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Ascena Retail Group, Inc (NASDAQ:ASNA)

Q2 2014 Earnings Conference Call

March 03, 2014 16:30 ET

Executives

Allison Townsend - ICR

David Jaffe - President & CEO

Dirk Montgomery - EVP & CFO

Analysts

Neely Tamminga - Piper Jaffray Companies

Oliver Chen - Citigroup

Anna Andreeva - Oppenheimer

Scott Krasik - BB&T Capital Markets

Eddie Yruma - KeyBanc Capital Markets

Taposh Bari - Goldman Sachs Group

Susan Anderson - FBR Capital Markets

Steve Marotta - CL King & Associates

Mark Montagna - Avondale Partners

Mike Richardson - Sidoti & Company

Operator

Good afternoon ladies and gentlemen. Thank you all for joining the second quarter 2014 Ascena Retail Group’s Earnings Call. My name is Ryan and I will be the operator in today’s call. (Operator Instructions). Now I will hand the call over to your host for today Miss Allison Townsend of ICR.

Allison Townsend

Thank you, Ryan, and good afternoon everyone. Today's call is being recorded and will be available for replay later today. Information on accessing the replay is available on today's press release. As a matter of formality, we would also like to remind participants the remarks made by management during the course of this call may contain forward-looking statements about the Company's results and plans. These are subject to risks and uncertainties that can cause the actual results and implementation of the Company's plan to vary materially. These risks and uncertainties are referenced in today's press release as well as in the Company's most recently filed Forms 10-K and 10-Q.

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

At this time I would like to turn the call over to Mr. David Jaffe, President and CEO. David?

David Jaffe

Good afternoon and thank you for joining us to discuss our fiscal second quarter 2014 results. Consistent with the overall retail environment we experienced increasingly challenge conditions as we closed down to holiday selling period and ended in second quarter. Total second quarter comp sales were flat for last year with negative 3% store comp performance offset by continued robust e-commerce growth of 28%.

Store comps were down across all brands in January driven predominantly by the weather events that gripped large parts of the country. Adverse weather conditions had continued to effect retail business through today’s storm. Adjusted earnings per share of $0.23 for the second quarter was slightly above our revived expectations due primarily to lower SG&A and tax expenses versus our plans. This compares to adjusted EPS of $0.26 last year. The decrease versus last year is soft due to soft performance at Justice and increased operating expenses for new stores and enhanced capability and brand merchandising and design functions. Now I would like to walk you through second quarter results for each of our five brands a little more detail.

Total comp sales at Justice were down 5% in the second quarter caused by soft store performance in an increasingly competitive promotional environment, poor weather and challenged sales of fashion basic merchandize. Despite the challenges in our stores the e-commerce channel continued to be strong delivering record sales for the quarter. The new online shopping platform that we launched in the fall is delivering efficient and engaging customer experience that we believe is enhancing both traffic and conversion.

From an assortment standpoint, our customers continue to shift their purchases away from basic apparel and into fashion choices. As a result the core apparel business was down during the quarter and our merchandising team is making adjustments in those categories to improve our differentiation versus the competitive set.

We’re pleased to see solid results in fashion apparel styles across most categories including fashion, cut and fill, premium denim, fashion knit pants, and licensed sports apparel. The accessory business continues to grow with good results in scarfs and large bags. Crafts and room décor items also performed well.

As we said in the past our marketing strategy includes both targeted loyalty programs and store wide point of sale events. To address soft traffic and a highly competitive promotional environment we increase the frequency of flash sales, in which an additional 20% was offered on top of 40% off the entire store promotion. We see relatively weak response to our overall promotional activity due in part to increasingly aggressive competitor promotions, and some overlapping of our promotions. The planned sales required us to run additional promotional and clearance events to clear inventory negatively impacting margins and profit. As we move forward we’re further assigning our promotional programs and testing a number of alternatives to drive profitable growth and existing customer frequency and new customer trials.

On a number positive note, our roll out at Brothers continues at a 128 dual gender locations were open as of the end of the quarter. We’re pleased with Brothers performance will continue to grow the footprint of this brand. We expect it can be a 160 or more locations by the end of fiscal 2014 including several units in Canada. The justice expansion is Canada is progressing well with 32 stores now open and the Canadian locations continue to outperform the U.S. locations. In total we ended the quarter with 991 stores versus 958 last year.

In the third quarter we plan to open up 70 new stores including one in Canada and closed eight stores.

Lane Bryant’s second quarter total comp sales were robust up 8% for the last year. We’re very pleased that we delivered positive comp performance growth both store and e-commerce channels with comp store increases in all regions of the country and balance growth across all major merchandize categories. We’re pleased with the progress we have made to reposition the brand as a fashion authority and destination for it's customers.

Merchandising improvements focus on increasing fashion content and improving wearer occasion mix are showing positive results. For the fall season our fashion assortment had very strong performance with sales up 27% last year. Our investments in expanded wear-to-work and active inventory paid off, driving 10% and 70% sales growth in those categories respectively.

Our Cacique intimate apparel business delivered strong double-digit sales comps led by bras and sleepwear. Sweater sales were below expectations but we believe that this can be a growth category for us in fiscal ’15 as we continue to improve fashion and quality. Another element of our fashion authority strategy is to launch designer collaborations. We recently announced our partnership with Ruben and Isabel Toledo that will be expanding with merchandise featured in most stores and online this spring.

There has been a lot of excitement about this collaboration and we will be presenting this new line of apparel at a fashion show this spring. We continue to prove our marketing execution in the second quarter through a more focused and effective promotion strategy. The brand achieved record sales during Thanksgiving week and during the holidays. We ran more targeted door buster key item promotions and a 12 days of Christmas event can drive traffic.

Lane Bryant’s also continues to have strong private label credit card penetration at 42% and our active customer file grew during the fall season versus last year. We’re improving our visual strategy by focusing more on lifestyle merchandising which includes adding dedicated space and fixtures for our growing active segment this spring.

Maurices has delivered total sales growth of 4% for the quarter driven by strong new store openings and continued strength in ecommerce sales. General pressure on traffic levels and severe winter weather resulted in soft store comps particularly in the Midwest. Top performing merchandise categories for the quarter were woven and knit basic tops in both missy and plus sizes. Overall accessories continued to be a strong category.

Underperforming categories included wear to work tops, plus size dressy knits, and denim. Maurices has continued to improve its marketing and visual strategies with more aspirational and integrated approach. The brand converted to a new CRM platform in the quarter that we expect to drive the top line growth this spring. Our Take Ten loyalty program continues to grow, and we have increased the size of our email database to 3.4 million. Marketing strategies going forward we will continued focus on greater engagement through social and mobile channels and increasing customer frequency. We’re planning partnerships with influential bloggers throughout the spring and summer and have developed a digital advertising campaign to target customer acquisition and reactivation.

We’re also testing more targeted email campaigns. Maurices private label credit card penetration continues to grow now upto 38%. Our store base is 898 locations at the end of the quarter up from 850 last year. We opened 12 net new stores during the quarter including three in Canada. The Maurices’ expansion into Canada has now reached over 20 stores. Overall our new stores opening results are meeting expectations with good returns. We’re planning 13 new openings and three closings for the third quarter.

Total comp sales at dressbarn were flat for the quarter with strong ecommerce sales and a slight decline in store comps. We were encouraged by low single digit positive comps for holiday sales through December and we believe we have been making the right changes to improve merchandizing and marketing execution. However the challenging weather combined with our high concentration stores in the Northeast had a significant impact on January sales.

They key category drivers of sales growth were wovens, blouses, sweaters, knits and accessory. Underperforming departments included suit separates and bottoms. Sweaters a key category for us in the fall season drove sales and profitability over LY. Dressbarn continued to improve it's marketing strategies in (indiscernible) in the second quarter with a good customer response to online and direct mail campaigns. We continue to increase our customer contacts in the quarter by adding two additional mailers this year which drove incremental traffic.

The new marketing strategy is more focused on fashion and is well integrated across online, direct mail and in-store marketing. A great example is the focused four day sale of a key fashion sweater that was aided by direct mail. This event drove an increase in our comp trend and margins during the promotion and replaced a profit draining BOGO from last year.

Our blushPERKS Loyalty program also continues to strengthen, with 7.4 million customer’s enrolled to-date. In addition our private label credit card penetration is now 32% of sales up from last year. Dressbarn effectively managed the inventory to below last year’s level increasing returns and delivering record high margin rates and dollars to the quarter. We entered Q3 with fresher wear now receipts and significantly less clearance merchandize compared to last year. These tighter controls have enabled us to eliminate several clearance promotions compared to the prior year.

Catherines continued its strong performance with total comp sales growth of 10% and positive comp sales of both stores and ecommerce. This is Catherines’ 11th straight quarter of positive comps. We saw strength in apparel with sales growth in sweaters, denim, knits and wovens. Our accessories and intimates businesses also improved, led by strong sales in boots, sleep wear and shapewear.

Customer response to our November and December floor sets was strong and fresh receipts of seasonal product delivered high margins and approved inventory turnover. We expanded product initiatives in petite tops, boots and anywhere this holiday with continued success. Reposition our holiday products delivery to peak the beginning of November to drive strong pre-Thanksgiving sales. In December we transitioned to more seasonal wear now products earlier than the prior year which worked well improving inventory returns and margins.

Catherines’ marketing program was mainly focused on direct mail events and bounce back coupons. This drove traffic and helped us to reduce level of store wide discounting. One additional direct mail event was added this year to help drive additional sales and also adjust for late Thanksgiving. Our new bounce back coupon was also added prior to Christmas to help drive peak holiday sales. All customer segments continued to grow with increases in new, reactivated and retain customers. In addition to customer file growth, we continued to improve the quality of sales as we saw higher average dollar sales, improved margins and an increase in our private label credit card penetration to 45%.

As we recap our total results for the second quarter there was a lot of variability across our portfolio. We were pleased with continued top line momentum at Lane Bryant and Catherines and performance was generally in-line with our revised expectations at dressbarn and maurice's. During holiday Justice faced a more intense competitive environment than anticipated and is making adjustments to both it's merchandising strategy and promotional cadence going forward.

Poor weather in January and February clearly had significant negative impact on trends compared to last year. We’re implementing promotional strategies and receipt flow adjustments to bring inventory balances back to targeted levels as needed across the brands. On a positive note we have observed a better response to our spring assortment in warmer weather regions. In addition the Easter and Mother’s Day selling periods are the most important periods for our missy brands. We’re lapping a low LY base and we should benefit from the later Easter holiday timing.

We plan to remain appropriately conservative with our inventory position throughout the season until more robust trends are established. We made very good progress on our longer range strategic priorities during the quarter including our synergy initiatives which will position the business for a long term growth. We have completed the construction of our new national retail distribution center and all brands will be rolled into this DC by early fall.

Our advanced ecommerce fulfillment center is completing the final testing phase and we’re in track to go live with our first brand this Spring.

Now Dirk will provide an update on financial highlights.

Dirk Montgomery

Thank you David. Good afternoon everyone. Before reviewing our second quarter results it's important to note that this year’s quarterly earnings include certain restructuring and integration cost related to the Charming acquisition, as well as certain charges related to accelerated depreciation. We believe these costs are non-indicative of ongoing operations or informative for period to period comparisons. The results discussed in this call has been adjusted to exclude those items which are described more fully in our press release.

Net sales for the second quarter increased 2% to $1.266 billion. As David mentioned we experienced challenging conditions in the quarter and our total comp sales were flat. Total company brick and mortar comp sales were down 3% due primarily to traffic with traffic at all five brands down to LY. The impact of weather on our results is clearly illustrated by our regional performance for the quarter with much better performance in warmer weather regions.

Our ecommerce business continued to be strong increasing 28% year-over-year to a 149 million with a lots of future growth opportunity. Ecommerce penetration increased to 12.1% of total sales versus 9.7% last year. Moving down the income statement, gross margin was $688 million or 54.3% of sales. This compares to last year's adjusted gross margin of $662 million or 53.5% of sales. The increase in gross margin rate compared to last year was driven by rate improvement across four of our five brands and mark down timing of Lane Bryant and Catherines, partially offset by increased mark down to Justice well prior to clear fall and holiday inventory as we entered the spring.

Total Q2 buying, distribution and occupancy costs were $232 million or 18.3% of sales compared to last year of $198 million or 16% of sales. The increase as a percentage of sales is due primarily to our investments in merchandising and design functions across multiple brands increased freight and fulfillment costs supporting strong e-commerce growth, and investments in store fleet growth at Justice and Maurices. Roughly 1/3rd of the rate increase versus LY is due to prior year favorable expense timing differences.

SG&A was $355 million or 28% of sales compared to last year of adjusted SG&A of $349 million or 28.2% of sales. The increase in SG&A dollars versus last year was driven by primarily by increased marketing and ecommerce spend as well as headcount growth of both the brands and the shared services growth to support future growth. As we look to our fiscal ’15 and ’16 we expect to generate savings in SG&A from planned overhead reductions.

Adjusted Q2 operating income results by brand fully loaded for corporate overhead costs were as follows, Justice operating income decreased to 50 million or 11.5% of sales mainly due to soft traffic and mark downs required to clear inventory. Lane Bryant came in with an operating loss of $2 million compared to a loss of $15 million in Q2 of last year. We’re pleased with the margin in profit improvement as a brand for the fall season and Q2 and believe there is still significant margin upside for this brand in the future.

As I’ve mentioned on prior calls Lane Bryant had a shift in required markdown timing that increased gross margins in the range of 300 basis points in the quarter versus LY. Maurices' operating income decreased to 25 million or 9.8% of sales. The brand had strong gross margin performance of margin dollar growth of 10% and total sales growth of 4%, this performance was by increases in BD&O and SG&A from planned investments in e-commerce and design along with unit growth.

Dressbarn came in with an operating loss of $14 million compared to a prior year Q2 loss of 25 million. The brand realized significant gross margin rate improvement versus LY due to continued improvement in inventory management with gross margin dollars up almost 15% on a 1% increase in net sales.

Q2 is traditionally dressbarn’s lowest volume quarter with a majority of it's business done in the spring. Catherines operating income was 1.5 million or 1.9% of sales representing significant improvement versus last year’s Q2 loss of 3 million. Catherines continued to deliver strong operating results with top-line growth and margin rate improvement driven by strong fashion execution. As of Lane Bryant, Catherines had a shift in required mark down on timing that favorably impacted Q2 margin rates. The company’s effected income tax rate for the second quarter was 3.9% well below the assumed rate we use in providing guidance. This difference translated to approximately $0.03 per share of EPS favorability for the quarter.

Favorability was driven by a revised full year earnings estimate along with the impact of an increase in permanent international investments.

Turning to the balance sheet we ended the quarter with a 170 million in cash and cash equivalents, of this amount approximately 150 million is overseas. We ended the quarter with long term debt of a 131 million. Total inventory cost was 541 million at the close of Q2 up 9% versus last year. However on an average store basis our unit inventory was up single digits versus last year. Across all the brands soft sales in January were a contributing factor to higher than expected end of quarter inventory. The increase was concentrated in Justice, Lane Bryant and Maurices with Catherines flat and dressbarn down versus last year.

The drivers of the increase in Justice dollar inventory balance included higher cost products, the Brothers in Canadian market expansion and new store growth. On a unit basis after adjusting for those factors Justice inventory was up low single digits versus last year at the end of the second quarter.

Increase in Lane Bryant inventory was primarily related to an increase in the mix of higher ticket fashioned product. Average store unit inventory for Lane Bryant at the close of Q2 was up low single digits versus last year supporting planned Q3 sales comps. The increase in Maurices Q2 inventory is primarily related to earlier timing of receipts to support spring selling in part from the heavier mix of vertically sourced longer lead time products.

Overall we’re comfortable with the level of prior year season carry over inventory that all of our brands enter in Q3. In addition we’re positioning inventory conservatively for Spring, with total receipts down versus last year and our revised guidance reflects increased mark down assumptions to ensure that we achieved targeted inventory levels at the close of our fiscal year in July.

CapEx for the quarter was approximately 120 million which includes investments in the major multi-year projects we noted previously including the centralized distribution facilities and the ongoing IT transformation. Our fiscal ’14 CapEx estimate is up slightly to a range of 475 to 500 million with the increase coming from investments in international sourcing office and IT and supply chain investments. In terms of year-to-date unit development we have opened 87 stores and closed 72. Regarding our overhead savings and synergy initiatives we’re on track to achieve combined 2014 overhead and synergy savings on 18 million or more for the year. We remain confident that our cumulative long range savings from overhead reduction and synergies will total over 95 million through 2016.

We’re reducing our EPS guidance for 2014 to the range of $1 to $1.05 per share reflecting challenging season-to-date performance across all our brands, and what we believe is an appropriately conservative year of sales for the remainder of the spring season primarily at Justice.

Our revised guidance is based on the following assumptions on a full year basis. Low single digit total comp growth, net new store growth in the range of 50 to 70 units, operating income margin of roughly a 130 basis points below last year and a full year effective tax rate of 36%.

That concludes my financial comments and now I will open up the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from Neely Tamminga of Piper Jaffray.

Neely Tamminga - Piper Jaffray Companies

David, could you tell us a little bit more in terms of the timing of the right sizing of these receipts. I mean are we, the contraction of the guidance overall for the full year will really kind of rest more in the Q3 timeframe for you guys and maybe relatedly what was your expected inventory levels to be tracking towards the end of Q3 and Q4. Thanks.

David Jaffe

Yes the take down in guidance is the majority of the takedown is in Q3. I think we see the management down of receipts occurring through the end of the third quarter as we head through the key Easter selling period through the end of April, I think we will still see a little bit of that adjustment in the fourth quarter of the bulk of it will be in the third quarter.

Neely Tamminga - Piper Jaffray Companies

And one quick follow-up, the status of today on the DC, can you mention that you guys are online here with the Aetna and the Greencastle facilities. Could you just give us a sense of, a little more granularity, a little bit more as to which division are running through this?

Dirk Montgomery

The NS [ph] system is up and running the two brands that were there prior dressbarn and Lane Bryant got transitioned over pretty seamlessly and then just this week we’re bringing Catherines up and so far so good. We’ve received all the goods from Greencastle into Aetna and now we’re just beginning to ship out Catherines from Aetna, so far so good on that as well. We will be bringing in Lane Bryant in about a month and then just to the seasonality we will be bringing in Maurices which should be the last brand early fall. On the Greencastle side once we move Lane Bryant out in about a month that facility will be clear and we’re going to start transition that very quickly to an ecommerce fulfillment center so that will be done the end of March with the first shipments going out roughly around the first week in April and again we will be going in brand by brand with the first brand Catherines followed by Lane Bryant a month or so and then the other brands falling in over the next 6 to 12 months at least. So far so good.

Operator

Next question comes from Oliver Chen with Citigroup.

Oliver Chen – Citigroup

As we model the rest of the year, how should we think about the gross margin? Is there is any timing issues in terms of the markdowns and the retail method? Also, where do you think that penetration of e-commerce should go overtime and in terms of the shopping experience as you do undergo this transitions to the new fulfillment what is the customer going to notice that difference?

David Jaffe

Well let me start with the second question, I will let Dirk come back to your first question on margins. We believe that we have to work to bring ecommerce into more what we are calling an omnichannel customer experience. So as we’re thinking about the next 2 or 3 years we’re developing a roadmap to put in a ecommerce platform internally that will host ourselves rather than use an outsourced third party provider as we do now with all of our brands. This will then tie into our own ecommerce fulfillment and at the same time we wanted to tie into the stores. So even today some of our brands if you walk into the store and if we don’t have the products you can order online from the store and then we can deliver it to your home or to the store.

So our challenge is to continue to make that as seamless as possible and create a better customer experience for our customers in all the brands and as we look at our brands you may recall ecommerce penetration is about 17% or 18% at Lane Bryant where dressbarn is much newer to ecommerce it's still in the single digits. So our five brands are at different levels of maturity and have different capabilities but over the next 2 to 3 years you will hear us talking more and more about the investments we’re making in ecommerce and in this omnichannel customer experience.

Dirk Montgomery

Oliver, we expect our gross margin rates actually to be slightly higher in Q3 versus Q4 as we had through the remainder of the year. On an overall basis we actually for the total spring season we actually expect our gross margins to be relatively stable versus last year in total.

Oliver Chen – Citigroup

And do you think that the volatility in the marketplace, that we’re witnessing January and February will continue as we get into spring or do you feel like the customer is on more firm footing?

David Jaffe

I think that we’ve gotten a lot of noise in the numbers over the last two months and while we even heard Janet yelling Friday in her testimony to Congress say that it was due to weather and things aren’t as bad as they seem. It's unclear to me as much as I would like to be bullish about the spring it's unclear to me whether or not we have truly come out of both the winter, the weather front whether the economy has improved for consumer discretionary or we’re still on the durable trend or there is a little bit of hangover still going on. So while I think we’re well positioned and I would like to be bullish, I think we need to see some good weather and the next couple of months as we go into what we’re calling Marple. I think will be a big determinant as to what the customer is really seeing.

Operator

Next question comes from Anna Andreeva with Oppenheimer.

Anna Andreeva - Oppenheimer

So a couple of questions, just a bigger picture question on Justice I guess this is now the second quarter, you’re taking expectations down on this division and the rest of the portfolio is actually pretty resilient, so maybe talk about some of the initiatives to course correct. At this division are you seeing new entrants in the tween space? You obviously commented that fashion is doing well so I guess we’re losing some of the basics customer to big boxes. Is there may be a way to cut back on that basics investment? And then on the inventory side still look high at Justice. I guess at what stage can we expect inventories to be more in-line with comp run-rate and then second just what drove that buying an occupancy increase in the second quarter? Is there anything kind of one time with investments and how should we think about that line item for the rest of the year?

David Jaffe

Let me focus on Justice first because there is a lot going on at Justice and part of it is based on what we’re seeing in the marketplace. We’re not seeing new entrants, we’re seeing some of the big guys like Walmart become more important as consumer has migrated to them in more greater way than the past year just based on price and that’s why we said in the comments that the core product was struggling. So what we believe is that the customer basically said, I don’t need to go to Justice for core I’m going to go to Walmart. And so that’s why one reason we saw that the business slowdown. There is significant price sensitivity out there and I would argue that it's not just the tween shopper, I think we’re seeing it throughout that whole tween customer and certainly we have already the transfers [ph] in some of our other retailers in that world, in that space.

So, what we’re trying to do is breakdown the business challenges into two parts. One part is merchandising and while the business is clearly has been soft we think it's not being in the fashion part, we have had pretty good results there, good response to our fashion both over the holiday but as well as we look forward to spring overall, the response has been very good. The challenges has been the more basic product as we discussed and so the merchants are working on that now to differentiate it in a stronger way from the more commodity offerings of the Walmart’s and targets of the world.

So that’s a work in progress, and while I’m not sure we’re going to see much of an impact on that for early spring by back to school we hope to have addressed that. Finally the other side is the promotional cadence and so what we’re doing here is trying to look at what’s worked for us and what haven't. So we’re testing a 50 off promo, a little bit more you will see that come up again, we will be doing more of the 40 plus 20 but we’re only looking at about 12 incremental days this spring and it's primarily in the Marple timeframe because that’s where we have got the biggest opportunity.

We also are readdressing our Jbucks loyalty program. It really was not driving any incremental sales because when it overlapped with the 40 plus 20 the flash sale that was actually a better deal. So there is a lot of learning to go on in terms of promotions, clearly the customer has voted that she needs to see a very, very attractive price and so we will continue to figure out ways to give it to her in a manner that she likes.

In addition we are looking for other promos, as you may recall on the fall we did a tie in with McDonald’s Happy Meal so we will do some other things like that that can attract new customers to our stores. So I think that’s a good overview now I will turn over to Dirk.

Dirk Montgomery

Sure just one comment on the Justice inventory, I think you’ve mentioned that as well. Justice spring receipts are planned down high single digits for the spring season. So I think that we expect by the end of the season not only is there other receipts planned conservatively in the season but I think by the end of the season they will also have a conservative position. The fashion basics receipts are actually below that. As it relates I think your last question was what were the drivers or the elements of the BD&O increase? Roughly a little bit less than half of the increase was due to occupancy, a large part of which is due to new stores. About a third of the increase is due to what really is a timing difference and expense last year in the second quarter we had unusually low level of BD&O as a result of some acquisition related adjustments that were made actually another quarter so that ended reducing the adjustments ended up reducing the LY Q2 expense. So there is a percent of sales that 16% of sales from last year was unusually low. The rest of the increase is spread across DC and logistics expenses and buying. On a full year basis we’re expecting essentially total BD&O dollars to be in line with what we had planned at the beginning of the year.

Many of those investments were either centered around growth in areas like ecommerce or due to new stores. So we feel like those are the right long term investments for the business. Because of lower overall sales level we’re going to see some deleverage of BD&O as a percent of sales probably somewhere in the range of 50 to a 100 basis points on a full year basis versus last year.

Operator

Next question comes from Scott Krasik with BB&T Capital.

Scott Krasik - BB&T Capital Markets

Just a couple of questions, first what is your comp assumption for Q3 implied in the guidance versus Q4?

Dirk Montgomery

It is general level, we’re expecting low single digits for the remainder of the spring season. As David said we’ve been off we’re off to a slow start so far season to-date, comps have been down. I think the big change here for us relative to our prior guidance is back in early fall we were still providing guidance of low signal digit plus comps but we have now our expectations are now in the lower end of that range and in the higher end and that’s really the big difference in the comp expectation as we head in the spring but we do expect as the weather turns if our early reads in warmer weather regions are correct which is difficult because it's still early. We’re expecting to see positive comps across the brands the remainder of the spring season with Justice flat up slightly.

Scott Krasik - BB&T Capital Markets

Okay and then I guess 50 off is better than 52 off. David you’ve evidence yet that these BOGOs are more successful than the 40 plus 20 right now?

David Jaffe

You mean the bounce back?

Scott Krasik - BB&T Capital Markets

You ran the BOGO, the buy one get one free the 50 off. So I thought maybe you’re seeing evidence if that’s more effective than 40 plus 20.

David Jaffe

What I was referring to wasn’t the BOGO, it's a pure 50 off the entire store. I think there is different appeal for both of them.

Scott Krasik - BB&T Capital Markets

Okay. In terms of Justice operating margins for the rest of the year, are there any other major impacts of the gross margins are going to be more normalized because of the fewer days that we’re not thinking of that or should we start to see healthier operating margins in Justice?

David Jaffe

Sure. So if we achieve the assumed sales levels that are reflected in the guidance we expect gross margin rates to be much more stable relatively stable versus last year for the entire season. So I think the answer is yes. In terms of overall operating income because of their slow start we’re expecting operating income in aggregate to be below last year for the spring but our gross margin rate should be stable.

Scott Krasik - BB&T Capital Markets

And then just last, when do you expect Brothers to be accretive or in-line with margins that you’re generally adjusting?

David Jaffe

It's going to take a while, the volume at Brothers is still such a small fraction of Justice that to give the volume that will enable us to get the same margins it will take a lot, remember it's incremental volume so we see it becoming accretive this year on an overall basis.

Scott Krasik - BB&T Capital Markets

Still fiscal ’14 or calendar 15?

David Jaffe

Spring season we expect it to be accretive.

Operator

Next question comes from Eddie Yruma with KeyBanc.

Eddie Yruma - KeyBanc Capital Markets

One last question on Justice I guess conceptually you have said in the past that you were being promotional to try to remain top of the mind of the consumer, how do you think about kind of market share in that space and whether you would be willing to seed some market share to lose some potential on profitable business. And then two with Lane Bryant you’ve had a strong sales trend for a number of quarters, how do you feel that inventory level is there and are you meeting the demand for the product? Thanks.

Jean-François van Boxmeer

So I think the market share versus profitability is a really good question, if you go back just a year we had very good profitability and high market share so I don’t think they are necessarily exclusive at, I think the market is going through a bit of tough time right now. So we don’t want to lose share of market. We got to be competitive and yet we also want to make sure that we’re continuing to build the integrity of our brand so we can maintain our margins over the long term.

So I think it's advance but I think we’ve to be reactive to the consumer, the challenges we’re seeing right now in the environment but at the same time I do think that we have a unique niche that will enable us to both hold on to market share and to get a premium margin long term.

Dirk Montgomery

And Ed as far as inventory goes at Lane Bryant I do think that we feel comfortable with their inventory actually being well positioned. As I mentioned in the prepared comments the close of the second quarter was up low single digits versus last year, however Lane Bryant is restoring [ph] their inventory investment to their growth categories including active and wear to work and they are actually decreasing their inventory in some of the more basic categories. So they are doing a very good job optimizing their inventory mix to invest in growth category. So I think we feel pretty good about that.

Operator

Next question is from Taposh Bari with Goldman Sachs.

Taposh Bari - Goldman Sachs Group

Just a question on February as a percentage of the third quarter, how big is the month?

David Jaffe

Small. Dirk is scrambling to get the numbers we can get it to you afterwards but first it's a four week month, of course March is a five week month but it's significantly smaller than the other two months, so do you have another question, we will let them to try and figure that out while we…

Taposh Bari - Goldman Sachs Group

Sure the other question I’ve is no shared repurchase. So haven't heard you talk about share buyback in a while and you mentioned it a couple of times in the back half of last year I’m curious get your comment what it's going to take for you to start buying back some stock in some of these cyclical pressures?

David Jaffe

I don’t have a strong inclination to buy back stock in this environment both because I’m not sure where your fashion especially retail environment is going in the next 6 to 12 months and I’m not comfortable getting an aggressive buy back program started while we still have debt outstanding. So I’m saying at the right price we wouldn’t be buyers clearly we have always said we’re opportunistic buyers but the inclination right now because of the uncertainty, this will all come out tomorrow I’m sure we just haven't seen it. So it's tough to see a very bullish when, we’re seeing the kind of results that we’re seeing obviously it's no fun to be talking to and reduce our guidance for the second time in two calls.

Dirk Montgomery

And February is definitely the lightest month of the quarter. Historically it's been in the range of 25% of our total sales for the quarter so it's if we’re going to have a soft month that’s definitely the month to do it unless in terms of growth.

Taposh Bari - Goldman Sachs Group

Just one point of clarification, did you say Justice is going to be down a high single digits or Justice inventories are down high single digits in dollars or was that a different metrics?

David Jaffe

It was units, sorry.

Taposh Bari - Goldman Sachs Group

Okay well what will that be in dollars?

David Jaffe

Let’s see it's actually high single digits for both. So we can get specifics back later as a follow-up.

Operator

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

Susan Anderson - FBR Capital Markets

Well on the SG&A impacts will that offset the synergy benefit and then real quick on the CapEx increase, is that something that was pulled forward for next year?

Dirk Montgomery

So the SG&A increase in the aggregate for the quarter was about $6 million, the components of that were largely marketing and ecommerce in terms of the increase. Our planned overhead savings that I referenced in the prepared comments that we expect in ’15 and ’16 should more than eclipse that quarterly increase if that’s your question Susan?

Susan Anderson - FBR Capital Markets

Also for the rest of the year too like how should I think about the offsets there?

David Jaffe

Similar to BD&O our overall dollar plan for SG&A is relatively consist with what we had laid out at the beginning of the year due to a lower sales level we’re going to see 50 to 100 basis points of deleverage in the SG&A line as a percent of sales versus last year. However as we head into 15 and 16 and we realize the benefits of the overhead reductions that we have planned that certainly will help us further leverage SG&A in the future. So we will have more specifics on that as we get closer into ’15 and sorry Susan could you repeat the second part of that question?

Susan Anderson - FBR Capital Markets

And then just the CapEx increase is that something that was pulled forward for next year?

David Jaffe

No it really was somewhat opportunistic, we had an opportunity as we combine our sourcing operations as part of the overall integration with Charming and Ascena. We had an opportunity to invest in billing space to combine our Hong Kong offices which we hadn’t really planned at the beginning of the year but economically it makes sense because we will be avoiding a pretty significant rent expenditure in the future and then the other expenditures related primarily to additional investments in IT and the DC and logistics reconfiguration.

Susan Anderson - FBR Capital Markets

Got it and then just the last question, I know you guys are working really hard in getting omnichannel feature implemented at all of your brands, maybe if you could give us an update there just on where you’re at with bringing ecommerce in-house, ship from store, et cetera.

David Jaffe

So we have got, just put initiatives at different brands but overall as I mentioned earlier we’re bringing ecommerce fulfillment in-house and now start this spring and we will be bring in one brand after another with the final two brands being early in calendar Q1, ’15. At the same time we’re working to develop our own platform which will start bringing the brands up on next year and then we’re looking depending on the brand, at different initiatives some stores already do have AOS associated ordering systems in the store and we will be looking to develop more of the omnichannel experience as I mentioned earlier.

Operator

Next question comes from Steve Marotta with CL King & Associates.

Steve Marotta - CL King & Associates

David you mentioned that you expect about 12 additional sales event days at Justice during the spring season. Can you quantify those days in the second quarter and also do you expect Lane Bryant to be the strongest comp in the second half of the year? Could that be mid upper single digit comp? Thank you.

David Jaffe

The number of flash sales we did in the fall versus LY was up 28 days and we’re looking to be up 12 days in the spring. So but we’re also adding as I mentioned, we’re also we will be testing 50 off a little bit more than we tested it in the fall, so little bit of a shift as we said just to try and see which one is most effective and then on the second part about Lane Bryant we’re very bullish on Lane Bryant and think it should have a strong spring in, I’m not sure that we’re going to sit here and pick which one is going to be strongest but we’re optimistic about it's outlook for the spring.

Operator

Next we have Mark Montagna with Avondale Partners.

Mark Montagna - Avondale Partners

The lower EPS guidance for really the second half, is that almost exclusively related to Justice that sort of seemed like.

David Jaffe

Well it's not exclusively but remember we have actualized February and I think we have been shy about telling you it's been a little bit challenging and early March and so our outlook is based on actualizing that as well as our kind of trued up perspective on the rest of Spring which certainly is influenced by our conservative view on Justice versus our original guidance but I wouldn’t say it's exclusively Justice.

Mark Montagna - Avondale Partners

And then operating cost on new stores you’ve mentioned that those were up, can you explain why those were up?

Dirk Montgomery

Sure. Sorry Mark maybe we were a little unclear, as it relates to BD&O we were comparing, we just had mix issues but the operating cost are necessarily higher on our new stores. We may have some mix drivers that we will have to check into and I can get back to off line on that. Some of it's also a function of the number of stores and the timing of the new stores because the cost, the rent dollars et cetera to the extent that we have more openings earlier in the year that would drive up the expense before the revenue ramps up. But we will get back to you with more specifics on that offline.

Mark Montagna - Avondale Partners

And are you saying, are you referring to perhaps more of one chain versus less of another and does any of this have to do with Canada versus U.S. store openings?

David Jaffe

We don’t believe it relates to Canada but we will check into that and get back because really the bulk of the openings are actually domestically.

Mark Montagna - Avondale Partners

Then last question, you guys were looking at adding more plus size merchandize into Maurices perhaps expanding that square footage within the store. Can you just bring us up-to-date on where you’re with that? Is it completed and just kind of what’s happening there?

David Jaffe

I’m not exactly sure what you’re referring, I will pass over to Dirk he may have a better recollection but what we have done and what we will continue to do is feed the business and grow it as the customer demands it. So that business has grown very nicely since we first introduced it about five years ago and we see nice comps, that overall have outpaced our regular comps. So with our new store layout we have it as a little bit more flexibility to allocate more space to plus and I think overtime we will see a little more space allocated but don’t get the wrong impression that it will ever be 50-50. Dirk do you want to add anything to that?

Dirk Montgomery

No that’s correct, my recollection is that we have been restoring [ph] inventory to the plus on plus assortment because it's been paying off in terms of growth in sales but not necessarily a significant increase in the amount of store space dedicated to that assortment.

Operator

Next question comes from Mike Richardson with Sidoti.

Mike Richardson - Sidoti & Company

I apologize on the first if I may have just missed the answer to this question but the uptick in new store openings versus original guidance, you’re going to be focused on which brands and then if you can just give us the total store count at the end of the second quarter and what you’re projecting at the end of the third quarter that will be helpful. Thank you.

David Jaffe

Yeah we will get back to you on that, generally speaking the mix of new stores is centered the large majority around Justice and Maurices. We will get back to you on the specific store counts and any changes and mix.

Operator

Okay. And we have no other questions so I will hand the call back to David Jaffe for any closing remarks.

David Jaffe

Thank you. Just a few comments I would like to make, as we look towards the remainder of this year and into future we’re focused on addressing issues we have identified and at the same time continue to realize our growth opportunities. We feel very good about our ability to achieve our longer range strategic plans and continue to make progress on those major initiatives including our synergy initiatives which will position with business for long term growth. Our leadership team shares a compelling vision for the future. We’re looking forward to demonstrating that we can grow our top line and improve efficiency and consistently generate superior shareholders returns.

Thank you for your interest in Ascena and have a good evening.

Operator

Thanks everyone for your time and your participation. Enjoy the rest of your week.

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