Tilly's CEO Discusses Q3 2013 Results - Earnings Call Transcript

Nov.26.13 | About: Tilly's, Inc. (TLYS)

Tilly's, Inc. (NYSE:TLYS)

Q3 2013 Earnings Call

November 26, 2013 4:30 PM ET

Executives

Anne Rakunas - IR, ICR Inc.

Daniel Griesemer - President and CEO

Jennifer Ehrhardt - CFO

Analysts

Sharon Zackfia - William Blair

Lorraine Hutchinson - Bank of America Merrill Lynch

Stephanie Wissink - Piper Jaffray

Lindsay Drucker Mann - Goldman Sachs

Jeff Van Sinderen - B. Riley & Company

Isela Soto - ROTH Capital Partners

Pamela Quintiliano - SunTrust Robinson Humphrey

Betty Chen - Mizuho Securities

Operator

Good day ladies and gentlemen and welcome to the Tilly's Incorporated Third Quarter Fiscal 2013 Results Conference Call. Today's conference is being recoded.

At this time, I'd like to turn the conference over to Anne Rakunas of ICR Incorporated. You may begin.

Anne Rakunas

Thank you. Good afternoon everyone. Thank you for joining us today to discuss Tilly's third quarter fiscal 2013 earnings results. On today's call are Daniel Griesemer, President and CEO; Jennifer Ehrhardt, CFO.

A copy of today's press release is available in the Investor Relations section of Tilly's website at tillys.com. Shortly after we end this call, a recording of the call will be available as a replay for 30 days in the Investor Relations section of the company's website.

I would like to remind you that certain statements that we will make in this presentation are forward-looking statements. These forward-looking statements reflect Tilly's judgment and analysis only as of today and actual results may differ materially from current expectations, based on a number of factors affecting Tilly's business. Accordingly, you should not place undue reliance on these forward-looking statements.

For a more thorough discussion of the risks and uncertainties associated with the forward-looking statements to be made in this conference call and webcast, we refer you to the disclaimer regarding forward-looking statements that is included in our third quarter 2013 earnings release which was furnished to the SEC today on Form 8-K, as well as our filings with the SEC referenced in that disclaimer.

We also note that this call contains non-GAAP financial information. We're providing that information as a supplement to information prepared in accordance with the accounting principles generally accepted in the United States or GAAP, and you can find a reconciliation of these metrics to our reported GAAP results and the reconciliation table provided in today's earnings release.

As for today's call we have a limit of one hour. So when we get to the Q&A portion, please limit yourself to one question at a time to give others the opportunity to also have their questions addressed.

And with that, I will turn the call over to Daniel Griesemer, Tilly's President and Chief Executive Officer. Dan?

Daniel Griesemer

Thank you, Anne, and good afternoon everyone. Thank you for joining us today. On our call, I will be providing with an overview of the third quarter performance and the key factors that drove our results. Jennifer will then review our financial results in more detail, and provide our outlook for the fourth quarter and full year 2013. I will provide a few closing comments, and then we will open up the call for your questions.

During the third quarter, we achieved quality earnings that were at the high end of our expectations, and I am pleased with how our team continues to execute in a challenging retail environment. We maintained healthy gross margins, controlled our costs and exited the quarter with inventory as planned and well positioned for the holiday season.

As a reminder and discussed on our second quarter call, the retail calendar resulted in sales shifting into the second quarter from the third quarter this year, when compared to the 2012 fiscal calendar. Taking this into account, on a like-for-like basis, we delivered higher gross profit dollars than the third quarter last year, in a very challenging teen retail environment.

During the quarter, we experienced a continuation of the weak traffic trends that have affected many retailers, leading to lower than expected comparable store sales. Consistent with the past several quarters, consumers continue to focus their shopping into compressed peak periods and pullback during non-peak periods. This trend was consistent across all product categories, real estate formats and store vintages, as well as in our e-Commerce channel; affirming our view that our sales results were primarily driven by external factors.

While acknowledging that teen unemployment remains high, and that other categories such as electronics and entertainment compete for teen dollars, we know that Tilly's remains the top destination for the most relevant merchandise and brands important to our action sports inspired customers.

Despite the challenging external environment, we continue to adhere to the proven business strategies that have guided Tilly's success for over 30 years, including our differentiated business model and our sharp focus on evolving preferences and needs of our customer.

Our dynamic merchandise model allows us to be nimble in responding to changes in demand and preference. (Inaudible) selective in our promotional activity. We believe it is critical to respect and protect not only the Tilly's brand, but the integrity of the brand partners, to ensure our long term health. This strategy has served to maintain our healthy product margins, while reducing inventory, as planned, by just under 16% on a per square foot basis compared to the same date last year. Our inventory is clean and current, which we believe positions us well to effectively navigate through the fourth quarter, if the challenging retail environment persists.

Significant to Tilly's success has been our present where our customers want to shop; in the right markets, and the right venues, as well as other channels of e-Commerce and catalog. We continue to strategically build out our store base in high caliber markets, and to refine our channels of distribution, which we believe will position us to benefit for more consistent traffic trends.

During the quarter, we opened seven new Tilly's stores, on time and within budget, bringing our total store count to 189. We introduced the Tilly's brand in three new markets and four new states. We continue to see a strong pipeline of new real estate opportunities, and we are on-track to open 27 net new stores in fiscal 2013.

During the quarter, we continue to advance initiatives that allow our target customer to shop how and when they like, in order to drive traffic to our stores and our website, not only in the coming quarters, but in years to come.

And now, I'd like to turn the call over to Jennifer Ehrhardt, for more detail on our financial performance in the quarter and an update on our outlook. Jennifer?

Jennifer Ehrhardt

Thank you, Dan, and good afternoon everyone. For the third quarter, net sales decreased 0.9% to $123.8 million, a $1.1 million decrease compared to the third quarter of 2012. This reflects approximately $8 million in back-to-school period sales that shifted into the second quarter from the third quarter this year, when compared to the 2012 fiscal calendar.

Comparable store sales decreased by 2.4%, with a similar level of comps in all departments, aside from accessories that performed slightly better. Our e-commerce sales, which are included in our comparable store sales, grew 3%. Our third quarter comps reflect lower traffic, largely offset by an increase in both conversion, and the average transaction value.

Gross profit was $38.2 million, or 30.9% of net sales compared to 33.5% of net sales in the third quarter of 2012. Even before factoring in the sales shift into the second quarter this year, we achieved slightly higher product margins, compared to the third quarter of last year. The increase in product margins was offset by deleverage and buying distribution and occupancy costs, as result of the negative comparable store sales, and the sale shift into the second quarter this year.

We continue to diligently manage our costs, with selling, general and administrative expenses of $28 million, or 22.7% of net sales, which is just slightly above an SG&A rate of 22.4% in the third quarter of 2012. Our operating margin was 8.2%, compared to 11.1% in the third quarter of 2012, reflecting deleverage of buying, distribution and occupancy costs, offset by slightly higher product margins, as previously discussed. When adjusting for the weak back-to-school sales that fell into the second quarter this year, operating margins were higher than 8.2% we reported, but still below the third quarter 2012.

Net income was $6.1 million or $0.22 per diluted share, based on a weighted average diluted share count of 28.2 million shares. This compared to an adjusted net income in the third quarter of 2012 of $8.3 million or $0.30 per share after applying a pro forma 40% C Corporation tax rate.

Turning to the balance sheet; we ended the quarter with cash and marketable securities of about $50.6 million, with no borrowings and no debt outstanding under our revolving credit facility. Cash used for capital expenditures during the quarter totaled [$12.0 million] compared to $9.1 million in the third quarter of 2012, and was primarily related to new stores opened during the quarter, new stores under construction during the quarter, that are scheduled to open in the fourth quarter of 2013, and our new e-commerce distribution center.

Inventory totaled $56.4 million at the end of the quarter, and as Dan mentioned, compared to the same week, 52 weeks ago, inventory declined 15.7% on a per square foot basis, as planned.

Looking ahead to the fourth quarter, our inventory plans continue to reflect our strategy of delivering healthy product margins, and keeping inventory fresh and current through the remainder of the year. Therefore, we have planned inventory per square foot at the end of the fourth quarter to be down in the low double digits. We believe this best positions us to start the new fiscal year, with the right level and composition of delivery, in order to deliver healthy margins. The fourth quarter guidance that I will now outline, reflects achieving this level of inventory.

Turning to our outlook for the fourth quarter and full year 2013, we continue to experience weak traffic trends in a highly promotional environment in teen retail. If these trends continue, we would expect fourth quarter comparable store sales to decline in the mid to high single digits, and net income to be in the range of $4.2 million to $6 million, or $0.15 to $0.21 per diluted share. This assumes an anticipated effective tax rate of 40% and our weighted average diluted share count of 28.3 million shares, compared to 28 million weighted average diluted shares in the fourth quarter of last year. This compares to adjusted net income of $8.9 million or $0.32 per diluted share in the fourth quarter of 2012, which includes a 40% effective tax rate, to make that quarter comparable.

Factoring in our fourth quarter assumptions, we now expect a comparable store sales decline in the low single digits for fiscal 2013, on a 52-week versus 52-week basis. Using these assumptions and an anticipated annual effective tax rate of 40%, net income for fiscal 2013 is expected to be in the range of $16.9 million to $18.7 million or $0.60 to $0.66 per diluted share, based on an average diluted share count of 28.1 million shares, compared to 26.1 million weighted average diluted shares for the full year 2012.

This projections for fiscal 2013 compares to net income for fiscal 2012 of $23.9 million or $0.92 per diluted share, and adjusted net income for fiscal 2012 of $22.9 million, or $0.88 per diluted share. Adjusted 2012 net income, included adjustments to have four quarters of ongoing stock-based compensation expense totaling $2.7 million, and a 40% effective tax rate for the entire year. Adjusted 2012 net income excluded, the one time charge of $7.6 million to recognize life-to-date stock based compensation, and the one time tax benefit of $3 million, both of those recorded in the second quarter of 2012.

We continue to expect capital expenditures for fiscal year 2013 to be in the range of $40 million to $45 million, with the majority approximately $22 million related to the opening of our new stores, as well as for remodels and refreshes of our existing stores.

Our projection also includes approximately $12 million to $14 million for our new e-commerce competition center. The balance of our expected capital spending in 2013, is related to expenditures on IT and other infrastructure improvements.

Our financial position remains strong, and we remain focused on diligently controlling our expenses and prudently investing in the long term growth of our business.

Now I would like to turn the call back over to Dan for some closing remarks. Dan?

Daniel Griesemer

Thanks Jennifer. While consumer shopping patterns remain inconsistent and current trends dictate a cautious approach in the near term, we are confident in the strength of our Tilly's brand, and remain focused on our initiatives that we believe will advance our long term growth. We continue to strategically expand our presence in high caliber markets to take advantage of the significant light space opportunities we see before us, increase our brand awareness through targeted marketing and grassroots efforts, and grow and refine our e-commerce platform. I am pleased with how our entire organization continues to not only navigate and execute in a challenging retail environment, but to plan for the future in parallel. Everyone at Tilly's is focused on growing our business, and driving quality, sustainable earnings.

I'd now like to open up the call for your questions. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). We will take our first question from Sharon Zackfia with William Blair.

Sharon Zackfia - William Blair

Hi, good afternoon. I guess a question on the fourth quarter guidance. So obviously, you are looking at kind of a mucky November, with a shift in thanksgiving. So if you would give us more insight on how the guidance kind of stacks up relative to your current trends, particularly as last year trends weakened, as the quarter went on. I guess, I am just curious, are you assuming there is an uptick from the current trend? Have you adjusted for the shift in thanksgiving? Any insight would be helpful?

Daniel Griesemer

Yeah, sure Sharon. So we recognize the range indicates a view of some volatility that we believe exists in the quarter and estimating here at kind of beginning at the holiday season, pre-Black Friday and well in advance of the majority of the season. The guidance reflects the trends that we have seen recently and for the last few months, so coming out of the post back-to-school time period, and we have several factors that are influencing that. Clearly, there is significant pressure on the teen sector and the teen customer, competing dollars, for limited dollars in a variety of things. Our own current trends, we have seen and believe this will be an extremely promotional season, and expect it to be pretty brutal out there.

We got a calendar shift that's shortening the number of holiday days, and we have a lack of clearance going into this season, that we had last year and that was contributed to our revenue. It's kind of the combination of those factors is leading us to think that it's prudent to have a bit of a wider range than normal.

We really want to see how this unfolds. The low end of the range is one thing, high end of the range is another. We are going to see how this unfolds. We are very confident about our content, our marketing strategies, the investments we have made in our merchandise, the way the stores look and feel, the preparedness of the teams. But we are going to stay focused on the things we can control. We are going to control those things. We are going to continue to work diligently, making the right decisions for the long term, and getting better at everything we do, but we recognize this very volatile season, and it's reflected in this kind of wide range that we have in here.

Sharon Zackfia - William Blair

Okay. Thank you.

Daniel Griesemer

Thank you.

Operator

Thank you. Our next question is from Lorraine Hutchinson with Bank of America. Please go ahead.

Lorraine Hutchinson - Bank of America Merrill Lynch

Did you mention that merchandise margins were up in the third quarter, and if so, could you quantify that?

Jennifer Ehrhardt

Yes, we did mention that merchandise margins, after you account for the shift -- even before the shift, merchandise margins were slightly up, and after accounting for the shift, they were up over that, compared to last year.

Lorraine Hutchinson - Bank of America Merrill Lynch

And does the fourth quarter guidance contemplate a higher merchandise margin year-over-year?

Jennifer Ehrhardt

It does.

Lorraine Hutchinson - Bank of America Merrill Lynch

As you watch some of your competitors compete with deeper and deeper promotions and discounts, how can you drive traffic into the store without succumbing to some of the same types of strategies?

Daniel Griesemer

Yeah. So there is only so much that we can and are willing to do, right? It's very hard to compete, when there is kind of reckless activity going on, in anticipation of some pretty significant discounting. We stay focused on making sure that the content is fresh and relevant, that the teens are creating a great experience out there, that the stores look amazing, and communicate. The value that exists in our offering, it's there, it's prominent, I am very pleased with kind of the content and where we are positioned going into that. But there is only so much we are willing to do, because we are not willing to compromise the integrity of this brand for the short term.

So we have got mail strategies, things we are doing with our catalog mailing to drive traffic, things on social media, very vibrant activity online, things that we are doing in the store, all kinds of things that are happening. But there is only so much we can do. So that kind of is feeding a bit of our caution and of the view of the fourth quarter.

Lorraine Hutchinson - Bank of America Merrill Lynch

Thank you.

Daniel Griesemer

Thanks Lorraine.

Operator

We will take our next question from Steph Wissink with Piper Jaffray.

Stephanie Wissink - Piper Jaffray

Hi. Good afternoon everyone. Thank you. Just a quick question Dan, on the new store performance, for Jennifer as well. As you look at the quarter, and then maybe stepping back just the general trend line around those new stores, is anything changing about how you think about your unit or site selection, based on what you have experienced, here in the back to school and kind of holiday-to-date period? Thanks.

Daniel Griesemer

So, the new store performance remains in the same relationship as the -- kind of established or heritage stores, as has always been the case. So its kind of a river or tide issue that's influencing, and again another indicator that -- and we recognize we are not perfect, and there is a lot of things we need to work on, but this is an externally influenced -- largely externally influenced thing with the teen consumer.

We are being very judicious on the site selection process. We have, I don't know, between a quarter and a third of the leases signed for next year, whatever that would be. That's normal at this time of the year. We still remain very flexible, and are being very critical about where we put our stores. There is no rush here. There is no race to get to what we believe is the long term opportunity. We still are committed to the strength and opportunity that we see out there for the long term, no change in that. But we will only bring to the business, the highest caliber opportunities that we see in both malls and in off-mall venues.

Stephanie Wissink - Piper Jaffray

Thanks Dan. If I could, could I just ask one follow-up. If you look at your back-to-school to holiday trend line, it seems like the sequence, Q3 to Q4 is a bit counter to the Group, in terms of what we have seen. Do you think there has been a delayed pull back by your customer, or maybe help shape what you are seeing, kind of third quarter to fourth quarter relative to the broader market, where we have seen, kind of significant pressure, Q3, and a slight important into Q4?

Daniel Griesemer

So I think what we are -- the way we are looking at it Steph, is we recognize that we have a unique business, a unique business model. We have certain peaks and valleys in our business, that may or may not sync up with other retailers exactly. We are reading the trend that we saw, coming in the peak back-to-school time period being consistent with where we had projected it and then softness that really began in Labor Day; and that softness really continued, if not slightly intensified.

The guidance that we have here is the caution and concern, given the multiple factors that seemed to be kind of perfect storm here for the fourth quarter, with all of the various contributing factors around the teen sector, our own recent trends, the promotional activity we see and believe is going to be there. The limited dollars and strength in maybe the gaming industry, and some distractions, instead of purchasing apparels at, the shortened calendar, and then our own intentional push to cleaner business with cleaner inventories, and less clearance. That combination is really what's leading us to this more conservative view of the fourth quarter.

Stephanie Wissink - Piper Jaffray

Thank you. Best of luck guys.

Daniel Griesemer

Thanks.

Jennifer Ehrhardt

Thank you.

Operator

We will take our next question from Lindsay Drucker Mann with Goldman Sachs.

Lindsay Drucker Mann - Goldman Sachs

Hi. Thanks everyone. On the March margin question, are you able to quantify how your March margin -- (inaudible) improvement you saw this quarter, versus what you saw in Q2 on an apples-to-apples basis? In other words, is the improvement reasonably consistent with what you saw last quarter, or did it change some?

Jennifer Ehrhardt

Thanks Lindsay. Yes, last quarter, when we talked about the impact of the shift, of that back-to-school week coming into Q2 out of Q3, we had mentioned that it met 70 basis points of product margin to us. We saw a similar decrease in Q3 related to that shift, as well as I mentioned earlier, even not considering the shift, we did have a slight improvement in our product margin. So when you look at that 70 basis points, plus slight improvement, it gets you to, what we saw, the improvement in overall product margin for the quarter.

Lindsay Drucker Mann - Goldman Sachs

Got it. So it sounds like, on an apples-to-apples basis, it was pretty -- the rate of improvement was pretty consistent versus 2Q?

Jennifer Ehrhardt

Right, that's fair.

Lindsay Drucker Mann - Goldman Sachs

Okay. Then, can you -- I was hoping, you could clarify the inventory. Your inventory positioning and the adjusted inventory, versus the reported inventory, where we saw the relationship between inventory and sales get a bit worse this quarter?

Daniel Griesemer

We talked about this at the end of the second quarter. We recognized coming out of the third quarter last year, the composition of our inventory had more fall, winter, carryover product in it, than we needed, given the sales trend that we experienced in the latter part of the third quarter, and in the fourth quarter. We had identified that, coming out of that season. We weren't pleased with the amount of clearance markdowns we needed to take, in order to ensure that it's so critical to our business, ensuring that our inventory remains fresh and current.

So we identified, that we did not need that overhang of inventory, and planned for it, and manage the inventory down to that and we talk about mid-teens, down on a per square foot basis. It really is cleaner and more current, and less clearance inventory was the make up. It was intentional, and we are going to exit the fourth quarter down in the low double digits. And so we are committed, we remain committed. It's critical to this business that we remain committed to keeping our inventory fresh and current, that's what our kid wants. They want to come in and see newness. So we won't carryover past season's problems into future seasons. So that's kind of where we have, and what we are thinking about, and the relationship of the inventory, really is less than related to the sales plan, and more in related to the composition.

Lindsay Drucker Mann - Goldman Sachs

Got it. Then just last one for me Dan; if we sort of go back to earlier in the year, where you talked about the softer backdrop and a slower -- the river, with a lower level, in terms of your customer spending. You talked about competitive environment, and while you were reticent to really dial-up aggressively on the promotions. You said you had some other plans to try and drive the business, even in the face of the softer, kind of backdrop. I was hoping, maybe you can talk to us about, what was successful, what you feel is working, and any incremental plans you have in store for 4Q, 1Q, I mean, (inaudible) that the macro dynamic doesn't get better, should we just be looking for ongoing sluggish comps, or do you have other areas you are looking to play off in? Thanks.

Daniel Griesemer

Yeah. Okay, okay. Sure. We clearly believe that it is, particularly in this fourth quarter, going to be a very competitive and promotional environment. We recognize that. We knew and know that our business is not built on a high-low strategy. We have a strong branded presence and the integrity of our brand, and of our brand partners, is critical to the long term health of the business. So we don't build our plans and strategies around discounting desirable and current and fresh and relevant products. So it starts with making sure, that we are relentless in the pursuit of having the brands and the styles and products from those brands that our customers want.

But then, more to your question is saying, how are we communicating the value that exists in our offering; and it's there. And if you go into our store right now, you will see us being more obvious with that value, and its in our windows, its on our tables. You can see it, and while we have some strategies in place for this coming weekend and throughout the holiday season, I am not going to give a whole lot of detail on that, we will be able to share that once its over, or you can see it as it unfolds. But we are going to remain committed to keeping the business clean, keeping the inventory clean, communicating value in the offering, and being very innovative on the product side and on the marketing, messaging side.

Lindsay Drucker Mann - Goldman Sachs

Thanks.

Daniel Griesemer

Thank you.

Operator

We will take our next question from Jeff Van Sinderen with B. Riley.

Jeff Van Sinderen - B. Riley & Company

Good afternoon. Dan, maybe you can just talk a little bit more about -- I mean, I understand kind of where you are in promotions generally, but just wondering if your plan is -- were you more or less promotional in Q3, just wanted to clarify that, and are you planning to be more or less promotional or take fewer discounts? It sounds like if you back -- let's say we back out the extra clearance inventory that you had last year, are you planning to be more or less promotional, take more or less discounts this year in Q4 versus last year?

Daniel Griesemer

Yeah, it's probably about the same. It is hard to back out the clearance, because that has such a heavy influence on kind of the promotional cadence and what you are messaging and what you are doing. Suffice it to say, both the third quarter and the fourth quarter, we will be taking less overall markdowns, so think about that. But there may be some shift in something that would have gone to clearance, that now might be promoted in a slightly different way. But other than that, no. This business remains very-very clean. Markdowns as a total or not, a big part of it, and the big lever that moves is, what you have to do to clear your residual inventory, that's really what influences the whole markdown pool. So keeping our inventory clean and current and lean is critical to the long term health of the business.

Jeff Van Sinderen - B. Riley & Company

Okay. And then just a follow-up on comps, if your inventory is much cleaner, you have got much clearance inventory in the next -- for Q4 this year, versus last year. I am just wondering how -- I know its hard to break this out, but how do you think about your comp to last year, if you were to say okay, apples to apples, we have the same amount of clearance last year as we do this year? Is there a way to look at it like that, and say gee, if we didn't have as much clearance inventory, or let's say we had flat clearance inventory, we would be guiding to a comp that is low to mid single digit, instead of mid to high single digit, or is there a way to sort of break that out?

Daniel Griesemer

Yeah. Without giving a whole lot of detail, you are on the right track there. We recognize that we did begin the season last year, with more inventory that needed to be cleared coming out of the third quarter, that was competing for fourth quarter products. So we intentionally pulled that out. We recognized that with that chain sales, and very little profit. So we are thinking, this is the right way to run this business for the long term. We would -- the lack of clearance is a contributing factor to our acknowledged wide range here for the fourth quarter, it is a contributing factor, so you are on the right track.

Jeff Van Sinderen - B. Riley & Company

Okay. Thanks very much, and good luck for holidays.

Daniel Griesemer

Thank you.

Jennifer Ehrhardt

Thank you.

Operator

We will go next to Dave King with ROTH Capital Partners.

Isela Soto - ROTH Capital Partners

Good afternoon. This is actually Isela Soto on for Dave King. Can you just talk about the outlook on the SG&A front, and how we should think about the opportunity for future savings, and then should we expect deleverage both in gross margin and SG&A in the fourth quarter, given your guidance for a negative comp?

Jennifer Ehrhardt

Sure. I will address that with you. If you look at SG&A for Q3, you will see from a pure dollar perspective, we came in just slightly above last year. So we really are diligently controlling costs and always looking for ways to optimize efficiencies, processes, things along those lines. So when you look at SG&A as a percent of sales, that was deleverage that you saw going from the 22.4 to 22.7 this year. It was deleveraged on the negative comp. And we look into Q4, you had already set it up perfectly. The SG&A and the rate that you see there is all driven by the deleverage on the guided negative comps that we put out there.

Isela Soto - ROTH Capital Partners

Okay. Thank you.

Jennifer Ehrhardt

You're welcome.

Daniel Griesemer

Thank you.

Operator

We will take our next question from Pamela Quintiliano with SunTrust.

Pamela Quintiliano - SunTrust Robinson Humphrey

Great. Thanks so much. So just to be clear with the guidance, not to beat a dead horse, but it sounds like the environment in traffic, that's the issue not as much, and obviously not having as much carryover product. But the new fashion content, the customer is responding to the product that you have in the stores currently?

Daniel Griesemer

Yes. We see good response from the lower level, right? So the tide is lowered, river lowered I guess, a better way to say it, and what we see the customer doing in the store, we are pleased with.

Pamela Quintiliano - SunTrust Robinson Humphrey

Then, I understand that it's critical for you guys to keep the inventory fresh and current, and not compete with the excessive promotions that are out there, just to remain -- having the integrity. But how do you balance that, just with the remaining relevance, given what's going on out there, and have you been working with vendors to try to create other types of compelling offers or anything differentiated for holiday that we could think about, that you think your customer would get excited about, that's not necessarily 50% of the entire store, or something like that?

Daniel Griesemer

I like where you are going with that. Yes, the answer is spot-on, because we cannot compete on price. You don't achieve greatness and relevance by just battling it out on the cheapest ticket. Using the long term relationship and partnerships that we have with our brands, mapping out of course with them, that works for them and works for us to make sure that there is a unique product, well priced value across the entire offering, and that's in all product categories and branded in our own proprietary product. It's critical, if you go into our store, you will see some of those things. Now, you will see them as part of the holiday offering, and you will see them ongoing.

Pamela Quintiliano - SunTrust Robinson Humphrey

Then, is there any change to the timing of the flows, just once again, you keep on talking about the inventory being fresh and current. Is that what we think about year-over-year?

Daniel Griesemer

So flow for us is different than it is for a vertically integrated retailer, and that we don't flow entire collections. So, newness is flowing into our stores on a daily basis. Multiple times a week, newness is across all product categories. So achieving these more rationalized inventory levels, we are done across the board, all levels, not just by pushing a collection out or pulling one forward. Does that make sense?

Pamela Quintiliano - SunTrust Robinson Humphrey

It does. And I guess what I was thinking more is, are there more statements that you are making? Sorry if I misphrased it with the flows, but more statements that you are making, when you are flowing in product, to create the excitement in between thanksgiving and Christmas to try to capture that traffic when its not Black Friday and those excessive promotions going on out there?

Daniel Griesemer

Yeah, I would actually ask you to go into a store, and you tell me; because, I am a little bit biased, because I think our stores look amazing right now. I am so bullish on the strength of the offering, the focus and fashion relevant product in the junior side, the key items, the wealth price, both branded and the proprietary product. On the guys side, the newness that we have in accessories and footwear. So I am not the good one to ask, because I think we are doing a lot of great things, and I hope that we are being overly cautious here, but there is a lot of headwind, the things that I have talked about. There is a lot of headwind that gives us reason to be cautious.

Pamela Quintiliano - SunTrust Robinson Humphrey

Fair enough. So best of luck with all of it.

Daniel Griesemer

Thank you.

Jennifer Ehrhardt

Thank you.

Operator

We will take our next question from Betty Chen with Mizuho Securities.

Betty Chen - Mizuho Securities

Thank you. Good afternoon everyone. Just to kind of follow-up on some earlier questions Jen? I was wondering, how we should think about, specifically in terms of SG&A in the fourth quarter? I know you mentioned that we should be looking for deleverage, given the negative comps. Should we look for the deleverage to be similar in magnitude to the third quarter, or is it going to be a little bit more (inaudible) because of the sales shift going on from the calendar?

Jennifer Ehrhardt

Yeah, if you look at the deleverage in SG&A, it is going to be a little bit more severe than what you are seeing, especially when you think about the comps that we guided for Q4, versus where we just came in at Q3, at the down 2.4. So as I mentioned, we only saw about 30 basis points of deleverage in SG&A for Q3. So you should be factoring in a bit more severe for Q4, based upon the deleverage on negative comps.

Betty Chen - Mizuho Securities

Okay. That's helpful. Then in terms of the Q4 inventory position being (inaudible) they did. Is the reduction just coming across the board from all categories, or are there specific categories where, you are sort of reducing the investment, given some of the learnings you have seen in last year or maybe this year?

Daniel Griesemer

No. That is pretty much across the board, because the inventory overhang that we believe we began the quarter with -- the fourth quarter with last year, was created by a -- at the beginning of some traffic softness. So it was across the board. That's really one of the things that I hope comes through, as people learn more about this business is the stability, the diversity, the balance that exists in this business across apparel, footwear and accessories, guys, juniors and kids, branded in private label, fashion, and more relevant basic. So its across the board, and its being prudently managed, I am very proud of it, the job, the merchants in the inventory teams have done to position us very well, or what we believe is going to be a challenging quarter.

Betty Chen - Mizuho Securities

Okay, great. It sounds to us that -- it sounds like maybe the e-commerce channel saw a similar challenge with traffic. I know you have talked about various marketing initiatives, whether it's social media, or maybe catalog mailing. What do we think is maybe happening with the e-commerce customer, and are there some, may be online only offers that you can continue to drive, that you did in the third quarter to try to stimulate that interest?

Daniel Griesemer

Yeah. So we do believe that this is a teen kind of macro, external influence; because we have seen, as we have talked about, what we experienced in the third quarter was, across all channels and all product categories. It was a relative thing going on. It's important to note, that the magnitude of that one week that shifted out of the third quarter into the second quarter was one of the largest e-commerce weeks of the year, and that moved, remember, we reported in second quarter, a 30% increase in e-commerce. We are reporting in the third quarter, a 3% increase.

When you combine the two, its 15% increase. So it's still a very healthy, very vibrant business and any other softness that you might see there, I would attribute to the clearance as well, because we talked many times about how efficient e-commerce is in clearing residual inventory, and not owning it. Has put a little bit of pressure on there. But that said, we are achieving those results and feel very bullish about e-commerce as a channel, and the things that we have in place, both from segmentation of our communication to social media to unique product, to broader and more dominant assortment, more compelling categories and more breadth from those categories to make sure we keep that channel growing and vibrant.

Betty Chen - Mizuho Securities

That's great. A follow-up Dan; in terms of the shift impacting third quarter e-com business, is the shift in the fourth quarter going to have a similar impact, or not as dramatic?

Daniel Griesemer

No. Kind of all washes out in the fourth quarter. That last week of the quarter, relative to the first week of the quarter, not a whole lot different. So minor. Nothing like the shift in the second quarter to third.

Betty Chen - Mizuho Securities

That's great. It will be nice, when we survive through all these shifts.

Daniel Griesemer

Yeah you're telling us, yeah, right, right.

Betty Chen - Mizuho Securities

Can you just remind us again, where we stand in terms of the e-commerce DC capital program, and I think originally, we were possibly looking at a -- maybe spring completion date; and so if you could remind us on that, and when we may perhaps see some benefits from the efficiencies of that DC?

Daniel Griesemer

Yes. Spring is still a good window to look at. We still believe that's the case. The real variable continues to be approvals that we need, in order to operate the facility, but it is moving along very nicely. Jennifer in her script commented about the capital associated. It's coming in, at or slightly below where we thought it would be. We are very pleased with how this is going to support the business, and we would look for kind of any benefit in the unit throughput to be probably more meaningfully expressed than the back half of the year. Wouldn't want you to model too much early on.

Betty Chen - Mizuho Securities

Okay. Wonderful. Best of luck for the holiday. Thanks.

Daniel Griesemer

Okay. Thank you very much.

Jennifer Ehrhardt

Thank you.

Operator

(Operator Instructions). And it appears we have no further questions in the queue. At this time, I would like to turn the conference back to management for any additional or closing remarks.

Daniel Griesemer

Hey, thanks operator. Thanks again for joining us. We look forward to speaking with many of you at the ICR Exchange in January. Have a good evening.

Operator

Ladies and gentlemen, this does conclude today's conference. We appreciate your participation.

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