Pacific Sunwear of California, Inc. (NASDAQ:PSUN)
Q4 2013 Earnings Conference Call
March 18, 2014 04:30 PM ET
Craig Gosselin - Senior VP, General Counsel and Head of Human Resources
Gary Schoenfeld - President and CEO
Michael Kaplan - SVP and CFO
Edward Yruma - KeyBanc
Dorothy Lakner - Topeka Capital
Jeff Van Sinderen - B. Riley
Dave King - Roth Capital
Andrew Burns - D.A. Davidson
John Morris - BMO Capital Markets
Marni Shapiro - The Retail Tracker
Justin Ruiss - Sidoti
Maria Vizuete - Piper Jaffray
Good afternoon. My name is Christine, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q4 2013 Earnings Conference Call. I would now like to turn the call over to Craig Gosselin.
Good afternoon and welcome to the Pacific Sunwear California conference call announcing our fiscal fourth quarter and full year 2013 financial results. This is Craig Gosselin, Senior VP, General Counsel and Head of Human Resources.
This call is being recorded, and the playback will be available starting today, approximately two hours after the call through midnight on March 25, 2014. It can be accessed at (855) 859-2056, or (404) 537-3406, passcode 8519739. The call will also be archived on our website at pacsun.com through midnight on May 28, 2014.
Your speakers today are Gary Schoenfeld, Chief Executive Officer; and Michael Kaplan, Chief Financial Officer. Today's call will be limited to one hour, and questions will be limited to one per participant. Before I turn the call over to Gary, I'd like to note that statements and discussions during today's call will contain forward-looking information about our future financial performance and prospects. Our actual results could differ materially from those contained in our forward-looking statements. Risks and uncertainties that could cause our business and financial results to differ materially from those in the forward-looking statements are included in our fiscal 2012 Form 10-K and in subsequent filings we made with the SEC, as well as in the earnings press release we issued today. These documents can be found in the Investor Relations section on our website at pacsun.com. All information discussed on the call today is as of today, March 18, 2014. PacSun undertakes no duty to update this information to reflect future events or circumstances. This call, the webcast and its replay are the property of Pacific Sunwear. It is not for rebroadcast or use by any other party without the prior written consent of PacSun.
With that said, I'll now turn the call over to Gary.
Good afternoon, everyone, and thank you for joining us on our Q4 2013 earnings call. I would like to start off by saying we are pleased with what we have accomplished in fiscal 2013 and are looking forward to carrying that momentum forward into this next year, tied to four key pillars of our overall strategy.
First has been our commitment to showcasing distinct brand identities derived from the best of brands that are inspired by the streets, the beaches, the skate parks, music, art, and culture that lives across the state of California. Second is to be a leader in anticipating and recognizing the fashion trends that emerges from our backyard and translate them to the marketplace with the expediency that today’s digital world now requires.
Third is to bring the creativity, diversity and optimism that is quintessentially California to every consumer touch point through our Golden State of Mind platform. Fourth is to continue to build the top talent organization across the country that similarly thrives on creativity, fashion, and a relentless desire to be the best. I believe we executed on these four pillars during the year, and we'll remain focused on these priorities in fiscal 2014 and beyond.
With these key drivers in mind, let we now speak to our fourth-quarter and full-year results. Total sales on a continuing operations basis for Q4 were $219 million versus $223 million with a plus 2% sales comp and for the year were $798 million versus $785 million, also with a positive 2% comp store sales increase. Adjusting for the 53rd week retail calendar shift, sales improved $5 million in Q4 of this year and $21 million for the year compared to fiscal 2012. Overall, throughout the year with consecutive positive comps, Q4 marked our eighth straight quarter of positive comps. In addition E-Comm was up 8% in Q4 and 6% for the year.
Both GAAP and non-GAAP EPS for the quarter were flat last year at minus $0.32 and minus $0.17 respectively. Excluding the 53rd week which added a 14th week to Q4 in 2012, our Q4 2013 results would have shown a $0.03 improvement on a non-GAAP basis. Overall, I continue to be encouraged by our results and our progress and growth, particularly in light of a rather challenging and promotional retail landscape.
Turning to our Men’s business, I've had confidence in our Men’s theme throughout the year and was pleased to see the progress with a positive comp in the fourth quarter. We continue to make great progress toward creating what I believe is the most coveted brand portfolio which translated to strong performance in our emerging brands, combined with continued momentum in footwear and accessories. Added to this, we were one of the first to see jogger pants as an exciting new trend and I believe we are well on our way toward achieving our goal of being a 17 to 24 year old guy’s first choice for great brands and on-trend merchandising.
On the Women's side, we had a flat comp for the fourth quarter in what was otherwise a very strong year with a total comp of 6%. In Q4 continued strength in women’s tops was offset by softness in Denim and non-apparel. But for the year as a whole, I believe we are winning with a more fashion savvy 17 to 24 year old customer by leveraging our speed to market and bringing in new and exciting brands such as Kendall & Kylie and Brandy Melville, as well as working closely with several of our men’s emerging brands. The introduction of these brands to our stores in both genders as well as to several in store events, as well as great opportunities on social media is helping further differentiate PacSun in a rather crowded market.
Another highlight for us in 2013 was the opening of our first pop up store this past summer in the heart of SoHo on Broadway in Lower Manhattan. As we’ve discussed before, our primary objective was to showcase the best of PacSun and our industry at one of the world’s most influential fashion and shopping destinations. Having been in New York, it continues to get talked about and I think from all of the feedback that we've received I'm confident in saying that we achieved these objectives and I believe raised the bar within our industry.
Stepping aside from the core business for a moment, as we begin this New Year we’re also excited to announce our partnership with Free the Children, which is a nonprofit organization created to bring awareness and activation amongst teens in developed countries regarding the tremendous challenges of poverty around the world.
The goal of this organization is to provide sustainable solutions through access to schools, clean water, healthcare, commerce and agriculture. Craig Kielburger, founder of this unique organization almost 20 years ago at the age of 12 has been featured on 60 Minutes, testified on Capitol Hill and recently inspired our headquarters’ employees while in our office with his passion and dedication to changing the lives of those less fortunate. I first met Craig six months ago and we’re very excited now to work with him and his amazing organization and look forward to sharing more about the positive impact we can make in the months and years ahead.
I will conclude by saying that we are excited about the leadership position that we are reestablishing for PacSun. We remain focused on the business absolutes within our control that will hopefully continue the positive momentum and turnaround of our business. We have increased sales through new and exciting emerging brands. We're also cultivating our relationships with great heritage brands.
We are continuing to develop and define the creativity, diversity and optimism that represents the California lifestyle through our Golden State of Mind brand positioning. We are enhancing the customer experience through intense focus on better selling and elevated talents in our stores and lastly we see the opportunity of better leveraging our digital, social and mobile channels as another critical dimension to strengthening our emotional connection with our customers.
From a financial perspective, our goals remain to continue our focus on driving positive comp store sales and gain market share and increasing our merchandised margins through improved inventory managements, store clustering and trend-right merchandise while maintaining our discipline in controlling expenses.
I will now turn the call over to Michael.
Thanks, Gary and good afternoon everyone. Today I will discuss our Q4 2013 operating results, our full fiscal 2013 operating results, the impacts of the 53rd week calendar shift on both our quarterly and full year results and then close with comments on our Q1 2014 outlook.
Our fiscal 2013 fourth quarter financial results were as follows. Total net sales from continuing operations were $219 million for the fourth quarter versus $223 million for the same period last year. Comparable store sales increased 2%. As a reminder we’re now including online sales in our comparable store sales data. The 53rd week calendar shift resulted in a decrease in Q4 13, net sales of approximately $9 million as there were only 13 weeks in the fourth quarter of fiscal ’13 versus 14 weeks in the fourth quarter of fiscal ’12.
Average unit sales for the quarter were flat while total transactions were up 3%. E-commerce sales increased 8% in the fourth quarter of ’13 versus fourth quarter of ’12. Gross margin as a percentage of net sales was approximately 20% compared to 21% for the same period last year. However adjusting for the 53rd week calendar shift gross margin increased 50 basis points, compared to the same period last year with approximately 30 basis points attributable to Merck's [ph] margin and 20 basis points to the leveraging, buying and occupancy costs.
Total inventory was down approximately 6% on a comparable store basis. SG&A expenses were approximately $58 million or 27% of net sales for Q4, which decreased from 28% for the same period a year ago. Adjusting for the 53rd week retail calendar shift, SG&A expenses decreased 130 basis points compared to Q4 last year. We recorded income taxes of $0.3 million for the quarter. On a GAAP basis we reported losses from continuing operations of $22 million or $0.32 per diluted share for both Q4 2013 and Q4 2012. The Company’s operating loss for the fourth quarter of fiscal 2013 was flat to last year of $15 million.
On a non-GAAP basis excluding the financial impact of our derivate liability and using a normalized income tax benefit of approximately $6.3 million, we also came in relatively flat through last year reporting losses from continued operations of approximately $12 million or $0.17 per diluted share in Q4 2013 and Q4 2012. The current quarter diluted share basis is based on approximately 69 million weighted average common shares compared to approximately 68 million weighted average common share last year. Adjusting for the 53rd week retail calendar shift non-GAAP EPS improved by $0.03 per share as compared to last year.
During the fourth quarter, we closed 17 stores for a total of 30 store closures for the year. We ended the quarter with a total of 618 core and outlet stores versus 644 a year ago. Looking ahead and consistent with this past year, we continue to evaluate individual store performance as leases come to their natural lease expiration and internal weathers is advantageous to extend those leases. This evaluation process could lead to the closing approximately 10 to 20 stores during fiscal 2014.
I will now provide comments on our full year 2013 results which have been reporting on continuing operations base. Total net sales from continuing operations were $798 million this year, versus $785 million last year, primarily driven by our plus 2% same-store sales increase over the prior year. This marks the second consecutive years and eighth consecutive quarter we have achieved positive comps. Adjusting for the loss of 53rd week, net sales increased approximately $21 million or $0.03 in the current year, compared with the same period a year ago. Average sales were up 1% and total transactions were up 2%.
E-commerce sales increased 6% in fiscal 2013 versus 2012 and represented 7% of total sales. Gross margin as a percentage of net sales was approximately 25%, which was flat for the year. Adjusting for the 53rd week calendar shift, gross margin increased 20 basis points, all of which was attributable to merchandised margin. SG&A expenses were approximately $221 million or 28% of net sales for 2013 as compared with $235 million or 30% of net sales for 2012. We continue to actively manage our class base and remain pleased with how these trends align with our declining store count.
We’ve recorded income taxes of $0.8 million for fiscal year. On a GAAP basis, we reported a loss from continued operations for the year of $47 million or negative $0.69 per diluted share, compared to a net loss of $53 million or negative $0.78 per diluted share for the prior year. Including the loss from continuing operations for fiscal 2013 was a noncash loss of $11 million or negative $0.15 per diluted share related to our derivative liability compared to $6,000 loss or no EPS impact for the same period a year ago.
The Company’s operating loss of fiscal 2013 was $21 million, as compared to $38 million in fiscal 2012. On a non-GAAP basis, excluding the financial impact of the derivative liability and using a normalized income tax benefit of approximately $12.5 million, we reported a loss from continuing operations of approximately $23 million or a negative $0.34 per diluted share versus a non-GAAP loss of approximately $33 million or negative $0.49 per diluted share last year.
Adjusting for the 53rd week retail calendar shift, non-GAAP EPS improved by $0.17 per diluted share or 35%, as compared to last year. This favorability was a direct result of delivering a comparable store sales increase of 2% for the year and managing our operating costs while sustaining margins.
I will now shift gears and focus on our Q1 2014 financial outlook. I’m glad to finally be providing guidance without discussing the 53rd week impact. We're approximately halfway through the first quarter of 2014 in terms of number of days, but the peak spring break selling weeks are still ahead of us. Our guidance range for Q1 ’14 contemplates a non-GAAP loss per diluted share from continuing operations of between negative $0.17 and negative $0.12.
Our forecasted first quarter non-GAAP guidance range is based on the following assumptions: Comparable store sales from 1% to 4%; net sales from $169 million to $174 million; a gross margin rate, including buying, distribution and occupancy, of 25% to 27%, compared to 25% last year; SG&A expenses in the range of $54 million to $55 million; and applicable non-GAAP adjustments or tax effected using a normalized tax rate. Our guidance for non-GAAP loss per share from continuing operations also excludes the quarterly impact of any change in the fair value of the derivative liability due to the inherently variable nature of this financial instrument.
Operator, we will now open up the call for questions.
(Operator Instructions). Your first question comes from Betty Chen with Mizuho Securities.
Actually, it’s Alex Sam [ph] on for Betty. So my question is on the competitive environment. Just wondering what the team is thinking in regards to the promotional landscape for 1Q and maybe beyond? And also maybe to discuss where the team sees some opportunity in gross margin this year? And then Gary, you discussed some speed to market initiatives. Wondering if you could comment on any updates or progress the team has made on that front? Thank you.
We don’t have any crystal ball that tells us the competitive landscape is getting any easier but we think that there is a lot within our control and the momentum of last eight quarters that says we stay focused on the priorities that we've outlined. We’re optimistic that we can continue to grow our business, gain share and then, to your question with regards to margins; a year ago we went into 2013 saying really speed was going to be a real priority for us and we condensed the way we approached the business, and I think that has been one of the keys to why we made the progress that we did in 2013 and we think that can continue to drive importance in terms of being on trend and our ability to drive margins.
Secondly we think that we can do more in terms of turning inventory faster and we think the result of that is not only working capital productivity but more so is about really being on trend and raising our batting average so to speak with regards to products.
So the net of those initiatives and then other just getting into the weeks in terms of how do we really drive margins, looking at different store clustering and a variety of other important details, we know -- we expect at least the retail climate will still probably not be that different than it was in 2013, but we think there is things in our control that can improve our merchandised margins going forward. So we hope to demonstrate that as the year unfolds.
Your next question comes from Edward Yruma with KeyBanc.
Edward Yruma - KeyBanc
First on the guidance, just wanted to know if you had any commentary about maybe the trends you observe quarter-to-date, if you've seen an impact from whether and maybe most importantly where it has warmed up, are you seeing better performance?
As Michael indicated, we’re right in the midst of the Easter shift and that always makes things a little bit fun. But I think in short what you see in our guidance is our expectation of achieving positive comps, which we’re excited about continuing that trend and you can draw your own conclusions in terms of what we’ve seen so far in the business if we feel confident in saying that at this point in time.
So we’re encouraged by what we have seen. Yes, weather plays a factor this time of the year and suffice to say, we do see a little bit better selling when there isn’t snow on the ground. But net-net, we’re encouraged by the start to the quarter, but also knowing some key weeks as it gets close of Easter are still ahead of us. But all in off to a good start.
Your next question comes from Dorothy Lakner with Topeka Capital.
Dorothy Lakner - Topeka Capital
Just wondered if you could give a little color on performance of women’s in the fourth quarter. Obviously the teen space overall was pretty tough, but you do have some pretty interesting brands. I continue to see some new ones, Saltwater Gypsy and Penny Lane. So it seems like you keep freezing the bar on the brand. So just a little color on women’s, which was a little bit weaker in the quarter than it has been. And then last year you did the pop-up store in SoHo. Was there anything you can talk about in terms of marketing spend for 2014?
Both really good questions, I may not fully answer them to the degree you might want me to, but both are really good questions. So first with regards to women’s, overall I really am pleased with the direction of our women’s business and we’re on lunch break as we’re doing a product review right now today and I like what I see on the horizon. Underneath that, having a flat comp for Q4, as I briefly mentioned, was -- our tops business and other categories continued to be very strong in other categories being, people debate, well our dresses, tops, or outerwear tops and some of those things.
So that business continues to perform very well for us and did during the fourth quarter. But as we said at the end of third quarter, Denim continues to be a difficult business. It’s a significant category for us in Q3. It’s a large category for us in Q3 and Q4. And that was down significantly in Q4 as it was in Q3. And then the other part was just our non-apparel of footwear and accessories. I would just say in short, we haven’t executed that very well and we don’t have brands leading that as compared to our men’s business where brands like and Nike and Vans continue to perform very, very well in footwear.
We don’t have the same brand mix in non-apparel, in women’s that gives us a really point of differentiation. In the prior year, we had a better boot and slipper business than we had this year. So, candidly we got a bit of work to do in terms of fixing our non-apparel business. But aside from that, I think the bigger question is looking ahead to 2014, I think for the year as a whole, I'm still bullish about where our women’s business is going to be, although I think the softness in Denim and non-apparel that we experienced in Q4 will probably look similar in Q1.
But for the year as a whole, like I say, I am bullish about where our women’s business is headed and that gets kind of the second part of what you asked in terms of just brands continuing to add excitement to our women’s business. I think that’s accurate and those newer brands which are fundamental to what PacSun stands for, they're helping drive our men’s business and they are also helping drive our women’s business.
Your next question comes from Jeff Van Sinderen with B. Riley.
Jeff Van Sinderen - B. Riley
Gary, maybe you can just touch on -- just as a follow-up on the women’s business. How are you planning inventory in a key category like Denim as you're looking out? I know it’s still early but just wondering how you're looking at that as we get into the back to school season, which I know it seems like it’s far away but it’s really not that far? And then just overall, if you can touch on more, overall how you are planning inventory for the whole business, as far out as you want to talk, that would be a good place to start?
Well, inventory productivity remains really important to us throughout the organization and I think we have demonstrated that and we will continue to do so. At the same time, I think we're getting more and more confident in terms of being able to seeing where growth opportunities are and part of that then comes from having the inventory to support that growth. But I expect that we'll continue to be smart in terms of how we invest in inventories relative to sales expectations and sales trends and with much shorter calendars that we work towards, I continue to feel good about our ability to manage that appropriately.
In terms of Denim, from a competitive standpoint, I'd love you guys to blurt out PacSun planning to double its Denim business next fall and make some others wonder what they should be doing. I'm not going to say a lot more but I think that would probably be an inaccurate picture. So I'm not going to give away a heck of lot beyond that but it probably would be reasonable to think that we're going to be a bit cautious in our approach to Denim in the second half of the year. But I'm going to leave it at that and we will continue to manage that as we think right. But if you are returning the question say, where do we see excitements in the women’s business, I think we would point to other categories in tops, in shorts, in dresses and other drivers at this point in time.
Your next question comes from Dave King with Roth Capital.
Dave King - Roth Capital
I guess just kind of following on along the same lines, the men’s business obviously was little bit more of a standout than the women’s in the quarter and it sounds like some of that was jogger pants. But just more generally, I'm curious, what are your thoughts, Gary, on how that’s trending between large brands versus small brands and how do you see that shaking out, particularly as you start to focus more on turning inventory faster, how do you see that shaking out in terms of the ability for small brands versus large brands in that context? And then another question in terms of the merchandise margins, obviously up 30 basis points on a core basis and you talked about some of the things you are doing there. As we look out with all the things you're doing to kind of improve that, where do you see those merchant margins going and at what point should we start maybe thinking about the Company turning profitable on an annual basis? Thanks.
Good questions. And we're still going to refrain from commenting in terms of when does that magic day come in terms of profitability. But as I said in my earlier comments, it is comp store sales growth than really merchant margin improvements that are going to be the drivers that get us closer to that day. And beyond our -- the Q1 guidance that we have given not going to be more specific but I think those are the right things to continue to look at our results in terms of the progress that we’re making.
As to the first part of your question, emerging brands are continuing to grow in terms of importance in our business and I couldn’t be more pleased now four years later where PacSun sits in terms of brands embracing what we’re doing and being eager to be a part of our business both in men’s and women’s.
So again I think what PacSun stands for through our Golden State of Mind communications but then also in terms of our merchandising execution of great brands and on-trend merchandising, I think is just getting clear and clear to consumers and I think we’re being consistent in terms of the importance of that in both men’s and in women’s and the result of that is exciting opportunities with brands in both genders and that certainly remains a priority for us as we move forward.
Your next question comes from the line of Andrew Burns with D.A. Davidson.
Andrew Burns - D.A. Davidson
I had a question on SG&A guidance. It looks like it contemplates growth, year-over-year growth for the first time in a number of years. And just curious if that is indeed an inflection point and what are the small areas of growth of investment that are driving that growth?
Sure. Yes, I mean I think that we’ve tried to chip away at every aspect of SG&A that we could over the past four years as we are becoming more optimistic about the growth prospects of the business as well as looking at areas in terms of social, mobile and digital as well as how we execute speed-to-market and some of other things. There are some incremental expenses that are part of that. What I also say as a smaller note, there is a portion of healthcare that we self-insure that adjusts somewhat quarter-to-quarter and we have some visibility but that’s going to be a bit unfavorable this quarter.
So that's some of what's going on in terms of Q1 but I would say overall still being disciplined in our SG&A will continue to be a priority for us and we recognize top line growth. You've got to work hard to get it. The same is true for margin growth. So we have no intention of having SG&A get ahead of us while we continue to drive a focus on top line and margins.
Your next question comes from John Morris with BMO Capital Markets.
John Morris - BMO Capital Markets
Gary, if you want to talk a little bit about, your customer, what’s your research telling you in terms of your target customer demographic? You mentioned really going after the 17 to 24 year old customers. Is that who you are getting into the stores currently? Do you need to continue to evolve it a little bit more? And any initiatives you have in the way of marketing, any substantive changes to marketing, given the confidence that you have now in your assortment as you look out to 2014 to communicate to that customer? And then just where are we in terms of women’s as a percent of the mix and how do you see that changing going forward? Thanks.
Sure. So, in terms of our customer demographic I think we really have achieved what we set out to achieve, which was aging up to that higher teen - early 20 being the sweet spot of our customer base. So really believe our customer is -- in the middle of our customer demographic is a guy and a girl in college and we think that we’re holding them into their 20s and certainly any brand that’s generating high relevance among college age is then certainly aspirational to customers in high school. So I think the range of our customers is primarily high school into their mid-20s and it’s pretty consistent between girls and guys and we feel that the customer walking in the door is the customer that we want to be having in terms of demographic profile. So pleased with that.
In terms of mix between guys and girls, guys tends to be a bit north of 50% and girls making up the balance. That bounces around a few points here and there from quarter to quarter and that continues to be the case for us. I’ve always said since the day I got here and it’s still is true, we don’t manage the business to a certain percentage. Within that we’re committed to being successful in both genders and both being in general of equal importance but with guys at least up until now continuing to be a little bit more than half the business.
And then the last part of your question around marketing, we continue to look at opportunities in terms of how to create that connection with our customers and importantly, how to further communicate both the new PacSun versus people’s perception that could go back four, five, six, seven, eight years ago as well as the reality of PacSun being I think pretty unique from just about any other retailer in mall today. So we are selectively looking at how we can continue to do that and perhaps even put a little more behind that as we continue to see improved performance in the business overall.
Your next question comes from Marni Shapiro with The Retail Tracker.
Marni Shapiro - The Retail Tracker
Can you just talk about two quick things? When I think about the Denim business and how it was so tough, can you parse that out at all in comparison to going up against the colored Denim trend of a year ago through the fall and holiday season, almost if you took that out of the mix and then if you could talk a little bit about the success you have with Kylie and Kendall and perhaps launching a new partnership, another brand and maybe even one on the men’s side.
So I think there’re far more detailed than what we’re prepared to get into on Denim candidly, but I think it is fair to say that when you look at what was selling in Denim this holiday season, I think one overall, there was just less demand in the marketplace as a whole to -- and somewhat connected to that was, there was far more promotional pressure and so I think AURs on Denim was another contributing factor to making it difficult. And third you are correct that color and print was a plus in 2012 and there really was not a obvious replacement or substitute for that in Q' 13. So I think you’re sentiments is right.
To the second part that you asked in terms of Kendall and Kylie, Brandy Melville and some of the other brands that we’re working with in women’s and are there others in the pipeline for women’s or men’s, yes' I think I’ve been it consistent since the day I got here, although there was -- not without a few bruises at first, but the visions since I got here, and it goes back to the origins of PacSun was that’s part of our mission in life frankly -- is to be a place that celebrates both great heritage brands, but also is a place where new emerging brands that reflect the ethos of California lifestyle where they want to launch themselves once they’re ready to be in the mall and grow their businesses across the country. So that continues to be fundamental for who we are at PacSun and I think it continues to be an important driver of the growth of our business.
Your next question comes from Justin Ruiss with Sidoti.
Justin Ruiss - Sidoti
I just had a quick question on footwear and how it all performed in the fourth quarter and just kind of where do you see it going from here forward?
Well I think you’re specifically asking about men’s footwear, the branded part of our footwear business and that continues to perform very well. As we talked for some time, that business is really led by Nike and Vans in a very significant way, I will say we’re excited about adding Adidas into our mix here in spring. But even with that I think Nike and Vans will continue to be critical parts to that business and we continue to be very, very pleased with the strength of those brands and again that’s part of the old DNA of PacSun that we brought back which is a great footwear assortment with great brands and that continues to perform consistently quite well.
Your next question comes from Maria Vizuete with Piper Jaffray.
Maria Vizuete - Piper Jaffray
I’m on the line with Steph Wissink. We’re just wondering if you can help us think a little bit about the kind of operating model and how we should think about driving profitability longer term. Assuming that there’s a little left to be taken out of the expense structure, will margins expand due to mix or a higher ADC? If you can just maybe elaborate on that?
So correct is that it’s comp store sales growth and improved margins and improved margins, as I alluded to comes from both a combination of how we go about planning and executing the detail of merchandising, our assortments in our stores, it’s also about the strengths of the brands that we bring into our stores, it’s our ability to leverage our speed-to-market capabilities and the ability to attract new customers. They’re excited and all those factors together are going to be the key driving growth and also hopefully continuing to incrementally increase our merchandised margins as well.
(Operator Instructions) Your next question is a follow-up question from Andrew Burns with D.A. Davidson.
Andrew Burns - D.A. Davidson
Just a question on e-commerce, 7% of sales. I was hoping you could spend a little more time on some of the growth initiatives there to accelerate the business in ’14?
Yes, I think with us having over 600 stores around the country, it’s not the same as some others that have a smaller store count or maybe do catalogues or do other things that make their direct business a bigger percentage of sales. That being said, there are number of I’d say smaller things around execution that we believe can continue to enhance the growth of our e-com business and still not prepared to get into a lot of detail, but obviously we like others are looking at what OmniChannel retailing for the future really looks like, and as 2014 progresses, we'll have more with regards to that that we can share with you.
So more to come in terms of initiatives to support growth of e-com. I do think it can be a bigger part of our business. But first and foremost, I still do believe in bricks and mortar retail given our age customer. And I think the more that we provide a great experience within our physical stores and then support that with excellence in execution online, we can grow the total business and again I think that the overall OmniChannel perspective of integrated both online bricks and mortar, I think that’s really where the marketplace is going to move. And obviously we want to do a great job on all aspects of that.
Your next question comes from Clavin Blair [ph] with Robert W. Baird.
Just a real quick following question. Michael how should we think about the interest expense line for 2014?
Yes, it will go up consistent what it increased in 2013. So not material increases but consistent growth.
And there are no more questions at this time.
Very good. Well, appreciate everybody's interest, and we look forward to continuing to update you on our progress as we look ahead to this fiscal year 2014. So thanks very much for your time this afternoon.
This concludes today’s conference call. You may all disconnect.
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