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Executives

Randi Sonenshein - Vice President of Finance & Investor Relations

Neill P. Davis - Chief Executive Officer and Director

Mark J. Vendetti - Chief Financial Officer and Senior Vice President

Analysts

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

Courtney Willson - RBC Capital Markets, LLC, Research Division

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

Simeon A. Siegel - Nomura Securities Co. Ltd., Research Division

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

Lizabeth Dunn - Macquarie Research

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

Isabel Keller - Jefferies LLC, Research Division

Adrienne Tennant - Janney Montgomery Scott LLC, Research Division

Laura A. Champine - Canaccord Genuity, Research Division

Janet Kloppenburg

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

Pamela Nagler Quintiliano - SunTrust Robinson Humphrey, Inc., Research Division

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

Richard Ellis Jaffe - Stifel, Nicolaus & Co., Inc., Research Division

Jerry Gray - Cowen and Company, LLC, Research Division

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

Francesca's Holdings (FRAN) Q3 2013 Earnings Call December 5, 2013 8:30 AM ET

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Francesca's Holdings Corp.'s Third Quarter 2013 Earnings Call. As a reminder, today's conference is being recorded. [Operator Instructions] I'd now like to turn the conference over to Ms. Randi Sonenshein, Vice President of Finance and Investor Relations. Please go ahead, ma'am.

Randi Sonenshein

Good morning, and welcome to Francesca's third quarter fiscal 2013 conference call.

Earlier this morning, the company issued a press release outlining the financial and operating results for the third quarter ending November 2, 2013. The following discussions may include forward-looking statements. Please note that actual results may differ materially from those statements. Additional information concerning factors that could cause actual results to differ materially from projected results is contained in the company's filings with the Securities and Exchange Commission.

We will begin today's call with Neill Davis, our Chief Executive Officer, who will comment on our third quarter performance and strategic initiatives. Mark Vendetti, our Chief Financial Officer, will then provide financial highlights of the third quarter, as well as details of our financial outlook for the fourth quarter and fiscal 2013.

Following prepared remarks, we will be pleased to address your questions. As usual, the text of today's conference call, along with detailed management commentary, will be posted to our corporate website.

I'll now turn the call over to Neill.

Neill P. Davis

Thanks, Randi, and good morning, everyone. We delivered third quarter results within our guidance range, in a challenging retail environment, in light of diminished transaction trends and fashion transitions in certain of our offerings. Compared to the prior year, sales of $79.6 million grew 15%, and that's based on a restated National Retail Federation retail calendar, reflecting largely our ongoing new boutique opening activities.

Our direct-to-consumer business continues to show brand resonance with our customer, with 87% growth in the third quarter and we opened 10 new boutiques, bringing our quarter end total to 86. Comparable boutique sales, which decreased 3% in the quarter, were driven by lower transaction counts. In this tough environment, we leveraged the flexibility and speed afforded by our buying strategy and built into categories where we saw opportunities.

This resulted in an improved performance level in the final month of the quarter. Given the negative transaction trends and highly promotional environment, I am pleased that for the third quarter, we were able to maintain healthy product margins in the high 60s range. However, challenges remain and were acutely present in November in the final week of the month, as transaction levels we expected were not realized during the Black Friday weekend.

Given our slow start to the holiday season, we are lowering our expectations for the fourth quarter and are adjusting our forward business planning to properly align our inventory investments to the updated outlook. Throughout the third quarter, our merchandise performance reflected strength in emerging offerings such as sweaters, bottoms and footwear.

We were pleased with the strong response to these new styles and their expanded presence in our boutiques. However, these were offset by the absence of strong trends in our fashion tops, jewelry offerings and the ongoing transition in our gift assortment that we have spoken to in earlier calls. Jewelry has long been a strong performing category of francesca's, and I anticipate this trend to continue. However, this category is evolving, as we are moving towards more metal materials compared to our dominant color themes.

This shift in materials favors silhouettes such as earrings and bracelets and diminishes the importance of necklaces. We have been and are continuing to make adjustments and expect to see the benefits during the first quarter of 2014. Within our accessories business, our footwear grew over 50% to the prior year, contributing 1 point of comp to the total. Footwear represented 20% of accessory sales and 4% of company sales.

Our gift and home offering sales declined during the third quarter, representing a decrease of 2 points of comp to the total. However, gifts showed sequential improvement across the quarter and into November. We have now largely converted our -- over our assortment to the more fun and functional occasion-based themes that enhance the overall shopping experience at francesca's.

We believe our merchandise strategies for the upcoming spring season of 2014 reflect trends in color, fabrication and silhouette, and should appeal to the sensibilities which have historically performed well for us, coupled with a dose of special and unique that our customers respond well to. With 87 locations open as of today, we will take possession of 4 boutiques during January 2014, which were originally slated for opening during the first quarter of fiscal 2014. This will bring total new boutique openings for fiscal 2013 to 91, reaching the halfway mark of our domestic goal of 900 boutiques.

As I look to fiscal 2014, we have identified 84 new boutique locations thus far. Of these, we have already executed leases for 60 locations. We continue to work diligently and invest appropriately in extending the reach of the francesca's brand, specifically growing distribution in our direct-to-consumer channel. Year-to-date, and supported by a refresh of our web portal, enhanced functionality and expanded style offerings, our direct-to-consumer business has processed over 10 million visits, 60 million page views, contributing to a 91% sales growth rate, with improvements across all productivity measures: conversion, average order, value and units per order. We remain focused on driving improved content, with increased fashion options and styling advice refreshed frequently.

Building out our teams and infrastructure is an important element of our long-term growth and return objectives. To that end, we have been proactively making investments throughout the year to enhance our abilities to deliver our brand experience to a broader market via the direct-to-consumer channel, as well as to enhance the differentiated feel of our boutique experience, with an expanded field leadership organization. Although these investments were aligned with expected revenue growth, given the diminished actual and updated forward sales growth rates, leverage from these investments will likely be realized during next year.

As I've said in the past, we believe we have a distinctive business model and we remain committed to operating our business with a disciplined approach, appropriately balanced to address both our short- and long-term business objectives.

Now let me turn the call over to Mark to review our financial performance in more detail for the third quarter and provide fourth quarter and full year guidance. And then after that, we'll take your questions.

Mark J. Vendetti

Thanks, Neill. And good morning, everyone. Total company net sales for the third quarter increased 11% to $79.6 million or 15% on a restated NRF retail calendar. The adjusted retail calendar impacted total revenue in the third quarter of 2012 by decreasing the base total by $2.5 million. Overall, net sales increase was driven by 87 new boutiques opened since the end of the third quarter of fiscal 2012, with 10 opened during the third fiscal quarter of 2013.

Comparable sales decreased 3%, including direct-to-consumer. This compares to a 17% increase in comparable sales in the same period last year, which has been restated to include direct-to-consumer sales. As Neill highlighted in his comments, this decrease was driven by a 3% decrease in comparable transaction volume, which we believe reflects the combination of weaker overall fashion trends, transition in certain of our offerings and lower traffic. Comparable average transaction size was flat to last year.

Net sales in our direct-to-consumer business grew 87% to $2.2 million, with improvements in traffic, conversion and average transaction size. We are pleased with the performance of our direct-to-consumer business as a result of the upgrades to the website earlier during the fiscal year.

Through the end of the third quarter, we opened 86 new locations and have plans for 5 additional boutiques in the fourth quarter, bringing the total base to 451. This is higher than our original plan, as we are pulling 4 of our 2014 planned store openings into the end of January in order to capitalize on additional revenue opportunities, as well as the ability to keep the number of openings during fiscal 2014 at the full planned number by backfilling 4 accelerated openings during fiscal 2014.

On a year-to-date basis, new boutiques continue to perform within 10% of same-store sales productivity. In the third quarter, we saw college market boutiques increase in productivity in September as the students returned to campus, and our aggregate levels of cannibalization from new boutiques remains low.

Gross profit as a percentage of sales declined 190 basis points to 50.7%, primarily due to deleverage on the occupancy costs. In addition, merchandise margins were lower by 30 basis points, reflecting higher markdown levels compared to the prior year, particularly in gifts and jewelry as we transition assortment. The decline in merchandise margins were within our expectation for the quarter. Our promotional activity was somewhat higher than the prior year, but concentrated in incremental jewelry events and targeted boutique additional percent-off clearance.

Selling, general and admin expenses increased 28% to $25.8 million, compared to prior year period of $20.1 million. As a percentage of net sales, SG&A was 32.4% versus 28% of sales in the prior year quarter. Within our SG&A, selling had deleverage of 300 basis points and G&A expenses had deleverage of 140 basis points versus last year. As Neill talked about earlier, we are building our infrastructure in order to support our short- and long-term growth objectives.

During the quarter, we completed the expansion of our field organization. This expansion is targeted to establish the direction, training and oversight mechanism needed -- necessary to enable our boutiques to achieve the desired productivity levels as we grow to 900 domestic locations.

We have increased our investment in our home office teams in the merchandising and IT groups by adding staff and investing in our direct-to-consumer business. Income from operations was $14.6 million, with operating profit margin of 18.1%, as compared to 24.6% in the prior year period. Net income totaled $8.7 million or $0.20 per diluted share, compared to $10.8 million or $0.24 per diluted share in the prior year period.

Turning to the balance sheet. Total inventories at the end of the quarter increased by $7.1 million to $30.6 million. Ending inventory was up 30% or 5% on a per average location basis. Given inventory carryover in fashion tops, dresses and colored jewelry, we expect merchandise margin pressure in the fourth quarter of approximately 50 basis points below the prior year. We currently expect to match the promotional intensity levels of the last year.

We ended the quarter with $31.8 million in cash and cash equivalents, an increase from $12.9 million at the end of the prior year quarter, and $29.9 million at the end of 2012. In addition, the company drew $25 million of our revolving credit facility during the quarter, which remains outstanding at the end of the quarter. Also, during the quarter, we repurchased 1.9 million shares of our common stock at an average price of $19.

Now turning to fourth quarter and full year guidance. First, I want to remind everyone that fiscal year 2012 was a 53-week year. The incremental week in fourth quarter 2012 contributed $3.9 million in net sales, and approximately $0.03 per diluted share in earnings. For the fourth quarter, we expect net sales to be between $90 million and $95 million, an increase of 9% to 15% over the prior 13-week period in 2012 ending January 26, 2013.

Comparable sales, including DTC, are expected to be in the range of minus 8% to minus 3%, compared to a 10% comparable sales increase in the fourth quarter of last year. Additionally, we plan to open 5 new boutiques during the quarter. Net earnings per diluted share are expected to be in the range of $0.25 to $0.29, compared to fourth quarter 2012 adjusted earnings per diluted share of $0.33. This guidance includes similar growth rates in selling-related expenses and corporate G&A expenses within the recent third quarter, that are largely payroll-driven, as I've previously mentioned.

In addition, lower legal costs in the prior year fourth quarter will contribute to higher SG&A growth rates in this year's fourth quarter. Also, we expect gross profit as a percent of sales deleverage less in Q4 than in Q3.

Moving to the full fiscal year 2013. We now expect net sales to be in the range of $338.2 million to $343.2 million, an increase of 16% to 17% over the prior 52-week period in 2012 ending January 26, 2013. Comparable sales, including DTC, are expected to be in the range of minus 3% to minus 1% for the 2013 fiscal year period, compared to 16% for the 2012 fiscal year comparable sales. We plan to open 91 new boutiques, approximately 1/2 of those will be mall-based.

Adjusted net earnings per diluted share are now expected to be in the range of $1.03 to $1.07. This compares to the 52-week prior adjusted diluted earnings of $1.04. This year's adjusted earnings exclude $0.6 million net of tax for a secondary equity offering in the first quarter.

Last year's adjusted earnings include, net of tax, $0.5 million for a secondary offering; $0.2 million related to stock option acceleration expenses; and $0.2 million for the relocation of our headquarters and distribution facility. The effective tax rate is estimated to be 39.3% for the fourth quarter and the full year. Capital expenditures for the full year are planned in the range of $25 million to $26 million.

This concludes our prepared comments for the quarter. We will now take your questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Thomas Filandro with Susquehanna Financial Group.

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

I just want to ask, really, 2 questions. Can you guys discuss the protocol that you tested in Houston, which I believe you rolled out during the quarter. What, if any, learns did you gain from those -- the rollout? And can you expand on the restructuring within the field organization and tell us exactly what has changed in that restructuring, and what, if any, implications might it have on the business?

Neill P. Davis

This is Neill. As it relates to the in-store visual re-merchandising, if you will, that we talked about on our last call, those activities surround efforts to repurpose existing floor layouts and fixturing in a way that enhance the customer's shop-ability of the boutique, to bring forward, an example, gifts and home during holiday season, such as we're in now, that are more visible to the customer. And we -- I would say the same thing as it relates to many of our other categories, from jewelry to footwear. Footwear is a great example. Last year, while we had a modest offering of footwear, the positioning and the visual presentation of the category was, in my words, muted, and meaning that the customer had difficulty seeing the product. What we've done now is taken some of our armoires, repurposed those, presented them in a way that really highlights strong key items. So that's an example of what we've been doing. And it's an ongoing effort. It's not something that is -- put on the CAD drawing, sent out to the stores and this is the way it looks. Each boutique has a unique flair and feel to it, and we're trying to provide some broad-based approaches to what we can do to enhance it. And relative to the question about are we seeing results, you heard us talk a minute ago about the performance in terms of footwear. That's an example of the kind of impact we think that can have. Now the presentation is not the only reason for footwear being what it is. We have enhanced our buying organization to help us source and merchandise what we feel to be good, strong key items for our particular demographic. As it relates to the restructuring in the field that we referred to, it's not really a restructuring, it's an ongoing building out of the organization as we move forward to our 900-boutique goal. Given that we're at the halfway mark today, we believe it's appropriate to enhance the depth, the focus of our multi-unit organization, meaning, there are focused eyes on our boutiques to look for consistency, best practice distribution in terms of converting the traffic that we do have in our boutiques. So what we essentially did is put in a layer of personnel that's referred to as area managers. We had those previously. They had oversight responsibility for individual boutiques. We've taken them out of that operating role and put them more into a managerial role with oversight responsibility for sales. And the structure is not unusual for any other kind of retail organization. We just feel that this was an appropriate time to begin to put that in place. So a lot of that spending that is done is consumed this year. As we move forward in the next couple of years, we'll be able to realize leverage off of that fixed investment, as well as hopefully, better sales productivity at the individual boutique level.

Operator

Now we'll go to Howard Tubin with RBC.

Courtney Willson - RBC Capital Markets, LLC, Research Division

This is Courtney Willson in for Howard today. I'm just wondering if you could talk a little bit about what types of promotions we should expect to see during the remainder of the holiday season and maybe even into spring.

Neill P. Davis

Courtney, this is Neill again. As Mark said in his prepared remarks, our approach to the promotional handles that we'll deploy this season are largely similar to what we've done in the past. But the primary handle is a BOGO handle, and we tend to approach our promotions by specific categories and we also approach our promotions by specific boutiques and regions. And that's the cadence that's largely similar to last year. I expect that to continue as we move forward through this quarter and into the spring, as external circumstances warrant. I will say that it's most challenging for our business to be able to offer a storewide BOGO on all categories, as we have attempted that in the past and the productivity of doing so is diminished from the practice I just mentioned in the front part of my answer to your question. So that said, it is as I described.

Operator

Next we'll go to Brian Tunick with JPMorgan.

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

I guess, 2 questions. One, is there anything interesting, I guess, from a class of store base or mall versus off-mall performance, as you guys look at the first 9 months of the year telling you anything interesting? And then, and the second question is, I know lead times are one of your big competitive advantages. Can you remind us how big jewelry is as a percentage of sales this year? And what's the timing of changing the offering and how you source that product?

Mark J. Vendetti

Brian, Mark here. I'll take the first question and Neill will take the second question. So relative to where we were in the second quarter, the general trends of our boutiques in terms of comps have remained consistent. We are not seeing significant deviations on our comp base depending on percentage. So we continue to see very similar performance between our newer boutiques and older boutiques as it relates to comp performance. As it relates to mall and non-mall, we are still seeing the non-mall transactional comps be slightly below the mall transactional comps, which is something that really began in the second quarter, and we've seen that carry through into the third quarter. And I think the reasons we articulated in the second quarter, in a way driven by a lot of the promotional activity, drawing the incremental shopper over to the mall continued into the third quarter. Neill?

Neill P. Davis

Brian, as to your question on our lead times, there's really, nothing's changed on the cadence of how we manage our open-to-buy and inventory positions. So what I would tell you and remind everyone on the call, as an example, where we sit today, we are largely 70% open for the first quarter of 2014, which is a little more aggressive of a position, and as we move through the balance of this quarter, we'll round those out and fill it out. So not any change in the protocols as it wraps around those lead times, still allowing us to be very responsive to developing trends and adjust as we best can do. As it relates to jewelry question, it is roughly 20% of our overall mix. It has certainly been a very strong grower over the last 2 years, with significant comps, as you have seen in the past. And we're just going through the transition. And that is hitting the floor as we speak. And the feedback and the sell-throughs that I see as it relates to performance of the metal classifications, they are responding well. We just haven't had to go through a transition of fashion in this category in a number of years. So there's, it's, in our opinion, it's nothing more than that. And I have seen what is destined to hit our boutique floors for the spring. And I think it is sharp, I think it's on point, I think it's fresh and our customers will like what they see. And then, on your final part of your question, as it relates to the sourcing of our jewelry, these, as all of our product, they are third party-sourced. We primarily get them from market in the northeast and those vendors are largely importers procuring out of the Pacific Rim.

Operator

Next, we'll go to Simeon Siegel with Nomura Securities.

Simeon A. Siegel - Nomura Securities Co. Ltd., Research Division

Neill, in light of the deeper offerings across the mall, do you think your November transactions may have missed out because the customer just had too many 50% off deals to choose elsewhere and the BOGO might not seem attractive enough? And then, just given the recent EBIT contraction, what's the right way to think about SG&A leverage for next year? I think you referenced that. And then just taking a step back, maybe you can talk to where we'd expect normalized EBIT margins to settle in?

Neill P. Davis

Simeon, as it relates to the promotions of what the broader market is doing and our particular handle, our customer has limited dollars in her wallet and I do believe that there's an element of our business that gets constrained as a result of that competitive promotional handle as she empties out her wallet before she happens to walk around the corner and see francesca's. Hopefully, she refilled her wallet, she'll come in at another time. But I do feel like it's had an impact and we're trying to be as targeted and timely in our offerings and focusing on elements such as urgency in our promotions over the holidays that create some of that excitement and maybe offset some of the storewide-type promotion offerings that others were able to do. And when we have done that, we have seen pretty good performance. So we're working that as diligently as we can, but nevertheless, it's a big challenge. As it relates to our EBIT margins, there's no question that we've gotten some deleverage from some of the SG&A spending, there's not as much flex in our overall spending structure as maybe other companies are. There are some fixed elements to it. But that said, having spent those dollars this year for the reasons, some of which I've talked about and Mark articulated, I should get a return of that leverage next year, so I see some benefit to our margin structure next year and I still hold to the longer-term outlook of a very robust operating margin structure, similar to the lines that you see on an annualized basis over the last couple of years. And of course, that's going to vary from one year to the next based on what the comp -- comparable sales profile is. But we still feel very good about that.

Simeon A. Siegel - Nomura Securities Co. Ltd., Research Division

And maybe just quickly for Mark, were there any just timing or 53-week impacts to the ending third quarter inventory?

Mark J. Vendetti

There were some. Just to think about the year ending a week later this year versus last year, and as you start to receive inventory prior to that Thanksgiving period, so it contributed a couple of points, as we talk about the 5% store growth in terms of average inventory, with the week ending -- this fiscal year, one week later than last year.

Operator

Next, we'll go to Edward Yruma with KeyBanc Capital Markets.

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

I guess first, it seems like there've been 2 step changes in fashion that have impacted the business. First, with gifts, and then second, with jewelry. Have you made, or are planning to make, any changes on the merchant front or on the process front to either remediate this or prevent them from happening going forward? And then I guess second, for the gift assortment that you have changed, have you seen improvement in sell-through or margin on some of the newer product?

Neill P. Davis

Ed, it's Neill. Yes, there had been a 2-step-type process, and we have been very clear about, or at least more articulate about, the gifts that's been going on for a while. There have been changes in our merchandising organization as it relates to the buying team. What you're seeing now on the floor and the sell-through that's occurring is a reflection of the new leadership of that particular team impacting the business. And it is, as we've made observation to in our prepared remarks, that there is a positive trend developing and we're seeing the results of those efforts coming back to levels that we have experienced in the past. As it relates to the jewelry, this is not a merchandising issue. Everyone should understand that it's a transition, okay? So it is not a stale issue. It is not the wrong merchandise. This is simply a transition in colors and silhouettes. And our team is doing, I think, a great job of addressing that and transitioning to it. And over the next 3 to 4 months, you'll begin to see that impact. But that is different from gift. Gift had gotten a little stale, to be candid, and we right-sided that and it's in a place where it needs to be and we're moving forward.

Operator

Next, we'll go to Liz Dunn with Macquarie.

Lizabeth Dunn - Macquarie Research

I guess I just wanted to dive in a little bit more on the gift assortment. How do you see this playing out? I mean, as we move away from color to more of a metal trend and move away from sort of statement necklaces towards more earrings and other things. I mean, does she buy less? How does that challenge the AUR and how should this transition go, I guess?

Neill P. Davis

Well, she'll buy more units. I mean, there's the ear and the hand, so there's expansion of the units. Our margin structure is similar. So it's -- the AUR, it will be slightly neutral to maybe a little negative. But we'll pick that back up with the units. Keep in mind, it's a mix, it's a mix shift that favors these others. It's not that necklaces are being significantly diminished. It's still there, it's just that we've had some reorientation. But to answer your question, it is -- it will be felt through higher units and a slight AUR decline.

Lizabeth Dunn - Macquarie Research

Okay. And one more, if I may. As you are kind of challenged with facing the mall traffic as it exists, is there anything you can do to drive traffic beyond just emphasizing promotions at the lease line? Is there any new tools or tactics you have to sort of be in more control of your own traffic situation?

Neill P. Davis

Well, the place where we are focused in on driving awareness as best we can is flexing our e-mail file. We have about 1.2 million e-mails and we have accelerated over the last 4 months and into the holiday, greater frequency of communication. And that, in my mind, is an element of what we can do to try to drive traffic inside boutiques, because I know that's a source of traffic that we can lean into. And that quite frankly, is what we're doing. That, as well as be more active in the social media sites, through page search is another element. And that's what we're doing.

Operator

Moving on, we'll go to Lindsay Drucker Mann with Goldman Sachs.

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

My first question is, as you think about November and the slowdown that you experienced, it sounds like you actually felt pretty good how you had affected the assortment, and trends started to get better in October, and that the driver of the deceleration in November, in your mind, is mostly a function of the competitive dynamic and the macro dynamic. So I guess, my first question is, I'm curious why you're looking to promote -- you talked about promotions generally in line with last year, why you're not dialing that up a bit more in order to fight for market share. And then secondly, I'm curious if your comp guidance implies an improvement in December versus the November run rate or if this is your view of kind of -- as soft as it was in November is your view of the status quo?

Neill P. Davis

It's Neill. I would add to the comment about November business, I mean, yes, it -- there's some macro elements and competitive elements, but reflect on our comments about the transition of our jewelry offerings. I mean, that has put some transitional pressure on our business and yes, we do anticipate that to improve as we move into the final runs of the current quarter. I mean, we were relatively very promotional fourth quarter, 4Q last year, and I think that our handles that we are offering are appropriate and we will maintain those. As I said to some other questions earlier in the call, we'll try to maximize the mix and the timing and the flash sales to flex our voice as best we can during the environment. And as it relates to the expectation of the cadence of the business for the quarter, yes, there is expectation that December will be better than November.

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

And that's a function of just working through the jewelry transition?

Neill P. Davis

That's part of it, and it's an easier compare to the prior year. November was our most difficult compare to the prior year.

Operator

Next we'll go to Randy Konik with Jefferies.

Isabel Keller - Jefferies LLC, Research Division

This is actually Isabel Keller in for Randy. I was just wondering, can you talk a little bit about how you're thinking about your capital structure going forward? How much cash cushion you think you'll need and how you're thinking about your share repurchases? Obviously, you purchased -- you bought back a lot of shares this quarter. And then, just kind of your cash-to-debt balances going forward?

Mark J. Vendetti

This is Mark. We like to maintain, at any given point in time, about $25 million of cash on our balance sheet and talk about, in order to feel comfortable, maintaining at least an open of $25 million on our revolving credit. So right now, we have available $75 million of revolving credit facility and we finished the quarter with $32 million in cash. So very, very comfortable from a liquidity perspective. I mean, those are the key parameters we look at. The business is very efficient from a cash perspective, and the boutiques continue to throw off, as we open them, a lot of cash flow, and continue to throw off cash flow very quickly. And we'll -- as we think about the share repurchase, we'll continue to look at market conditions and do that opportunistically as we go forward.

Operator

Next we'll go to Adrienne Tennant with Janney Capital.

Adrienne Tennant - Janney Montgomery Scott LLC, Research Division

My question is, first of all, should we assume that the quarter-to-date comp is running at the lower end of the range that you gave us, Mark? And then, you made a comment in your prepared remarks, you said something about the fourth quarter -- and I'm sorry if I got this wrong, but delevering, deleveraging less in the fourth quarter than the third quarter. Is that just the leverage piece or is that also the total gross margin inclusive of the merch margin? And then, on SG&A dollar growth, should we expect it to be similar to the 28% that we saw in the third quarter? And then rounding into 2014, as we start to anniversary a lot of these investments, how should we start to think about that?

Mark J. Vendetti

Okay, so there are many questions there and I'll try to go through them. So we -- with the current guidance, November is at the lower end. As we talked about, we expect some improvement as we progress through the quarter. On the gross profit leverage, as we talk about deleverage less in Q4 versus Q3, that's an all-in gross profit number. If you think about, we've -- there are 2 elements of that. We've already talked about the merch margin aspect of that, it's about 50 basis points. So we had deleverage total of 190 basis points in Q3. So we've kind of given you some brackets in which to think about where that is going to be in Q4. And that should help you, as you think about your SG&A for 4Q, which again, the growth rate of 28%, as we talked about, will continue into Q4 from an investment perspective. But we did have lower legal expenses in Q4 of last year, so you should actually expect the total G&A or SG&A when you adjust for that to be higher in Q4 of this year. And then as, again, as we think about next year, as Neill alluded to in terms of as we go through and develop our plans for next year, we'll take a cautious approach to sales growth and really look at our SG&A structure and try to make sure we can bring some element of leverage as we go through next year.

Neill P. Davis

Adrienne, this is Neill. We're -- there's a -- on the horizon, relative to our spending, it's on a downward slope. I mean, there's -- relative to the leverage that you're going to expect. And it's just -- that's the cadence that we're on right now. What you're looking at, as we speak, as narrowly in a quarter within a year, it seems to be outsized, but that's because of this transition in terms of comp, but I think on a SG&A growth rate go-forward basis, you'll see that decline versus historical trends, which supports my earlier comment to an earlier question about our margin structure.

Adrienne Tennant - Janney Montgomery Scott LLC, Research Division

Exactly. And then just the notion, like, if we come out with a similar comp, let's say, negative low-single, I guess, I'm just trying to figure out, does the guidance embed similar, deeper or less deep promotional cadence for the fourth quarter? Because I'm just trying to figure out why the pressure on that GPM line should be less in the fourth quarter, which is typically sort of a clearance quarter to get into the next season.

Neill P. Davis

Right. It really relates to occupancy leverage. There's a higher growth rate expectation of sales in the fourth quarter than there was the third quarter. So that is -- it's a lower level of deleverage in occupancy on a sequential view of gross profit margin.

Adrienne Tennant - Janney Montgomery Scott LLC, Research Division

Perfect, that's the answer. And I completely agree with you about the jewelry cycle moving from color to the metals and that it's very much of a trend thing and not a you thing.

Operator

Next, we'll go to Laura Champine with Canaccord.

Laura A. Champine - Canaccord Genuity, Research Division

We're concerned with the inventory level still up 30% on projected sales growth, much slower. And it looks from your gross margin guidance in Q4, like you're not willing to take the hit in Q4 either and we may see elevated inventory levels into next year. Where do you think inventory is in the year on a year-over-year growth basis?

Mark J. Vendetti

So given the sales trends we've seen, we've already started to manage the open-to-buy in our receipts for the fourth quarter. And we're targeting an inventory number as we leave the quarter, and I'll call it that 20%, low 20% year-over-year increase versus the prior year as we head into our first quarter of next year.

Operator

Next we'll go to Janet Kloppenburg with JJK Research.

Janet Kloppenburg

I wanted to ask, Mark, just a question on the inventory, then. Are you implying that inventory on a per-store basis would be down year-over-year, and in line with comp, your expected comp performance for the fourth quarter? And also, Neill, I was wondering if you could, or Mark, if you could talk a little bit about inventory content? I think you said you had some carryover of tops and maybe jewelry. I was wondering how you expect it to stand in terms of spring versus fall holiday at the end of the year as well.

Mark J. Vendetti

So on the first question in terms of the average or we'll call it inventory comp, as we end the quarter. Again, as we try to work through the open-to-buy and have already started to manage that, that kind of plus 20-ish number should be around a flat inventory boutique comp as we move into Q1, and again, we're looking at the ending inventory at the fourth quarter to really align with what we think our expectations are for the first quarter of 2014. And then could you just repeat that last -- the last part of that question? So the...

Janet Kloppenburg

I was just wondering about inventory content, how healthy it would be. You said that you had some carryover products of fall into fourth quarter, and I'm wondering if your guidance assumes that you'll clean up all of your fall holiday product and be fresh for spring going into 1Q.

Mark J. Vendetti

So the areas where we've alluded to, example, like fashion tops and some of the areas in jewelry, our plans are to really work through that as we particularly move through the very heavy clearance period that you start to see after Christmas and through January. And the guidance we've talked about, in terms of that 50 basis points, includes our plans to do that. And if you look back in the third quarter and we talked about our third quarter and our ability to try to clean up some of the clearance, particularly in gift, at a reasonable gross margin, we were able to do that third quarter. And we're confident we're going to be able to take care of some of the issues where we have higher inventory than we would like as we move into the back part of the Q4, particularly that January period, and exit the quarter in good situation for the first quarter of next year.

Operator

And now we'll take a question from Betty Chen with Mizuho Securities.

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

I was wondering if you can talk a little bit about Sei Jin and how her merchant team is thinking about spring fashion. I know Neill, you mentioned that you've got a very high percentage of open-to-buy. Is that -- does that reflect the fact that, perhaps, there's still a lack of dominant fashion trends out there, so the team is leaving themselves a lot of flexibility? And then also, I was wondering, any updates regarding the outlet stores? I know, I think there were a few in the Houston region. How are they doing? And as part of 2014, how many openings will be attributed to outlets?

Neill P. Davis

Betty, as to the questions on merchandise and how our buyers and planners are looking towards the near term, I would tell you that a lot of that has to do with texture and color. I would tell you that if you would be able to see and observe our spring look book, you would see a variety of silhouettes and colors and textures that, quite frankly, are feminine. More close -- and they're very closely aligned, I think, to our -- the sensibility of our demographic. So we feel very good about it. So the open-to-buy is not a reflection of the lack of energy that we see coming. It is an opportunity -- it's more of a conservative approach such that we can be in a greater chase and reorder mode based on where she decides to vote with all of that relative newness that's coming in, in the first quarter. You want to talk about the outlets? What was the question on outlets, I'm sorry, Betty?

Mark J. Vendetti

Sure, I can talk about the outlets. Outlets, our 3 outlets continue to perform very well. We're very pleased with their performance on both the top line and a dollar four-wall contribution basis. Our plans for 2014 are basically to open in the 8 to 10 outlets for next year, given the strong performance we've seen. And we continue to view that as a very strong channel for our future growth of boutiques.

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

And just in terms of the four-wall, is it comparable to the retail stores or any sort of variance, is it possibly higher?

Mark J. Vendetti

It's still in the 30%, but given the higher sales volume they do, they actually turn out higher dollar four-wall contributions.

Operator

And next, we'll go to Pamela Quintiliano with SunTrust.

Pamela Nagler Quintiliano - SunTrust Robinson Humphrey, Inc., Research Division

Just had a few for you, actually. Can you remind us of what the promotional cadence was last year for the holiday season, as you keep on citing that we should expect something similar? And then, sorry if I missed this commentary earlier, but we went through jewelry, we went through giftable, fashion tops going forward, just, is there anything out there -- obviously without going into detail, but anything out there that you guys are excited about as we think about spring? And then lastly, if you could just touch on real estate opportunities and what you're seeing in the marketplace?

Neill P. Davis

This is Neill. As it concerns the promotional cadence to last year, it's, again, largely the same, with a BOGO handle. What's being filtered and layered into that profile are the more urgent elements of a BOGO handle, i.e., the flash sales point of view. So that would be -- that's incremental but it's a change in the voice, if you will, in how we deploy the BOGO-type handle. Tops, tops next year are going to be impacted by a variety of fabrics. So fabrications and silhouettes. We're going to give our customer a lot more choice. So we haven't been as good giving her a lot of choice in terms of fabrications, relying a little bit too heavy on synthetics. So what you're going to see, walk into the boutiques is there's embellishments in the tops, there is broader fabrications, better quality. So it's -- we think it will resonate quite well for our customers in the spring. Real estate opportunities, I think as we mentioned in our prepared remarks, we've identified 80-plus. We've executed 60-plus. And in my interactions with the real estate team and the real estate community, we are continuing to -- we're almost rounding out that open-to-buy, if you will, and thinking about what 2015 looks like. But the mix is similar to what it has been this past year, from a mall, non-mall perspective. We're finally able to get into some locations that we've been looking for, for quite some time, like King of Prussia, and I think that the team there has done a great job of being patient and position us in that type of location that gets us to a high-tier volume boutique. So we're continuing to make the right decisions and the right timing and the right place and the right mix that maximizes continuity, maximizes as well the continuity of the significant sales productivity ramp that we do get out of these boutiques.

Pamela Nagler Quintiliano - SunTrust Robinson Humphrey, Inc., Research Division

So you're getting in the right malls and you're also getting in the right corridors or more -- better locations within the malls as well?

Neill P. Davis

We believe so, yes.

Operator

Now we'll take a question from Susan Anderson with FBR Capital Markets.

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

I may have missed this, but can you talk about the performance of your pants business and also, the penetration of sales in the quarter versus historically, and where you think it could go? And then also, I think you'd mentioned that new product was doing really well. Are you going to have increased penetration of this in the fourth quarter?

Neill P. Davis

There is an ongoing shift in -- between our dress and our bottoms separate business, and it's been gradual and we've been making adjustments to it. And the performance that we've seen in those efforts have been exceptional. The mix, I don't have off the top of my head in terms of that overall, the separates-type classification. We will have to get back to you later on that, but it's performing as we had hoped. And within that category, I would also put in sweaters, and that's been a very positive and aggressively nice-performing category in the holiday period. We believe that the fabrications and the silhouettes have been more aligned to seasonal fashion rather -- as opposed to the big, chunky weather-oriented. So we feel like it's been a nice complement to the mix, and we'll continue to build on that in the following years.

Operator

Now we'll go to Richard Jaffe with Stifel.

Richard Ellis Jaffe - Stifel, Nicolaus & Co., Inc., Research Division

Neill, just a little digression into direct-to-consumer business, and obviously, its very rapid growth, albeit off a small base. And wondering how you're thinking about direct-to-consumer going forward as a business that can be leveraged fairly quickly. Is it an opportunity to test and then chase in-stores, to build a much broader assortment online and give the customer a much bigger store to shop at versus the in-store experience? And wondering how you're thinking about it and how you see it ramping up? Obviously, the rate of change we've seen is likely going to slow, but I'd like to hear your input.

Neill P. Davis

Richard, clearly, through our prepared remarks, you hear us talk about the significant growth in that particular channel of our business, from all of the metrics that we look at. You're right. I mean, there are things that we can do from a merchandise offering standpoint through that platform that we can't do inside our boutiques, and footwear's an example. So you'll see a broader, more robust offering in 2014 through that channel than we've had in the past. We continue to learn the assortment online and we'll get progressively better and more productive by expanding our presence. We focus on the analytics, we focus on the productivity and we're going to start feeding more funding of those categories that can help continue perpetuation of the growth rates that we've been looking at. Three, four years out, there's a goal of 7 -- high-single digit penetration, which, that would entail a pretty significant growth rate out of that channel over that period of time. And so it's just -- it's improving execution in the channel and embellishing it in places where we can, so it's translating the experience of the boutique online, creating a little more sticky of an environment. The keys [ph] are there. We've seen increases over the year in terms of the amount of time that she stays on our site, the number of pages that she's looking. So we'll continue to work and follow where she takes us and feed it where we think we can get the best return.

Operator

And now we'll go to John Kernan with Cowen and Company.

Jerry Gray - Cowen and Company, LLC, Research Division

This is Jerry Gray on for John. I just want to talk a little bit about new store productivity. It seems like it had dipped a little bit versus the productivity numbers you guys put up in the past. I was wondering if you could talk a little bit more about the trends that you're seeing in your new stores and then also, how we should think about new store productivity as you continue to approach your 900-boutique goal?

Mark J. Vendetti

So our new boutiques continue to perform very well and in line with our expectations. We look at, again, I'll just use kind of bumpers [ph], a plus or minus 10%, and they continue to be in that range, ramping up very quickly to sales productivity and also very quickly on a sale -- on a profitability four-wall contribution perspective. And relative to our expectations for the third quarter, they performed very much where we thought they were going to perform. So we continue to be pleased with what we see coming out of the 2013 group. And as we look forward, that gives us the confidence as we continue to expand and grow into 2014.

Operator

And now we'll take our final question from Mark Montagna with Avondale.

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

When you look at the direct business, can you just tell us what's been accomplished with your investments at this point? And I think you might have touched on this, where are you in terms of total spend? Are you halfway done, 1/3 of the way done, and do you still expect to be done with that by the end of the second quarter next year?

Neill P. Davis

Mark, it's Neill. What we've done over the course of this year is, first, refresh and recalibrate our existing website to largely, the look and feel that you see today. There had been a number of initiatives underneath and inside the mechanisms of that platform to enhance the functionality, the seamless nature from click all the way through the basket. So there's an accumulation of sub-improvements that have been occurring that are largely complete. What you'll see us begin to deploy next year is an enterprise platform that can help us be able to support the kind of penetration and volume that I referred to earlier in the phone call. So it is a much stronger, grounded platform that we're looking to deploy in terms of 2014. And that largely rounds out the capital investment that's required for that platform that we would live on for quite some time.

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

Okay. And then, so is the spend -- in terms of say, more the SG&A, do you feel like you're halfway through that spend or should we expect the same trajectory of spend all the way through second half -- first half of next year?

Neill P. Davis

Well, the spend will diminish in 2014. We have put in place the balance, the P&L capital, the payroll that we need in terms of IT in order to stand up this system and we'll add a few more into that mix in the first half of next year, but we'll get more articulate for you as we complete our 2014 budgeting. But conceptually, we're still on the track that we have articulated over the course of this year.

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

Okay. And then, just the other part of the expenses, with the field management team. Can you just help us try to quantify that? How many area managers do you have now? How many district managers, region managers and how many of the district and region managers that you used to have?

Neill P. Davis

We essentially doubled the number of area managers going from 24 to 48. We have 14, 16 regional managers that, that area manager group reports up to. And we have 4 zone leaders that district managers are bucketed into and report up to. We basically divide the company, the country in 4, north, east, south, west, and they report into Theresa Backes, our Chief Operating Officer.

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

So then, how much did the district and zone manager count increase by?

Neill P. Davis

The district -- the districts did not expand and the zones were new and it's more of a putting in place a matrix for the structure. What is new is in terms of headcount and payroll is the area managers. Historically, we've had area managers that were essentially a boutique manager. They had their home boutique, but they also had oversight responsibilities from a process standpoint of a handful of boutiques that were in drivable distance from their home boutique. What we've now done is make that area manager more of a regional focus. She has anywhere from 10 to 15 boutiques under her responsibility, and her responsibility is maximizing sales as opposed to checking the box on processes. But that's where the headcount in investment's put in place and we did that in the last -- in the second half of this year. So you will anniversary that spend second half of next year.

Operator

There are no further questions at this time. So I'd like to turn it back over to our speakers for any additional or closing remarks.

Neill P. Davis

Thanks, everyone, for joining us today. And happy holidays, and a safe one to that, for everyone. We'll talk to you next quarter.

Operator

And that does conclude today's call. We thank everyone again for their participation.

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