have been impacting many retailers throughout the mall. As most of you know, our operating model facilitates extremely fast reaction times. We manage inventory tightly and leave inventory dollars open to buy so we can take advantage of our short lead times and chase emerging trends. We watch the market closely and have the unique ability to make adjustments faster than many of our competitors. During a challenging second quarter, this enabled us to return the business to positive comp store sales and achieve considerable gains in merchandise margin, demonstrating the resilience of our operating model. Our goal is to deliver progressively improving and consistent performance over the long term. We believe we can achieve this by managing the business carefully, maintaining our maniacal focus on product and continuing to be obsessive about inventory management. In the second half of the year, we expect to deliver continued comp store sales growth and significantly improved merchandise margin. Steve will speak to our forecast for the third quarter during his remarks later in the call.

It's clear to us that our products are resonating and the Wet Seal girl is returning to the brand. We are pleased with how the stores look today and feel very well positioned in terms of our assortments, merchandising, marketing and branding. In the second quarter, we saw a strong performance in leggings, graphic tees, dresses and accessories. For back-to-school, we believe sweaters, outerwear and boots will be particularly important categories. Our online Jr. Plus business has performed well and, this fall, will be expanding to a select number of stores. A little later in the call, I'll talk about some of our upcoming marketing programs and social campaigns.

Now I'll turn to Arden B, where we're also seeing continued improvement and reported our second consecutive quarter of positive comp performance, increased merchandise margin, a segment-level profit and well-managed inventory levels. We're encouraged by early reads on fall product, which reflect the influence of Tamara Chamberlain, who joined us as GMM in April. We're continuing to watch the business closely as we evaluate future opportunities and put together a longer-term game plan for the brand.

During the second quarter, we brought in new talent to manage our store operations. Lesli Gilbert joined us as EVP of Stores and Operations, bringing 25 years of retail experience. She is a terrific asset to the company and an ideal fit with our entrepreneurial culture. She's taking a hard look at our stores' organization to ensure we have the right level of talent and accountability in the field, with the #1 goal of driving consistent execution.

Turning to our e-commerce business, sales were essentially flat in the second quarter, which principally reflects our current system's limitations, as well as some organizational issues that we've already course-corrected. We recently completed some internal changes to consolidate roles and bring more effective leadership to this part of the business. Additionally, we're in the final stages of our e-commerce re-platform, which is expected to be completed in October. Together, these initiatives will better position us to drive strong execution and begin building a more meaningful e-commerce presence.

Moving to marketing, mobile and social media. In keeping with our playfully disruptive approach to customer engagement, we're utilizing a wide range of strategies. From a social media perspective, we're seeing a high level of attention from our social campaigns and partnerships with emerging music artists such as Olly Murs, Bridgit Mendler, Mindless Behavior, Emblem3, Little Mix and Imagine Dragons. The images from our "Wanna Be Next?" model search will be in stores and online in mid-September, and for the first time, the campaign includes a social sharing component.

Additionally, we're currently developing programming for the rollout of a digital campaign with AwesomenessTV, one of the top YouTube channels focused on the teen segment. In mobile, we're growing our texting database and testing promotions that feature exclusive product offers. Finally, we're particularly excited about our agreement to be the exclusive retail partner for Crush by ABC Family line, which is launching in late October. The initial collection of apparel and accessories will emulate the items worn by key characters on 3 of the network's top-rated shows and will also incorporate trends that are relevant to the Wet Seal customer.

We'll be showcasing the product in our windows and launching traditional, social and texting campaigns, which will be supported by television ads run by the network. We think this is a perfect union for us. ABC Family is the #1 network in prime time for 18- to 34-year-old females and the #2 cable network for 12- to 34-year-old females. The target demographic for the Crush brand is the 16- to 20-year-old girl, right in our sweet spot. Our agreement calls for a minimum of 18 collections over the next -- over the course of next year, which has the potential to serve as a powerful marketing tool and generate terrific exposure for the Wet Seal brand, both in-store and online.

Lastly, I want to highlight our new store opening plans for the back half of the year. Between late October and mid-November, we expect to open 22 new Wet Seal outlet stores. Nearly all of these new stores will be in outlet centers, where we feel the Wet Seal brand is underpenetrated and productivity and returns outpace traditional mall locations. As the business continues to strengthen, we're excited about the opportunity to drive more robust unit growth beginning next year through a combination of outlet, traditional and off-mall locations.

Before turning the call over to Steve, I want to recognize all of our associates who are working extremely hard to make this turnaround successful. In the first 6 months, we have surpassed many of our goals and are winning back our core customer much faster than we imagined possible. At the same time, I'd like to point out that we're in the beginning stages of our turnaround. As we continue to rebuild our relationships with our customers and improve execution in all facets of our business over the next several quarters, we expect to deliver ongoing performance improvement and profitable growth. I'd also like to thank our shareholders for their support as we continue our work to transform the business, prepare for substantive growth and build value for all our stakeholders. Now Steve will review the financials and discuss our third quarter outlook.

Steven H. Benrubi

Thanks, John, and good afternoon, everyone. We're pleased with our second quarter financial results, which tell us our products are resonating and we're getting the customer back at both Wet Seal and Arden B.

Net sales for the second quarter came in at $137.2 million, up 1.5% versus a year ago, while consolidated comparable store sales grew 3.7%. In the second quarter of last year, consolidated comp store sales declined 11.1%. From a regional perspective, we experienced stronger performance in the West while the Midwest proved to be the most challenging. On a comp store basis, combined average unit retail was up 2.3% to $9.55, transactions per store were up 2.8%, and units per transaction declined 1.6%. Combined e-commerce sales in the second quarter were approximately flat versus a year ago. As John noted, we believe there is an opportunity to demonstrate more meaningful growth in e-commerce following the organizational changes we made in the implementation of Demandware, scheduled for completion in October.

In the Wet Seal division, second quarter net sales were $120.6 million, up 6% versus last year, while comparable store sales increased 3.9%. E-commerce sales increased 2.5% to $5.3 million. On a comp store basis, AUR increased 1.9% to $8.73, transactions per store were up 3.2%, and UPT was down 1.4%. At Arden B, net sales were $16.7 million. That's down 22.5% versus last year and primarily reflects having 21 fewer stores in operation versus a year ago. Comparable store sales were up 2% and e-commerce sales declined 7.9% to $2 million. On a comp store basis, AUR increased 17% to $31.18, transactions were down 2.8%, and UPT was down 10.4%.

Returning to the income statement, second quarter gross profit came in at $40.7 million. That's up 32% compared to $30.8 million last year. Gross margin improved 680 basis points to 29.6% versus 22.8% in the second quarter of 2012. The year-over-year improvement primarily reflects the substantial increase of 470 basis points in merchandise margin that John referenced earlier. We also leveraged occupancy by 210 basis points. For further perspective, our total buying, distribution and planning and allocation costs were essentially flat. We're pleased with the progressive improvement in merchandise margin over the past 2 quarters and expect to generate year-over-year increases in the back half of the year as well, driven by product execution and lower markdown rates.

Selling, general and administrative expense declined in the quarter, coming in at $39.4 million or 28.7% of sales. That compares to $41.4 million or 30.6% of sales a year ago. Selling expense in the second quarter totaled $30.5 million or 22.2% of sales, reflecting a year-over-year decline from $31.5 million or 23.3% of sales in the second quarter of 2012. General and administrative expenses were also down, coming in at $8.9 million compared to $9.9 million a year ago. As a percentage of sales, G&A declined 80 basis points to 6.5%.

Second quarter operating income was $1 million compared to an operating loss of $19.5 million last year. The results include noncash asset impairment charges of $262,000 in this year's quarter and $9 million in last year's quarter. 2012 period also includes $1.9 million of severance related to the departure of our prior CEO.

Net income in the second quarter was $1 million or $0.01 per diluted share, which compares to net loss of $12.4 million or $0.14 per diluted share in the prior year period. On a non-GAAP basis, which excludes the aftertax effect of the asset impairment charges, adjusted net income was $1.2 million or $0.01 per diluted share. That compares to a non-GAAP adjusted net loss of $5.8 million or $0.07 per diluted share in the second quarter of 2012.

Now moving to the balance sheet. Inventories at quarter end stood at $40.9 million, down 1.4% versus last year. This was in line with our expectations and reflects our strategy to ensure the company is consistently positioned to chase into emerging trends. Inventory per square foot was up 2% versus a year ago, with Wet Seal up 3% and Arden B down 15%. The company remains in strong financial condition and ended the quarter with $80 million of cash and cash equivalents and short-term investments and no debt. This is down from $110 million at year end and reflects the completion of our $25 million common stock repurchase program, as well as payment for the settlement of a previously disclosed employment-related class-action lawsuit, net of insurance proceeds.

During the second quarter, we repurchased a total of 4,359,224 shares of common stock at a weighted average cost of $4.89 per share for a total cost, including commissions, of $21.4 million. Capital expenditures totaled $5.3 million in the second quarter. We continue to expect fiscal 2013 net capital expenditures to be in the range of $20 million to $22 million, with roughly 3 quarters of our planned expenditures being store related. Also noteworthy, a significant portion of our spending will be deployed in the third quarter in preparation for new store openings occurring late in that period and early in the weeks of the beginning of Q4.

Now I'll turn to our financial guidance for the third quarter of 2013. Our expectations are as follows: net sales in the range of $135 million to $138 million; a comparable store sales increase in the mid-single digits; gross margin in the range of 26.9% to 27.9%, reflecting an increase of between 770 and 870 basis points over the prior year third quarter; SG&A between 28.9% and 29.2% of sales; and an operating loss ranging from $1.8 million to $2.7 million. Also, we expect a loss in the range of $0.02 to $0.03 per diluted share, which includes approximately $800,000 or $0.01 per share of preopening costs for the 22 new Wet Seal stores opening mostly between late October and mid-November.

Thanks for listening this afternoon. And now I'll ask the operator to open up the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Eric Beder with Brean Capital.

Eric M. Beder - Brean Capital LLC, Research Division

Could you talk a little bit about -- last conference call, we talked about how the Saturday specials were getting the customer in. And can you talk about how that has evolved and how do you feel that you're driving the customer, maybe, besides the weekends?

John D. Goodman

Yes, I think one of the things we said is that we really were looking at how do we win the weekends and get the girl back when we know she's in the mall. And the key component of that was the Saturday Steal and still is. Saturday Steals started at -- really by using underperforming product or trying to showcase some of that to move the goods. We now buy into the Saturday Steal, and we have specific items that we buy for. And what we've seen is an uptick in the business by buying those items in advance and driving traffic into the store.

Eric M. Beder - Brean Capital LLC, Research Division

When you look at -- you talked about getting better in terms of the fast fashion pieces and being in line and kind of being where your other competitors are. Where do you think you are in that stage right now in terms of getting kind of the fashion right in terms of driving with compared to your competitors?

John D. Goodman

I think we've done a really good job of getting the fashion right and being at trend right now, which is really important for us. Some of our competitors were up to 2 or 3 months ahead of us in trend. I think we've done a really good job of being at the trend and having multiple trends within the store. So if you go into our store now, you would see 3 to 4 trends within the front of the store. So that's important for us to constantly add newness. We know that, that girl's walked in the mall, as we've talked about before, every single weekend and during the week. And really getting her attention through new products, through the trends have been very good for us. To answer your question, I think we're in a really good place. And as I've told the team, we need to be about 80% right because we need to take the appropriate fashion risk for our business. But I feel like we're in a really good place with the product right now and, going forward, feel very good about our assortments going forward.

Eric M. Beder - Brean Capital LLC, Research Division

Okay. And finally, just in terms of the store openings, I assume you're going to close a number of stores in Q4. That's kind of why we're at net flat for the year. I know you're opening about 14 in Q3. Is that how to think about that?

Steven H. Benrubi

Yes. In Q3, there's about 5 Wet Seal stores and, I think, 3 Arden B stores we're estimating are going to close and then additional closures at the end of the fourth quarter in both divisions, and that gets you to the flat Wet Seal for the year and the net 8 down at Arden.

Operator

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

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

I guess, this is going to be the first time in some time that you have really opened stores. I guess, how do you feel about kind of your store development team, managers you're putting into place and kind of the people component of this growth? And, I guess, how should we think about potential risks as you grow the store base?

John D. Goodman

That's a really good question, and one of the things that happened last week is we opened St. Louis premium outlets. That was our first outlet with the new prototype, and we're very pleased with the results, as well as how the new store opening went. That's a critical part for our team because we really haven't done that where we're opening pretty much 19 stores in a 2-week, 3-week span of time. So it was important to make sure we took a test drive to make sure all the stores are lined up from an inventory perspective, from a fixture perspective, from a visual perspective and, most importantly, from a management perspective. We feel like we have the right team to do that. We've been building up our staffs as we start opening the stores later in the quarter, so we feel very positive. And certainly, St. Louis coming out of the box pretty good last weekend was a positive for us.

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

Got it. And I wanted to ask a quick question on gross margin and maybe the competitive environment. You're guiding for 3Q not quite to re-claw kind of all the gross margin that you lost last year. I guess, how do we think about your ability to cycle some of those heavy markdowns? And, I guess, are you having to be a little sharper in your pricing based on kind of what we're seeing in the competitive landscape?

John D. Goodman

Yes, we really manage our markdowns and our promotions pretty carefully right now. And I think, based upon the inconsistent traffic that we've seen in other -- our other competitors have called out, it's really important for us to be competitive, yet we don't have to run, at this point, all -- discounts off the entire store. So we've been strategic around the promotions we're running. We will continue to do that. We feel really good about the progress we're making from a gross margin dollar standpoint. We feel like our margin is moving in the right direction, and what we are really looking at is long-term growth of the margin. So where each quarter, we're making incremental steps -- I would say bigger than incremental steps, and that will continue going into next year. It's really important for us to have a right balance of sales and margin so we're not overpromoting and we're being cautious and with the traffics. And the key thing for us right now, as Steve alluded to in the earlier message, is if we manage our inventory tightly, if we leave money open for chasing, that gives us the ability to preserve margin, which is very important when we have such macroeconomic conditions going on right now.

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

Got it. And I guess a last question, what kind of operating performance would you need to see to get more comfortable with running with a lower cash balance in the business? I know you guys completed the share repo during the quarter but I guess, one can argue, you still have plenty of cash on the balance sheet. So I guess, what would you need to see operationally to get even more aggressive with share buybacks?

Steven H. Benrubi

I think, as we began to turn the business around at the beginning of the year, one of the things that we wanted to make sure we would see is that we were getting the customer back at a healthy margin and productivity throughout the year. And we've done that well through spring and summer. Obviously, back-to-school and now holiday ahead of us are key benchmark points to feel even more comfortable that at all times of the year, the product is resonating and we're engaging the customer the right way. We felt like the $25 million buyback -- obviously, we executed aggressively on that. We're happy to have done that. We think it's an appropriate balance at this time to our capital structure as a result. And from there, it's proving ourselves here in the back half of the year and going from there in terms of use of cash, including, as we commented, looking at additional growth or starting to grow the business next year.

John D. Goodman

And I would just add that consistent performance is key for us, that we continue to build every quarter and look at that. And certainly, that's something that we understand from our shareholders that's important to really look at the amount of cash we have on our balance sheet. So we'll continue to look that, but we need to see continued, consistent growth -- profitable growth, I should say.

Operator

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

Janet Kloppenburg

I was wondering if you could talk a little bit about the traffic trends that you saw in the second quarter and if you witnessed challenging trends in July. I think I saw you said you did. But I was wondering if you give us an indication as to whether you're seeing a build to the back-to-school business right now or if it continues to be choppy and if your mid-single-digit comp sales guidance for the third quarter reflects the current tone of business? And, Steve, I was wondering about the decline in the Arden B inventory and just wondering if you would be able to comp with that level of decline in the inventory.

John D. Goodman

So let me take your first part, and I'll hand it over to Steve. We did see traffic patterns definitely fluctuate in the June-July time frame. As we talked about, May was very strong, and I think there was some pent-up demand. We continued to see comp store growth, good comp store growth in the months of June and July. We felt good about our progress, but we also noted that during the mid-week, we weren't seeing the same traffic we were on the weekends. It became very important for us to win the weekends and really to maximize when that girl is coming to the store to make sure she's coming to Wet Seal. So we feel like we've done a good job of that. Going into third quarter, to August, we're pleased with where our performance is currently. We feel good about our assortments, and the customers are very accepting of our product right now, and we feel good about the guidance we gave for the quarter, certainly, leading into September going forward.

Janet Kloppenburg

Just a question about the colored denim comparison. Some competitors are having a tough time comparing against that. I know your leggings are performing well. I was just wondering if you could comment about whether you view that as a challenge here in the third quarter.

John D. Goodman

Yes, we really saw denim -- it was a little slow at the beginning, but it's really started to ramp up, and we're very pleased with our denim performance. I think from a wash and from a styling perspective, we have one of the best assortments in the mall right now. So -- and we are seeing the girl by the denim in the rate we wanted. So we feel good about our denim assortments. Certainly, it's multiple different SKUs and styles and washes and distressed. So pleased about the performance so far.

Steven H. Benrubi

Janet, just a comment on the Arden B inventory. Last year, in hindsight, third quarter inventory levels were elevated at Arden. Our turns were not where we wanted them to be, and we planned the business to come out of the second quarter where it is. And we believe, certainly, with the better quality of selling that we're seeing, that we should be able to drive that business in spite of that decline. It was -- last year's number was not a good place to be.

Operator

Our next question comes from the line of Jeff Van Sinderen with B. Riley and Company.

Jeffrey Wallin Van Sinderen - B. Riley Caris, Research Division

I guess my first question, maybe you can just touch on, and Steve, maybe this is best for you. But in terms of the promotional levels you're expecting to run in Q3, are you expecting to be pretty much similar to what you ran in Q2? And then also, order of magnitude, I know you gave gross margin guidance, but just wondering what you're expecting in terms of the increase of merchandise margins. Should we be thinking about sort of a similar rate of increase that we saw in Q2 for merch margin?

John D. Goodman

Yes, one of the best things that I think we've done in Q2, and that continues into Q3, is really manage our promotions. And that has been critical for us. We really feel comfortable with what we're doing. That mall is very competitive right now, and a lot of our competitors are running entire-store promotions. This happened at the beginning of the year during the Easter time frame, as well as Memorial Day and all the holidays where a lot of our competitors are the whole store on sale. We haven't had to do that. We really are maximizing our promos, making sure that the customer sees the value, selling a balance of regular price, selling a balance of promotional and then also keeping our clearance very, very tight and clean. We're down significantly in clearance year-over-year, and that's a really important part of the margin growth that we're seeing. We want that, and we believe we will continue to see that, all the way through the balance of the year. We're certainly up against easier comparisons. But in terms of really maximizing margin, maximizing the promotions, making sure that we are not giving away merchandise when we don't have to, we're doing a very good job at this point. And then, Steve...

Steven H. Benrubi

Yes, just to be clear, Jeff, I mean, most of the improvement year-over-year in the gross margin is going to be merchandise margin driven. We were in a mode in Q3 last year of repositioning the business whereas obviously, we feel a lot better about it this year and the -- I think it's 770- to 870-point improvement in gross margin that we're expecting over last year, most of that is coming out of the merchandise side.

Jeffrey Wallin Van Sinderen - B. Riley Caris, Research Division

Okay. And then assuming a mid-single-digit comp, you're also going to be getting some occupancy leverage there as well, correct?

Steven H. Benrubi

Yes.

Jeffrey Wallin Van Sinderen - B. Riley Caris, Research Division

Okay. And then the other thing that I'm wondering, I don't know if you guys are -- maybe it's too early to talk about this yet, but I'm just wondering if there's any more you can share on your accelerated store opening program for next year, wondering if you're going to lean more toward going into more outlets, which seems to be working well for you, or if it will be more of a balanced mix next year and maybe how many stores you're thinking? Anything you can share there?

John D. Goodman

Yes, we're not going to give a number, but I could tell you, as we talked about in our release, that we will be a regressive about store openings next year. The board is very committed to our growing, and I think that's an important part of our turnaround. We certainly have stabilized the business, and now we're beginning to grow it, but we're doing it in a profitable way and we're doing it in a consistent way. With that, then, comes the next growth, which is basically looking at growing the Wet Seal brand consisting of outlet, traditional malls and off-mall. So we'll be looking at that, and I'm sure we'll give information in the next quarter about our growth plans for the 2014 year. But we feel good about our progress right now and certainly prepared to grow, as indicated by the 22 stores we'll be opening between now and the early part of fourth quarter.

Jeffrey Wallin Van Sinderen - B. Riley Caris, Research Division

Okay. And then along those lines, I'm just wondering if discussions with landlords are changing in terms of, look, your business is comping, you're getting profitability levels that you didn't have last year. Just wondering if maybe you can refresh us on -- I'm not sure, I can't remember how many leases you guys have coming up with -- for normal expiration. Just wondering about that and kind of how -- what you're seeing in terms of the rent picture for renewals, that sort of thing.

Steven H. Benrubi

Yes, I mean, the conversations clearly get better with landlords as the business improves. We're all looking to add stores and renew leases in stores that are growing traffic in the mall, growing productivity. So as business moves along, that's always great for those conversations. We had about mid-30s number of stores that would be up for renewal next year. There's a few more that will go on top of that, as we've done some extensions, 1- or 2-year extensions that also come up in the early part of next year for renewal. But clearly, getting business momentum the right way and, obviously, product that she as a customer likes a lot better is going to help those discussions.

Jeffrey Wallin Van Sinderen - B. Riley Caris, Research Division

Okay. And along those lines, I mean, are you sort of seeing average rent increases? I don't know what is average these days, but...as far as rentals.

Steven H. Benrubi

It's really mall-by-mall, and it has been the case for quite a while that more firm in the A and B+ malls. And there's been opportunity even into this year in B, B- and below malls to get -- stay flat or even get some improvement in our rents. And given that we work well in all mall settings and we're pretty diversely spread in terms of A, B, C malls and perform well across the board or can do so, that's helpful to us to be able to spread that so that we're not facing just a bunch of A mall renewals that have pretty firm rents in front of them.

Operator

Our next question comes from the line of Liz Pierce with Ascendiant Capital Markets.

Elizabeth O. Pierce - Ascendiant Capital Markets LLC, Research Division

In terms of the outlet, I actually saw the St. Louis outlet this weekend, and I was trying to just determine how much overlap there was. I mean, it seems like the product is pretty much the same. And is that a strategy going forward?

John D. Goodman

Yes, we opened up with similar product just because of the time frame. We will actually have outlet-exclusive product. We're very -- it's very important. My background through the years has been with outlet, so I know having exclusive product with outlet is very, very important. So you'll start to see that beginning in the next month of exclusive product that we'll be carrying in the outlet to make sure that, that girl sees a reason why it's different than the regular store and giving her some incredible value. So we're building that as we speak, and it's an important part of our outlet strategies to make sure that we do have those exclusives and give the girl the value, but she can also get some of the product she sees in the regular store as well.

Elizabeth O. Pierce - Ascendiant Capital Markets LLC, Research Division

John, do you have a defined percentage for that at this point or not in terms of how much will be made for?

John D. Goodman

We're building that right now in terms of what percentage that it will be, but we know that it will build over time. That is our goal, to keep building up exclusive outlet product over time.

Elizabeth O. Pierce - Ascendiant Capital Markets LLC, Research Division

Okay. And on the plus side, can you -- you said it was going to be 30 stores. About how many SKUs is it going to be, and how do you position it in the store? And is she going to be able to make outfits when she walks in and sees what you have?

John D. Goodman

Absolutely. We are positioning our 30-plus stores that we are converting a piece of the store to Wet Seal plus outlets -- or excuse me, Wet Seal Plus stores within the Wet Seal store. That's really important for us. We're showcasing outfits. We have different models, obviously, for the Jr. Plus, as well as the presentation and the fixturing is similar, but you'll really see more visuals around the Jr. Plus within that store. So we're excited about the possibility of Jr. Plus. We are also testing a store -- in the next month, we'll be opening Clovis Crossings in the Central Valley. That will be a Jr. Plus-exclusive store. So we're excited about launching that and seeing what happens with the brand with Wet Seal Plus.

Elizabeth O. Pierce - Ascendiant Capital Markets LLC, Research Division

Is that going to be -- is that a traditional mall? Is it a strip or outlet?

John D. Goodman

It's a strip -- it's a strip mall, so it's not a traditional mall. It's more of a strip mall located with other plus brands, as well as other retailers within the mall.

Elizabeth O. Pierce - Ascendiant Capital Markets LLC, Research Division

Okay. And then in terms of the Demandware that you -- it sounds like now it's going to be October. And maybe just give us a little bit of what you see coming out of it? I think in the past, you had talked about kind of a common platform or an even mobility in common between mobile and iPad, and maybe just share with us what else you think comes out of that.

John D. Goodman

Well, the Demandware will be early October. I want to make sure we're clear on that. So we really -- it's just pushed back a little bit, but it will be early October when we launch Demandware. The key thing for us is to have capabilities that we don't have today. You made mention to it where basically, we take your desktop today and put it on your mobile, whether it's an iPad or your mobile phone. So really, giving us more opportunity to connect with the girl, her usability will be much better on mobile than it is today. It's very slow, as we talked about before. It's a system that we had put in, in 2004 and we never updated it. So it's important for us to get Demandware out there as fast as possible. As we made mention in the earlier comments is that we have an opportunity to grow the e-commerce business. We had some missteps ourselves within the organization. We think we've corrected that and -- within the new organization how we've done it, as well as Demandware, we feel like we're positioned to start growing, in the back half of the year, the e-commerce business again.

Elizabeth O. Pierce - Ascendiant Capital Markets LLC, Research Division

Okay. And then just finally, on inventory, so it seems like you're going to continue to keep maybe some open to buy, continue to chase. And how are you feeling about upcoming trends, without necessarily identifying what those trends are for competitive reasons?

John D. Goodman

Right. Well, we feel good about our ability to chase. We're in the market. Our merchants are in L.A. every week, and they're in New York once a month. So we feel good about keeping money open because there's always a trend coming. That is very important for us, to keep money open, so that we can go after those trends, as well as the ability to get out a product that's not working. So whether we have an order that the trend is changing quickly, we have that ability to adapt and adjust very, very quickly. So that will continue to be the case. We feel really good about that. Every weak, we have a dialogue about where we're funding businesses that are trending and where we're funding -- or taking away money for businesses that aren't. That will continue to be the cadence, but I would expect our inventory levels to remain pretty in line for the balance of the year.

Operator

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

Marni Shapiro - The Retail Tracker

So can you talk a little bit about a few things? Some of the smaller businesses in the store, I did see the large size assortment and I thought it looked great in the stores. And I'm assuming, based on your optimism, that early reads on that are good. Could you also talk about the intimates business and the accessories business, which both look very good in the stores? And then could you talk a little bit about your loyalty, your Fashion Insider? As the assortments have improved, have you seen a list in the number of girls signing up for this, using this, spending more online and in stores, given -- as the product has improved?

John D. Goodman

Yes. So in terms of Jr. Plus, we're very encouraged by initial reads of the new product. I think we have a great team here that's doing it that are experts in the Jr. Plus field. So we're very encouraged by beginning signs of that. I think where it's placed in the store also is helping. So that will continue to be the case. In terms of accessories, we feel very good about our backpack assortments, our scarves and our boots and footwear. We think that those are categories where we can continue to win in. And certainly, giving them the space and carving out a space, which we didn't really do in the past, identifiable walls so that the girl knows that we're in this business, as well as integrating them around the store with outfits, is critical for that. So we're encouraged by that. The intimate apparel business continues to be strong for us. Our promotions have been consistent all year, and that will continue to be the case, and we feel really good about our assortment. And also, some of the sleepwear sets that are -- we just put in the store this week, so we've got some really cute 2-piece sets for sleepwear that we're very, very enthusiastic about. So that feels good about where we're headed for the assortments and accessories. And your third question, I think I forgot.

Marni Shapiro - The Retail Tracker

The loyalty of the Fashion Insider. Are you seeing nice response here now that the assortments are looking better and better?

John D. Goodman

Absolutely. And one of the key things for that is, as we build up our texting capability and our Demandware with our social mobile, it's critical that we start communicating with our Fashion Insiders all the time, and we're starting to do that. We're really starting to do that with the music, incubating the artist every single month, all the new musical artist, as well as with the ABC Family will be a very, very important part of that integration with our Insiders in giving them special perks that the other customers don't have. But we're encouraged by our insiders, and we have seen that business continue to grow every month.

Marni Shapiro - The Retail Tracker

Great. Can I just ask a follow-up? On the online part of the business, as you guys sort of ramp it up and change the mobile business, do you see opportunities -- I mean, obviously, with the Fashion Insider, but also to grow certain businesses like intimates in a more aggressive way online? And will you look at things like free shipping at certain times and the hurdle rate, the right hurdle rate should be when you look at the online business? And also, one silly question, but are you hearing anecdotally from your shoppers? I mean, what are you hearing about the stores? I find them much easier to shop. It's very consistent, the way you're merchandising it for the first time in I don't know how many years. But are you hearing this from your customers, or do they miss the mess at all or not at all?

John D. Goodman

No, I think -- I'll take that last question first. I think as you look at it, we're encouraged by the feedback we're getting. We just got a survey back from our customers, 20,000 surveys came back, which is pretty amazing. We were very surprised. They wanted to give us feedback, and we were very encouraged by what they had to say. And we just got that last week. So having 20,000 of your customers give you feedback is very powerful for us. But what they're saying is they like how it's laid out now. They think it's easier to navigate. They think the service is improving, which is very important for us because I think we have a ways to go in our service equation. But in terms of the layouts, the trends, the easability of shopping, as well as how we have key destinations, whether it be for denim or for intimates and different things, that's important for her. The windows are certainly very important. So we feel really good about the feedback we're getting, but we know we still have a lot of work to do with that.

Operator

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

Stephanie S. Wissink - Piper Jaffray Companies, Research Division

Just a couple of questions for us. First, Steve, if you could just give us, directionally, where are you in your merchandise margin recovery? How far back towards peak or how far from trough are you currently, and then where you kind of anticipate that to go over the next maybe 12 to 18 months? And then secondly, I think, John, you mentioned that there is -- the target for the ABC Family event or the collection is really 16 to 20. And it seems a bit older than what I recall from how you described your customer historically. Is that the opportunistic customer, or is that the customer that you're starting to see return to what sales were a period away?

John D. Goodman

I'll do first part, and I'll let Steve chime in on the rest. We have a 16-year-old girl, and why we're starting to win and starting to get her back is that it's really important we focus on that 16. What that means is she's 13 to 23. So that's sort of the range. And if you look at the ABC Family and the connection between that, it's right in our sweet spot. So we really know that we get her out of the tween category, and then we get her -- there's a big difference between a 16-year-old and an 18-year-old girl, and I think we really focus on our 16-year-old girl. That's our sweet spot, and that will be what we're continuing to do as well how you line it up with ABC family and the characters. We spent a lot of time with the ABC Family team, as well as Andrew Lee -- or Gerard Lee [ph], our manufacturer, as well as the Wet Seal merchants, making sure we've identified the characters and the trends that speak specifically to the demographic. So we really think 13 to 23 is our range. We've been consistent about that. But 16, if you want to put a number in there, is right in our sweet spot.

Steven H. Benrubi

Steph, I would say, if you think about the second quarter, about 2/3 to 70% of the way back on merchandise margin performance. There's definitely some more runway in front of us there. And the way we're going to drive more earnings power and gross margin rate up, hopefully, meaningfully beyond that 30% point is through some additional merch margin improvement and then getting sales productivity to further leverage fixed cost because clearly, we have a fair amount of work still there. We're trailing 12 months now. I think Wet Seal is at about $247 a foot. We peaked at $321. And our goal in the near term is to get back to a run rate closer to $270 a foot on sales productivity, and that's the equation, as we've talked about, that helps drive our operating margins up into that mid-single-digit place again.

Stephanie S. Wissink - Piper Jaffray Companies, Research Division

Steve, if I may, just one follow-up. I think you had mentioned in your prepared remarks that units were down, pricing is up, and transaction counts are up. Are you seeing some flexibility in your customer or willingness to actually pay up if priced along your continuum? And is that also part of the merchandise margin opportunity that exists in that last 1/3?

Steven H. Benrubi

Yes. One, we're definitely seeing better reception to the product overall, and that's reflected in the AUR. And that's even with, as John talked about, the accessory business, which overall has been pretty solid and strong here in the first half of the year. And that business, if anything, will tend to put a little pressure on the AUR. But in spite of that, AURs are up. So it's all pointing to better reception to the product. Units, I think that more and more of that metric move from last year, you have to keep in mind what we were doing at this time last year, and that was trying to sell through inventory. And various promotions might have been driving units, but not in a healthy way. But in terms of growing productivity going forward, transactions have to be a big element of it. We're happy with the progress so far, and it's something that we hope is the beginning of a build of momentum with this girl again that gets transaction growth to be the driver to our future continued productivity increase.

Operator

Our next question comes from the line of Peter Mahon with Dougherty & Company.

Peter Mahon - Dougherty & Company LLC, Research Division

My questions have been answered.

Operator

We have no further questions at this time. I would like to turn the call back over to management for closing comments.

John D. Goodman

We thank everybody's time today, and we appreciate the support, and we will talk to you next quarter. Take care.

Operator

Thank you. This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation

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