New York & Company's CEO Discusses Q4, 2013 Results - Earnings Call Transcript

Mar.20.14 | About: New York (NWY)

New York & Company, Inc. (NYSE:NWY)

Q4 2013 Earnings Conference Call

March 20, 2014, 04:30 PM ET

Executives

Suzanne Rosenberg - Director, IR

Gregory J. Scott - CEO

Sheamus Toal - EVP and CFO

Laura A. Weil - EVP and COO

Analysts

Eric Beder - Brean Capital LLC

Neely Tamminga - Piper Jaffray & Co.

Edward Yruma - KeyBanc Capital Markets

Pamela Quintiliano - Suntrust Robinson Humphrey, Inc.

Rebecca Duval - Bluefin Research Partners

Operator

Good day, and welcome to the New York & Company Fourth Quarter and Fiscal Year 2013 Earnings Conference Call. Today's call is being recorded. At this time I would like to turn the conference over to Ms. Suzanne Rosenberg, Director of Investor Relations at New York & Company.

Suzanne Rosenberg

Thank you. Good afternoon. Before we begin I would like to remind you that some of the comments made on today's call, either as part of our prepared remarks or in response to your questions, may contain forward-looking statements that are made pursuant to the Safe Harbor provision in the Private Securities and Litigation Reform Act of 1995. Actual results may differ from those projected in such forward-looking statements. Such forward-looking statements are subject to risks and uncertainties as described in the company's documents filed with the SEC, including the company's fiscal year 2012 Form 10-K.

On the call with me today are Greg Scott, Chief Executive Officer; Laura Weil, Executive Vice President and Chief Operating Officer; and Sheamus Toal, Executive Vice President and Chief Financial Officer. For today's call Greg and Sheamus are joining us from Los Angeles where we just launched the new Eva Mendes Spring collection and Laura and I are in our New York Office. For the call first Greg will review our fourth quarter and fiscal year 2013 results and discuss the progress we've made on our strategic initiatives as well as harp on our priorities for 2014 and beyond. Sheamus will then review our financial results in more detail and provide you with our near-term financial outlook. Following our prepared remarks we will open up the call for your questions.

With that I'd like to turn the call over to Greg.

Gregory J. Scott

Thank you, Suzanne. Good afternoon, everyone. I am excited to be speaking with you right from Los Angeles where we are busy launching the new Eva Mendes Spring Collection. On Tuesday Eva's joins Fashion Netters and Bloggers for a launch party at her beautiful new Beverly Center Pop-Up location. Yesterday we had [inaudible] event at our store at Los Cerritos Center where Eva made an appearance and engaged with our customers. It was truly an exciting experience.

Our partnership with Eva continues to generate media buzz, which greatly increases our brand exposure and awareness. We also continue to be opportunistic with the press, including TV, social media and magazine partnerships. As you know we received a strong customer response for the initial launch of the Eva Mendes collection and while the collection is still a small part of our total business we expanded it for spring and introduced an additive assortment to the majority of our stores.

Now turning to the subject of today’s call; we performed positively in the fourth quarter delivering growth in comp store sales, expansion in merchandise margin, and exceeding our operating income guidance capping off a solid year for our company. Our fourth quarter performance marks the third consecutive quarter of positive comp store sales growth and the eighth consecutive quarter of year-over-year operating improvement, clearly demonstrating that our strategies are working despite a challenging retail environment.

We continue to be especially pleased with our growth initiatives in E-comm and outlets. We achieved these fourth quarter results while operating 23 fewer stores versus a year-ago period, and one less selling week than 2012. Specific to the fourth quarter, we began the holiday season strong with a successful Thursday/Black Friday event, where we achieved positive mid-single digit comp store sales in our New York & Company stores channel and achieved the highest average store volume in the history of our company.

We were also very pleased to deliver merchandise margin improvement versus the prior year. Our performance continued positively in December, driven by strong in-store promotion including door-busters and excitement stemming from our 12 days of wishing, leading up to Christmas. January saw continued momentum highlighted by our big, big sale event. While traffic was challenging throughout the quarter, we saw increases in other metrics including conversion, average dollar sale, and average unit retail.

Across categories, our comp growth in the fourth quarter was driven by sweaters, our Love NYC collection, outerwear and winter wear, separates including hats, gloves, and scarfs. We also experienced positive results in denim fueled by denim legging. The Eva Mendes collection also contributed to our fourth quarter performance with a strong performance in December as the collection focused on party and specialty pieces that resonated with our customers. Our customers especially love Eva's dusk-to-dinner dresses, bodysuits, blouses, and skirts.

Turning to our growth channels; e-commerce represented over 10% of our business, up from 9% in the fourth quarter last year. Overall, our e-commerce site saw increases in traffic driven by Eva Mendes as we optimized our digital marketing. We are excited about our newly launched website which gives us a strong platform for future growth. The new site has great new features and functionality that we believe will propel e-commerce to a higher double digit percentage of our business in the near term.

Our outlet business was a true standout in the quarter with positive comps and was a key driver to our total comp growth and margin expansion. We remain very pleased with our outlet strategy and continue to focus on growing outlet exclusive product, which strongly differentiates this channel from both our New York & Co. stores as well as our current e-commerce business.

Throughout the year, we delivered consecutive improvement driven by our key strategic initiatives. In 2013, we achieved several milestones. One, we continue to grow the important pant and denim business, which are hallmarks of our brand while delivering strong comps in merchandise margin expansion in these categories.

Two, we opened our 50th outlet location and nearly doubled our outlet exclusive product from 36% of the business to just over 60%. Three, we grew our e-commerce channel to almost 10% of our total business which is more than doubling its penetration rate in three years. Four, we expanded the capabilities of Ask Us, a program which allows our customers to be in the store and order an item to be fulfilled either from another store or from our online business. We will soon pilot the next phase of this program, which will allow customers to order online and pick up in store.

Fifth, we debuted our Store of the Future in Columbia, Maryland, which features an amazing new store design that we will incorporate into a portion of the 10 to 15 remodels we are implementing in 2014. And last, number six, in 2013, we took a huge step forward in our plans to grow brand awareness and traffic to our brand by establishing a multi-year collaboration with Eva Mendes.

We have truly been building momentum over the past three years as we have successfully implemented operating strategy and established a foundation for future growth. In the process, we have returned our company to peak merchandise margin levels, rationalized our expense structure, and improved fiscal year operating results by nearly $70 million.

In fiscal 2014 and beyond, we are focused on additional growth strategy to drive sales and margins. First, drive top line and comp growth in each channel of our business anchored by a seamless omni-channel experience. In our New York & Company stores, the majority of our store closures are behind us, and as we stabilize the store count, we are focused on growth by maximizing our highest volume stores. We continue to implement our strategy of downsizing and remodeling, which has increased sales productivity and delivered a higher rate of store contribution.

At our outlet business, we are leveraging our investment in infrastructure while growing the top line. We currently have 51 outlets and expect to end the year with 59 to 63. We continue to grow outlet exclusives and expect them to be over 70% of the business as we end 2014.

Moving forward, we will continue to grow this business and see a longer-term opportunity for between 75 and 100 locations. Growth in our e-commerce channel will be fueled by our newly launched, redesigned, and re-platformed website, both desktop and mobile. We launched this site on February 28, and overall we are pleased with this performance. While it's still early, we've already seen an uptick in total conversion and conversion across all devices, mobile, tablet, and desktop.

Moving forward, we expect to see significant improvement in all of our e-commerce metrics. The new site truly reflects the new New York & Company brand and its look and feel, simplified navigation, outfitting suggestions, and an easy one page checkout process are just some of the new features on our site. As with any new site, we will continue to make enhancements from a design and functionality perspective.

From an omni-channel perspective, the site provides us with the capability to roll out the next phases of our Ask Us program, including order online, pickup in store; and order online, ship from store. Second, increase brand awareness and drive traffic to our brands by attracting new customers and engaging existing customers. To lead this initiative, we are very pleased to have hired a new Chief Marketing Officer, Cheryl Callan, who brings us nearly 30 years of experience to our brand including a deep understanding of digital and social mediums.

A key element toward attracting new customers for our brand and engaging our existing customers is our partnership with Eva Mendes. Since the initial launch of Eva Mendes in September, our research shows that the Eva Mendes collection attracts a slightly younger customer with a slightly more available spend.

Moving forward, we will continue to increase brand awareness by further leveraging our partnership with Eva as we market Eva Mendes as the face of our brand. We will also optimize digital marketing and better segment our database to speak to our customers across all channels of our business.

Third, grow the New York & Company brand through key merchandizing initiatives. Here we are focused on high margin businesses that are core activities of our brand. One, launched the 7th Avenue Suiting Collection two years ago, based on the success of our signature 7th Avenue Pant, and we see significant room for growth. Two, we will continue to grow our denim category to be a larger percentage of our total business through continued success in our leggings franchise and in fit solutions including high-waisted denims, our curve creator, and city-slim jeans. We will also create a branding point for total jean collection under the name Soho Jeans providing us with another sub-brand and point of differentiation within our business.

Three, the Eva Mendes collection will continue to evolve and grow. The collection provides a unique lifestyle component for us with a feminine and romantic dusk to dinner assortment including dresses and blouses that we've never sold before. As I mentioned we have expanded the selection to the majority of our stores with the launch of the Eva Mendes Spring Collection.

And four, we will also drive our Love NYC sub brand which is our former active category where we see a great opportunity to leverage the authority we have intent into this business. And lastly, we will continue to optimize our real estate portfolio as we stabilize our New York & Company store count, roll out our new Store of the Future Design and continue to grow our successful outlet locations.

Looking ahead we remain confident in our strategies and our ability to drive further improvements in our operating results for the full fiscal year 2014 and beyond. While the first quarter began softer than anticipated and it is reflected in our guidance much of the spring season is still ahead of us with significant traffic driving events planned and compelling fashion trends in our assortment.

Beginning in March we have seen our customers responding to the new spring fashion and there has been a shift towards softer silhouette, including soft pants, jump suits and soft skirts, that we are chasing into for our second quarter assortments.

Before I turn the call over to Sheamus I would like to address the separate press release we issued this afternoon regarding our new corporate headquarters. Ahead of the expiration of our current lease we entered into a new 16-year lease at 330 West 34th street which provides us more cost effective alternative versus renewing in our location. In addition to averting increased cost the new location also provides us with an amazing space, featuring a modern and more open work environment that will foster even closer collaboration amongst our associates. We expect to fully relocate our corporate headquarters to this new space by the end of this year.

And now I would like to turn the call over to Sheamus to review our financials and guidance in more detail.

Sheamus Toal

Thank you, Greg. Good afternoon everyone. The company notes that this fiscal year included 52 weeks as compared to 53 weeks in last year’s fiscal year with the additional week occurring in the final month of the year. Therefore the fourth quarter of fiscal 2013 represents a 13-week period as compared to 14-week period last year. However all comparable store sales numbers offer 13-weeks and are reflected on a shifted basis comparing the closest calendar weeks from the prior year.

Net sales for the fourth quarter were $271 million as compared to $291.8 million for the fourth quarter last year. Comparable store sales increased 1.2% for the fourth quarter of fiscal year 2013 as compared to an increase of 2.3% for the fourth quarter of last year. In the comparable store sales base average dollar sales per transaction increased by 5%, while the number of transactions per average store decreased by 3.6%. The decrease in net sales reflects the exclusion of the 14th week of the fourth quarter of fiscal year 2012. Also contributing to the decrease in net sales was the company’s lower store base throughout the quarter. This was partially offset by sales growth in the e-commerce and outlet channels.

In addition, during the fourth quarter of fiscal year 2012 the company recognized non-operating breakage income of $4.3 million which resulted in a benefit to net sales, gross margin and operating income and was disclosed as a non-GAAP adjustment to our prior year results. Please refer to the reconciliation of GAAP to non-GAAP financial measures in Exhibit 5 of our release issued this afternoon.

Gross profit increased 150 basis points to 28.4% of net sales versus the prior year non-GAAP adjusted gross margin rate of 26.9% of sales. The improvement in gross profit as a percentage of net sales was driven by 120 basis point increase in merchandise margins resulting from improved product cost and a reduction in markdowns and a 30 basis point decrease in buying and occupancy cost. On a GAAP basis the prior year gross margin rate was 28%.

Selling, general and administrative expenses were managed tightly in the fourth quarter reflecting a year-over-year decrease in store selling expenses, partially offset by an increase in variable compensation. On a rate basis we did however deleveraged this reduced expense structure by 130 basis points from last year due to the lower sales volume resulting from the reduced store count, the loss of the extra week in 2012 and the $4.3 million benefit recorded in net sales during the fourth quarter of fiscal year 2012.

Operating income was $7.2 million in the fourth quarter of fiscal year 2013, exceeding the high end of our previously issued guidance range and compares to non-GAAP operating income of $6.2 million in the same period last year. On a GAAP basis the company’s operating income for the fourth quarter of fiscal year 2012 was $10.6 million, which included $4.3 million of non-operating breakage income.

Net income in the fourth quarter was $6.9 million or $0.11 per diluted share. This compares to non-GAAP adjusted net income in the fourth quarter of last year of $6.2 million or $0.10 per diluted share and GAAP adjusted net income of $10.5 million or $0.17 per diluted share.

Moving to our quarter-end balance sheet, we ended the quarter with $69.7 million in cash compared to $60.9 million at the end of last year's fourth quarter, reflecting continued cost savings efforts. Total year-end inventories were below our previously issued guidance, reflecting an increase of 4.1% as compared to the end of the year last year. This represented a 6.6% increase in inventory per average store reflecting the increases in in-store inventories partially offset by a lower level of in-transit inventory.

During the fourth quarter the company remodeled one existing store, opened one new outlet location and closed seven stores, ending the year with 507 stores, including 51 Outlet stores and had a total of 2.6 million selling square feet in operation. During the full fiscal year the company closed 20 stores, opened seven new Outlet stores and one new New York & Company location and remodeled seven existing locations including its location in Columbia, Maryland where the company debut the Store of the Future Design.

Capital spending for the fourth quarter was $6.2 million as compared to $4.2 million last year, reflecting an increase in IT and e-commerce infrastructure investments, partially offset by a decrease in spending on store remodels.

Turning to our outlook for the first quarter fiscal year 2014, net sales for the first quarter of fiscal year 2014 are expected to decrease slightly. This includes the impact of 12 fewer stores in operation since the first quarter of last year. Comparable store sales are expected to be approximately flat to last year. Gross margin is expected to decrease slightly as we anniversary favorable freight credits from the prior year which are not expected to occur in 2014.

Selling, general and administrative expenses are expected to be approximately flat as a percentage of net sales versus the first quarter of last year. Operating results for the first quarter of fiscal year 2014 are projected to be approximately breakeven. We expect inventory levels at the end of the first quarter to be up in the high single digits percentage as compared to the prior year which was down 13%. This increase -- this reflects additional inventory investments in new businesses including Eva Mendes and Outlet exclusives.

Capital expenditures are expected to be approximately $6 million for the first quarter as compared to $3 million in the prior year's first quarter, reflecting two net Outlet stores, four remodeled locations, investment in information technology and e-commerce and costs associated with the relocation and buildup of the company's new corporate headquarters.

For the full fiscal year 2014, capital expenditures are expected to range between $35 million and $40 million. This increase reflects continued investments in Information Technology and e-commerce, real estate spending to support the opening of new Outlet stores and remodels of existing locations and capital expenditures relating to the company's relocation and build out of its new corporate headquarters in New York City.

As announced today, the company is relocating its corporate headquarters in December of 2014 in advance of the expiration of its existing lease. The new headquarters location provides a more cost effective alternative to renewing our existing space. In connection with this relocation, the company is anticipating some impact on its operating results and cash flows for the current fiscal year.

First, we anticipate that the company will incur capital expenditures of approximately $14 million due to the buildup of our office. Second, we expect to incur approximately $12 million of capitalized lease costs associated with the new lease. The cash flow impact of this capitalized lease cost will largely be offset by lease incentives in 2015 during the first full year of the lease.

Finally, we anticipate the move will result in $3 million to $4 million of non-cash duplicate rent expense during the fall season as we will be required to record book accounting rent even though it’s occurring during a cash free rent period. Importantly this move enables the company to downsize our space requirements and allows us to avoid cost increases associated with remaining in our existing space.

Depreciation expense for the first quarter of fiscal year 2014 is estimated at $8 million. For the full fiscal year depreciation expense is estimated to be approximately $30 million. During the first quarter of fiscal year 2014 the company expects to open approximately two new outlet stores, remodel four existing locations and close three stores, ending the first quarter of fiscal year 2014 with approximately 506 stores, including 53 outlet stores. For the full fiscal year the company expects to open between eight and twelve outlet stores along with approximately two new New York & Company stores, remodel 10 to 15 existing locations and close between 12 and 14 New York & Company stores ending the year with between 503 and 509 stores, including between 59 and 63 outlet stores.

With that I would like to turn the call over to the operator to begin the question and answer portion of the call.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And we’ll go first to Eric Beder with Brean Capital.

Eric Beder - Brean Capital LLC

Good afternoon. Congratulations on a solid year.

Gregory J. Scott

Thanks Eric.

Sheamus Toal

Thanks Eric.

Eric Beder - Brean Capital LLC

I know you spent about two plus years changing this customer around, and what is the new New York & Co. customer, and kind of when you look at it going forward adding more Eva to the business and more fashion, how is it going to become even -- how is the customer going to change even more?

Gregory J. Scott

So I feel that we have really embraced on a path where the New York & Company is about a great mix of current fashion, a great mix of basics, that she’s always loved from us, and a great mix of unexpected things in the assortment. What we’re really finding as we have seen over the past three years as we raised our AUR and ADS, our customer, while she is incredibly value driven, she really responds to fashion and we aim to be as relevant both on our site, both in our stores, and both in our outlets as all of our competitors. And I think that has been a big significant change. Our go to market strategy has had to be more, has had to be faster, and it has had to be more relevant with the times.

As I look even at this quarter alone, as we began March and we saw our customer response with what we thought was pretty fashionable items, jump suits, soft pants, soft skirts, soft tops, a whole new way of dressing, this is incredibly important as we move the assortments forward.

Along with Eva Mendes, we are seeing this attracting a fashion consumer as well as our core consumer to the brand, and so I think what I think that we’ve always wanted to do is toggle both, meaning always celebrate the customer we have, the loyalist that really have kept us going who love New York & Company for what they exist, but along the way bring new people into the brand through our fashion assortment at great value, and that is what we plan do is bring more of that fashion assortments into our brand to attract more new customers in the brand that really will celebrate fashion and fashion newness.

So, I think in a nutshell, that’s probably how I would sum it up.

Eric Beder - Brean Capital LLC

Great and just quickly, on the Internet -- the Internet change, you’ve made significant changes to the Internet, it’s obviously working. How should we look at -- where do you think the final penetration could be for the Internet, and is there the opportunity, -- I know you talked about this being a more fashionable customer on the net, has that kind of split, continued, or has it become kind of one customer base going forward?

Gregory J. Scott

So, you know, I think we would look at it and say we know in the near term our e-commerce business as we reported will be in the mid-double digit percentage of our business. I do believe there’s probably continued opportunity as we go out further in the years. What we are continuing to see is our focus on E-comm, , our focus on our investments in digital technology are the smart investment for us in terms of return to our shareholders, and it's really important that we as the company continue to focus on the growth of E-commerce.

This new platform really while there is a new look and feel, and consumers are seeing that and we are immediately seeing improved conversion, we know we have a long way to go to continue to maximize our conversion opportunity because we, as we launch the site, there are many things we wanted to do that we will roll out this year which I think will improve conversion.

In terms of fashion, I think what you -- what's really important to note is as we've always said, the Eva Mendes business online is significant percent of their business, and what that really says is people find the accessibility of looking at Eva Mendes online in terms of whether it's a search word or whether going directly to our site and find that ease of shopping Eva Mendes online to be something they really value. So to that note, I'd say that there is a fashion component and there is a real relevance of growing the Eva Mendes collection even bigger online as a percentage of business for us.

And lastly, what this platform really did is allowed us the capability/technology to implement our next two phases of Ask Us, Ask Us phase three, which we'll be piloting very soon which is order online pickup in store, which we will be piloting sometime in the spring and then finally order online ship from store, which is -- we believe -- a large potential for sales and margin growth for us when we implement that.

So, we're excited about what this new technology can do, we're excited that the site is stable right now, and honestly with the new site and the teams did a great job in pulling that off, and we continue -- the Board, myself, top management really believes in the success and the growth of our digital business.

Eric Beder - Brean Capital LLC

Great. Congratulations and I look forward to very strong year for you guys.

Gregory J. Scott

Thank you.

Sheamus Toal

Thanks Eric.

Operator

Next we'll go to Neely Tamminga with Piper Jaffray.

Neely Tamminga - Piper Jaffray & Co.

Great, good afternoon and congratulations on another quarter of positive comps, job well done.

Gregory J. Scott

Thank you Neely.

Neely Tamminga - Piper Jaffray & Co.

Of course. So just a couple of questions, if I may. Is there any way you can really quantify or contextualize what you think the disruption in the sales may have been when people do the platform redesigns, I guess what I am trying to drive at here is, I am just wondering if you guys saw some disruption in your business rate because it always takes consumers a little while to figure out where everything is on the site, and then you see a rebound. I am just wondering if your Q1 comp guidance is reflecting more of the disruption trends versus what might be a re-bound picture?

Gregory J. Scott

So I'll answer and then I'm going to ask Laura to add on if there is anything that she would like to add to this. And I will say that in the month of February as we were transitioned to the new site, we are very cautious about promotional changes, about not really stressing the site so that we can keep the site stable and can keep the site live. So what I would state is that is in the month of February while we launched the site and we saw good stability, not perfect stability by any means, so anybody who went on the site and saw that they couldn't order, we understand there were times that -- and we continued to see that there might be an hour or two that we are having some site issues.

But I would say the biggest changes in February, we had a holdback on being as flexible and responding to the business as we normally would. And as we entered into March, especially the week 2 and this week, we are now getting back to that more flexibility, being able to say, hey today we want to go with dresses, tomorrow we want to go with pants, and the next maybe we want to go with Eva, which in February and really leading up to that launch in early March, we consciously did not do that.

And I will say that, not really the site performance but more about consciously us not wanting to stress the site, probably had some holdback of our E-commerce business in the month of February, and Laura could you add…?

Laura A. Weil

Yeah I would, I echo your comments. Clearly we wanted to startup, get the site up and running, which we're very pleased, went very smoothly. I think the most important thing that we've seen and Greg mentioned in his comments is that our conversion right after that has significantly improved and it's more than doubled on mobile devices and that was something that we were hoping for and was part of the whole strategy, but that started immediately and we haven't seen any decline in our improvement in conversion on all devices.

So while we may have tempered a bit of our promotional strength as we got the site up and going you know after February 28, I think we have seen a lot of improvement in terms of our metrics.

Neely Tamminga - Piper Jaffray & Co.

It certainly seems so from a mobile engagement perspective, so job well done there and continue to look for some of those additional enhancements. Just a couple more questions, if I may on the model. So Sheamus if you could on, helping us think through this rent expense that you are referencing, I think the $4 million, I think that you are referencing. Is that something that hits incrementally then on SG&A expense, obviously headquarter rents and occupancy store rents and I mean is this something that you guys can’t lever necessarily in the back half?

I mean I am not really getting a sense on a full year guidance from you guys as to how we should be thinking about gross margin and SG&A but you know obviously we want to be sensitive to the fact that you have some extra sort of items going on this year. Could you help us?

Sheamus Toal

Yeah, so I can provide you some context to that. So the $3 million to $4 million of duplicate rent will occur largely towards the backend of the year, the last three to four months of the year and it represents, as I said earlier, non-cash rent charges associated with recording straight line rent for a portion of the free rent period associated with our lease. Once we move into the new space which will occur by the end of the year, as we start into 2015 that duplicate rent disappears because we are out of our existing location but we’ll have a three to four month period where there will be some duplication of book accounting rent, although it will not be duplication of cash rent.

In terms of leveraging those amounts, as we’ve done in the past we are constantly looking at opportunities to reduce our SG&A expense structure and better leverage SG&A expenses. As we move into 2014, we haven’t guided to specific numbers for the back half of the year yet but our traditional benchmark in terms of SG&A, is you know that we need to drive comparable store sales increases in the low to mid-single digit positive comps to leverage SG&A.

In many periods we’ve been able to reduce that for Q1 for example and our guidance is implied that we’re able to reduce that to approximately flat comps. So as we move to the back half of the year we start to move back to that traditional leverage point and certainly this $3 million to $4 million, which will end up in SG&A won’t help us but we’ll look for other opportunities to reduce expenses elsewhere to try to counteract that increase. So we are constantly pushing on those expense reductions.

Neely Tamminga - Piper Jaffray & Co.

Thanks Sheamus. And I just have one last question for you guys, just a clarification. So when you cite on Q4 that your average dollar sale was up 5 and your number of transactions was down 3.6, that is inclusive of e-commerce transaction values, yes or no and maybe asked another way too, the decline in the number of transactions could you kind of help us understand a little bit more what’s going on between traffic and conversion. I think I know the answer but I guess I just want you guys to talk through that. And then I am done, thank you.

Gregory J. Scott

Sure. So the first component to your question we do incorporate our e-commerce results in our comparable store sales as well as in the transaction data that we disclosed. So the answer to the first part is yes, it is included in those numbers. In terms of the breakdown we obviously experienced some modest traffic declines in Q4, which contributed to the transactional declines. So that certainly was a factor in the transaction declines, as we look at the business for Q4.

Sheamus Toal

I think what I would really say is obviously traffic was definitely declining in the month of December and January but the opposite of that obviously is improved conversion which really balanced that. What I would say also there were increases, we really have strong success in some cold weather categories sweaters, outer wear, winter wear separate, driving some of our best margin in history in these categories which allowed us to raise that AUR and ADS overall and specifically in the month of December we played pretty much offensively in that quarter I mean in that month and said you know what she loves this product. We don't have to drive the lowest price and we are going to get some AUR upside here and that’s what we did, seeing that the traffic went up when she was converting and really liking the product and that translated to that lower transaction count, higher ADS and obviously higher merchant margin rate.

Neely Tamminga - Piper Jaffray & Co.

Thank you so much guys and best of luck.

Gregory J. Scott

Thank you Neely.

Operator

And we'll go next to Edward Yruma with KeyBanc.

Edward Yruma - KeyBanc Capital Markets

Hi, thanks very much for taking my question. Good afternoon. Just a real question on gross margin, you guys are guiding, I believe the gross margins to be down in the first quarter. That would be kind of the first time since 4Q '11 that your gross' would have been down. Have you kind of hit a ceiling as gross goes or kind of how do we think about that longer term?

Sheamus Toal

Yeah. Hi, Ed, this is Sheamus. So definitely as we look at our past experience, we've experienced significant increases in our gross margin. A big component of that was improvements in our products cost, as we start to lap those significant improvements year-over-year for a couple of years now. That component of our improvement is becoming more difficult. So we are seeing a leveling off of that. We do believe that there is still opportunity to drive future product cost improvements and we're pushing hot on that.

The bigger opportunity in terms of margin improvement is to get further reductions in our mark-down rates which we're pushing on as well. As we look specifically at Q1, while we're guiding to our gross margins being down slightly as we look at our merchandize margin, it is comparable to last year's level. So where we are experiencing a slight deterioration is in some freight credits and one-time items that occurred last year. Our true merchandized margin is fairly comparable to last year with modest decreases in that. So we are obviously looking to further improve that as we move forward as well.

Gregory J. Scott

And just to follow-up on that from a merchant margin level, obviously to your point, when the first time we've guided that, probably eight quarters or even more than that, and what I would say is in merchant margins, in MMU we continued in fourth quarter for instance, continue to see operating and see improvement in our IMU as well as our markdowns, which I think was a good feed in Q4.

As we move forward into the year we believe we continued as we see improvement in our IMU year-over-year more so than we did in Q1 and we continue to believe we have improvements in our markdowns, which I think ultimately we still believe we have room to improve our MMU even though we are at some of our peak MMU levels in our history, though that's not something we think we are at our peak.

Edward Yruma - KeyBanc Capital Markets

Great, and one follow-up I know Eva Mendes was very limited launch and I know you are broadening the product offering for spring, but I guess just to kind of give us some context as to if you kind of hit the objectives you are looking for, how big a part of the mix will it be going forward? Thanks

Gregory J. Scott

So it's a multi-year agreement with Eva and we are so lucky, so happy that she is our partner. I mean she is amazing and the connection with the customer to Eva is just beyond anything, I think I have ever seen. And what I would say is it's a small percentage of our business. Over the three year period we believe it can go to a larger percent. If I had to take or give a percentage or range in that I will say what we're seeing is online some of our top stores specifically in the California market, in the Texas market, in the Florida market and some of our northeast stores, we're seeing a good penetration of Eva in the stores.

I think that it will continue to grow as a penetration. Right now we see good opportunity and I don't think we have capped it, we're just going to continue to fuel it and feed it and do the best we can to optimize it. What's exciting is some of our best jewelry is coming out of Eva Mendes. So there is an opportunity to grow jewelry in Eva Mendes Body suit, we don't sell a body suit in anything, Eva Mendes Bodysuits are amazing, big core equity we can grow there.

And then obviously dusk to dinner -- sorry, yes, dusk to dinner dresses, something we didn't have in our assortment, something we can grow. So as long as we continue to have Eva, really as a strong collaborator working with our internal team, we think that we can grow this business and when we're ready we'll talk about how big we think it can be. And we continue to test things. We opened a Pop Up store in Beverly Center, small store. We want to see what's the traction of a small Eva Mendes Pop Up store. We've just -- we want to be opportunistic with the jewel we have in our brand right now.

Edward Yruma - KeyBanc Capital Markets

Great, thanks so much.

Operator

We’ll go next to Pam Quintiliano from SunTrust.

Pamela Quintiliano - Suntrust Robinson Humphrey, Inc.

Hey guys and congrats on a very solid quarter in a difficult environment.

Gregory J. Scott

Thanks Pam.

Sheamus Toal

Thanks Pam.

Pamela Quintiliano - Suntrust Robinson Humphrey, Inc.

So I have a few questions for you guys starting with, can you just talk us through not what the planned promotions actually are but when we think about 1Q, is there any shift in timing of promotions, especially reflecting related to Easter and does that shift potentially make your quarter more back-end loaded?

Gregory J. Scott

Yeah, for sure. I mean I hate shifts in the holiday calendar. So obviously Easter shifting into April this year with Mother's Day really starting for us at week four of April obviously the quarter is more backend loaded than it was a year ago. And that’s really, I think implied in our guidance. I think you know the later Easter could be really great for our store, history can tell us that and the question will be how good Mother's Day is after that, so that’s one shift.

And one of the things we did to combat really this week, and next week which are real pre-Easter weeks where we have new floor sets is really derived to Eva Mendes. Now obviously Eva is a small piece of our business and it isn’t like launching a new wear-to-work collection but the main shift there was to really have Eva Mendes come at week three to kind of to keep the interest going, keep that customer traffic going and then in week four we will anniversary our post Easter sale day-to-day so that will be open Easter in April week one we’re going to be have a clean set for the new spring/some real spring assortment.

So Easter was a big shift, throwing -- really the offset for us is really to get Eva Mendes in there to really counter balance that week three/four of March, is never going to counter balance completely because that’s Easter but that was really what we shifted there.

Pamela Quintiliano - Suntrust Robinson Humphrey, Inc.

Okay and then a few more questions and I got on late. So I am sorry if I missed this but with the quarterly day trends, could you comment on warmer weather getting her back into the stores and just in general as you think about your customer, what’s going on or you think that -- is there anything macro wise that’s prohibiting her from shopping, or do you think it was just more of a general mall-based traffic not being solid for you guys?

Gregory J. Scott

Yeah, so like most retailers we saw incredibly or incredibly is a little strong word, a soft week two of February, that Valentine's week that was unanticipated, how soft that was and I think that was driven by, I think we have two snow storms in the Northeast. It really wasn’t positive for us in that respect but as we move past that we really started to see the business uptick past the Valentine’s Day period. I will say we are seeing positive comps in our west region, in our Florida market. So warmer weather does say that she is responding to the fashion.

I would say that weather is not always the piece of it. It’s a small piece of it. I think from our consumer base, as I think all retailers say, if the product is right, if the product price is right and it's relevant for her at that time she is coming in and wanting it. So I think with the cold weather, even though we were not super spring focused she just didn't have that desire to shop.

Now we are seeing on the reverse of that as we opened March real trends starting to emerge that hadn’t emerged in February and that’s the strength of the jump suit or the strength of the soft pant or the strength of the soft top, real things that can drive some business for Q2. So that’s what I have, you know that’s what as a team we are really focused on right now.

Pamela Quintiliano - Suntrust Robinson Humphrey, Inc.

And then just one last question, when we think about the strength that you are seeing which not a lot of retailers are seeing strength in really any fashion categories, as you know. So it’s very encouraging. Just could you remind us of lead times and your open to buy ability, to chase especially given it’s a little bit later of a read that you would normally get because of the unseasonal weather conditions?

Gregory J. Scott

Yeah, so it’s a great question and it’s applicable. I think one of the things that our [inaudible] for March will really be in stock probably by June in a lot of those items. The good thing though is some of these items tested very well in December-January period, like the jump suit, like the soft shirt that we were able to get into are really in a bit better position for that April-May period before March reads and before the Chinese New Year period. So we were already sensing that. I don't think we sensed the magnitude of how much she wants the jump suit.

You know I don't think we anticipated that and so that’s why we are really converting some of our assortments and really we're also seeing strength in early test region. So I think will affect the June period from what we saw from our assortments really from the March selling, but we already saw some indications early on, especially online and in test that help us influence that mid-April to May assortment. I mean the trickiest time for us is really when the factories are closed for Chinese New Year, really that period when we can't really get into something from like that, January period I mean we have to really wait till that April-May period when typically we get it in by March. But after that I think our turn times and reorders are fairly quick.

Pamela Quintiliano - Suntrust Robinson Humphrey, Inc.

And I am assuming the warm personal jumpsuits that something that kind of has a life when we think about the back half of the year or two?

Gregory J. Scott

We will go -- we debate this trend a lot, because it is a trend or is it fad. So we will be as close to it as we can be and not get over exposed to it. So we debate a lot, is this colored jeans or is this towards this -- at one season only trend and we continue, as you know, we test a lot. So we'll continue to test our relevance and her need and wants for these. But some of the fastest things we have in the store right now are anything that looks like a jumpsuit.

Pamela Quintiliano - Suntrust Robinson Humphrey, Inc.

Well, thank you so much for that detail and best of luck.

Gregory J. Scott

Thank you.

Sheamus Toal

Thank you.

Operator

(Operator Instructions). We'll go next to Rebecca Duval with BlueFin Research Partners.

Rebecca Duval - Bluefin Research Partners

Hi guys. Congratulations let me add my congratulations as well,

Gregory J. Scott

Thank you.

Sheamus Toal

Thank you.

Rebecca Duval - Bluefin Research Partners

And I love the new Eva a lot, the new Eva spring line looks amazing.

Gregory J. Scott

Right, yes.

Rebecca Duval - Bluefin Research Partners

Greg, can you just give us a little bit more color, maybe on some of the categories in terms of the assortment, where you are seeing the most strength, how is separates doing the work wear, denim. Can you give us a little bit more color on that?

Gregory J. Scott

Sure, so our denim jeans continue to do an outstanding job, continue to deliver comp and positive margin growth. Our pant and denim have led in February, continue to deliver positive comps and positive margins event after event and obviously we need to keep tweaking that. But what we're seeing in denim is the teens have moved away from just core basics to real fashion, penetration in leggings, both printed, say [camel] leggings and colored and light colored obviously and then we've really done well with what we call our fit solutions, whether they be the curve creator or the city slim jeans or proprietary items for us and then high waisted, selling very well for us in denim.

And whether our customer is wearing high waisted as a body enhancement versus wearing it with a cropped top the jury is out. High waisted she's responded really well to. So denim continues to be strong. I would also say we're seeing soft tops to be really good, whether it be the soft shirt, long sleeve and soon to be sleeveless or whether it be soft novelty tops, whether a bow top or side bow tops, very, very strong there.

I would say our jewelry business has rebounded, driven by statement necklaces and our Love NYC business which is really our active performance business has been good. To offset that, I think where we're seeing some weakness is really our knit-top business across both divisions, meaning uptown and downtown and for me, it's like we're excited that in March we saw some new fashion emerge because that gives internal hope that we could continue to drive newness and need for the customer because there's things that she doesn't have in her closet.

And our job is to understand the scope of soft, to understand how that big that really can be and the teens are really on that. I think one thing that also is in our numbers that we don't probably talk about is our Outlet business. We talked about in Q4 how it was strong, there's people say their Outlet business were weak. But I think the Outlet teams have done a really strong job to spur that Outlet penetration of Outlet exclusives over 60% and that Outlet exclusive business as we moved away from just clearance transfers to the Outlet has really helped our margin and Outlet exclusives are performing well.

So our teams in Outlet have really helped the total company by sales and margin, but really moving on to make for Outlet product, which I don't talk a lot about, but that is definitely helping us below the line.

Rebecca Duval - Bluefin Research Partners

And speaking of outlet I mean everybody is talking about and just in general traffic for outlets I know has been down so are you guys just not seeing -- are you not seeing a decrease in traffic or are you just seeing higher conversions? Can you give us a little bit more color on what you are seeing?

Gregory J. Scott

Yeah, we are definitely seeing the traffic challenges but what I think was one of our strong benefits is the outlet team has really driven merchandise product that she wants more that is made for the outlet at the right time which has really helped our conversion and at the same time obviously AUR, which has turned into higher ADS. So I think we benefited, especially in Q4 in our outlet division not by the soft traffic as we think we were, I think when we look at the numbers, we definitely had our traffic challenges but with our move to outlet exclusive being over 60% higher margin, she wants more of them higher conversion and higher AUR than selling sale product.

So all of that work that we had been doing in ’12 really helped us in the ’13, especially in the second half.

Rebecca Duval - Bluefin Research Partners

Great and just one other question, you talked about this before how the customer that was coming in maybe a new customer that was coming into buy say the Eva product. You were starting to see some good conversion to the NWY products are you still seeing that? What kind of trends -- I know you guys are keeping data on that. Are you seeing the customer shop both brands, are you still seeing a lean towards one or the other? Can you give us an idea on that?

Gregory J. Scott

Yeah, so I would probably hold off on an answer to that because the work we’re going to do on that to really understand from September to now will happen probably in two weeks which we’ll give you a lot more color on it. We definitely were seeing it in September-November period but now that we launched Eva again, that she was on e-entertainment last night. Hopefully she was on -- had a jump suit on today’s show this morning. Fingers crossed that she’ll be on Good Morning America sometime really soon. We hope to continue to see the customer coming in and buying Eva along with NWYCO our New York & Co. products. So I'd prefer to wait to give you concrete information on that.

Rebecca Duval - Bluefin Research Partners

Okay, well best of luck to you guys.

Gregory J. Scott

Thank you, Rebecca.

Operator

And that concludes our question-and-answer session. I would like to turn it over to Mr. Scott for any additional or closing remarks.

Gregory J. Scott

Well I would like to thank everyone for joining us. We look forward to speaking with you when we report our first quarter results in May. So thanks and have a great day.

Operator

And that does conclude today’s call. Thank you all for your participation.

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New York & Company (NWY): Q4 EPS of $0.11 beats by $0.02. Revenue of $271M (-7.1% Y/Y) misses by $4.91M.