Ascena Retail Group Management Discusses Q4 2013 Results - Earnings Call Transcript

Sep.24.13 | About: Ascena Retail (ASNA)

Ascena Retail Group (NASDAQ:ASNA)

Q4 2013 Earnings Call

September 24, 2013 4:30 pm ET

Executives

Allison Townsend

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

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

Analysts

Anna A. Andreeva - Oppenheimer & Co. Inc., Research Division

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

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

Taposh Bari - Goldman Sachs Group Inc., Research Division

Oliver Chen - Citigroup Inc, Research Division

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

Kelly L. Halsor - BB&T Capital Markets, Research Division

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

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

Susan K. Anderson - FBR Capital Markets & Co., Research Division

Operator

Good day. My name is Jackie, and I will be your conference operator for today. At this time, I would like to welcome everybody to the Ascena Retail Group Fourth Quarter Earnings Conference Call. I would now like to introduce Ms. Allison Townsend of ICR. Ms. Townsend, you may proceed.

Allison Townsend

Thank you, Jackie, and good afternoon, everyone. Today's call is being recorded and will be available for replay later today. Information on accessing this replay is available on today's press release.

As a matter of formality, we would like to remind participants that remarks made by management during the course of this call may contain forward-looking statements about the company's results and plans. These are subject to risks and uncertainties that could cause the actual results and implementation of the company's plan to vary materially. These risks and uncertainties are referenced in today's press release, as well as in the company's most recently filed Form 10-Q. Finally, in these remarks, we refer to adjusted earnings, which is a non-GAAP financial measure.

A reconciliation of the non-GAAP measures we discuss today to GAAP measures are included in today's press release.

I would now like to turn the conference call over to your host, Mr. David Jaffe, President and CEO. David?

David R. Jaffe

Thanks, Allison. Good afternoon, and thank you for joining us to discuss our fiscal fourth quarter 2013 results and our outlook for 2014. We were pleased to see sales improve more than expected across all brands in our fourth quarter despite the continued challenges of the external economic environment. Total comp sales for the fourth quarter were up 4%, reflecting a store comp increase of 2% and e-commerce sales increases of 30%. All of our brands reported flat to positive total comps, driven predominantly by improved units per transaction. Lane Bryant showed particularly strong improvement from the third quarter.

Adjusted earnings per share for the fourth quarter were $0.34 compared to $0.29 per share in the same quarter last year, driven primarily by a full quarter of Lane Bryant and Catherines results versus only a partial quarter of last year. As we head into fiscal 2014, we expect consumers to remain focused on durable goods and expenditures, creating pressure on many other discretionary spending segments, including apparel. In light of that, we have taken a conservative approach to our fall plan. I'd like to walk you through results for each of our 5 brands in a little more detail.

At Justice, total comp sales were up 2% in the fourth quarter, with store comps up 1% and e-commerce up 15%. The store comp increase was driven primarily by average selling price increases, offset partially by transaction declines. With regard to specific categories, casual shorts, lifestyle and license apparel were standout performers. Fashion trends shifted away from casual skirts and camis, which led to declines in these categories in Q4.

Total Justice revenues were up 6% for the quarter, with comp gain supplemented by new store growth. We took the cadence of promotions up versus last year with a marketing strategy that continues to focus on communicating value through both targeted loyalty programs and storewide point-of-sale events. Justice executed 4 additional point-of-sale events during the quarter, including 3 flash sale events in which an additional 20% was offered on top of the 40% off the entire store promotion.

We continue to be encouraged by our progress on the Brothers roll out, which was in 50 locations at the end of the fourth quarter, and in 81 locations in time for back-to-school. These locations have seen no decline in the girls business and are generating promising incremental boys sales to date in the high-single-digit range. We are continuing to roll out this brand and expect to be in 150 locations by July 2014.

We opened 14 new Justice stores including one in Canada and closed 4, ending the quarter with 971 stores versus 942 last year. The Justice expansion into Canada is progressing well, and we now have 40 -- sorry, 23 stores in Canada with additional openings planned in fiscal 2014. On average, the Canadian locations are outperforming the U.S. locations in terms of both sales and profit.

In the first quarter, we plan to open approximately 23 stores including 5 stores in Canada and close 7.

At Lane Bryant, fourth quarter total comp sales were up 9% to last year, with store comps up 6%, driven by increased conversion and transactions. E-commerce continued to be strong at 27% growth versus last year. Fourth quarter results reflected positive customer reaction to new merchandising depth with reduced choice counts, and increased wear now assortment and a more customer friendly approach to merchandising the floor to support outfitting. We saw strong performance in intimates, active and wear-to-work separates driven in part by new product launches.

Lane Bryant continues to refine its promotional strategy toward category-focused promotions in place of storewide events, including a key item, Lane Bryant style-tics [ph] program that included a successful mobile opt in. Lane Bryant also increased the focus of direct-mail programs on key items in fashion, with 8 mailers versus 10 last year at an increased total circulation level. Lane Bryant's private label credit card penetration is now at 41%, up from prior year.

We ended the season with a lower level of inventory compared to last year driven by reduced all season inventory that will enable an increase in the mix of fresher product assortments in the stores. As we move into the fall season, our strategy will be to keep inventory at low levels, which should drive continued improvement in margins and inventory turns.

Also in the fourth quarter, Lane Bryant welcomed it's new Senior Vice President of Real Estate, Jeffrey Parisian, who has a wealth of specialty and big box retail experience. Jeffrey will lead real estate store design, construction and facilities functions. The Lane Bryant store count was 788 locations at the end of the quarter versus 805 last year. During the fourth quarter, we opened 12 stores and also closed 12. In the first quarter, we expect 11 new openings with 4 closures as we improve the existing store base and selectively expand. We will also be testing fixturing and decor alternatives as we continue our brand repositioning work.

Turning to maurices. Total comp sales were up 3% for the quarter, driven by strong e-commerce growth of 50% and flat store comps. Cooler weather merchandise categories performed well in the quarter, including our woven tops in both missy and plus size, as well as footwear. Underperforming categories included fashion knit tops, plus dressy knits and studio wide tops. Sales growth for the quarter and the year were 8%, driven primarily by new store openings.

With respect to marketing, we had an incremental mailer in Q4 last -- versus last year with 2 mailers in the quarter. However, there is no bounce back program this year. Our Take Ten loyalty program continues to grow, and we've increased the size of our email database to 3.4 million. Additionally, the penetration of our private label credit card increased over last year and is at approximately 38%. Marketing strategies in 2014 will focus on improving content to elevate the fashion profile of the brand, increasing existing customer frequency and developing an improved loyalty program that integrates with e-commerce.

Our store base is now 878 -- 877 locations at the end of the quarter versus 832 last year. During the fourth quarter, we opened 18 new stores, including 2 in Canada and closed 3. The maurices' expansion into Canada is progressing well, and we now have 15 stores in Canada. We have continued new store growth potential in this brand. And new store results in 2013 were in line with our targets. 17 new store openings, including an additional 4 stores in Canada and 2 store closings are planned for the fourth -- for the first quarter.

At dressbarn, total comp sales for the quarter were flat with a 2% decrease in store comps, which was an improvement over the prior 2 quarters. The e-commerce channel continued its impressive growth with a 54% increase for the quarter. Our dresses, outerwear and woven top categories all showed increased sales versus last year, reflecting better assortment and mix. Underperforming department included knits, jewelry and accessories.

Looking forward to fall, we will be improving our presentation on the floor with reduced choice counts, increased focus on outfitting and improved integration with marketing. We feel confident that our sweater assortment issues from last fall have been addressed. We also made adjustments to the jewelry and accessory businesses, including our new trend shop called hotspots.

dressbarn continue to monitor inventory levels in light of negative store comps and managed receipts to below last year for the quarter, which was a major driver in improved margin rates and overall profitability over last year. We ended Q4 with inventory position conservatively this fall, with carryover below historic levels and fall receipts planned below last year. In response to customer insights, we increased our direct-mail marketing cadence in Q4, adding 1 mailer this year. It was successful in driving incremental traffic, top line full price sales and merchandise margin dollars during a traditionally heavy markdown period. Our blushPERKS loyalty program continues to strengthen with 5.8 million customers enrolled to date. In addition, our private label credit card market share is now at 29% of sales. The dressbarn store count is at 826 locations at the end of the quarter versus 827 last year. During the fourth quarter, we opened 5 and closed 12 stores. For the first quarter, we plan to open 32 and close 7, as we continue to optimize the store base via relocations and selective new openings.

Finally, our search to find a successor for our retiring Chief Merchandising Officer is well underway, and we hope to have an announcement on Keith's successor soon.

At Catherines, it continued its strong performance with total comp sales growth of 13%, with store comp sales of 12% and 24% growth in e-commerce sales. Casual wovens, knits and denim merchandise categories continued to perform well this quarter. In terms of full year performance, Catherines showed significant improvement with full year fiscal 2013 store comp sales of 8% and strong improvement in margins and operating income. The Catherines marketing program was largely unchanged versus last year and stayed focused on frequent mailers, 10 this year and last. We had an incremental Catherines cash bounce back event this year, which was successful at generating increased sales. The penetration of our private label credit card has increased to 42%.

During the fourth quarter, we consolidated the Catherines team into the former Charming Shoppes corporate offices, which allowed us to reduce total office occupancy costs in Bensalem, while improving the work environment for the team. The Catherines store count is at 397 locations at the end of the quarter versus 422 last year. During the fourth quarter, we closed 5 underperforming stores. Catherines will continue to trim its fleet in 2014, closing approximately 10 underperforming units in the first quarter.

To recap our total results for Q4, we drove moderate sales growth against a backdrop of increasingly challenging macro conditions. We ended the year with our inventory levels appropriately positioned for fall and also made progress on longer-reaching strategic priorities to serve as a platform for growth in 2014 and beyond.

Now Dirk will provide an update on financial highlights.

Dirk A. Montgomery

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

As I review the highlights for the fourth quarter, I'll note that the strength of the results versus our guidance had 3 sources: Sales slightly better-than-expected; operating expenses were lower versus expectations, primarily due to the deferral of some discretionary items; and taxes were much lower than expected as a result of some significant discrete items that were primarily onetime in nature.

Total quarterly net sales increased 27% to $1.198 billion. Lane Bryant and Catherines accounted for substantially all of the sales growth versus last year, due to only partial results for those brands reported in 2012. As David mentioned, comp store sales results for the quarter were above our expectations despite the continued challenging economic environment. Due primarily to units per transaction, store comps were up 2%.

In terms of sales by region, all regions had positive comps except for the Northeast, which was flat. Our e-commerce business continued to be strong increasing 30% year-over-year to $103 million, with lots of future growth opportunity. On a combined basis, total comp sales increased 4%.

Moving down the income statement. Gross margin was $672 million or 56.1% of sales. This compares to last year's adjusted gross margin of $617 million or 54.5% of sales. The 160 basis point improvement was largely due to lower markdown requirements, most notably at dressbarn and Catherines. Total Q4 buying, occupancy and distribution costs were $209 million or 17.5% of sales compared to last year of $193 million or 17.1%, reflecting deleverage due to increases in store occupancy and store comp sales increases below our tipping point.

Total SG&A was $336 million or 28% of sales. This compares to last year's $316 million or 27.9% of sales. As I mentioned, this was lower than our expectations primarily due to the deferral of some discretionary items. While we picked those up in the new year, the deferral created between $0.02 and $0.03 of EPS favorability against our guidance for the fourth quarter. Adjusted operating income increased to $87 million or 7.3% of sales. This compares to $70 million or 6.1% of sales last year. Adjusted Q4 operating income results by brand, fully loaded for corporate overhead costs, were as follows: Justice's operating income decreased 17% year-over-year to $20 million or 6.6% of sales. This compares to prior year Q4 operating income of $24 million or 8.4% of sales. The decrease was mainly due to increased promotions driven by a more challenging environment. Lane Bryant came in with operating income of $3 million compared to 0 in Q4 of last year. Improvements in gross margin and leverage on depreciation expense drove the increase.

maurices' operating income increased 5% versus last year to over $15 million or 7.1% of sales. The income growth was driven by strong e-commerce growth, slight improvement in gross margin rate and new store contribution, offset partially by operating expense deleverage. dressbarn came in with operating income of $41 million or 14.3% of sales, compared to prior year Q4 income of $31 million or 10.8% of sales. The increase was driven by improved gross margin rates due to lower markdown reserve requirements and tightened inventory control.

Catherines' operating income was $7 million or 8.2% of sales compared to an operating loss of $1 million or 1.2% in the prior year, reflecting very strong overall performance for the quarter.

The company's effective income tax rate for the fourth quarter was 32.6%, well below our guidance assumption of 38%. That difference translated to approximately $0.04 of EPS favorability for the quarter versus our guidance. We had a number of favorable discrete items, the largest being a onetime favorable settlement on an Ohio tax issue.

Adjusted net income from continuing operations increased 19% to $56 million or $0.34 per diluted share. This compares to last year's adjusted net income of $47 million or $0.29 per diluted share. As I noted previously, discrete largely onetime tax items accounted for roughly $0.04 of EPS in the fourth quarter and expense deferrals accounted for another $0.03 per share compared to the assumptions in our guidance.

Turning to the balance sheet. We ended the quarter with 188 -- $189 million in cash and cash equivalents. Of this amount, approximately $140 million is overseas. We ended the quarter with long-term debt of $136 million, a $20 million reduction from the prior quarter. Total inventory at cost was $541 million at the close of Q4, up only 1% versus last year or roughly $7 million. We adjusted promotional and clearance plans in the fourth quarter to position ourselves for a clean inventory position going into fall and have planned the fall inventory levels conservatively. CapEx for the year was approximately $290 million, which includes investments in the major multiyear projects we noted previously, including the centralized distribution facilities and the ongoing IT transformation.

In terms of unit development, we ended the year with 193 openings and approximately 162 closings.

I'd now like to provide some thoughts on our guidance for 2014. We expect to see a continued challenging environment due to consumer spending patterns away from apparel. At the same time, we believe that our brands are well positioned competitively for that environment. We hope to see revenue growth reach the milestone of approximately $5 billion in sales this coming year. Our EPS guidance for 2014 is $1.25 to $1.30 per share. Our guidance is built on the following top line assumptions for the year: Low-single digit total comp growth and net new store growth in the range of 55 to 75 units. In terms of margin and expense rate assumptions built into the guidance, the range we provided is based on the following assumptions: Gross margin rate of flat to up 30 basis points versus 2013 with improvement from merchandising somewhat offset by what we believe will be a more promotional external environment in 2014. Operating expenses as a percentage of sales are expected to be roughly flat versus 2013 as we balance gradual elimination of redundancies with resource builds to improve capabilities to drive top line growth in areas such as e-commerce. Combined with reasonable revenue growth, we expect to generate operating expense leverage in 2015 and beyond.

Operating income as a percentage of sales is expected to be flat to up 30 basis points versus 2013, driven by gross margin improvement and flat OpEx expense rates. Our effective tax rate assumption for the year is 39%. This is a 300 basis point increase in the effective tax rate versus 2013 and a significant factor in our relatively muted profit growth versus reported 2013 results.

Regarding our sales trends in fiscal 2014, thus far, season-to-date total comps are up low-single digits and back-to-school selling period margins were challenged by an increased promotional environment.

In terms of CapEx, we expect to spend $400 million to $450 million in 2014 on new store development and major transformational projects. Approximately half of the total spending in 2014 relates to a continuation of those large transformational projects including the DC consolidation and build-out, IT transformation and office investments in Mahwah, Duluth and Columbus. Beyond 2014, as the major projects are completed, we expect CapEx to reduce to lower levels.

We noted last fall that we anticipated significant long-range overhead savings potential as a result of the Charming acquisition and synergy initiatives. Our current estimate for the savings potential for those initiatives is $95 million or more in full implementation. We feel confident that we will reach this total potential savings over the next 3 years. In 2014, we anticipate achieving combined overhead and synergy savings of $18 million or more for the year. Those savings are incorporated in the guidance I provided.

As we fully implement our DC consolidation and other major initiatives, we expect savings to accelerate significantly in 2015. We will provide a more detailed overview over the longer range plans on synergy and overhead savings at our annual Investor Day on October 9, in New York.

Just a few final notes. We have multiple factors at play that will lead to higher EPS growth in the second half of fiscal 2014 versus the first half. The total overhead and synergy savings that I mentioned will accelerate over the course of the year, with the majority of the savings coming in the second half of the year. In addition, the impact of new hires and redundant overhead expense is expected to be higher versus last year in the first half.

In addition, within the first half of fiscal 2014, we expect have much stronger profit growth in Q2 versus Q1 due to easy comparisons against a tough holiday and poor weather last year, as well as differences created by a shift in timing of required markdowns at the Charming Shoppes brands. Regarding ongoing sales reporting, due to the blurring of sales by channel between brick-and-mortar and e-commerce, we will be evolving our sales reporting in 2014. We will report total comparable sales only for each brand, as it is becoming increasingly difficult to separate e-commerce and brick-and-mortar sales. We will be breaking down e-commerce from brick-and-mortar sales at the total Ascena level.

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

David R. Jaffe

Thanks, Dirk. As we look forward to 2014 and beyond, we feel very good about our ability to achieve sustainable top line and bottom line growth. We feel that our brands continue to be well positioned in this environment to increase market share based on our unique combination of fashionable merchandise, service and value. We're pushing to improve each of those attributes in the year ahead.

In terms of operating margin improvement, as Dirk mentioned, we remain confident in achieving the combined long-range synergy and overhead savings targets and expect further margin improvement over time from the impact of improved merchandising. Our leadership team shares a compelling vision for the future and is looking forward to growing the business and achieving that vision while generating superior long term shareholder returns. Our brands and shared services leaders are all looking forward to meeting with you and providing a more detailed update on our growth plans at our annual Investor Day in a few weeks.

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

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from the line of Anna Andreeva with Oppenheimer.

Anna A. Andreeva - Oppenheimer & Co. Inc., Research Division

I had a couple of questions. First, I was hoping you can talk about comps progression during the fourth quarter. I believe you guys guided for flat comps in June and July. How did that come in versus your expectations? The second question on Justice operating margins. Just wanted to double check, is there anything onetime in that roughly 400 basis point decline? I think you talked about 4 additional POS events during the quarter, so just kind of trying to understand the magnitude of the decline and how should we think about Justice's operating margins going forward? And then finally, cash building on the balance sheet and the debt levels coming down, maybe talk about some of the priorities for cash as you guys pay down the debt.

David R. Jaffe

Okay, well, I think I got all those down. I'll start with the last one and work my way back and then turn over to Dirk to add to it. First, I'd say our first priority, Anna, is to pay off our debt. And, as you heard, we're down considerably since -- just over a year ago when we closed on the transaction. And we think that we'll be able to make a big dent in it this year as well even with the significant CapEx we're doing. So that would be number one. I would also say though that we've always been opportunistic in our share repurchases, so that's always a possibility. And at this level of debt with our revolver capacity, we would certainly always keep that. We have an open commitment from the board, so that's always a possibility. Beyond that, though, we're not going to start a dividend. We've talked about that many times. And I'll just hopefully preempt some questions saying, we are not looking at any acquisitions and have no intention to until we get these businesses operating on a firmer keel and we have these major transformational projects complete and running smoothly. And so that could be 2 years or more. But that's certainly, the acquisition is certainly not on the horizon. Turning to Justice. As we mentioned, it was a tough back-to-school. That fourth quarter was the very beginning of it. And so operating margins were hit because of the incremental flash sale. As you may remember from earlier calls, a flash sale is an incremental 20%. And so what we found is that the rate gets hurt, but what we're able to do is generate more dollars. So we saw a little bit of an impact on the margin. There were no significant onetime expenses, except the typical clearance as we roll out of spring into back-to-school, and there is probably a little bit more activity in the clearance this year than in last year, but not dramatic. And I'm going to turn over to Dirk to talk about the comp progression.

Dirk A. Montgomery

Sure. To speak to the comp progression, as we mentioned, I think publicly on our last call, we were off to a strong start in May. May comps were in the higher end of low-single digits. And then June and July actually were positive, both in terms of brick-and-mortar and e-commerce. So we had, certainly, had a deceleration from May into June and July, but we maintained positive comps through all 3 months. And at a general level, mall traffic at least based on the information that we get on apparel mall traffic, had a pretty similar pattern. Mall traffic actually was much lower in June and July than in May.

Operator

And your next question comes from the line of Edward Yruma with Keybanc Capital Markets.

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

Just a quick follow-up on the previous question on Justice. I guess I'm just trying to drill in. Obviously, you were being reactive to a very promotional back-to-school environment. But as we think about the Justice model going forward, 40% off, which has obviously been a mainstay of your promotional strategy, I guess, could you give us an update or insight into some of the tests that you might be running and whether Justice will have a more flexible promotional strategy going forward?

David R. Jaffe

I don't want to steal any thunder from the Justice leadership team that's going to be presenting in 2 weeks. So I'll just say that they have been and will continue to test alternate programs, including the flash sale, which has been successful to look for other tools. And we'll have some discussion about the success of the flash sales and some of the other things they are testing at the Investor Day, if I can defer until then.

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

Great. And just some quick questions about the guidance you provided. You pointed to, I believe, gross margins of flat to 30 basis points. Obviously, you're lapping some easy compares as you had some sweater issues. How do we think about other potential drivers on the gross margin front, as well as you indicated that obviously promotions have been fairly heavy, at least early in the fiscal year. Do you expect those promotions to abate as the year progresses?

Dirk A. Montgomery

Well, we've seen a, as I think everyone on the phone probably knows, a pretty heavy -- a heavier promotional environment in back-to-school than we saw the year before. Don't know how promotional things are going to be at the balance of the year. I think your question gets to, where do we see improvement in the gross margin rate? And I would say it's, one item that you mentioned, which is, we are up against fairly low margins at various points in 2013 because of the tough year that we had both at holiday and then in some portions of spring. And I think we also believe that the improvement in merchandising is going to help us reduce markdowns by higher initial sell-through as we improve our merchandising strategies.

Operator

And your next question comes from the line of Neely Tamminga with Piper Jaffray.

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

So I just wanted to ask a little bit more about Lane Bryant. It just looks like you've been making some really nice headway on this brand. And that's, obviously, key to the group of brands that you did acquire from last year, David. How are you feeling about how we -- continuing to fall for that division specifically, especially as we will seemingly see more of Linda's influence being more fully realized throughout the fall season. Just wondering how you're feeling about that, both from an opportunity in sales and margin. And then I'll just have one follow-up.

David R. Jaffe

Sure. I think Linda's really made a terrific impact. And she has helped galvanize the team over her vision, which is really to give the customer what she wants. So we saw as early as the fourth quarter, I mean, you saw the results. Certainly can't point all of that to Linda, but certainly a lot of it was. And she's been going after all aspects of the business, whether it's the merchandise or promotional cadence or working with her team to develop high levels of service or a customer engagement, et cetera. So I'm feeling very good about the brand. They're really working on developing a more focused fashion direction to appeal to her. And at the same time, trying to have kind of a coordinated look at addressing that customer whether it's through service, through marketing, online, et cetera, et cetera. I think they're making really good progress. And as I look out, I think that brand is going to continue to grow and develop both top line and bottom line. There may be some bumps along the way, but I really think they're on the right path, and I'm excited for Linda to be at the Investor Day in 2 weeks and be able to meet all of you and talk about her vision.

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

And just a few housekeeping here on the modeling. Dirk, if you could help us, I just want to clarify. So the guidance on the season-to-date comp numbers that you've offered, I just want to confirm that they do in fact include e-commerce?

Dirk A. Montgomery

That's correct, Neely. So it's total comps. Yes.

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

Okay. And then in terms of -- I mean, the implication on some of the EPS -- thank you for giving us the high level on the EPS number, but I just want to make sure. Are we walking away with the belief here that Q1 EPS could actually be down to last year, but then first half actually maybe being flattish, but really the bulk of the growth that you just guided to really coming in the second half as you get the bulk of the synergies? Is that kind of the high-level summary that we should be thinking about?

Dirk A. Montgomery

Sure. Well, so we are -- our policy has always been to not give quarterly EPS guidance. We do think that the 2 factors that if you just look at how our trends are going to be first quarter versus second quarter, obviously, we expect a much better second quarter in the first half than first quarter because we're up against a pretty challenging LY. And also, I mentioned the shift in markdown timing. Those 2 factors are actually going to lead to a much stronger Q2 versus Q1. And I can provide -- I'll provide some additional color on the specifics of the impact of those items when we have our follow-up calls.

Operator

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

Taposh Bari - Goldman Sachs Group Inc., Research Division

Dirk, I just wanted to clarify the Justice EBIT margins for the quarter. So the press release, I think, that's $14-and-change million of EBIT, but you said $20 million in your prepared remarks, did I hear that correctly?

Dirk A. Montgomery

Let me check.

David R. Jaffe

So another question while he's checking?

Taposh Bari - Goldman Sachs Group Inc., Research Division

Yes, the other question would be -- so you guys had guided to -- prior to this quarter, going back to last year's Analyst Day, you had guided to about $20 million of cost reductions in 2014 plus brand synergies of about $40 million at the midpoint over the course of '14 and '15, so it sounded like at least $20 million of that total accretion. And now you're saying $18 million in total. So just trying to get a better sense of what's changed? It looks like some of those opportunities are being pushed out. Just wanted to get a better sense of what's happening there.

David R. Jaffe

I'll let Dirk pick this up. But I just think we're -- maybe there's a misperception. I believe the number wasn't the $20 million plus the $40 million that we threw out there. So we may need to kind of level set on that. We're a little bit behind on the timing, but as you heard, we increased the total from $90 million to $95 million. So just some of these projects got a little bit bigger because instead of just being a Charming integration project, it became an Ascena transformation project. So it ended up involving -- some of these things involving all 5 brands and not just the 2 new brands. And that may be some of the reasons that there's a little bit of a delay. But again, I just want to emphasize that we are confirming, not the $90 million, but actually $95 million. So the detail on the timing of the 2014 savings, I'll let you pick up with Dirk on your follow-up call.

Dirk A. Montgomery

And Taposh, I'll follow-up with you offline on the discrepancy. I'm seeing $20 million in a couple of sources that I have in terms of Justice's operating income. So we'll -- we can work that on the follow-up call.

Taposh Bari - Goldman Sachs Group Inc., Research Division

Okay. And then just a quick follow-up I had. Just looking at segment operating margins for Catherines, it looks like about 8% for the fourth quarter and Lane Bryant closer to 1%. I think they're both coming off of a similar starting point if we go back to a year ago from the slides that you provided at your Analyst Day last year. So it looks like -- I guess, the question I'm trying to ask is, structurally, because I think they're comparable businesses. Is there any reason why Lane Bryant's margins 1 day in the fourth quarter shouldn't be closer to where Catherines were this quarter?

David R. Jaffe

No. They should be. It's not going to happen tomorrow, but yes, I think we're all in line that their margins are not where they need to be, and that's part of the opportunity. And we'll -- I mean, there's some funny things going on, as Dirk mentioned about the markdown timing, the required markdowns. And, again, that's a little technical. I'll let Dirk get into it. But in general, I think if we take the operating margins, both those businesses, as well as the dressbarn business, we feel that those margins have significant room to grow. And while we acknowledge that it's not going to happen in a year, we still believe that those businesses, as well as frankly, Justice and Lane Bryant have room to expand and we'll be talking -- we'll let each brand talk more about that in a couple of weeks at the Investor Day.

Operator

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

Oliver Chen - Citigroup Inc, Research Division

Regarding the low-single digit comp run rate currently, could you give us a rough sense of how that's shaking out amongst your concepts? If there's a pretty wide disparity or not? And then also, I just had a broader question in terms of where you see -- which concept has the most opportunity to make the product better? And if you had comments on the journey to become more vertically integrated at some of your concepts as you look to source less from other people?

David R. Jaffe

So the comps by brand were actually very tightly clustered. On a total comp basis, nobody was negative and -- this season-to-date and the biggest number was still mid-single digits. So it's really fairly tight, which I'm pleased about. And then your second question about product enhancements. I think as we said before, the dressbarn and maurices businesses are in a transformational period now, where they're developing the ability to design a product internally. And that product development capability is something that Justice, Lane Bryant and Catherines are already doing a great job with. So I think those are the 2 biggest opportunities. And we've already seen that begin to happen. As an example, the maurices business sourced 8% of its product last year directly through our Ascena global sourcing arm. And we expect that number to increase significantly next year. And dressbarn is probably just a year or 2 behind maurices as they ramp-up and develop their talent in that capacity.

Oliver Chen - Citigroup Inc, Research Division

And then just a follow-up, as we do enter this consumer environment with the durable spending and the heightened promotion investment, what are we going to notice in the stores? Are there going to be different strategies in terms of trying to gain consistency in light of this mixed consumer picture?

David R. Jaffe

Well, we're certainly not going to do anything consistent among the brands. Each brand has their own promotional strategy and cadence. And I think that is reflective of their focus on their customer, and it's very different. But I don't think that you're going to see anything dramatic, Oliver, that's going to change our business model. You may see an incremental mailer, business gets tough. You might see an extra promotion or what have you, but we're fairly -- as you heard Dirk say earlier, we're fairly tightly controlled on inventory. We're not particularly concerned about how tough things can be because we've gone in with a very conservative plan, and we've got plan Bs in our back pocket to promote or do extra marketing, whatever, if things come in tighter, if business becomes a little bit more difficult than that.

Oliver Chen - Citigroup Inc, Research Division

Okay. And you guys gave lots of great detail on how we should think about the cadence. But on the comp side, will things get better as the year goes on or do you think it's more prudent to maintain a conservative posture?

David R. Jaffe

Can I just say from your lips to somebody's ears, it would be great if we could just as -- hope that comps will get better. But obviously, hope is not a strategy, and we plan to be conservative. And if it gets better, that would be great. And we can certainly, in all of our brands, we can chase the business right up to a very strong comp. So we're, I think, really well positioned for what we think is going to be a challenging fall. And we continue to evaluate and look at our inventory levels as we get a better perspective on the business and our projections for the spring.

Operator

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

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

So 2 questions. One, maybe for Dirk. On the flattish EBIT margins for 2014, I mean, our assumption is that you guys are probably hoping that Lane Bryant and dressbarn have expanded operating margins given the problems in 2013. So what are your assumptions for Justice or maurices' operating margins for 2014? And then a couple of questions on Lane Bryant, and obviously we'll get more at the Analyst Day, but wondering if you can talk about mall versus off-the-mall comp differences? Update us on the progress on the real estate transformation. And also I think last quarter, you mentioned you were doing a survey on the Lane Bryant shopper, so just curious what you may have found out from that.

David R. Jaffe

Sure. I'll start and turn it back to Dirk on the operating margins. The survey is not quite complete. We're hoping to have it available for October 9, so Linda, if you're listening, you know your homework for the next 2 weeks. The real estate at Lane Bryant is a little bit more nuanced than perhaps the knee-jerk response we had a year ago, which was, oh, let's move out of malls into strips. So to that end, as I mentioned, Jeffrey Parisian has joined us. He is a terrific guy that really understands this business. And he is taking a very analytical approach to thinking through what the right strategy is by market and not just making some blanket statement that, "Okay, we're going to be out of all malls into strips." We're really looking at it on a case by case. I just spoke to them actually. They just came back from St. Louis and saw some things that they didn't like, and I think they're going to be doing that market by market to make sure that we have the best real estate for our customer in that market. So this is going to be a long process. We're not rushing to close stores or to open stores willy-nilly. And I think that as we go forward, we'll keep giving you an update as we learn more. But in concept, it's very simple, let's be convenient to where our customer wants to shop us.

Dirk A. Montgomery

Yes, and in terms of margins, we are expecting margin improvement at Lane Bryant and dressbarn in '14 relative to '13. They represent just under 40% of the total mix. The other thing to bear in mind is that there were at least a couple of quarters where both of those brands actually had pretty solid margins. So it's not as if they're going to get a full year benefit of significant improvement in margins. So when you weigh all that out, it actually comes out to about this flat to up 30 basis points improvement. But certainly, Lane Bryant and dressbarn are the 2 brands that we expect to have the most margin improvement from. And the rest of the brands, we're not expecting declines per se, but probably flattish.

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

Okay. Finally and lastly, on Hurricane Sandy, can you maybe give us some idea of what kind of impact that may have had to your business or supply chain?

David R. Jaffe

On the supply chain, really none. We're fortunate in that regard. It may have slowed down a few shipments by a week, but nothing dramatic. It really hit dressbarn the hardest. It has the highest concentration of outdoor or strip, northeastern stores. And then maybe Lane Bryant was a distant second and a couple of Justice stores. But we really felt it the most at dressbarn. And Dirk's sitting there calculating quickly what we think the impact was.

Dirk A. Montgomery

Yes, so the impact in total for the company and it's always difficult to estimate weather impact, but it was somewhere between $8 million and $12 million, as best we could tell in the second quarter.

Operator

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

Kelly L. Halsor - BB&T Capital Markets, Research Division

This is Kelly for Scott. David, could you just comment on the competitive landscape in the missy category given the weakness with the consumer? Are you seeing value consumer trade down at this point? And could just also comment on the market share position for dressbarn at this point and how you plan to protect that?

David R. Jaffe

Well, I'll tell you, it's competitive as all hell right now in all of our segments. It's, I think, if not a shrinking pie. The pie is certainly not getting any bigger. And you've got challenges from people, big box, big guns like JCPenney. And I don't need to tell you guys. I'm sure you know a lot more about it than I do, but that's certainly an issue we're watching carefully. And then surrounding JCPenney, you've got the Kohl's of world and then the big discounters like the Targets and Wal-Marts that, well, we might argue aren't overlapping with our business. If any of you saw the Emmy Awards, Target had like seemingly an ad every break with all fashion. And they were great ads. And their product looked terrific. So I think the competition is getting tougher. I guess, I seem to say that every year. And I think that what we have to do at dressbarn, as well as at our other brands is fight back. And I believe the best way to fight back is to offer compelling products at fair prices. So we're not looking to be the cheapest, but we're looking to have great fashion that's geared to our customer and give it to her in an environment that's comfortable and highly service-oriented. And that's what's been successful. That's been our model. And I think it will continue to work for us.

Kelly L. Halsor - BB&T Capital Markets, Research Division

Okay. And then just switching gears to Justice. I think this question has been asked in a different way, but I believe you are anniversary-ing the flash sale this Columbus Day weekend. Are there particular strategies in place to offset that to drive incremental sales going forward at Justice?

David R. Jaffe

Well, initially, you'll find that the time of the sale event will be lengthened. So for the 2-day event, I believe, we'll make it a 4-day event. And that will help, I think, get us some incremental sales and continue to help us hold onto our market share. And as we go forward, as I said earlier, Justice continues to test other types of promos to see what's going to work or what's going to resonate most effectively with our customer.

Kelly L. Halsor - BB&T Capital Markets, Research Division

Okay. This is my last question, is with Justice operating margins. When you're looking at it longer term and obviously, we've seen some impact from these additional flash sales, but are there any offsets to that flash sale reinvestment that we should consider?

David R. Jaffe

I'm not sure I follow you. Let me just say that the flash sale does impact rate, but it is more than offset by incremental dollars. So I'm not sure that answers your question.

Kelly L. Halsor - BB&T Capital Markets, Research Division

It doesn't -- I mean, just in terms of margin, but I will take that offline with you guys.

Operator

And your next question comes from the line of Steve Marotta with CL King Associates.

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

David, I have a question on the fourth quarter and the delta off of what guidance was. I believe you guys mentioned that sales were a little bit better. There was $0.03 in SG&A. There was $0.04 in taxes. As I read it from midpoint to actual, it was about $0.125. Was there an additional chunk in gross margin as well?

Dirk A. Montgomery

No. Not other than what was driven through sales. We didn't necessarily have a higher gross margin rate than we had expected. But relative to our guidance assumptions, we did have slightly better sales.

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

So gross margin dollars were better, is what you're saying -- than expected?

Dirk A. Montgomery

Correct.

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

Got you. And Dirk, if you mentioned this, forgive me. I missed it. The $0.03 in SG&A was specifically what expense? And will that be wholly captured in the first quarter?

Dirk A. Montgomery

Not necessarily in the first quarter. We had a number of expenses in categories such as new hires, professional fees for consolidating expenses that we chose to defer into the first quarter. By and large, the expense favorability that we saw in the fourth quarter was essentially moved into our 2014 guidance. So it was kind of a onetime benefit, and we were just working to try to tighten expense controls and really be thoughtful about adding those incremental expenses.

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

So some will be captured in Q1 but not wholly?

Dirk A. Montgomery

Correct. Some will actually be spread over the course of 2014.

Operator

And your next question comes from the line of Mark Montagna with Avondale Partners.

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

Question regarding Lane Bryant. When can we expect to see Linda's full influence given the time lapse with supply chains? And do you think that Lane Bryant has corrected their sweater issue of last fall? And then just referring to Justice, I wanted to know how many -- I think you did 1 or 2 price increases in fiscal year '13, I just wanted to verify that. And then lastly, just on quarter-to-date back-to-school margins, Dirk, you had mentioned some challenges there. Are those challenges all related to Justice or is some of that related also to maurices?

David R. Jaffe

So just Justice. Maurices is -- got more -- a little bit of a back-to-school business, of course, but not nearly to the same extent. The price increases that Justice took, it was more -- there were 2 price increases taken and those are now basically done. Some of the product that was increased last year was done over the summer and so the early fall deliveries, some of that had the last remnants of the price increase, but it's kind of maybe 1% -- overall for the fall, maybe it's a 1% impact, so it's pretty minimal. And then with respect to Linda, I think it's kind of a continuum. She's already had an impact. And you'll see more and more of it. And I think that holiday, she would certainly feel she's putting her thumbprint on, but I don't think she'll really own the product completely until spring. Because at that point, she will have been here. She would have been at the kind of soup to nuts from the trend, to the concept-ing, to the development. So I would say she's definitely having an impact. She had an impact in the fourth quarter, more so in the fall and then completely by spring.

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

And when you say completely by spring, are you talking in beginning of the third quarter or you're looking at more towards fourth quarter?

David R. Jaffe

I'm going to go out. Linda may kick me when she sees me, but I'm going to go out and say, the third fiscal quarter, which is going to be -- call it the first deliveries. Not so much the early deliveries in November, December, but the first deliveries in the new year.

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

All right. Well, we'll give her a chance to adjust that if she wants in a couple of weeks.

David R. Jaffe

Yes, okay. Well, she can correct it when she sees you in 2 weeks.

Operator

And your next question comes from the line of Susan Anderson with FBR Capital Partners.

Susan K. Anderson - FBR Capital Markets & Co., Research Division

I was wondering if maybe you could just touch a little bit more on the dressbarn margins. They seem to be pretty decent this quarter, seems like it's one of the high peaks versus historically over the past several years. And also should we kind of expect this going forward? Do you see the same benefits? And same with Justice, I guess, but on the another end, do you think that this base that we're seeing this quarter is kind of like the new base for it?

David R. Jaffe

Well, I think on dressbarn, as we said in the call, they had negative comps, store comps, so a little disappointing but they had wonderful inventory control. Just dramatically superior to where it had been in prior years that enabled them to hold their margins. And that enabled them to get this nice pop in their operating margin. So very impressed with their performance in the fourth quarter, really drove their results in a quarter that wasn't up to snuff, so great, great job there. And then on Justice, I think we've talked about how they had to do these flash sales. I believe, I mentioned that they did 3. And the 3 had big impact on sales and dollars, but at the expense of margin rate. So not a surprise. And as I said earlier, they're testing different types of promos, and we'll see where we come out. So we've been thoughtful on how we're planning their business for fall, for the year in terms of their operating margin as it's impacted by these various promotions. So the key that we're focused on at Justice, let's make sure we hold on to our market share and let's make sure we continue to grow profitable sales. And would love you to come to our Investor Day, and we can have you meet Mike and get a little more detail beyond that, if you're interested.

Susan K. Anderson - FBR Capital Markets & Co., Research Division

Okay, that's helpful. And then just one more question, more I guess on modeling. The shift in the Charming Shoppe format in terms of the promotions, has that all shifted from fourth quarter and first quarter? Just a verification on that. And then also was there any other format and then also is there any guidance just on integration expenses for next year?

David R. Jaffe

So the promo shift is ongoing and it's promo by promo. So each one is going to stand on its own, but each one, they're looking at. And the general trend is, as we mentioned, is away from the storewide promos to the category-specific promos, and that's going to be ongoing. But I don't want to say it's black and white, like we're flipping a switch. I'm sorry, I lost the second question. Can you please repeat.

Susan K. Anderson - FBR Capital Markets & Co., Research Division

Just on any guidance on integration expenses for next year?

David R. Jaffe

I thought we gave that.

Susan K. Anderson - FBR Capital Markets & Co., Research Division

Oh, so onetime expenses. Oh, it is in there. Okay. I guess, I missed it.

David R. Jaffe

If it's not clear, just give Dirk a call afterwards.

Dirk A. Montgomery

Yes, we've got time, Susan, I'll make sure we cover that in our follow-on call.

Operator

At this time, we have no further questions.

David R. Jaffe

Well, that's just perfect then. All right. Thank you, everyone. And I hope we'll see in a few weeks at our Investor Day on October 9 in New York City, and I appreciate your interest and support. Have a good evening.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and have a great day.

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