Aéropostale Management Discusses Q3 2013 Results - Earnings Call Transcript

Dec. 4.13 | About: Aeropostale, Inc. (ARO)

Aéropostale (NYSE:ARO)

Q3 2013 Earnings Call

December 04, 2013 4:15 pm ET

Executives

Kenneth Ohashi - Vice President of Investor and Media Relations

Thomas P. Johnson - Chief Executive Officer and Director

Emilia Fabricant - Executive Vice President of The Aeropostale Brand

Marc D. Miller - Chief Financial Officer and Executive Vice President

Analysts

Thomas A. Filandro - Susquehanna Financial Group, LLLP, Research Division

Adrienne Tennant - Janney Montgomery Scott LLC, Research Division

Betty Y. Chen - Mizuho Securities USA Inc., Research Division

Marni Shapiro - The Retail Tracker

Matthew McClintock - Barclays Capital, Research Division

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

Jennifer Black

Kimberly C. Greenberger - Morgan Stanley, Research Division

Dorothy S. Lakner - Topeka Capital Markets Inc., Research Division

Lindsay Drucker Mann - Goldman Sachs Group Inc., Research Division

Paul Alexander - BofA Merrill Lynch, Research Division

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

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

Stephanie S. Wissink - Piper Jaffray Companies, Research Division

Roxanne Meyer - UBS Investment Bank, Research Division

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

Courtney Willson - RBC Capital Markets, LLC, Research Division

Operator

Thank you for joining us for the Aeropostale conference call to review first quarter 2013 financial results. [Operator Instructions] I would like to remind everyone that this conference call is being recorded.

And I would now like to introduce our first speaker for today's call.

Kenneth Ohashi

Thank you, all, for joining us this afternoon. With us today are Tom Johnson, our Chief Executive Officer; Emilia Fabricant, EVP of Aeropostale; Marc Miller, our Chief Financial Officer; and Susan Lewis, our Vice President of Investor and Media Relations.

We issued a press release earlier this afternoon announcing third quarter fiscal 2013 financial results. A copy of the release can be found on our corporate website.

Before we begin, I would like to remind you that, during this earnings conference call, certain statements and responses to questions may contain forward-looking information, such as forecasts of future financial performance.

Forward-looking information and statements involve known and unknown risks and uncertainties, which may cause our actual results in future periods to differ materially from our forecasted results. Those risks are described in our Annual Report on Form 10-K and our quarterly reports on Form 10-Q, all of which have been filed with the SEC and are available on our website. We undertake no obligation to update or revise any forward-looking statements to reflect subsequent events or circumstances. Listeners of this call are referred to those filings.

Before I turn the call over to Tom, I would like to remind everyone that an Investor Presentation covering our third quarter results can be found on our corporate website. [Operator Instructions]

I would now like to turn the call over to Tom.

Thomas P. Johnson

Thank you, Ken. Good afternoon, everyone, and thank you for joining us today. Before I begin, I'd like to welcome Susan Lewis, who has joined our team as Vice President, Investor and Media Relations, succeeding Ken, who has moved into a role in our international business. Ken and Susan will work together during the transition period.

I'll start today with a high-level review of our third quarter performance and our results from Black Friday weekend. Following comments from Emilia and Marc onto the quarter and holiday, I will outline the initiatives we're taking to improve our results as we head into the new year.

Our performance in the third quarter was clearly disappointing. While comparable sales declined in line with our year-to-date trend, we were more promotional than anticipated in order to position ourselves for the fourth quarter. Sales in what historically had been core categories, graphics and fleece, remained weak. We were encouraged, however, with the increase of our conversion rates and our customers' response to our new fashion merchandise in certain categories, as well as our new sub-brand, Live Love Dream.

Turning to our performance over the Black Friday weekend. We executed and integrated merchandise, marketing and social media plan, while navigating an increasingly promotional and competitive teen retail environment. Our holiday marketing campaign, Wish For It, generated record numbers of teen engagement across all social media channels, and we were able to create excitement around our holiday product.

During the extended Thanksgiving holiday weekend, our comparable sales decreased mid-single digits. While we were encouraged with the improvement in trends over the holiday weekend versus our third quarter run rate, we believe it is prudent to be cautious with our outlook for the remainder of the holiday period given the inconsistent trends in our business. As you know, our entire organization [Audio Gap] diligently with a sense of urgency on transforming our brand and our business. The structural changes that have been happening within the world of teen retail have profoundly influenced how we think and the way we approach our customer. To better understand these changes, we've conducted countless independent focus groups, leveraged the knowledge of our over 20,000 teen employees and formed an internal customer insights group headed by our EVP of Customer Engagement. The findings have been consistent and clear. Today's teen wants more options, more personal interaction with brands and more flexibility in how they access these brands. We understand the shifts that have taken place, and we continue to aggressively respond to these changes.

Over the past year, the team has given our customer more choice with a wider assortment of fashion, exciting new sub-brands and new categories, such as footwear, all presented in a curated, collection-driven approach; significantly invested in social media with the goal of connecting more directly with our teen consumer, building our social media team and creating grassroots marketing efforts and partnerships with relevant social media personalities and icons; addressed changes in the way the consumers are accessing brands by investing in the look and feel of our e-commerce site and the development of mobile platforms. With exclusive styles and expanded categories such as third-party footwear and home, we also continued to rightsize our fleet through an accelerated store closure program and focused our energies on our most profitable and volume-driving doors.

As we noted on the last quarter's call, we recognize that the turnaround in our business is taking longer than expected. We have made progress this year in executing our key initiatives. However, it takes time for customers to recognize the changes that we made in our brand. This delay in customer adoption is particularly magnified by weak mall traffic and a highly promotional retail environment. As we continue through the holiday period and into next year, we are more determined than ever to improve our performance.

Our priorities remain consistent: Focus on customer acquisition by differentiating the Aeropostale brand through compelling product, coupled with marketing and social media programs that are relevant and connect emotionally with our customer.

I'd now like to turn the call over to Emilia, who will take you through some of our recent merchandising highlights.

Emilia Fabricant

Good afternoon, everyone. As Tom mentioned, we operated in a challenging and highly promotional environment during the third quarter, and this environment has continued as we have entered the holiday selling period. In the third quarter, we were encouraged with positive trends we experienced in key areas where we added newness to our assortments. In women's, we experienced strengths in sweaters, woven pants, footwear and the new Live Love Dream collection, consisting of active tops and pants, yoga, intimates and lounge.

In Men's, we experienced good performance in sweaters, wovens and short-sleeve knits. While traffic trends remained weak during the quarter, we realized higher AURs and healthy sell-throughs on certain fashion styles and maintained our value proposition in core. As we called out earlier, we were very encouraged by the positive consumer response to new merchandise categories and sub-brands we have introduced.

Our logo business, including graphics and fleece, trended down, but we are seeing an improvement in our inventory sales ratio in these categories. Denim and knit tops also underperformed. During the Thanksgiving weekend, we experienced an improvement in overall trends from the third quarter with stronger performance in categories that were more fashion-oriented along with continued strength in Live Love Dream.

Throughout this year, we have approached our assortments by building collections to meet our girls' various moods and activities. We know that she wants complete outfits that are relevant when she is lounging around, going to school or out with friends on a Friday night. We also made significant changes to trim, the finishing and the authenticity of our product with the particular focus on quality and hand-feel. We have projected a true lifestyle approach in our stores, making strong product statements at the front door, throughout the selling floor and in our marketing. Operationally, we've reduced product lead times; created more flexibility in our sourcing model, allowing more open size [ph]; and improved product distortion and localization.

Moving onto the remainder of the holiday season and into next year, we intend to continue to build on these initiatives. We plan to further refine our merchandising mix, including the expansion of our fashion basics areas. As Tom said earlier, the teen is looking for more differentiated product options and brands that connect with their lifestyle. In just a few months, the team did an amazing job developing our lifestyle sub-brand, Live Love Dream, which has now evolved into a substantial business from concept to stores. We are looking forward to leveraging our speed and power to continue to develop and incubate new sub-brands that are exclusively at Aeropostale.

You may have noticed the self-made teen social media sensation and celebrity, Bethany Mota, began blogging about us earlier this year. We are thrilled to be expanding that relationship for the holiday season, partnering with Bethany to introduce a new collection, Bethany Mota exclusively at Aeropostale.

We launched a Twitter campaign to reveal pieces within the collection and had Bethany appear at 1 of our stores. Over the course of just 5 weeks, over 0.5 million people tweeted to unlock these looks. The collection truly underscores how we are evolving our business in terms of relevancy and speed to market as the line progressed from concept to launch in just 3 months. We have also started a similar partnership with Warner Bros. for Pretty Little Liars, which is both the most highly watched and tweeted about television program by female teen viewers. The first-ever Pretty Little Liars collection, which was designed in partnership with Mandi Line, the show's costume designer, will launch in stores on January 6 and will feature looks for each of the 4 main characters. We hope you all take time to see both of these collections over the next month in our stores.

I will now turn the call over to Marc, who will take you through the financials.

Marc D. Miller

Thank you, Emilia. Before I begin my third quarter review, I would like to underscore our entire organization's commitment to maintaining the financial discipline that is necessary to appropriately steward the business during this repositioning of the Aeropostale brand. I'll discuss these financial initiatives in more detail after I cover our third quarter results.

Total net sales for the quarter were down 15% versus last year, reflecting a negative 15% comp, which includes our e-commerce channel. Including our e-commerce channel, our girls and guys businesses were both down 15% for the quarter.

Our comp for the quarter was driven by a 10% decrease in transactions and a 7% decline in average unit retail, partially offset by a 2% increase in units per transaction. During the quarter, we opened 3 Aeropostale and 6 P.S. from Aeropostale stores. We closed 4 Aero stores in the third quarter, bringing our year-to-date total closings to 17. Accordingly, we ended the quarter with 976 Aero and 148 P.S. stores.

On a GAAP basis, including store asset impairment charges of $5.1 million, gross margins for the quarter were 17.1%. On an adjusted basis, excluding the impairment charges, gross margins for the quarter were 18.1% versus 27.9% last year. The 980 basis point decrease was driven by 690 basis points of lower merchandise margins and 290 basis points from the de-leveraging of non-merchandise COGS.

SG&A for the quarter was 25.1% of sales versus 20.9% last year. Our SG&A for the quarter included a retirement plan charge related to the payment to our former President of $0.6 million and extraordinary legal fees of $1.5 million. Excluding the aforementioned charges, SG&A would have been relatively flat in dollars versus last year.

Our tax rate for the quarter was 38.0% against our original expectation of 35.5%. This resulted in a net loss of approximately $25.6 million or $0.33 per diluted share. On an adjusted basis, the net loss for the quarter was $22.9 million or $0.29 per diluted share.

Cash and cash equivalents at the close of the quarter were $68 million versus $184 million last year. Inventory at the end of the quarter was $263 million, down 5% in total or down 11% on a retail per square foot basis and down 7% in units.

Our capital expenditures for the quarter were approximately $24 million, and depreciation and amortization was approximately $16 million.

I will now discuss our guidance outlook. Our business quarter-to-date continues to experience pressure, and we expect the macroeconomic landscape, weak consumer spending and heavily promotional environment in the teen retail sector to continue to affect our financial performance. Accordingly, we are initiating guidance for the fourth quarter at a loss of $0.24 to $0.32 per diluted share. This guidance excludes the impact of any potential store asset impairment charges and assumes a share count of 78.9 million and an effective tax rate of approximately 33 -- 36%.

Additionally, as part of our expanded and accelerated store closing plan for the year, we plan to close 29 stores in Q4, bringing our total store closings for the year to approximately 46 compared to our original expectation of 15 to 20 in 2013.

Now that I've discussed our third quarter results and guidance for the fourth quarter, I would like to take a moment to update everyone on our financial strategies over the longer term. As I said earlier, we are committed to upholding a financially-prudent capital structure that allows us to steward the business through today's retail challenges, while supporting our product and branding efforts. These financial strategies include maintaining appropriate levels of liquidity, optimizing our real estate portfolio and managing our expenses prudently.

Our first financial priority is to maintain appropriate levels of liquidity by managing our working capital closely through actions such as controlled inventory buys and leaving flexibility in open-to-buy for Chase. Additionally, we have access to $175 million revolver to help augment our liquidity. We did not draw down on our revolver during our peak working capital cycle in the third quarter, and we do not expect to do so at any point in the fourth quarter. Looking ahead, we are reducing our capital expenditures significantly in 2014 and plan to spend approximately $35 million versus an expected $82 million in 2013, which is also down from our initial plan of $89 million. Clearly, we have taken aggressive steps to reduce our capital spending versus initial plans at historical levels.

Our second financial priority lies in optimizing our real estate portfolio by accelerating our store closure program, while refocusing our store fleet primarily on the highest volume and most productive locations. Based on the acceleration of our store closure program, we now expect to close a total of approximately 175 Aeropostale stores over the next few years compared to our previous plans to close approximately 100 stores over the same period. In addition, we plan to open a limited number of new stores in 2014, catering to the teens' shifted shopping preferences. With respect to Aero, we expect to open 11 Aeropostale stores with virtually all of them located in highly-productive outlet centers. With P.S., we plan to limit the number of new store openings to 5 next year and focus our efforts on making the chain profitable with the critical mass of stores we have already achieved with this younger brand. Our real estate plans also include selective remodeling of a limited number of Aero stores to our new store -- studio store format. Currently, we expect to remodel 26 stores in 2014 through partial or full remodels compared to the 30 full remodels that we will complete in 2013. As always, we will continue to regularly review performance across our store fleet as part of our real estate optimization efforts.

Our third financial priority is expense management. This year, we increased our investments in crucial areas of our business, such as marketing, social media, new brand development, international and GoJane while offsetting most of this incremental spend through reductions in all other areas of our business. We plan to maintain our strong financial discipline as we continue to invest in these critical drivers of our brand transformation. We will continue to carefully evaluate all potential investments and discretionary expenses, as well as closely manage headcount into next year.

Now I will turn the call over to Tom for closing remarks.

Thomas P. Johnson

Thank you, Marc. In the beginning of the year, we laid out key strategic initiatives surrounding the evolution of our product, the redefinition of our brand projection, the focus of our processes and infrastructure and the investment in our future growth drivers. All of these initiatives continue to be the foundation for future success of our company, and the team is working aggressively in executing our strategy. What historically has made us successful, logo and price alone, are not the keys to success in the future. Today's teen wants more choice and unique and differentiated product at a value.

In order to execute within the new paradigm, over the past year, we've added significant talent across our entire product development team. I think you have all seen the aggressive steps this new team has taken this year to transform our merchandise assortment and worked towards achieving the right mix of product. Ongoing refinement to our merchandise and merchandise mix and delivering relevant, differentiated and unique product that is available exclusively at Aeropostale will continue to be the most important area of focus. We will continue to develop sub-brands and brand extensions and pursue alliances with key influencers that are relevant to today's teen.

Brand projection to drive customer acquisition also remains a top priority. This is the first all-digital generation with access to more information over a multitude of touch points than ever before. Teens want brands to interact with them, solicit and apply their input and align with their values. To better understand our teen, we have begun piloting a loyalty program and remained committed to the structured customer insights and employee brand ambassador programs. We will continue to invest in social media, connect with our consumers through crowd sourcing and new engagement techniques and leverage our industry-leading number of fans and followers on social media channels.

Additionally, we are working with a prominent New York branding firm to refine our DNA platform and brand positioning. In regards to process and infrastructure, we plan to direct efforts towards product optimization, including further improvements in allocation and size optimization and tiered buying. We continue to evaluate changes in our merchandise flow processes to match the current shopping patterns of our teen consumer.

Finally, we plan to continue to grow e-commerce, international and position P.S. for future expansion. As Marc discussed, we are slowing growth for P.S. next year as we reduce capital expenditures and work towards in making the brand profitable. We intend to continue to implement initiatives for P.S. that are designed to further increase brand awareness, optimize our assortments and build on our current in-store experience.

Before we turn the call over for your questions, I would like to address the recent shareholder letter sent to the Board of Directors and the Board's adoption of the shareholder rights plan. We're always open to hearing views and feedback from all of our shareholders. The board's action reflects its ongoing commitment to maximizing value for all shareholders. Given we are currently in a peak holiday season and this is a critical time of year for every retailer, our team is concentrating its full energies on executing our business. We are not commenting any further on these items at this time.

I want to thank all of our employees across our organization for their hard work and dedication over the holiday selling period. Longer term, we continue to believe that we have the right strategy and the right team in place to execute on the initiatives that will drive improvement in our performance and allow us to generate substantial growth. We look forward to sharing our continued progress with you in the upcoming months.

Operator, we are now ready to take questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from the line of Thomas Filandro with Susquehanna.

Thomas A. Filandro - Susquehanna Financial Group, LLLP, Research Division

Can you guys help us understand the math behind the average unit retail decline of 7%? I kind of would to specifically know if you could tell us what's happening in the core logo classifications. And more broadly, with Emilia's comments, the entire bucket of the new merchandise, what's happening on that piece from an AUR standpoint? I'm trying to get a handle on when can we potentially see a stabilization of the AUR, as Emilia's product moves to a bigger percentage of the overall mix. If you can help me with that, that would be great.

Emilia Fabricant

Sure. While we've injected quite a bit of fashion into the business, it has not been able to offset yet the down trend -- the bigger down-trending departments, for instance, knit tops, fleece and logo graphics. So we are -- for instance, in sweaters, fashion has been very successful in sweaters and in trending categories, while in denim, as an example, it has been a down-trending category. I think, across the sector, fashion and core had been challenging. So where we have -- where we're seeing trend, we're seeing a success in fashion and a higher AUR in gross margins, coupled with the promotional activities and pressures that are happening in this sector in the mall that has given additional pressure to our AUR in this quarter.

Operator

And our next question comes from the line of Adrienne Tennant with Janney Capital Markets.

Adrienne Tennant - Janney Montgomery Scott LLC, Research Division

My question is on gross margin and kind of the implied gross margin for the fourth quarter. Is there excess inventory at this point that we should see sequential gross margins lower than the 18.1% adjusted gross margin, or did you move through a lot of that in the third quarter, such that we should see sequential improvement? And then, along those lines, kind of, as we look out to how far you bought out, which is spring of '14, is there excess inventory units there that you think you need to move through as we've turned -- turn into the new year?

Marc D. Miller

Adrienne, it's Marc. I'll take that. We feel good about where we're sitting from an inventory position. As we mentioned in the upfront remarks, we are down 11% per retail square foot heading into the quarter. So based on that, we do expect to see sequential improvement in the gross profit rate for Q4 versus Q3. However, when we originally thought about this quarter, we thought we had the opportunity for greater margin expansion. And in fact, what we anticipate, based on what you see in our guidance, is that we'll -- there will be continue to be year-over-year pressure on that gross profit line as we work through what is a very competitive and promotional marketplace and with competitor inventories in particular sitting high based on the comments that we've been hearing. So sequential improvement in gross profit rate, but still down year-over-year.

Operator

And our next question comes from the line of Betty Chen with Mizuho Securities.

Betty Y. Chen - Mizuho Securities USA Inc., Research Division

I was wondering if we can -- I guess, a follow-up to Tom's earlier question. When we think about the percent of merchandise, Emilia, that you and your team have now affected, I know initially we started with fashion, which was maybe about 20% of the mix. Fashion basics now seems to also have been getting some benefit. Is it fair to say that maybe 2/3 of the merchandise is now seeing improvement, and we can see the balance of that 1/3 happen around some time in first half of next year? And so, that's a clarification. And then, I also just wanted to ask Marc, sort of, what's the thought process that led the team to add to the number of closures? And how should we think about the sales and margin contribution from those closures and how that could lift overall numbers going forward?

Emilia Fabricant

So as far as the mix, we believe the mix that we have set forth with core, fashion basics and fashion is still the right target. It will flux throughout the year based on seasonality. What we believe our biggest opportunity continues to be is fashion basics, and we are 1 quarter into our transformation and I can guarantee you that this team has read and reacted to anything and everything that we could have affected for holiday and spring. Denim is a perfect example. We saw a major shift from boots and skinny into jeggings. The team went out and re-distributed the penetration in those fits for holiday and spring. So we are reading and reacting and affecting what we can. As far as fashion basics, we believe one of the biggest opportunities is in our knit tops, and that's one of the strategies that we're working very closely on affecting.

Marc D. Miller

And, Betty, on the store closings, we had originally come up with our 100 store closing number based on a bottoms-up analysis of our money-losing stores and stores that we saw the opportunity to get out of on either natural lease expiration or kick-outs over the next few years. We then triangulated more recently, taking a market-by-market approach, looking at a portfolio and, in particular, focusing on the population that was necessary to support a store. Historically, we had thought about that number as 100,000 to 300,000 in local population to support a store. And as we see how trends and shopping patterns have shifted, we think that number is more like 300,000 to 500,000 in local population per store. So it caused us to take another look at the portfolio. And then, the third piece of the analysis went to looking at it through a landlord lens. Landlords have been looking at their portfolios, pruning some of the declining traffic locations, particularly in B and C centers. And as we saw how landlords are deploying capital, it also caused us to rethink how we should be looking at the stores within our portfolio and potentially refocus and rebalance a little bit more towards A locations, as well as outlet locations. In terms of the overall impact, I'll speak to the approximately 46 stores that we're closing in 2013 because I think it's roughly indicative of the average store loss. Those stores collectively on a 4-wall basis lose about $2 million. So what we have is a number of loss stores that lose money, but they don't lose significant amounts on a per door basis, but you can use that as a model as you think about the impact of the future closings that we've announced.

Operator

[Operator Instructions] Our next question comes from the line of Marni Shapiro with Retail Tracker.

Marni Shapiro - The Retail Tracker

My question is about -- Emilia, you touched on fashion and basics saying you are a quarter of the way there. Do you mean a quarter of the way there in the balance of your knits in the store, logo versus fashion versus fashion basics; or a quarter of the way there on refining that fashion basics assortment? And if you could also just revisit denim, I think you said, coming out of the second quarter, the denim was sort of holding its own in spite of -- if you sort of pulled out the colored denim compare. So as we sit here today, was it -- was there a change from that, or are you looking at it compared to the momentum from the colored denim? If you can just clarify that.

Emilia Fabricant

Sure. And I'm sorry, if I -- if you misunderstood. The fashion basics, I meant we read the quarter in Q3 and reacted to business. Fashion basics has been a mixed bag. When the category has been successful, all components of that category have been strong. Where we've seen, and I'll use denim as an example, where the whole category is trending down, fashion as well as fashion basics and some core were -- felt some pressure. Back to denim, core was better than the fashion piece in denim. However, it was still -- it still had pressure especially from the promotional activity that was happening in the mall, while color -- and while fashion was again -- felt more pressure due to the success of color last year. That was what we saw early reads in back-to-school, and we continue to see that through the quarter.

Operator

And our next question comes from the line of Matt McClintock with Barclays Capital.

Matthew McClintock - Barclays Capital, Research Division

I was just wondering if you could talk a little bit about -- you have a lot of initiatives still underway, whether that be the remodels, whether that be some of the supply chain optimization initiatives that are underway. As we think about the reduced CapEx for 2014, can you at least talk about, specifically, how you're prioritizing the infrastructure investments, e-commerce, supply chain, et cetera? How should we think about those investments now versus maybe how you were thinking about those investments maybe 3, 4, 5 months ago?

Marc D. Miller

First on the remodels piece, when we're originally thinking about 2014 CapEx plans, we had definitely contemplated a broader number of remodels. What we'd say on the remodels that we have done is that qualitatively we're very happy with their performance. We think it does a lot to enhance the brand, and there are certainly key metrics that are moving in the right directions in those new model stores that make us feel that, over the long term, the remodel is an important component of our brand reinvention. But thinking about CapEx and being prudent from a cash management perspective, we culled down that number of remodels substantially in 2014, and that's the 26 number that I mentioned in the upfront remarks. Importantly, as we're thinking about these remodels, we're still value engineering the new format, so we're looking at ways to strip out costs. And by being more conservative in 2014, we hope to be in position when we are ready to roll it out on a broader scale to do it in a more cost-effective manner. As it relates to the other initiatives, clearly, the CapEx of $35 million meant that we cut down new store openings, that we cut down on number of remodels and also certain systems projects. The one that I'd say is clearly different from when we're thinking 4 to 5 months ago, and this is both because of cash management concerns as well as frankly our experience to-date with it, is the assortment planning system. We believe that we gained the majority of the benefit by instilling the discipline of an assortment planning into the planning process, but we don't necessarily need to make an investment in an expensive system right now to deliver those benefits. So that's the key one we stripped away. We will continue to deliver PLM, which is 1 of our key other supply chain initiatives. We think there's efficiencies that come from that.

Operator

And our next question comes from the line of Brian Tunick with JP Morgan Chase & Co.

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

I guess, 1 question first. So I think P.S. and international were supposed to be the bright spots as the company went through the transition. So just curious, it sounds like you're slowing down P.S. Is it going to take it longer to scale for you? And just what's happening on the international front? And then, maybe Emilia can talk about how the stores are assorted. I know you don't assort all the stores the same way. Anything you can highlight in different classes that you're seeing any successes or learnings from as you move into next year?

Thomas P. Johnson

Yes. Brian, this is Tom. P.S., we continue to feel very good about the brands and the adoption to the brand. We have a very loyal base. We have over 750,000 loyalty members. The consumer really enjoys our brand. We think that it does resonate. Our challenge with P.S. is really about brand awareness. We feel good about the size of the chain today to work on the profitability overall. And I think, as Marc outlined, being thoughtful and prudent about cash deployment with regard to new stores, we think that it's the right thing to do to take a little bit of a slowdown, a little bit of a pause, but it has nothing to do with our -- the -- how we feel about the brand itself. We think that, like I said, it's just really about brand awareness. Our focus for P.S. is just to get more people into the door. We think that, additionally, adding P.S. on a global scale will certainly help us, and we're excited about that. So from an international standpoint, Marc will take that. But we think that, that will also help leverage the P.S. brand as well going global.

Marc D. Miller

And speaking about international, overall, we are extremely pleased with the performance of that division. We will end the year with almost 100 stores. We're in 11 countries. We had a very successful launch in Q3 in Mexico. And the division continues to outpace our plans by a significant margin. We -- as a reminder, we -- our version of international is through licensing through local partners and, as such, does not require any capital on our end. So we are going to continue to push aggressively to expand internationally. The move we made with Ken is just an indication. We're putting the right talent in place to help drive that business, and we are looking to add new territories next year and, as Tom said, increase the presence of P.S. in certain markets where we already operate.

Emilia Fabricant

Yes. And as far as assortments, there are 2 areas that I can speak to today. One would be, we -- how we address high- and low-volume stores. We addressed the pre-packs and the low-volume stores, and we did see some benefit there in the velocity of those stores. And we also protected heritage doors with the logo product and also increased fashion in the high-fashion stores, and we did see heritage outperform in logo product and, obviously, the high-volume doors performed better in fashion. However, I would tell you that we are watching the fashion business very carefully because it is the first time that Aero has had this type of merchandise. So we're getting some great surprises and have adjusted continuously on a month-to-month basis on who those fashion stores are and how we're assorting to them.

Operator

And our next question comes from the line of Jennifer Black with Black & Associates.

Jennifer Black

I wondered if you could talk a little bit more about the Bethany Mota collection. I wondered if you are in a position that you will be able to chase that and if you have a specified amount of time as far as an agreement. And then, also, with Warner Bros., I also wondered if there was a specified amount of time as far as an agreement.

Emilia Fabricant

What I can tell you about the Bethany Mota collection is we essentially launched it from concept to in-store in 3 months, so the answer to chase is, yes, we can chase. We are positioned to chase actually all of Aero in that way. As far as the length in time, we're not prepared to speak to that today.

Operator

Our next question comes from the line of Kimberly Greenberger with Morgan Stanley.

Kimberly C. Greenberger - Morgan Stanley, Research Division

I'm wondering if you can share with us your fourth quarter-to-date comps just to help us think about the potential range of outcomes here on the revenue line for the fourth quarter. And then, looking at the cash balance, it looks like you're -- it's down to about $68 million. I know that, when cash gets depleted, you can lean into that credit facility. I'm wondering if you can just talk about any of the restrictions around that -- your access to that $175 million. What are the covenants? And are there any restrictions to the access to the full $175 million?

Marc D. Miller

Sure, Kimberly. With respect to quarter-to-date comps, what I'll say -- we typically don't comment on intra-quarter comps, but I'll say they're -- they've been roughly similar to the trends that we've seen on a year-to-date basis. As it relates to our liquidity and access to our credit facility, there is 1 covenant which is a fixed-charge covenant, which basically restricts the last 10% of our ability to borrow against our inventories when our cash flows are negative. So we have access to 90% of that facility based on our inventory base, but that last 10% is the restriction. Other than that, there are no other covenants that would prevent us from accessing that revolver.

Operator

And our next question comes from the line of Dorothy Lakner with Topeka Capital Markets.

Dorothy S. Lakner - Topeka Capital Markets Inc., Research Division

I wondered if you could share with us, kind of, where the real estate portfolio stands now in terms of A, B, C and outlet locations. If you could kind of break that down for us given where you'd like to move, where are you now and how quickly do you think you can get there.

Marc D. Miller

So to-date, Dorothy, approximately 50% of our stores are either A malls or outlet doors, and the remaining 50% fall into the B, C lifestyle and street bucket. As I mentioned earlier, as we're looking to this next round of store closings, there will be some re-weighting towards A and outlets and away from that second B and C bucket, but it's not a wholesale shift. It's just more of an evolution in the direction of more A's and outlets.

Operator

Our next question comes from the line of Lindsay Drucker Mann with Goldman Sachs.

Lindsay Drucker Mann - Goldman Sachs Group Inc., Research Division

I have 2 quick questions. The first one is just does your fourth quarter guidance contemplate being free cash flow positive? I'm assuming it doesn't, but I just wanted to clarify. And then, the second one is a little bit deeper, so -- to the extent that your strategy to go to assort more fashion product and really evolve the Aero brand proves not to be as successful as you hoped it will be, I'm actually curious whether you believe that there are alternatives in sort of doubling back to your bread-and-butter product, the logo business, the old sort of Aero that was before the transformation; whether there is opportunity to pursue that as the strategy, close more stores, cut a lot of costs. I mean, as you embarked on this strategy a year or so ago, the view at the time was that the business model as it was, based on a competitive environment, was untenable. I'm just curious if your views on that have evolved and if this is really the only way out of the tough situation.

Marc D. Miller

Quickly, Lindsay, on the fourth quarter, it contemplates a range of outcomes, but they are free cash flow negative.

Thomas P. Johnson

Yes. And, Lindsay, I'll take the strategy. We've talked about -- and Emilia's answered and fielded a lot of questions about the assortment. I would tell you, in our upfront comments, that we believe that adoption is our biggest challenge right now. While we know that we have opportunity -- and if we could wave a wand, you would change some things in the assortment and you would change some things that we do in the store and we change some things from a marketing because we certainly are not perfect, and we would never sit here and blame any of this on the macro environment wholly. We know that we have a lot of work to do. This team has worked wonders on changing assortment in the face of this brand. And to your challenge of us having a dominant logo business, we have -- we always will have a logo business, but we know that the teen preference has changed so significantly it has been a seismic shift over the past 5 years, and what we've done is added the fashion component. We know these truths because of the declining business over a multi-year scenario. And the reason why we were able to blunt some of the declining sales in those areas was by lowering price. And unfortunately, for us, it just eroded the margins. So what we have to do is capture the emotional heart of this teen customer, and we believe that we're at the beginning phase of that with regard to the whole assortment that we delivered for Q3 and going into Q4. So while I do believe that we will absolutely have logo product in our stores, as Emilia said earlier, in some of our stores, we have distorted logo into to make sure that we do not alienate and lose that customer because we love all customers. We're an incredibly inclusive brand, and we want them to stay with us for the long term. We know that, in order for us to succeed, we have got to win back that high school teenage girl and guy. And while the numbers absolutely do not prove that yet, we know that from customer intercepts, from market research and just being present in our stores that we are attracting some customers that we have lost and have drifted away from the brand over the years. So this is -- unfortunately, I can't sit here and tell you that the sales and margins are at the levels that we believe they should be and they are not, and -- but we are working feverishly to change the direction of that.

Operator

Our next question comes from the line of Paul Alexander with Bank of America.

Paul Alexander - BofA Merrill Lynch, Research Division

Can you talk a little bit about inventory strategy going forward? I think, entering back-to-school, you planned inventory down double digits and you had a lot of open-to-buy. Are you planning anything differently going forward? Do you feel like you need to be still more conservative? How are you planning the open-to-buy versus the initial buys?

Marc D. Miller

We think the strategy is working. As we look through the first half of next year, we will continue to buy down double digits over the first half, leaving fairly similar proportions of open-to-buy. But we will deploy that open-to-buy where we see opportunity, and a great example of that is with the Bethany Mota and the Pretty Little Liars collections, as Emilia said, in the last 3 months from concept to delivery. We saw an opportunity. And as we believe this is a great opportunity to bring a new customer into our store looking for that product, we've strategically deployed some of that open-to-buy into Q1 in those new brands.

Operator

Our next question comes from the line of Anna Andreeva with Oppenheimer.

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

I was hoping you guys could talk about the improvement in trend over Black Friday. Was that driven by better transactions or UPTs? And how should we think about AUR compression during that time? Obviously, a very promotional environment out there, and any color by category, region or mall type. And then, just quickly, a follow-up on the guidance for the fourth quarter. So assuming some improvement in gross margin rate versus the third quarter, I think this implies SG&A dollars up low-single digits. Maybe talk about what's driving that. And just looking out to '14, you guys have been lean from SG&A standpoint for some time, are there any expense cushions if top line continues to be difficult next year as well?

Thomas P. Johnson

Yes. And I'll just take trends. We're not going to give too much detail about -- underneath the comp trend, but we're pleased with the change in the trajectory of our trend. And obviously, we want it to be positive, but we felt that we had made, obviously, some improvement. With regard to the regions, the South and the West performed best for us, and the Midwest was the weakest overall.

Marc D. Miller

And with respect to the SG&A component of guidance, in Q4, we do expect to deliver a similar SG&A rate as we did in Q3, and that's because there are some pressures on our SG&A spend, one of which is a planned marketing investments, as we roll out the new brands, invest in social media and invest against other brand-building and traffic-driving activities. The bigger component actually is that we are up against an incentive comp reversal in Q4 last year, so the incremental marketing, combined with IC reversal, means that we will have a higher SG&A expense in Q4 versus LY, but at a similar rate to what we saw in Q3. As we look to 2014, as you know, we've always been very tight with our expense management. We've historically had an SG&A rate that was best-in-class amongst specialty retailers, and we've been operating, frankly, in the last few years in an environment of reduced spending across-the-board. The 1 area that we achieved significant gains this year was in the biggest line item in our SG&A, which is store labor. We started to see the benefits both of the workforce management tool that we implemented. And as well, we took a relook at just structurally how we think about staffing the stores, particularly in non-peak periods. As a result of those store line initiatives, stores were actually able to spend less on total store labor year-to-date than they did LY despite the increase of 3% extra square footage this year. We will continue to look at that line item, as well as others in 2014 should we need to exercise an even a greater degree of expense reduction.

Operator

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

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

It seems like the amount of Live Love Dream product in stores varies by store and store size. I guess, in stores where you have a bigger presentation, are you seeing a lift, are you seeing kind of different margin profile in that product versus either your core product or maybe some of the legacy logo product?

Emilia Fabricant

Yes. We've actually assorted the Live Love Dream product as well based on initial reads. Yes, the bigger shop-in-shops and side-by-sides are performing better when we do a bigger presentation in the lifestyle area. The Live Love Dream does perform better on all metrics. So we will continue to read that and expand it as necessary across the fleet and where the sales warrant.

Operator

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

Stephanie S. Wissink - Piper Jaffray Companies, Research Division

I just want to follow up on Tom, some comments I think you made in your prepared remarks regarding your consumer focus groups. I think you mentioned that trip frequency was down. But if I look at the transaction value component of your comp in the third quarter, it looks like it was down even more or so than traffic or transaction. Did you find that the brand may be migrating or being perceived differently in the mind of your customer more of an item versus a collection business? I just want to understand a little bit of that -- reconcile that with Emilia's comments around kind of generating that collection business and how we should think about that in the context of your topline goals.

Thomas P. Johnson

Sure. From the focus groups, the anecdotal feedback that we continue to hear is that they like the changes that we've made. Interestingly, we're -- from exit interviews, we're speaking to high school teens and talking to them about when the last time they visited our stores and now that they visited our store more recently that they feel very good about what they've seen and in some cases very pleasantly surprised because of the fact that they felt that we were 100% logo in the past and now that we have a much better balance of fashion versus logo. As far as frequency is concerned, we have seen in our market research a decline over a multi-year period that teens frequenting the mall has become less and less over time. And that is more of a macro, not specific to Aeropostale only. It's just more macro data that we've gathered. And as such, we believe that the teenager, historically, who've used to come to the shopping center and hang out on a Friday night and socialize, they're socializing in a very different way. So the social media impact, we think, is significant, and we know that what we have to do is we have to have the right product there at the right time when they are frequenting the mall. So we think that, that trend could continue. So to counterbalance that, we are attacking social media in a significant way, and we've made great strides over the past quarter or so with regard to our social media effort. And we think that we just have to be much -- communicating more frequently and more intensely on their terms from a social media standpoint. Just as a couple of factoids, our engagement factor with Facebook is up significantly on a year-on-year basis. Our Twitter sentiment has gone from neutral to negative to neutral to positive in the last quarter or so. So those are the things that tell us that consumers are really liking what they see. And clearly, when you're looking at the numbers, they're not voting at the register wholly just yet, but we think that there's a lag time that's got to happen. From a transactional standpoint, in how people shop and looking from a coordinated outfit effort or a collection effort, we think that, that balance is necessary. And Emilia spoke to having a greater presence of fashion basics. We think that, that will help round out the transaction for us. And we believe that, in many ways, that once we're able to have the collection -- more collection-oriented would actually add to the transaction and add to the units per transaction. So we think that -- those are the things that we're working on, and we want to make sure that we're communicating that on a social media standard, as well as in in-store standard, as well as in marketing standards. So all of those things are synced up very nicely.

Emilia Fabricant

The 1 thing I would add about the assortment is really a multi-lifestyle that we're addressing with the teenager and the success that we have in outerwear, shoes. Specifically, the great success that we've seen in boots and in sweaters, I believe that we have the opportunity to dress them from head to toe.

Operator

Our next question comes from the line of Roxanne Meyer with UBS.

Roxanne Meyer - UBS Investment Bank, Research Division

My question is on the men's business, kind of, multipart. I mean, given the contraction in women's over the last few years, what percentage of the business now is men's? How should we think about the challenges there? Do you have same issue with logo and more of a need for fashion? And how should we be thinking about improvement? And are the comp metrics for men's different than for women's?

Emilia Fabricant

So as far as the men's business, it's about 1/3 of our total. And though they've seen the same -- they've been affected the same with the traffic declines, and we're actually seeing similar trends as far as products across men's and women's. For instance, wovens are very strong; bottoms has been an opportunity for guys; sweaters, a very strong category; outerwear, another very strong category. So as we look at both businesses, we do see some synergies between the 2, as far as fashion trends are concerned.

Marc D. Miller

And we did say in the upfront remarks that men's and women's comp for the third quarter was both negative 15%.

Operator

Our next question comes from the line of Susan Anderson with FBR Capital Markets.

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

I was wondering if you can talk about the P.S. format and its performance relative to the company. And then, also, how long do you see it to get it kind of to profitable in terms of the timeframe? And then, just really quick, on the Thanksgiving improvement, if you can maybe give out some color on what you think drove that.

Thomas P. Johnson

Sure, Susan. This is Tom, and Marc will take the second piece. In terms of the performance for P.S., we feel good about the -- as I mentioned earlier, about the way the brand is being perceived. We feel good about the marketplace. We think that the kid's business is a business that we can be successful in. And as we said earlier, we're focused on making sure that the stores were able to change the negative to a positive this year with regard to profitability. And Marc will take the second half.

Marc D. Miller

In terms of how long to profitable, we had hopes based on 2012 and the momentum the brand had been building through 2012 that this would be the year that we would become profitable. As we've seen traffic trend declines in the mall, it has affected the P.S. business, as well as our Aeropostale business. So we're not going to hit that mark in 2013 as we had originally hoped. Clearly, the path to profitability is going to be based on getting that comp momentum back in P.S. And I think a lot of the initiatives that Tom will speak to and Emilia will speak to in a minute about from a product perspective will help get us there. And as part of that component, there is still a margin expansion that we'd like to see. We do think we have the critical mass of stores to get to profitability, but we're not going to put a time on that yet.

Emilia Fabricant

So we are continued to be pleased with the execution in the P.S. merchandise. As far as back-to-school, we were very happy with bottoms. Both -- it was a win both for girls and boys. Woven tops continued to be strong. Fashion was strong in footwear. For back-to-school, the graphic tees and fleece continued to be challenging, but we did see some improvement entering in the holiday season.

Operator

And, ladies and gentlemen, we have time for 1 more question. Our next question comes from the line of Howard Tubin with RBC Capital Markets.

Courtney Willson - RBC Capital Markets, LLC, Research Division

This is Courtney Willson in for Howard. Could you just give a bit more detail on maybe the marketing plans at both Aero and P.S. to drive spring traffic or even traffic for the rest of the winter? And also, if you could give an update on GoJane and if anything is new there.

Thomas P. Johnson

Sure. I'll take the marketing, and Marc will handle the GoJane question. The -- as far as marketing is concerned, in Aeropostale, we feel really great about some of the marketing campaigns that we launched for fall and more notably for holiday. And much of it was through our in-store marketing, which we think we've really changed the look and feel of marketing internally through the help of many of the folks, including, obviously, our marketing team, as well as Emilia. In addition to really the projection of the brand, the online projection of the brand, we think that we've done a really great job of changing the look and feel of the website as well to match the in-store experience. With regard to some of the other more specific campaigns, from an outreach standpoint, our social media campaign has been, in my opinion, outstanding with the Wish For It campaign creating over 80,000 tweets of people engaging with our brand and us talking to them about what they wish for. And obviously, we granted their wishes during the course of the 15-day period. On top of all of that, the way that we've interjected Bethany Mota into the brand, she actually took over our tweets on a Saturday for a couple of hours, and it was -- we were tweeting worldwide, which I think is an exciting moment for us because we think that this just really adds a lot of interest to our brand. So as we move into the spring season, one of the specific campaigns that I'll speak to -- and I'll probably get yelled at for -- later for sharing, but -- because of competitive reasons, but we're launching Epic Kids, which we think is really pretty dynamic, and it's something that we're going to also engage on a broader level with really showcasing some incredible talents that kids have. And then, we will have a campaign wrapped around that as well for P.S. So we feel it's very important to, kind of, live the lifestyle with not only our teenage customer on all of the social media channels, as well as our littler customer in P.S. to really showcase them in what's so great about some of these unique kids because we think that our customers that shops in our store in P.S. are just great kids, so we just want to surround them with other great role models.

Marc D. Miller

And finally, Courtney, on GoJane, we just anniversaried the 1-year mark of the acquisition of that brand. I characterize the first year as a very successful one. We met our growth plans for the business and not only met our growth plans for the first year of operating that business, but also I think set important component to the foundation for future growth. We, for example, moved their warehouse, so that we are actually doing their fulfillment now, and that's the first time we've done direct fulfillment on e-com, and we think that has future benefits for us. And in addition, GoJane continues to serve as a little bit of a leading fashion indicator for us, particularly in the areas of footwear, where we can watch trends that materialize and see how that could translate to a younger Aeropostale customer.

Operator

Okay. And do you have any additional closing remarks?

Thomas P. Johnson

Yes. Thank you, operator. Thank you, everybody, for your continued support. And Aeropostale wants to wish you a happy holidays for you and your families. And just in closing, just a sign-off to our teams across the country in our stores, and we wish them a happy holidays as well. We look forward to catching up with you -- all of you soon to fill you in on our progress as we head into the new year. Thanks, and have a great holiday.

Operator

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

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