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

Q1 2014 Results Earnings Conference Call

May 22, 2014, 4:30 pm ET

Executives

Suzanne Rosenberg - Director of Investor Relations

Sheamus Toal - Chief Financial Officer, Executive Vice President

Laura Weil - Chief Operating Officer, Executive Vice President

Analysts

Adrienne Tennant - Janney Capital Markets

Eric Beder - Brean Capital

Neely Tamminga - Piper Jaffray

Rebecca Duval - Bluefin Research Partners

Matt Temple - Avondale Partners

Operator

Good day, ladies and gentlemen. Welcome to the New York & Company first quarter 2014 results conference call. Just a reminder, today's call is being recorded.

At this time, I would like to turn the call over to Ms. Suzanne Rosenberg, Director of Investor Relations at New York & Company. Please go ahead, ma'am.

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 2013 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. First Greg will review our first quarter results and discuss the progress we have made on our strategic initiatives as well as outline our priorities for second quarter 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 would like to turn the call over to Greg.

Greg Scott

Thank you, Suzanne, and good afternoon. Our first quarter breakeven operating results were in line with our guidance, reflecting tight managing of our inventory receipts and expenses. While top-line sales were softer than anticipated, comparable store sales improved during the latter portion of the quarter. We were encouraged that in a tough retail environment we achieved positive comparable store sales in our eCommerce business and in our Western region along with Florida. We also continue to see great success with the Eva Mendes Collection.

In February, we transitioned our eCommerce site to a new platform and while sales during the month were affected, after the launch, we saw steady and significant improvement in this channel as we progressed through the quarter. In terms of merchandise during the quarter, we executed a successful denim and pant event in February, which definitely exceeded our expectation.

March was highlighted by the introduction of our Eva Mendes Spring Collection, which is now in the majority of our New York & Company stores. The spring collection was well received and included in particular strength in dresses, skirts and body suits. As we entered the Easter selling period in April, we saw strength in wear to work pants, dresses, jumpsuits and jewelry.

These highlights were offset by weakness is knit and woven tops. We continue to see a faster shift into softer silhouettes. As we enter the second quarter, we have addressed this shift in our assortment with our Mercer Soft Shirt program in three quarter lengths, sleeveless and cropped, which we chased in both the second and third quarters.

Turning to the channels of our business. First, our growth businesses, eCommerce and outlets continue to represent an increasing portion of our total business. In the quarter, eCommerce was 11% of total sales versus 9% in the first quarter of last year. As I mentioned earlier, sales were impacted in February, leading up to the launch of our new site. However, we saw significant improvement after we went live in March and April.

Overall, our eCommerce site saw increases in traffic and we also experienced stronger conversion with the improved features and functionality of our newly launched site. During the quarter, we continue to expand the capabilities of Ask Us, a program which allows our customers be in a store and order an item to be fulfilled either from another store or from our online business. We are now piloting the next phase of this program which will allow customers to order online and pickup in store.

Turning to the outlet business. While traffic was challenging, this channel continues to be highly productive for us. We remain focused on the success of growing the penetration of outlet exclusive product, which strongly differentiates this channel from both our New York & Company stores as well as our eCommerce business. Outlet exclusives grew to 75% of total sales, up from 48% in last year's first quarter. During the quarter, we opened two new outlet stores, ending the period with 53 locations. We expect to end the year operating between 59 and 63 outlet locations and we continue to see a longer-term opportunity for 75 to 100 locations.

In our New York & Company stores, we saw strength in our West region along with Florida with positive comp driven by stronger conversions and higher AUR. The Eva Mendes collection also continues to be a successful component of our stores driving new and slightly younger customer to our brand while also driving conversion and generating stronger ADS. We continue to move forward with our store remodel program with one what remodel completed in the quarter.

As you may recall, we debut our first Store of the Future in Columbia, Maryland, which speaks as our new store design that we will incorporate into a portion of the 10 to 15 remodels we are implementing in 2014. We will also continue to implement our strategy of downsizing and remodeling 15 locations to improve sales, productivity and profitability.

Looking ahead, we remain focused on significant opportunities we have ahead of us to drive sales and margin. First, we remain focused on driving topline and comp growth in each channel of our business, all of which will be anchored by a seamless omnichannel experience. At the same time, we continue to optimize our overall real estate portfolio through downsizes and remodels to improve productivity.

Second, increase brand awareness and drive traffic to our stores. Leveraging our partnership with Eva Mendes is a key fact of this strategy and we are already seeing how this collaboration is driving conversion with a strong ADS or attracting new customers to our brand. During the launch of our March collection, the marketing surrounding Eva Mendes generated approximately 1 billion impressions.

Third, through key merchandise initiatives, we will grow the New York & Company brand. We continue to roll our product to capitalize on higher margin product categories in areas where we see opportunity, including the 7th Avenue sub brand, our denim business, which will be branded under the name Soho jeans for this fall, the Eva Mendes sub brand and our Love, NY&C sub brand which is our former active category where we see a great opportunity to leverage the authority we have in pants into this business.

Four, maximize sales during holidays and peak traffic times of the year. As we enter the second quarter, we are building on the success of our New York deals to drive traffic to our stores during the Memorial Day holiday and throughout the summer. We will also deliver more wear now assortment at sharp price points that truly addresses what our customers' needs are during the summertime period and expand upon our successful summer (inaudible) promotion in July.

Looking ahead, while it is still very early in the quarter, we have seen an improvement in our comp store sales from the first quarter and expect to be flat to slightly positive in the second quarter. We have applied our learnings from the first quarter and are playing to our strength in the second quarter with our soft Mercer shirt program along with jumpsuits, rompers and the palazzo pants.

Our collaboration with Eva Mendes also continues to resonate strongly with customers. During the second quarter, we will also expand our Love, NY&C sub brand to seasonally appropriate active wear, lounge wear and suite wear. Finally, we expect to capitalize on the natural increase in outlet mall traffic to coincide with the summer season. As a result, we expect to deliver increased comp sales and improving operating results in the second quarter.

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. Net sales for the first quarter were $219.6 million as compared to $227.5 million for the first quarter last year. Comparable store sales decreased 2.2% for the first quarter of fiscal year 2014. In the comparable store sales base, average dollar sales per transaction decreased by 1%, while the number of transactions per average store decreased by 3.1% as compared to the same period last year. Net sales was also impacted by 12 fewer stores in operation as a result of the company's ongoing real estate optimization strategy, partially offset by sales growth experienced in our eCommerce and outlet businesses.

Gross profit for the first quarter of fiscal year 2014 was $62.2 million or 28.3% of net sales as compared to $66.3 million or 29.2% of net sales in the prior year. Gross profit as a percentage of net sales decreased as the company anniversaried favorable freight credits from last year and incurred increased costs associated with its growing eCommerce business and expanded omnichannel capabilities. In addition to these increased cost, the company also deleveraged buying and occupancy costs on lower sales.

Selling, general and administrative expenses were managed tightly at $62.1 million or 28.3% of net sales for the first quarter as compared to $65.1 million or 28.7% of net sales for the prior year. The decrease in SG&A was primarily attributed to decreases in variable compensation expenses, reduction in store selling expenses and decreases in certain general and administrative costs, partially offset by a slight increase in marketing expenses. As a result of the diligent management of these expenses, the company experienced a 40 basis point improvement in the leverage of selling, general and administrative expenses despite lower sales.

Operating income was $100,000 in the first quarter of fiscal year 2014 meeting our previously issued guidance of approximately breakeven operating income and compares to operating income of $1.2 million in the same period last year.

Net loss for the first quarter was $0.3 million or breakeven per diluted share. This compares to net income in the prior year first quarter of $1.6 million or $0.03 per diluted share.

Moving to our quarter-end balance sheet. We ended the quarter with $47.5 million in cash compared to $39.5 million at the end of last year's first quarter, reflecting continued cost saving efforts and effective management of inventory receipts. Total quarter-end inventory were essentially in line with our previously issued guidance, reflecting an increase of 10% as compared to the end of last year's first quarter, which reflected a reduction 13%. The increase in inventory reflects additional investments in the company's growth businesses, along with Eva Mendes collection and investments in core pant and denim categories.

During the first quarter, the company remodeled one existing location, open two new outlet stores and close three stores, ending the quarter with 506 stores including 53 outlets and a total of 2.6 million selling square feet in operation.

Capital expenditures for the first quarter was $3.4 million as compared to $3 million in the prior year period. The $3.4 million of capital spending primarily represents the opening of two new stores, remodeling one existing location and to a lesser extent investments in information technology.

Turning to our outlook for the second quarter of fiscal year 2014. Net sales for the second quarter are expected to increase slightly versus last year reflecting the impact of 13 fewer stores in operation offset by increased sales in our eCommerce and outlet businesses. Comparable store sales are expected to be flat to up slightly. The company expects gross margins for the second quarter to increase between 50 and 100 basis points from the prior year's rate, driven by the combination of improved leverage of buying and occupancy expenses, along with improvement in merchandise margin, driven by lower product costs.

Selling, general and administrative expenses as a percentage of net sales are expected to be approximately flat versus the year ago period. Operating results for the second quarter are projected to be approximately breakeven as compared to an operating loss of $2.2 million last year.

As a reminder, the company continues to carry a deferred tax valuation allowance, resulting in an approximately 0% effective tax rate excluding certain required tax payments, which are expected to amount to approximately $200,000 per quarter.

The company expects total inventory at the end of the second quarter of fiscal year 2014 to be up by a mid to high single-digit percentage versus the end of the second quarter last year. This reflects continued investments in growth businesses including Eva Mendes, eCommerce and outlets and increases in goods in transit from overseas due to contingencies relating to the longshoremen labor negotiations.

Capital expenditures are expected to be approximately $10 million for the second quarter, primarily reflecting real estate spending to support new and remodeled stores, expenditures related to the company's previously announced relocation and buildout of its new corporate headquarters and continued investments in information technology and eCommerce. This compares to $4 million of capital expenditures in the second quarter of last year.

Depreciation expense for the second quarter of fiscal year 2014 is estimated at approximately $7 million. During the second quarter, the company expects to open four new outlet stores and remodel four existing locations, ending the second quarter of fiscal year 2014 with approximately 509 stores including 57 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

(Operator Instructions). Up first is Adrienne Tennant, Janney Capital Markets.

Adrienne Tennant - Janney Capital Markets

Good afternoon, everybody.

Greg Scott

Hello.

Adrienne Tennant - Janney Capital Markets

Hello. Greg, I have a question for you about inventory management. The product, I think it looks the best that I have seen in a long while and we are noticing our stockouts both online and stores almost within the first week, some of the really key product brand, particularly in smaller sizes. So I wonder if you can talk about that and any remedies to that?

Can you also talk about May? Any color on month-to-date? When you landed the new product, how things trended then and are we expecting an acceleration in comp to get to flat to positive or steady as she goes status quo? Thank you.

Greg Scott

Sure. So I think I am going to first talk about inventory management. The first thing I would say is, and some of the items that you might be referring to, some of our fashion items or Eva Mendes you know, we are really buying those very tightly. We are buying them to turn fast and we are buying them really to sellout.

A couple of things coupled with that is as we have expanded our Ask Us technology, which is really our omnichannel initiative where a customer can be in a store, order an item from online or from another store, that also is helping us for those stockouts because we carry a lot of the extra sizes on our online site and we can fulfill out of our fulfillment with GSI and that actually help us a lot to improve customer satisfaction in terms of sizing and stockouts.

Now, in reverse of that, in our pant and denim category, where we really have invested and we believe in this business and it's a high margin business for us, you will find the sizes more readily in our stock in our pants and our denim, especially in those key bottoms. In terms of the Eva Mendes collection, I think we have got smarter, better about allocation to our stores. We went out in almost every single store. We tiered the stores better than we ever have in our history. We bought this stores by group better than we ever have in each style and really we looked at buying through those on sizes.

But I do think, as we look at it, the whole Ask Us technology and the improvement of that in the roller back is the way to satisfy the customer, no matter where she is. Good to know is that, we are now testing the Phase 3, which is order online and pick up in store. That went live last week just for the state of New Jersey. You can see, anybody can see it, but it is only available in New Jersey. We are excited about how that's going to progress.

In terms of May, I will say that really our guidance is consistent with the trend that we are seeing in Q2. I will say that the Eva Mendes collection in May have been very successful. The customer is loving yellow. It is just a win for her who loves color of the Eva Mendes collection. It is really resonating. I also will say that, as I said in my prepared remarks, we really were able to see some of the things were happening in Q1 and really chased into them for Q2.

So as most of the month of May was beginning to help us, is really landing some of those items like the Mercer soft shirt, especially sleeveless, great item for us, or jumpsuit really now becoming a more important part of our business. We have been chasing jumpsuits and rompers since January and we finally are in, not the best position, but a much better position, which is improving our results also.

And then obviously, our casual assortment really led by denim, the Mercer soft shirt program have performed well even in Q1 and that downtown casual becomes a larger percentage of our business into Q2, that also helped the trend line.

And then lastly, dresses. Dresses have been good all the way since January, and it is obviously helped by jumpsuits and rompers but there is also a good dress trend we have there. Three of our key items in dresses are probably the stronger than I have ever seen them. Dresses grow as a percentage of our business in Q2 as well.

So that's really why I will say why we are seeing that guidance as an improved comp from the Q1 actual comp.

Adrienne Tennant - Janney Capital Markets

Okay. Great. And then Sheamus really quickly, where should be thinking as kind of the breakeven comp on fixed cost leverage these days?

Sheamus Toal

So as we have talked in the past, from a buying and occupancy standpoint, our traditional leverage point is sales, comparable store sales in the low single-digit percentage. But as you know, over the last couple of years, we have taken a hard look at a lot of our occupancy expenses. We have been able to leverage those costs at lower than that traditional benchmark. That was the case in Q1. That's also the case in Q2, as expect to be able to leverage occupancy costs at probably the flat to slightly up in terms of comp.

In terms of SG&A expenses for Q2, we are also expecting to move closer to our traditional benchmark. We have experienced a lot of reductions in SG&A expense over the last couple of years, as you know we did in Q1 as well. As we move into Q2, we anticipate to move back to our traditional leverage point of low to mid single-digit positive comps. As we move beyond Q2 into the second half of the year, for both of those key leverage points I would expect to move back to our traditional buying and occupancy in the low single-digit positive and SG&A slightly higher.

The only callout with exception to that is in terms of SG&A expenses as we communicated earlier in the year. We are anticipating some significant non-operating charges associated with the buildout of our new office space, primarily relating to duplicate rent and certain move cost towards the end of the year. So that will obviously affect that leverage point. So excluding those costs which are anticipated to be approximately $4 million towards the end of the year, we should be back to our traditional leverage point.

Adrienne Tennant - Janney Capital Markets

Okay. Very helpful. Best of luck for the summer season.

Greg Scott

Thank you.

Operator

Our next question comes from Eric Beder, Brean Capital.

Eric Beder - Brean Capital

Good morning. Congratulations on a good start to the year.

Greg Scott

Eric, how are you?

Eric Beder - Brean Capital

Doing great. Could you talk about the dresses, how well have skirts been and where do you see the active wear denim going as we move a little bit in summer and then some cold weather?

Greg Scott

So skirts are a very small part of our business. They were strong in Q1 actually but really the skirt business is really relatively small for us. We continue to see strength in our active business in maxi skirt and our wear to work business in pencil skirt. We have not seen the same strength in, sat the fitness wear skirt as we have in dresses.

What's interesting about trend is, we really believe that our active wear across Love, NY&C represents a great opportunity for us as we move into Q3 and in Q2. So Q2, you will see our Love, NY&C active expand next month. We really created a great line of both, true yoga lounge but we are really trying to move that street wear business there also which is that casual, active, I hate that word at leisure dressing. We are not using that word, but that's really something that we see emerging again, which we did about three years ago.

But as we move into fall with Love, NY&C, we see three distinct businesses. Our true yoga lounge business, based on whether its yoga fabric, velour, graphic tee which has been good. We are going to continue to grow our small Envy collection which is true performance and then lastly we are reintroducing street wear for September and we are excited about that because that was a great business for us. The trend feels very right and so we think that's a good launch in September.

I will say, for the denim business, strong in Q1 as we launch several jeans in Q3. We are really excited about the launch of some of those jeans. Really talking about the strength of this collection, about the fabric, about the fit, how comfortable it is, designed in New York, really with that downtown attitude. We are excited about that but there is something really new on the horizon there that bridges between denim and Love, NY&C and the bottom that I don't really want to talk about, because I think it's super exciting. I don't want to be really release it right now.

Eric Beder - Brean Capital

Okay. In terms of shrinking stores, how many more stores do you think you can reduce in size? I know it has been a big focus of you guys.

Sheamus Toal

It has definitely been a big focus over the last couple of years in terms of optimizing our entire real estate portfolio. We continue to look at that and make adjustments to that strategy. We have identified certain underperforming stores that we expect to close over the next couple of years. But very much we anticipate that the store count will start to stabilize.

So we have gone through several years of reduction in store count. That should be coming to an end. We should see a stabilization of the store count, with some level of closures in the New York & Company channel offset by new store openings in the outlet channel primarily.

In terms of downsizes and optimization of the footprint of the stores, there will be a certain level of optimization as we shift into higher penetration of outlet stores. Those have a smaller footprint than our traditional mall-based stores.

And then, to the heart of your question, we do still anticipate some level of downsizes and that activity will occur over the next couple of years. As we have announced this year, we are anticipating that there will be 10 to 15 remodels, some of which will be downsizes in place and some of those locations, I would say, in terms of the potential for the future we probably have about 10% of our chain that we would expect over time that we have the ability to downsize a little bit further.

Eric Beder - Brean Capital

Okay. Last question. You redid the net. Where should we think our longer-term that can be in the mix in terms of sales, in terms driving higher returns?

Sheamus Toal

So as we look at both the NPD and our competitor data, we see a benchmark of 15% of total business as something that we should be seeing in the near short-term, and then as we go out, I think it's really hard for us to say, because as we see, as we open up Ask Us Phase 4 and we talk about order online and ship from store, that I think increases as we will count those sales to eCom. I think that increases eCom as a portion of our business alone. So I think as we talk about, I think it was 11% in the last quarter, I think that we keep benching 15% as really the near short-term goal and then after that, I think it is hard to say, I think it will obviously keep growing.

Eric Beder - Brean Capital

Thank you.

Operator

Next up is Neely Tamminga, Piper Jaffray.

Neely Tamminga - Piper Jaffray

Great. Good afternoon. Greg, I am glad to know I am not the only one who doesn't like the word at leisure. Okay, seriously, you just alleviated my concerns. It's one my least favorite words right now too, but yes, it's a category. Okay. So here is my question for you. It is really shifting gears on Ask Us thing first. Could you speak a little bit more -- congratulations on getting through the overall site redesign. Can you talk now about mobile? Like what sort of traffic are you seeing coming in via mobile? As you lead the company, what is your view as to the role of mobile for the next steps to drive towards the 15% or to capture, rather, that 15%? Thanks.

Greg Scott

So a couple of things. I will pick up the first part and then I will have Laura follow-up. We have seen obviously the traffic through mobile increase significantly over the last year. It now represents a significant portion of our traffic to our eCommerce site. We have a redesigned mobile site as well which is the same platform that our desktop site, which we didn't have before. One of the things that we saw immediately was improved conversion on our mobile site. That was huge and very important for us. I would say that we still believe there is still opportunity to improve that version because it's a new site enhancement we will continue to make to mobile so that certain portion of this spring that I think could be used for more selling and for more upselling inside that site.

Now we continually see growth in conversion in all three portions with the new site, the desktop and tablets and mobile. But mobile is our biggest growth and it ultimately continues to be our biggest growth of mobile traffic. I think that there is a lot of new things going on in terms of mobile and in terms of geotargeting, in terms of things that are happening, both from the mall developer side and what we are seeing internally.

We continue to explore this because we know this is where can to communicate first and quickly with the consumer and making that transaction seamless like we have seen at some of the -- I look at people like (inaudible), how seamless that mobile transaction is, as something as a model for us.

The second thing, obviously, is just the mobile check out are very different size. Mobile check out in on a store along with mobile feel, that's something that we are highly needing in the next couple of months.

So I am going to have Laura follow-up on that.

Laura Weil

Right. We are planning a pilot right now. It began in the third quarter to pilot our platform for stores in terms of our mobile technology. It's obviously a major initiative for us. It's something that we very much believe in, as Greg alluded to, just on our mobile eCom or our conversion is at nearly 100%. So we are very focused on mobile. We think that the future is eCommerce and we are investing in it both at the store level and obviously on a eCom level.

Neely Tamminga - Piper Jaffray

Laura, could you talk a little bit more about that rollout then in Q3 or the fall?

Laura Weil

It's really a pilot to look a smaller footprint of fixed registers along with tablets and the tablets will be used both for check out as well as customer service. It will be also used by our Associates in terms of managing their business. So we will the new platform in our stores. I think there are about 12 stores that we will be looking at. We will look at that pilot and then we will monitor, look at the metrics from it and then roll it out in 2015. And we will do that in a measured way. We won't be doing all stores at the same time.

Neely Tamminga - Piper Jaffray

Okay. That makes sense. Good. Exciting things to watch from you guys. All right. Thank you so much. Good luck to you.

Greg Scott

Appreciate it. Thank you.

Operator

From Bluefin Research Partners, we will hear from Rebecca Duval.

Rebecca Duval - Bluefin Research Partners

Hi, guys. Congratulations on managing through a tough environment.

Greg Scott

Thank you.

Rebecca Duval - Bluefin Research Partners

My question. I have two questions. One is, maybe you can give us some color on how the outlet is performing? We know that outlets in general have seen down traffic trends. But are you encouraged with what you are seeing at your stores and then what kind of response, now that you are increasing your made for outlet products up to 70%, 75%? Are you encouraged by the customer response that you are seeing to the products?

Greg Scott

So I will say that, along with very prudent industry, we definitely struggle with traffic trends at our outlets in Q1. That said, our outlets remain a highly productive channel for us because of the fact that early on we built our outlet stores smaller than our core New York & Company stores and smaller than probably the mall average in the outlet, which has made a highly productive channel for us. Also to the extent that we are growing out outlet exclusives to around 75% of our business in the quarter that also improves our margin in the outlets from a product side because instead of transfers and clearance, we have now generated products for the outlets which have allowed then to improve their margin because of stronger cost, average unit cost and stronger IMU, which has allowed us to realize better merchandise margin.

As I said, that traffic was challenging. To know, and I kind of myself alluded to this on the call in my prepared comments, traffic trends in the outlet have improved significantly as we really entered the second quarter. Those traffic trends have improved better than plan. So we are encouraged to see that. It's not a trend. It's a three week, something we have seen in the last two to three weeks in terms of traffic really improve in the outlet. We hope with this warmer weather we will continue to see that. I would just say that because of the way we built the stores, because of how productive we are in the stores, because of moving to outlet exclusive to about 75% with higher margin, and because of the buildup cost, outlet remains a highly profitable channel for us, a productive channel for us. I do believe it we experienced the same traffic challenges in Q1 as other retailers.

Rebecca Duval - Bluefin Research Partners

Got it. Thank you. That's very helpful. And my other question, Greg. I am not sure if you are ready to tell on this one or not, but I was wondering if you could give us some color on what kind of conversion you are seeing for the new customers that are coming into the store to buy the Eva line and are you seeing an encouraging conversion to the NY&Co. lines from the new shop.

Greg Scott

So we just did a comparison of our after the September launch new customers to the March launch new customers. What we are seeing is we are continuing to increase the amount of new customers coming to our stores during that time period. It's still small percent of our customer database. The line is still small, but we are continuing to see new customers come in. What we continue to see even more so than when they did in the September period, they are buying more New York & Company products with Eva Mendes, creating a higher average dollar sale than the core customer. And we are also seeing with the March customer, along with September, but even better in March, we have more repeat purchases with that Eva Mendes purchase customer than the non-Eva Mendes purchase customer.

All really good metric. When we look at Eva Mendes, both from a selling and from margin, the customer acquisition, the customer spend, the customer profile, all really good metrics. It's just too smaller percent of our total right now, but there's the opportunity to continue to grow it because we are encouraged by every metric we see in it. So that's what I say about the new customer for Eva Mendes.

Rebecca Duval - Bluefin Research Partners

Great. Will Eva be featured more in the NY&Co. brand as the brand ambassador? Will we start to see more marketing with her and featured in those clothes?

Greg Scott

So I will just say right now this is a constant dialogue we are having with the marketing team right now and really we will align that in for fall. You won't see that in this summer period. As we launch of our pants, the Soho jeans, she will not be a part of Soho jeans launch because it is really that August period. She will appear in September. Our goal obviously is to create a halo for the Soho brand around Eva Mendes and tie in Eva Mendes more clearly and distinctly with the New York & Company brand. So you will see that but I don't believe we will really see that until the September period.

Rebecca Duval - Bluefin Research Partners

Right. Well, thank you. It's very helpful. Best of luck in summer.

Greg Scott

Thank you.

Operator

(Operator Instructions). We will now hear from Matt Temple, Avondale Partners.

Matt Temple - Avondale Partners

Good afternoon. Thanks for taking that question. I just wanted to get a little more color on the outlet exclusive. I think you previously said, you hope to get to 70% penetration by the end of the year, but Q1 already got to 75%. What's the driver behind that? What are your expectations with that for the rest of the year? And is your merchandise margin improvement been driven primarily by the outlet exclusive merchandise?

Greg Scott

So our outlet exclusive merchandise during the first quarter accounted for proximately 74% of the business, as compared to 48% last year. So it's significantly up. When we look at the outlet exclusive merchandise, currently it is around 80%. This is kind of where we are going to stay. It is going to stay in that 75% to 80% for certain businesses, jewelry, outerwear, denim, where we continue to shared product across the channel. So slightly different mixes for instance, our fashion denim in our New York & Company stores, a lot more core denim than outlet.

What I will say is, in the outlet business, the increased penetration of outlet exclusive ahs helped this channel improve their merchandise margin, and that is just because they are no longer using New York & Company clearance merchandise for liquidation in the store, which obviously was depressed margin. We have now kept that at New York & Company stores which has also helped them from a sales perspective.

Matt Temple - Avondale Partners

Right.. So for Q2, when you guide to improving merchandise margins, is that being primarily driven by the merchandise of the outlet exclusive merchandise?

Greg Scott

It's not. So the sourcing team, the merchant team have done a very good job of continuing to improve our IMU in the quarter for Q2. We believe we have made some real strategic buys in terms of upfront fabric buys, in terms of cost position in some of our key items which has lead to improved IMU and a lot lower average unit cost on like items. That has helped us really improve our selling IMU as we move into Q2. And that was a mix of markdown with why we are saying that our merchandise margin in Q2 will be up in the quarter.

Matt Temple - Avondale Partners

Okay, and then in terms of marketing, are you guys planning an increase at flat or down for second half? And have you ever considered using Eva as possibly a vehicle for TV or do you see her organic appearances as sufficient with, I think you said 1 billion impressions in Q1?

Greg Scott

So right now, I don't think we really are going to talk about the second half of the year from a marketing spend. As we look at Q2, our marketing spend is slightly up over a year ago, driven by really the Eva Mendes collection, be in print, publications like Vogue and InStyle which are on newsstands today. I will say that Eva Mendes, there are so many opportunities for Eva Mendes that we can continue to explore, many other ways to get her out there to represent a great collection and collaboration with that and we are looking at all possibilities as we move forward.

I would not say that TV is out of the question but I would say that right now we are not currently in our plans, but we are looking at all different media vehicles that can really drive. What we are really seeing to is, how we can use Eva more efficiently in our digital marketing. I think we continue to have and it really improved our digital marketing, especially in banner advertising with Eva Mendes as another form at the top of the funnel of customer acquisition. So I really believe that we are continuing to see there is great things we can do with Eva, as long as Eva wants to do them.

Matt Temple - Avondale Partners

Okay. Great. Best of luck.

Greg Scott

Thank you.

Operator

And at this time there are no further questions. I will hand the conference back to our speakers for any additional or closing remarks.

Greg Scott

Thank you. Thanks, everybody, for joining us. We look forward to speaking with you when we report our second quarter results in August. Thank you.

Operator

Ladies and gentlemen, that does conclude today's conference. We would like to thank you all for your participation.

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Source: New York & Company's (NWY) CEO Greg Scott on Q1 2014 Results - Earnings Call Transcript
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