Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Ascena Retail Group (NASDAQ:ASNA)

Q1 2014 Earnings Call

December 02, 2013 4:30 pm ET

Executives

James R. Palczynski - Senior Managing Director

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

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

Analysts

Taposh Bari - Goldman Sachs Group Inc., Research Division

Oliver Chen - Citigroup Inc, Research Division

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

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

Janet Kloppenburg

Luke S. Whorton - KeyBanc Capital Markets Inc., Research Division

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

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

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

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

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

Michael Richardson - Sidoti & Company, LLC

Operator

Good afternoon. My name is Eskaban, and I will be your conference operator today. At this time, I would like to welcome everyone to Ascena Retail Group's First Quarter Earnings Conference Call. I would now like to introduce James Palczynski of ICR. Mr. Palczynski, please begin.

James R. Palczynski

Thank you, operator, and good afternoon to everybody. Just as a couple of reminders, today's call is being recorded and will be available for replay beginning later this evening. Information on accessing the replay is available in today's earnings press release.

As a matter of formality, I'd also like to remind our participants today 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-K.

Finally, in today's remarks, we refer to adjusted earnings, which is a non-GAAP financial measure. A reconciliation of the non-GAAP financial measures we discuss today to GAAP measures are included in today's press release.

I'd now like to turn the conference call over to your host, Mr. David Jaffe, President and Chief Executive Officer. David?

David R. Jaffe

Thanks, James. Good afternoon, and thank you for joining us to discuss our fiscal first quarter 2014 results. We were pleased to see continued sales momentum in the first quarter despite a challenging specialty retail environment.

Total comp sales for the first quarter were up 4%, reflecting store comp growth of 2% and e-commerce growth of 27%. All of our brands reported positive total comps. Adjusted earnings per share of $0.36 for the first quarter exceeded our expectations, although the outperformance was largely due to one-time benefits. This compares to earnings per share of $0.39 last year.

The decrease in EPS versus LY is primarily due to increased depreciation expense from growth-related and infrastructure investments. We expect the challenging retail environment to continue for the foreseeable future, including a highly promotional holiday season. As a result, we have taken a conservative approach to planning inventory and have developed promotional contingencies to ensure we end the season clean. Regardless of the environment, our teams are focused on driving profitable growth, and we feel that our brands are well positioned for success.

Now I'd like to walk you through the results for each of our 5 brands in a little more detail.

At Justice, total comp sales were up 3% in the first quarter, with both positive store comps and strong e-commerce growth. With regard to specific categories, woven tops, knit tops and casual pants were stand-out performers. Sweater sales were soft for Q1, which we believe was weather-related. Camis and denim were also softer in the quarter, as customers shifted their purchases away from basics and into fashion.

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 5 additional flash sale events during the quarter compared to last year, in which an additional 20% was offered on top of the 40% off the entire store promotion. We continue to refine our marketing programs in order to make them more relevant for the customer, testing different strategies to drive growth in new customer trial and to increase existing customer purchase frequency.

As an example, we ran a promotion with McDonald's during the quarter, in which coupons for 40% plus an additional 10% off were distributed in Happy Meals. This promotion resulted in the significant increase in trial from customers who had not shopped at Justice.

We continue to be encouraged by our progress on the Brothers rollout, which was in 102 locations at the end of Q1 and was opened in 128 locations in time for Black Friday. These locations have seen no decline in girls business and to-date are generating incremental sales in the high-single digit range. We are continuing to roll out this brand and expect to be in 150 or more locations by July 2014. We opened 16 new Justice stores, including 7 in Canada and closed 3, ending the quarter with 984 stores versus 961 last year. The Justice expansion into Canada is progressing well, and we now have 30 stores there. On average, the Canadian locations are outperforming the U.S. locations in terms of both sales and profit. In the second quarter, we plan to open approximately 9 stores, including 2 stores in Canada and close 6.

At Lane Bryant, Q1 total comp sales were up 7% last year with strong store and e-commerce comp growth. First quarter results reflected positive customer reaction to new fall merchandise with a focus on outfitting, particularly in Wear to Work categories. We saw positive comps in all major areas led by intimates, footwear, Wear to Work separates, dresses and our newly-expanded Activewear business. For the holiday season, our merchandise will reflect a more fashionable assortment and increased penetration of active and Wear to Work categories.

We continue to make progress on tighter inventory management, while shifting our mix toward growth categories. We achieved our selling and margin rates targets on clearing remaining spring inventory during the first quarter and ended the quarter with 6% less inventory compared to last year. We remain focused on revitalizing our brand and expanding our customer file. In the first Quarter, Lane Bryant continued to transition toward more targeted promotions and increased focus on developing multi-channel customers and attracting new and reactivated customers.

Certain store-wide promotions from last year were reduced in scope either by number of days or limitation to specific categories. A first-ever August promotion targeting teachers and educational professionals drove strong sales, and a comprehensive cause marketing campaign in October supporting the American Cancer Society also drove tremendous response. Lane Bryant's private-label credit card penetration also continues to grow, now at 43%, up from prior year. The Lane Bryant store count was 790 locations at the end of the quarter versus 815 last year. During the first quarter, we opened in 13 stores and closed 11. In the second quarter, we expect 5 new openings with 24 closures driven by natural lease expirations and our ongoing strategy of repositioning markets to maximize store productivity.

maurices total comp sales were up 2% for the quarter with positive store comps and strong e-commerce growth. Total sales growth for the quarter was 8%, driven by new store openings. Top-performing merchandise categories for the quarter were woven and knit basic tops in both missy and plus size, as well as footwear. Accessories in plus sizes also continue to be strong categories. Underperforming categories included Wear @ Work tops, plus-size dressy knits and sweaters.

With respect to marketing, maurices had 2 mailers in Q1, the same as last year. Our Take Ten loyalty program continues to grow, and we have increased the size of our e-mail database to 3.1 million, up versus last year. Additionally, the penetration of our private-label credit card increased over last year and is now at approximately 39%. Marketing strategies going forward will continue to focus on improving content to elevate the fashion profile of the brand and increasing existing customer frequency.

Our store base is now 886 locations at the end of the quarter versus 840 last year. During the first quarter, we opened 10 new stores, including 3 in Canada and closed 1. The maurices expansion into Canada is progressing, and we now have 18 stores there. Our Canadian stores are meeting expectations, with successful fiscal year '14 openings to-date. Smaller market locations are performing the best, and we will continue to focus on them as we move forward to our Canadian expansion efforts. 12 new store openings, including an additional 3 stores in Canada and 3 store closings, are planned for the second quarter.

Total comp sales at dressbarn for the quarter were up 1%, with store comps down just slightly and strong e-commerce growth. The key category drivers of sales growth were dresses, career bottoms and tops. Underperforming departments included suit separates, casual bottoms and jewelry. Sweater is a key category for us in the fall season and drove sales and profitability over LY levels based on an improved customer response to our current product assortment. dressbarn continue to improve its marketing strategies and content in the first quarter, with improvements in online and direct-mail campaigns that customers have responded to positively. We continued to increase our customer contacts in the quarter by adding 1 additional mailer this year, which drove incremental traffic.

Our blushPERKS loyalty program continues to strengthen with 6.6 million customers enrolled to-date. In addition, our private-label credit card penetration is now 32% of sales, up from last year. dressbarn continued their tightly managed inventory levels below last year, increasing inventory turn and delivering record-high margin rates and dollars for the quarter. We ended Q1 with less total inventory than LY, driven by a reduction in early season products. We're entering Q2 positioned with fresher wear now receipts and significantly less clearance merchandise compared to LY. Based on our improved inventory position, to-date, we have eliminated the several clearance promotions compared to the prior year.

The dressbarn store count is at 842 locations at the end of the quarter versus 840 last year. During the first quarter, we opened 21 and closed 5 stores. For the second quarter, we plan to open 2 stores and close 21, as we continue to reposition our fleet and transition in better-performing locations.

One final note, we were pleased to announce recently that Judy Langley is our new Executive Vice President and Chief Merchandising Officer. Judy brings both expertise -- broad expertise as both a senior merchant and in product development. She comes to us from Charming Charlie's, a jewelry and accessory chain, where she was Chief Merchandising Officer. Previously, Judy was Senior Vice President of design and trend at Kohl's, where she oversaw product direction for 15 brands. Judy has also held merchandising and product development positions at Ann Taylor, Banana Republic, Gap and Victoria's Secret.

Catherines continued its strong performance, with total comp sales growth of 11% with both stores and e-commerce performing well. In apparel, knits, Wear to Work and denim merchandise categories performed well. We also had strong performance in accessories, primarily boots, along with intimate apparel. Updating our assortments was a key component to our success. Customer response to floor sets was strong, as fresh receipts with seasonal product delivered high margins and improved turnover. Product initiatives also performed well as petite tops, boots and knits separates were expanded to more locations after successful testing last year.

We also improved our inventory mix for fall by increasing the mix of seasonal, wear now goods and reducing level of slower-turning year-round product. Catherines' marketing program is largely unchanged versus last year and stayed focused on frequent mailers, 9 this year and last. Our Catherines Cash bounce back event was lengthened this year, which generated increased sales. All customer segments continue to grow with increases in new, reactivated and retained customers. In addition to active customer file growth, we saw improved sales metrics across all segments. Credit penetration improved to 43% and membership in our purchase loyalty program increased 4%. The Catherines store count is at 390 locations at the end of the quarter versus 417 last year. During the quarter, we relocated 4 stores and closed 7 underperforming stores. Catherines will continue to trim its fleet in 2014, closing approximately 7 underperforming stores during the remainder of the year.

To recap our total results for the first quarter, we were pleased that we continued our positive top line trends with all of our brands generating positive total comps. We also continue to make solid progress across a number of important areas during the quarter that will position the business for long-term growth.

Now Dirk will provide an update on financial highlights.

Dirk A. Montgomery

Thank you, David, and good afternoon, everyone. Before reviewing our first quarter results, it's important to note that this year's quarterly earnings include certain restructuring and integration costs related to the Charming acquisition, as well as certain charges related to accelerated depreciation. We believe these costs are not indicative of ongoing operations, nor informative for period-to-period comparisons.

The results discussed in this call have been adjusted to exclude those items, which are described more fully in our press release. As discussed during our previous call, starting this quarter, we have evolved our sales reporting to include only total comparable sales for each brand, as it is becoming increasingly difficult to separate e-commerce and brick-and-mortar sales. E-commerce and brick-and-mortar sales have been broken down at the total Ascena level only.

Before I review the highlights for the first quarter, I'll offer a couple of summary-level comments. Our earnings per share was above our expeditions due largely to one-time benefits from tax favorability and timing of operating expenses. Those items combined to benefit EPS by approximately $0.04 per share. After adjusting for those items, our EPS was roughly in line with our expectations. As we look toward the holiday season and into spring, we expect the challenging environment to continue, including a highly promotional holiday season.

Total quarterly net sales increased 5% to $1.197 billion. As David mentioned, we saw a continued momentum in comp store sales results despite the challenging economic environment. Total company brick-and-mortar comp sales were up 2%, due primarily to units per transaction growth. In terms of sales by region, all regions had positive comps with the strongest growth in the West Coast.

Our e-commerce business continued to be strong, increasing 20% year-over-year to $106 million, with lots of future growth opportunity. E-commerce penetration increased to 9% of total sales versus 7.5% last year. On a combined basis, total comp sales increased 4%.

Moving down the income statement. Gross margin was $710 million or 59.3% of sales. This compares to last year's adjusted gross margin of $677 million or 59.5% of sales. The slight difference in gross margin rate compared to last year was due to increased promotional activity at Justice and markdown timing at Lane Bryant and Catherines, partially offset by improved margins at dressbarn.

Total Q1 buying, distribution and occupancy costs were $219 million or 18.3% of sales compared to last year of $207 million or 18.2% of sales. The slight increases in percentage of sales was due to our investments in design and sourcing functions at dressbarn and maurices, which was offset partially by overhead reductions from our integration efforts.

SG&A was $353 million or 29.5% of sales compared to last year of $333 million or 29.3% of sales. The increase in SG&A is associated with investments in marketing and headcount to support brand growth, including the e-commerce resources and the shared services group. A portion of the increase is expected to be offset with future overhead reductions from integration efforts. Compared to our expectations at the beginning of the year, we saw a shift out from the first quarter to the remainder of the year in BD&O and SG&A expense categories for e-commerce, professional fees and talent-related expenses. This resulted in roughly $0.02 per share of our EPS favorability versus expectations, and we will pick up those expenses later in the year.

Adjusted Q1 operating income results by brand fully loaded for corporate overhead costs were as follows: Justice operating income decreased 5% year-over-year to $54 million or 14.4% of sales, mainly due to increased promotions and a challenging back-to-school environment; Lane Bryant came in with an operating loss of $3 million compared to a loss of $2 million in Q1 of last year. As I mentioned on our Q4 earnings call, Lane Bryant had a shift in required markdown reserve timing that decreased margins in Q1 versus last year and will increase margins in Q2 by a similar amount in the range of 300 to 400 basis points. maurices' operating income decreased 3% versus last quarter to $29 million or 11.9% of sales. Improvement in gross margin rate and dollars were offset by increases in BD&O and SG&A from planned investments in e-commerce and design. In comparison to last year, the impact of those investments was expected to be higher in the first half of the year.

dressbarn came in with operating income of $9 million or 3.5% of sales compared to prior-year Q1 income of $9 million or 3.6% of sales. Improvement in gross margin rate and dollars were offset by increased BD&O, SG&A and depreciation.

Catherines' operating income was $6 million or 7.7% of sales, roughly flat total operating income for the quarter versus last year. As with Lane Bryant, Catherines had a shift in required markdown reserve timing, unfavorably impacting margins in Q1, but was still able to hold operating income at the prior-year level due to strong top line growth and margin rate expansion. Excluding the non-comparable impact of markdown timing, Catherines would have delivered double-digit operating income growth versus last year for the quarter.

The company's effective income tax rate for the first quarter was 35.4%, well below the assumed rate we used in providing guidance. This difference translated to approximately $0.02 per share of EPS favorability for the quarter. We had a number of favorable discrete items, with the largest related to Charming Shoppes and international reserve adjustments.

Adjusted net income from continuing operations decreased 5% to $59 million or $0.36 per diluted share. This compares to last year's adjusted net income of $63 million or $0.39 per diluted share. The decrease in EPS versus last year is primarily due to planned investments in SG&A and increased depreciation expense from growth-related and infrastructure investments.

Turning to the balance sheet. We ended the quarter with $202 million in cash and cash equivalents. Of this amount, approximately $160 million is overseas. We ended the quarter with long-term debt of $189 million, a $53 million increase from the prior quarter due in part to an expected seasonal working capital build prior to the holidays. As we complete the holiday season and sell down inventory, we expect our debt to be much lower. Our seasonal low point for debt is typically at the close of Q2.

Total inventory at cost was $634 million at the close of Q1, up 5% versus last year. The increase was concentrated in Justice and maurices, with our other brands being down versus last year. The drivers of the increase in Justice dollar inventory balance include the impact of mix shift and higher cost product, the Brothers expansion and new store growth. On a unit basis, after adjusting for those factors, Justice inventory was up low-single digits versus last year at the end of Q1.

With respect to maurices' inventory, that increase was due to earlier holiday inventory flow versus last year and new store growth. After adjusting for those factors, maurices' inventory was down slightly versus last year.

Overall, we believe that our inventory at the end of the first quarter was well positioned based on holiday sales plans.

CapEx for the quarter was approximately $130 million, which includes investments in the major multi-year projects we noted previously, including the centralized distribution facilities and the ongoing IT transformation. Our '14 capital expenditure estimate remains in the range of $425 million to $450 million. In terms of unit development, we ended the quarter with 60 openings and approximately 27 closings. Regarding our overhead savings and synergy initiatives, we are on track to achieve combined 2014 overhead and synergy savings of $18 million or more for the year. As we noted at our investor day in October, we remain confident that our cumulative long-range savings from overhead reduction and synergies will total over $95 million through 2016.

We are reaffirming our EPS guidance for 2014 in the range of $1.25 to $1.30 per share, which is based on the following assumptions: low-single digit total comp growth, net new store growth in the range of 40 to 60 units, operating income margin of roughly flat to up slightly versus last year and a full year effective tax rate of 38.5%.

As we noted on the prior earnings call, we expect higher EPS growth in the second half of fiscal 2014 versus the first half due to the following factors: 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. In addition, the impact of redundant overhead and rev rent [ph] of new hires is expected to moderate in the second half.

Looking ahead to our second quarter and the holiday season, November got off to a bit of a slow start. However, sales for Black Friday week improved from the November trend, and we were in line with our expectations. Consistent with past practice, we will be releasing holiday sales results in early January in advance of our presentation at the ICR Conference.

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

David R. Jaffe

Thanks, Dirk. As we look toward the remainder of this year and to the future, we are confident in our ability to achieve sustainable top and bottom line growth. Our brands continue to be well positioned in this environment to increase market share based on our unique combination of great merchandise, service and value. We're always pushing to improve each of these attributes. In terms of margin improvement, as Dirk mentioned, we remain confident in our ability to achieve combined long-grade synergy and overhead savings targets and expect further margin improvement over time as we improve merchandising and drive expense leverage through comp store growth.

Our leadership team shares a compelling vision for the future. We are looking forward to demonstrating that we can grow our top line, improve efficiency, extend our leadership position and consistently generate superior shareholder returns.

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

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Taposh Bari from Goldman Sachs.

Taposh Bari - Goldman Sachs Group Inc., Research Division

David, I wanted to ask you a question on Justice. So you're now a year into the start of the flash sales that you began last fall. I guess, what do you think is happening at that business? You're obviously doing something right there because you have the #1 share in tween apparel, even bigger than Wal-Mart, yet the EBIT line is admittedly declining despite all the initiatives that you're implementing there, like Brothers, Canada, et cetera. So I'm hoping you can maybe give us a backward-looking commentary on what you think is happening at that brand.

David R. Jaffe

Well, I think the challenges is in that category right now. Kids is very, very competitive. In fact, I think I read one of your colleagues to put out something this morning about Gymboree and their aggressive promotions greatly increased versus last year. So as we've said back on the last call, the Q4 call, the back-to-school season for kids was highly competitive, and we saw that continue to ramp up through the fall as we transitioned to holiday. So we've been testing different types of promotions, and you heard me talk about a minute ago. So as we think about this business, we're still feeling very good that we have a leading share in terms of what we call our "-est", that we are the hottest and coolest brand for this customer. And yet, when the mom, who really is making the purchasing decision at the end of the day, is pulling back, she's saying, "Geez, so we are going to buy your commodity products, your basic jeans and camis as I mentioned a minute ago at a big box because we can get a much better price, but we're still going to buy the fashionable merchandise at Justice." So we've seen a little bit of pressure on more of the basics. And to continue to maintain our market share, we have gone after some aggressive promotions, including more flash sales than last year in order to hold onto market share. And we believe when the business gets a little stronger, that we'll be in a much better place.

Taposh Bari - Goldman Sachs Group Inc., Research Division

Just a quick follow-up on that. Do you feel like strategically or in terms of the merchandise you need to skew up the fashion assortment in order to kind of combat that commoditization of the basics business?

David R. Jaffe

I mean, if you go into our stores, you'll see we are primarily a fashion business. So I really think that there may be a little bit of downplaying on some of the commodities, as we look at our categories and figure out the balance as we look in the spring. But really, we always want to be a one-stop shop for this customer. We just want to make sure we got the balance right.

Operator

Our next question comes from Oliver Chen.

Oliver Chen - Citigroup Inc, Research Division

Regarding the gross margin line and the more promotional activity on an adjusted basis for this quarter, what's -- what should we think about modeling on that line item going forward? I know there's a Lane Bryant comparison opportunity. And what's -- just remind us what the adjusted gross margin rate is from last year. Are we supposed to model to about flat to that as well?

Dirk A. Montgomery

Yes. Hello, Oliver. It's Dirk. So for the year, we still are maintaining the view that our guidance assumption is for flat to just slightly up gross margins for the entire year. As we head from the first quarter to the second quarter, as I mentioned on the fourth quarter call, we will have -- because of the markdown timing adjustments, we have a timing difference, which, at the total Ascena level, penalized the first quarter versus last year by 1 full point, 100 basis points in margin rate. And we should get a pickup for an equal amount in the second quarter. So within the first half, you got a shift from the first quarter into the second quarter in terms of margin improvement.

Oliver Chen - Citigroup Inc, Research Division

Okay. And just on the Lane Bryant, the numbers are very nice there. Where are we? Are we going to continue this great consistency, or do you feel like there's more strategic and product opportunities ahead? And was that comp -- that positive comp AUR-driven, or what conversion are you thinking [ph]?

David R. Jaffe

There's a lot of questions there. Starting backwards, Oliver, we saw really good conversion at Lane Bryant, and I think it speaks to the fact that they've got really good product. The customer comes in, and she likes what she sees. It is not being driven by promotions, as you heard me speak a minute ago. And I think as we go into the second quarter and then certainly into spring, we're going to continue to see improvements because Linda and her team have done a wonderful job of focusing the merchandise mix a little bit more. We've seen good response to that. And Linda's impact in this gradual evolution of our merchandising approach is going to be seen to a greater extent in this spring than last spring.

Operator

Our next question comes from Anna Andreeva.

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

So, David, I guess, your comments on a tough promotional environment out there and contingency plans, you mentioned Black Friday trends improved versus early November. Maybe talk about what you saw by brand. I mean, obviously, you talked about Justice being challenging, so curious on Justices especially. And I think you said you're now running in line with plan. I think you guys usually talk about low-single digits being the plan, so should we think about the quarter-to-date trend being in line with that? And maybe just remind us, how did the rest of the quarter progress for you? I think you just lapped your most difficult comparison here in November. And just a follow-up on dressbarn, congrats on seeing recovery there. Not sure if I missed it, it looks like the margins were about flattish versus a big improvement in the fourth quarter. Is there anything unusual there? It certainly sounds like product is resonating and you guys are actually pulling back on promotions. How should we think about margin recovery at dressbarn, as we go through the year?

David R. Jaffe

I'm out of breath just listening to you. A lot of good questions there. First, I would say that we're not going to break out on any of the Black Friday numbers by brand. We'll do that in January, as Dirk said, when we do our release for the pre-ICR commentary. I think at this point, the point I want to make to everyone, in case anybody asks a question, we felt good about the Black Friday weekend, whatever you want to look at it because we had a little bit of challenges early on November, and we hit our numbers. We hit our expectations for the Black Friday week. So that feels good. The flip side of it is we all know that it's just a weekend or 5 days or however you want to look at it. We still have 3 weeks to go, and the numbers are pretty big for the next 3 weeks. So while it's certainly the kickoff to the holiday shopping season, time has taught us over and over again that it's not necessarily a harbinger of what we're going to see for the next 3 weeks. So we're cautiously optimistic about the rest of the season. And while we feel we're extremely well positioned whether it's in terms of our marketing strategies, the promos we've got in place, the contingencies we've got in our back pocket, the window sets, the merchandise itself, everything feels good, it's going to be a really quick Christmas. I don't need to tell you guys. And so, we're kind of holding our breath and waiting to see what happens. Specifically on dressbarn, we definitely are seeing an improvement in margin there. We spoke a lot about last year about the problems that dressbarn had with its sweater selection, and the good news is that we're now lapping that and not having any of the same problems that we had last year. The consumer likes the sweaters. We had a doorbuster at dressbarn on a particular sweater that was very successful. And so, as we look out for the season, as we said, our inventory levels are lower, our clearance is much lower, we're in very good position and we're looking forward to the next 3 weeks. Anna, I'm sure I forgot a few things, so please jump back in if I didn't answer a couple of your questions.

Operator

Our next question comes from Neely Tamminga.

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

So just 2 little follow-ups, actually. One is about the Black Friday. So it sounds like things trended better for sales. There's a lot of press out there about what sort of margin it costs to grab sales in general. How are you feeling about kind of the margin, the profitability levels around Black Friday relative to your expectations? That would be helpful. And then, just one real quick follow-up for Dirk, if I may. The inventory levels overall, it seems like you guys are going to be really focused on managing that. Where should we expect inventory levels to be at the end of Q2, especially concerning that there's earlier -- New Year out of China, help us navigate through thinking about that, if that's an impact for you.

David R. Jaffe

Thanks, Neely. I'll go first. Our promos for Black Friday were planned well in advance. So the fact that our sales came in line with expectations, so did our margins. So we didn't do anything extraordinary that wasn't planned, and everything worked out pretty much as we expected. And, Dirk?

Dirk A. Montgomery

Sure. Neely, as far as our expectation, our plans to -- for end of season inventory balance targets we're targeting, it varies brand by brand. But generally speaking, inventory flat to even down slightly brand by brand. So we're taking a very conservative inventory position as we head toward the end of the second quarter and we head into spring.

Operator

Our next question comes from Janet Kloppenburg.

Janet Kloppenburg

I just wanted -- wondered, David, if you could talk a little bit about the progress you're seeing in the large size business, where we are in both brands versus your expectations. It feels like things are accelerating in both brands, but I'm just wondering if I'm getting my hopes up too much or if that is really coming to fruition. My only hesitation is that the team hasn't been together at Lane Bryant that long. So I just wondered if you'd like to talk a little bit about the progression we should expect there. And, Dirk, I also wanted to ask. It sounds like marketing expense is up across the board. Should we expect that in the second quarter as well? And should we expect that, that could impact your ability to leverage operating margins going forward?

David R. Jaffe

Sure, Janet. I'll start off. Even though dressbarn and maurices both sell large size, I assume you're referring to just Lane Bryant and Catherines?

Janet Kloppenburg

Yes. Right now to the acquired large size businesses. My apologies.

David R. Jaffe

Sure, no problems. So Catherines, as we've said, has been doing terrific. They are like the little engine that could. So while we all acknowledge that they're a smaller business than our other 4 businesses, they've had the strongest performance for quite a while now and very, very proud of what they've been able to achieve and continue to achieve, and we see great things as they continue to build their business on both the top line and the bottom line. So very pleased with their progress, but by no stretch of the imagination do I feel that they've maximized their potential. So I think you'll continue to see good things there. Lane Bryant is a more recent story. As many of you will recall, Linda came on board last February. So it hasn't even been a year yet, and she has made tremendous impacts and really pulled the team together doing some wonderful things, and we've seen the results. So while -- as I said in an earlier question, while we're pleased it's kind of like, "you ain't seen nothing yet." I just see what they've got coming down the pike and how they continue to refine their model, continue to focus on their customer, shoulder more fashion and it really stressed fashion over price promotions. So while we're still are clearly a promotional business, we've had less promotions whether it's in frequency or depths, this quarter, Q1, as I mentioned, than we did last year, and we will see that trend continue for the coming quarters.

Janet Kloppenburg

And just quickly before Dirk, I just wanted to ask about the sweater business at dressbarn. It sounds like it's accelerating here in the second quarter, as you come up against those disappointing comps in that category last year. Is that fair?

David R. Jaffe

Well, I'm not sure what you mean by accelerating, but certainly...

Janet Kloppenburg

Accelerating from the first quarter, sorry.

David R. Jaffe

Well if you look on it just a TYLY basis, the dressbarn business was not terrific last fall in Q1 and really got hammered with Sandy. And so, it just never got going and then got worse. So to clear the inventory, there were some very, very aggressive markdowns, which clearly we're not doing. So we're getting better selling and much, much better margins. So we'll continue to see that play out through the season for sure.

Dirk A. Montgomery

And, Janet, this is Dirk. On your question around marketing, we are -- on a full year basis, we are planning to grow our marketing expenses at a rate above sales to invest in growth. We're testing a lot of new ideas, particularly on the e-commerce front, in terms of how to drive trial and frequency. We don't believe that it will hamper our ability to leverage expenses in the future. Our marketing expenditures as a percentage of sales are less than 3%. So even though we are growing our marketing spending, which we think is appropriate, we're doing that within the context of a longer range plan to leverage our overall SG&A.

Janet Kloppenburg

But can you leverage on the comp guidance you gave us, Dirk?

Dirk A. Montgomery

We can leverage within -- at the higher end of the range that we've provided. Yes, that's correct.

Operator

Our next question comes from Edward Yruma.

Luke S. Whorton - KeyBanc Capital Markets Inc., Research Division

This is Luke Whorton in for Ed. Wanted to revisit Catherines a little bit. It sounds like as things continue to improve there, performance gets better every quarter. Are you at a point where you feel it's ready to be -- to invest in -- I know you talked about some store closures earlier, but at the point where you're ready to invest more into that? And if not, can you give some more color around what you kind of would like to see or expect to see to kind of accelerate the investment there?

David R. Jaffe

Sure. We're not quite at the point where we're willing to begin investing again. In concept, Luke, what we had done was set a goal for the Catherines team to get back to achieving the level of sales productivity that they had prerecession, and they're not quite there yet. But they're certainly on the right track, and we believe we'll achieve -- once they hit that level, achieve the higher contribution margin -- or operating margins. So once we see them achieve that and believe that they're sustainable, then that would be a time where we'd say, "Okay, this model now works and is worthy of further investment."

Operator

Our next question comes from Scott Krasik.

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

Two questions on Justice. First, you mentioned, in the McDonald's promo, you were able to capture new customers. Maybe talk a little bit about those. Were those customers that you can now sustain, are they at the lower end of the socioeconomic range, why weren't you touching them before, maybe? And then, also, Brothers, is that a material drag on the margin rate? And how many locations do you need to get to where you'll buys I think, start to scale and you can start to see better margins there?

David R. Jaffe

Okay. The first one, I'll take, and then turn over to Dirk. With McDonald's, we were able to touch -- I mean the number of meals that we have. I am not supposed to talk about the specifics with our agreement with McDonald's, but it was an awful lot. And so, we were able to talk to people that maybe weren't aware of us because their daughter is now just becoming old enough to shop at Justice or maybe they had thought it was too expensive. But now, with the 40 plus with 10, because they weren't on our mailing list and didn't regularly shop at the store, it was an incentive to check it out. So once they came in, we were pretty good at getting them to sign up to be in our mailing list. And thereby, once we get them, we've got the opportunity to talk to them and hopefully get them back to be a repeat customer. So we continue to look, as I mentioned earlier, for new ways to attract new customers or reactivate or just bring back our loyal customers for additional business, and that -- this is a really good example of what was successful for us. Dirk?

Dirk A. Montgomery

In terms of Brothers and their -- and the impact on profits for 2014, generally speaking, because they're still in ramp-up mode, the impact in 2014 on a full year basis is going to be relatively neutral. It will be -- we think it'll be slightly accretive in the first half of the year. It's going to be just slightly dilutive. But then we'll start to become accretive in the second half of the year. In terms of scaling that business, as we talked about at the Investor Day, once we get to 200 locations, that will be a point at which we feel like we'll be able to start to lever scale in terms of sourcing.

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

Is that holiday 2014?

Dirk A. Montgomery

Tough to say at this point. We feel good about the results of the rollout so far. We expect it to continue, and we'll provide more details on what we expect for fiscal '15 in terms of openings next fall.

Operator

Our next question comes from Brian Tunick.

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

One question on Lane Bryant first. Just to sort of trying to dig a little deeper, looking at the last 2 quarters of the inflection, I guess. Would you say the business is being driven more from newer customers, or is this old customer reactivation? And then mall, off-mall, outlet, just trying to piece through the real estate performance. And then, over at dressbarn, the question really is, is on Judith's product, what will be the timing, David, do you think of what categories and the timing of when she can impact that business? And then, just finally for Dirk, I think I actually have notes left over from the Analyst Day, but this is the peak CapEx year. This year, I think $425 million you're guiding to. What is the more normalized CapEx level, as we look out the next couple of years?

David R. Jaffe

Thanks, Brian. I don't know that I could segment who's being attracted to Lane Bryant with any degree of accuracy. I'll ask the Lane Bryant team if they're listening to help me on that. But I would tell you that we're seeing success across all segments. I don't know if one outweighs another. As I said earlier, what's driving the business is conversion. So whether you're a new customer, you're an old customer, you're coming in, you're being offered products and promotions that you're finding compelling. So just to go back for a second, if you think about our prior model or even before we got involved with Lane Bryant, there was a bit of a favoritism to the existing customers and they were sent many offers that the -- the passerby would not get. So what Linda's done has kind of equaled the playing field lot with a lot more offers that are available in-store to the passerby. So from both a promotional perspective and of course as I said from a fashion perspective, there's much more for that customer, however she's coming in. And again, on the real estate, I'm not aware of any significant difference between the different locations. And we'll follow up on that if there is anything significantly different. We'll get back to you.

Dirk A. Montgomery

And regarding CapEx, you're correct. We do expect this year to be the peak CapEx year. And at the Investor Day, we broke out some of the larger buckets. The transformational CapEx spending in 2014 should be roughly $200 million, and that is the spending bucket, if you will, that we expect to drop fairly significantly in 2015 and beyond. So that $200 million should reduce down to a much lower number. I don't know yet how much it will be, but it'll probably be in the range of, say, $50 million a year. So that should point us to CapEx in '15 and beyond somewhere in the mid-2s to low 3s as we move forward.

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

All right. That's helpful. And David's comments on Judith's product and the timing and what categories to beat?

David R. Jaffe

Yes, thanks for reminding me. Judy has been on board for like 11 days or something. So I don't want to put too much pressure on her. She's got to get her feet wet. Obviously, she comes from a very different background most recently, and we think that she has a got a great taste level and she's got great experience that she's going to bring to bear. But the last thing we'd want to do is rush her, force her into making big decisions right away. So we pretty much have the spring season concepted out and, in many cases, bought. So I think she'll -- she's going on the orient trip next month, and I think that's when she'll first start having some influence. So I'd say fall will be a big chunk of it. And then, certainly, by spring of next year of '15, you'll see her in earnest. And I just want to mention, I just got a quick message from the folks at Lane Bryant on the customers, and the point they wanted to make sure everybody understood was that they're winning -- all segments are improving, but they're winning by reducing attrition of our old customers, while at the same time gaining new and reactivating existing. So it's all good on all segments.

Operator

Our next question comes from Mark Montagna.

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

David, during Q&A, you had emphasized the gradual merchandise change at Lane Bryant. And I'm just trying to understand what you mean by gradual. Are you trying to avoid a situation like Talbots had where they went from A to Z overnight and it was too much of a shock to the system?

David R. Jaffe

Yes, for sure, Mark. I mean, Linda's been on board for almost a year, and we have not pushed to make any wholesale changes and won't. It has been fine tuning, and where there's been a couple of products that she didn't think were appropriate, we simply didn't ship them to the stores. But we weren't going to eliminate everything and recast it in her vision overnight. It's got to be an evolution. And as she gets to know the customer and what she likes and what she's looking for, it will be a continued progression to more fashion, less basics and really driving a whole new sense of fashion sensibility that wasn't there a year ago.

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

Okay. And then, Dirk, just 2 questions. For inventory, you mentioned that Justice was up due to mix shift and higher-cost product. Is the mix shift -- is that the fashion product? And then, Lane Bryant, lots of store closures coming up. Is there -- what's the overall real estate strategy with Lane Bryant? Is it to get more off-the-mall or any other general strategy on that?

Dirk A. Montgomery

Sure. So on -- the mix shift is into higher fashion, higher-cost merchandise. And as I mentioned in the prepared comments, the Brothers expansion and new store growth is also having pretty significant impact on their overall inventory trend. And I'm going to let David take that second question. Mark, can you repeat that, please?

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

Yes. It was just the real estate question. You've got a bit -- quite a few store closures coming up in the second quarter. Is Lane Bryant aiming to be more off-the-mall than where it is right now?

David R. Jaffe

Mark, at Lane Bryant, but also all the brands that's closing, it's just that when the leases run out, everybody gets Christmas in and then typically will close at the end of December, January. And at Lane Bryant, there certainly was a move to go off-mall before we got involved. Linda has come on board and basically said, "Why don't we find the best real estate in a market where our customer wants to shop us and not worry about if it's mall or strip?" So Linda and her team are doing a market-by-market analysis to understand where they want to be and then make a determination if that means relocating or renewing or trying to find new space or wherever it may be.

Operator

Our next question comes from Taposh Bari.

Taposh Bari - Goldman Sachs Group Inc., Research Division

A follow-up on AUCs. Can you comment on how much they were up or down like-for-like in 2013 -- or by the time 2013 ends and what your outlook is for spring '14?

Dirk A. Montgomery

Sure, Taposh. We'll cover that when we have our follow-up call.

Operator

Our next question comes from Susan Anderson.

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

A lot of questions on Lane Bryant and clearly the second quarter of positive comps and it looks like profitability is improving. How long do you think it's going to take to kind of get it back to the levels both in terms of sales and operating at margins that you guys bought it at? And then, a second question just on Justice. On the prices, are you guys are expecting -- were prices were up in the quarter or flat, and are you guys expecting to raise them into next year?

David R. Jaffe

On Lane Bryant, I'm not exactly sure what numbers you're referring to because there's a little bit of noise from the numbers the way some of the overhead was allocated and all that. So I'll let Dirk, offline, drill that with you a little bit more. But I would tell you that, while we're pleased with the progress that Lane Bryant is making, they are not anywhere near where we think they have the potential to reach in terms of their operating margin 10% or more, and the good news is that we're making good progress but we're not there yet. And so, I think it'll be a multi-seasoned journey. It's not going to happen in the second quarter or the third quarter. It's going to be several seasons before we get there, and that assumes that we have continued strong performance.

Dirk A. Montgomery

And as far as the average selling prices, Susan, for Justice over the quarter, the average selling prices, we call it the price out the door, was generally flat versus last year. I can cover -- give you more details when we have our follow-up call.

Operator

Our next question comes from Steve Marotta.

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

SG&A was up 20 basis points on a year-over-year basis related to do 3 items that you said in the press release, duplicative overhead, marketing as well as investments in e-commerce. Can you quantify those either in dollar terms or as a percent of sales?

Dirk A. Montgomery

Sure. Why don't I do that offline with you? Again, we'll give you that color offline.

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

Okay. That's fine. And one quick follow-up regarding the tax rate. Can you talk a little bit about why it's increasing so much sequentially as well as annually year-over-year?

Dirk A. Montgomery

Sure. So for the quarter, we actually had -- last year, we had an unusually large number of favorable discrete items. So the effective rate relative to last year was higher. However, relative to our expectations, we frankly didn't anticipate the number of favorable discrete items in the first quarter that we realized when we gave our guidance. Those were largely onetime, so we expect kind of a more normalized effective rate the rest of the year and for the full year. As I mentioned, we expect an effective rate of 38.5%.

Operator

Our next question comes from Mike Richardson.

Michael Richardson - Sidoti & Company, LLC

Most questions I have had already been answered, but I have just 2 quick ones. First, if you can remind us of the impact that Sandy had on the comp in 2Q last year. And then, David, maybe you can just give us a quick update as far as what you're seeing on the sourcing front.

David R. Jaffe

Well, while everybody's digging through their numbers to try and find out the impact of Sandy, which we have and I'll let them speak to that, the sourcing is still a work in progress. So just to remind you, we have a group we call Ascena Global Sourcing that's putting together the in-house legacy group we had at Tween Brands called Tween Brands Sourcing and then the Charming Shoppes' sourcing arm. So we're putting those together into AGS. That's in process, as we speak, and that's been going on for nearly a year now. We're making good progress on consolidating that and figuring out how to get the most out of that. At the same time, we still have 2 brands, dressbarn and maurices, that have a very small amount of direct sourcing and, in dressbarn's case, it's done through an agent. And so, what we're doing is building the capability that are going to -- that's going to allow us to be able to source, instead of through a third-party like we use now, these agents, but source through AGS. And that design and product development capability is underway both at dressbarn and maurices, and we see that continuing to grow and develop. And we're going to see more and more of their -- those brand sourcing being given to AGS over the coming years.

Dirk A. Montgomery

As far as the impact on Sandy, our estimate that we completed last year was roughly $12 million on the quarter in terms of the sales loss due to the storm.

Operator

It actually looks like there are no more questions in the queue.

David R. Jaffe

Well, that's great. Thank you. Well, thanks, everyone. We appreciate your interest, and everybody have a very happy holidays. And we hope we'll see you in January at ICR. Bye-bye.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Ascena Retail Group Management Discusses Q1 2014 Results - Earnings Call Transcript
This Transcript
All Transcripts