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Gordmans Stores, Inc. (NASDAQ:GMAN)

Q1 2014 Results Earnings Conference Call

May 28, 2014 4:30 PM ET

Executives

Scott King - Interim Chief Executive Officer

Mike James - Chief Financial Officer

Mike Wirkkala - Chief Operating Officer

Tracie Wickenhauser - Senior Vice President, Stores

Geoff Ayoub - Senior Vice President, Planning, Allocation and Analysis

Analysts

Mark Altschwager - Robert W. Baird

Kayla Berg - Piper Jaffray

Evren Kopelman - Wells Fargo

Laura Champine - Canaccord

James Fronda - Sidoti & Company

Richard Jaffe - Stifel

Bill Dezellem - Tieton Capital Management

Operator

Please standby. Good afternoon, ladies and gentlemen. Welcome to the First Quarter Fiscal 2014 Gordmans Stores, Inc., Earnings Conference Call. My name is Katherine, and I will be your operator for today's call. At this time, all participants are in a listen-only mode, but we will be conducting a question-and-answer session at the end of the call. (Operator Instructions)

Before we begin, I would like to remind everyone that the information contained in this conference call, which is not historical fact, maybe deemed to constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Actual future results might differ materially for those projected in such statements due to a number of risks and uncertainties, all of which are described in the company's filings with the SEC and our earnings release.

I would now like to turn the call over to Mr. Scott King, Gordmans' Interim Chief Executive Officer. Please go ahead, sir.

Scott King

Thank you and good afternoon. Thank you for joining us to discuss our operating results for the first quarter of fiscal 2014. With me is Mike James, our Chief Financial Officer; Mike Wirkkala, our Chief Operating Officer; Tracie Wickenhauser, our Senior Vice President of Stores; and Geoff Ayoub, our Senior Vice President of Planning, Allocation and Analysis.

I will start the call with the presentation of the operating results from the first quarter, as well as the status of our expansion plan. Next, Mike James will present our financial results for the quarter in more detail as we discuss our guidance for second quarter. I will then speak briefly about our initiatives for 2014 that will contribute to improved operating results as the year progresses, as well as over the long-term. We will conclude by answering any questions you may have related to the topics covered in today's call.

Net sales for the first quarter increased 8.8% to $143 million, $131.4 million for the first quarter of fiscal 2013. The increase was attributable to the 10 new stores we opened in fiscal 2013, three of which were opened in the first quarter of fiscal 2013 and three stores that were opened in the first quarter of this year.

Comparable stores declined by 2.7% in the first quarter compared to 10.5% comparable store increased last year. With our first quarter sales performance -- while our first quarter sales performance was disappointing, represents an improvement over recent trends.

Our apparel business incurred a low single-digit comparable store decrease for the quarter, while accessories and home posted low single-digit comparable store sales increases.

Despite the overall softness of the business, a number of businesses had positive comparable store performances in the first quarter including men’s and boys, career looks in missies and juniors, plus sizes, footwear and parts of home including gifts, kitchen décor, pillows, pets and toys.

Businesses that underperformed in the first quarter included girls, infants, juniors tops and bottoms, handbag, accessory and parts of home including garden, floral, wall décor and lighting.

Sales in the new 10 stores that we opened in 2013 are performing above 98% of our new store model. Our new stores that we opened in 2011 through 2013 are performing in aggregate above 90% of our new store model. We believe that sales in our new stores are suffering to certain extent from the same issues around inventory content that our comparable stores are facing.

We remain confident that sales will improve in new stores as sales improve across the chain and we believe the scalability of our business model across the significant number of new and existing markets throughout the country.

Despite an increase in net sales, gross profit margins including licensing fees experienced a deterioration of 60 basis points versus last year. We continue to experience deleveraging in our SG&A expenses related primarily to certain non-recurring costs associated with the retirement of our Former CEO and recruiting for our new CEO, higher depreciation expenses and expenses associated with our second primary distribution center opening in the second quarter.

As a result earnings per share for the quarter was a loss of $0.04 per share, which includes $0.02 per diluted share associated with the expenses related to retirement of our Former CEO and also include the impact of interest expense of approximately $0.03 per diluted share associated with the term loan used to partially fund the special dividend in September of 2013. This compares to earnings per share of $0.17 per share for the first quarter last year.

Regarding expansion, we opened three new stores in the first quarter in two market, Schererville, Indiana, Muskegon, Michigan, our first store in Michigan, our 20th state and in existing market in Boise, Idaho, the reflection of our ongoing strategy to leverage economy of scale opportunities in under penetrated markets.

We have closed two underperformance stores this year and will likely close a third outperforming store in the fourth quarter. We will open four more stores this year. In the second quarter we will open three new stores in two new markets, including Grand Rapids, Michigan, Saginaw, Michigan and the existing market of St. Louis.

In the third quarter we will open one new store in another new market Tyler, Texas, our first store in Texas which will be our 21st state. At the end of 2014, Gordmans will increase its numbers of stores by 43% since the end of 2010 expanding from 68 stores to 97.

Construction of our second primary distribution center is on track and schedule to begin servicing stores late in the second quarter. This new facility will allow us to double our current store account.

Mike will now present our financial results for the first quarter in more detail, as well as our guidance for the second quarter. Mike?

Mike James

Thank you, Scott. Net sales for the first quarter of fiscal 2014 increased $11.6 million or 8.8% to $143 million as compared to $131 million the same period last year. The increase was due to the 10 new stores opened in fiscal 2013 and the three new stores opened in March of this year.

Comparable store sales decreased 2.7% in the first quarter of fiscal 2014, driven by a decrease in comparable transaction partially offset by a low single-digit increase in the average sales per transaction which improved from the first quarter of fiscal 2013 due in part to the rollout of our guest loyalty program gRewards to all stores in the second quarter fiscal 2013.

Gross profit which includes license fees increased 7.4% to $63.4 million, license fees from lead department were $2.2 million for the first quarter of 2014, compared to $1.9 million for the same period last year.

Gross profit margin was 44.3% for the first quarter compared to 44.9% last year, a 60 basis points decrease, primarily driven by higher promotional markdowns associated with our loyalty rewards program which was launched in May of 2013, resulting from higher rewards earned and redeemed. The combination was maintaining the same promotional advertising, the issuance of discount coupons to guests in an effort to drive traffic and conversion during the quarter.

In addition, initial markup was lower due to higher freight charges. These margin reductions were partially offset by lower merchandise markdowns due to lower inventory levels during the first quarter as compared to last year.

SG&A expenses were $63.4 million or 44.3% of sales versus $53.7 million or 40.8% of sales in the prior year, a 350 basis point increase. In addition to the lack of sales leverage associated with the comparable for sales decrease corporate expenses increased by 180 basis points, primarily due to certain non-recurring costs related to the retirement of our Former CEO and recruiting for our new CEO, and higher recruiting and relocation costs associated with the addition to our stores and merchandising leadership teams.

And store level expenses -- store level expenses increased by 80 basis points, primarily due to higher occupancy, maintenance and utility costs, as well as higher health insurance and workers compensation plan.

Distribution center expenses increased by 50 basis points due to higher rent expenses associated with our second distribution center opening in the second quarter as the lease expenses began in November 2013 when we took possession of the building and charges associated with lower capitalized spread in the prior quarter since the lower merchandise inventory level and lower average delivery chargers as the percentage of inventory receipts during the quarter.

In addition, depreciation expense increased 40 basis points due to increase property addition associated with new store openings, investment in upgrading our information technology systems and the new corporate headquarters.

Pre-opening, closing expenses also increased by 30 basis points through the second distribution center opening in the second quarter and the closing of an existing store in the first quarter.

Interest expense for the first quarter was $1.2 million compared to $100,000 for the same period last year. The increase in interest expense is primarily driven by interest on the $45 million senior term loan we entered into in August 2013, partially fund the special cash dividend paid at September 2013.

The net loss for the quarter -- for the first quarter of 2014 of $700,000 compared to net income of $3.2 million last year. Our combined federal and state tax rate for the first quarter this year was 38% compared to 37.5% first quarter last year.

Diluted earnings per share were loss of $0.04 per share for the quarter based on $19.4 million weighted average shares outstanding. Diluted earning per share was $0.17 in the first quarter of fiscal -- first quarter of 2013 based on $19.4 million weighted average diluted shares outstanding.

I would now like to turn to our balance sheet. Cash and cash equivalents at the end of the quarter decreased by 63% to $18 million compared to $49.4 million a year ago, primarily due to special cash dividend of almost $70 million last year, which was financed with the combination of cash and a term loan.

Inventory was $95.2 million at the end of the quarter, up 6.4% compared to $89.4 million at the end of the first quarter last year but represented a 3.7% decrease on an average store basis. On a comparable store basis, which represents merchandising stores and excludes the inventory in transit, inventory in processing at the distribution center, inventory decreased by 8.4%.

Our working capital was $37.2 million, 54% lower than at the end of the first quarter last year. We had no borrowings outstanding on our $80 million revolving line of credit at the end of the first quarter.

With respect to forward-looking guidance, we're projecting second quarter fiscal 2013 net sales to be between $143 million and $146 million which reflects a low single-digit comparable store sales decrease versus the 2.6% comparable stores sales decrease incurred in the second quarter of last year.

We expect 90 to 100 basis point decrease in gross profit margin compared to the second quarter last year as result of aggressive plans to address inventory content that has been strained by poor sales performance. We also expect additional selling, general and administrative expenses related to depreciation expenses associated with the company's second distribution center that will be operational in the second quarter to result in some deleveraging of expenses.

However, we’ve undertaken a thorough review of our overall expense structure and are making plans to reduce expenses by $3 million throughout the remainder of the year. As a result, we project diluted earnings per share for the quarter to be between a loss of $0.16 to $0.13, using a weighted average diluted share count of approximately 19.4 million, which also includes the impact of interest expense associated with the term loan of approximately $0.03 per share compared to earnings of $0.05 per share in the second quarter of fiscal 2013, given the weighted average diluted share count of approximately $19.4 million.

For the 52-week fiscal year ended January 31, 2015, comparable store sales are forecasted to be down low single digits, though we expect to see improvement as the year progresses as we are encouraged by improving comparable store sales performance that we experienced towards the end of the first quarter. In addition, we expect an improvement in gross margins in the back half of the year as we tightly manage our inventory level.

SG&A expenses will be leveraged due to the addition of the second distribution center. And we expect that depreciation expense will increase by 40 basis points for 2014 and preopening and closing expense will increase by 10 basis points for the seven new stores, the second primary distribution center and preexisting store closure versus the 10 new stores that opened in fiscal 2013. Our diluted share count is expected to remain at 19.4 million shares through the year.

I would now like to turn the call back over to Scott to discuss our strategic initiatives.

Scott King

Thanks Mike. We’re focused on a number of initiatives in 2014 that we believe will have a meaningful impact on comparable store sales and our profitability through the remainder of this year as well as over the long term. And we’ll continue to test new initiatives throughout the year.

The first initiative, we are testing a number of new marketing initiatives that we are leveraging information of team from the loyalty program including advising the creative content of our email advertising to focus more on key merchandising offerings and our value price proposition, increase in the frequency of our email blasts and expanding the audience receiving these emails in order to increase the frequency of visit and overall spend at Gordmans.

Additionally, we are modifying our TV commercials and reintroducing print media with freestanding inserts, or FSIs, throughout the year, as opposed to only the holiday period in the past years, which was aimed at reaching new guests. The creative content of the TV and FSIs are similar to the email strategy and are all focused on highlighting fashion and selection, value and creating a sense of urgency.

We now have over 2 million registered loyalty guests which represents over 60% of all of our transactions. We are focusing on increasing the penetration level as well as increasing the number of guests enrolled in the program.

Second, we are focused on improving our brand portfolio with the addition and intensification of nationally recognized brands. Key growth plans in Q1 included Buyer’s, Carter’s, Calvin Klein, Jessica Simpson, Perry Ellis, Puma, Silver Jeans and XOXO.

Third, we are recalibrating our inventory, tightly controlling receipts until we see consistent sales improvement. We are clearing out aged clearance merchandise and challenging our buyers to find great door buster type merchandise that we can bring in to drive new traffic to our stores and increase the frequency in which our guests shop.

Fourth, we are revitalizing our product presentations and shopping experience for our guests by reallocating selling space to key categories of merchandise that have sufficient significant growth potential, including the misses and men’s businesses and rolling out signage, visual merchandising and in-store announcements to highlight our merchandise offering in our value composition.

Fifth, we are focusing on improving the strength and acumen of our merchandising organization. In the first quarter, we have hired several talented merchandising associates with strong retail background and we are now fully staffed with traditional merchandising manager level for the first time in over a year. However, Mike Morand, our Chief Merchandising Officer has recently tendered his resignation in order to relocate to California to pursue other interest. We are actively searching for his replacement. In the interim, the merchandising organization will be reporting to me.

Sixth, we continue to focus on tactics to improve conversion at store level, including the integration of traffic information into our store labor management system, improved associate interaction with guests and improved analytic to better align the scheduling of our store associates with traffic patterns.

Seventh, we are focusing on driving cost reductions and efficiencies through the reevaluation of our cost structure, leveraging the investment made in technology, distribution and support facilities and thorough evaluation of opportunities to reduce our investment in new locations to a process of value engineering.

Eighth, we are in final stages of completing instructions of our second distribution center in Indianapolis. This new distribution center will allow us to double our current store count and reduce our outbound freight transportation cost to stores and allow us to backward engineer new technology into our current distribution center.

Ninth, but certainly not last and important, we view e-commerce as a sales opportunity with omnichannel capabilities as an opportunity to drive traffic into our stores in concert with our successful loyalty program.

We are working on developing a strategy and an assessment of our potential for implementing eCommerce as an additional channel to service our guest and are preparing for potential launch of eCommerce in fiscal 2015. We believe these initiatives will strongly position our company for long-term growth and we continue to identify other strategies to drive performance as the year progresses.

Operator

We’d now like open it up to all your questions.

Question-and-Answer Session

Operator

Thank you, gentlemen. (Operator Instructions) And we will go to Mark Altschwager with Robert W. Baird.

Mark Altschwager - Robert W. Baird

Hi. Good afternoon and thanks. Just to start, could you update us on the CEO search and what stage are we in there, and then any expectations for the potential timing on the announcement and similar thoughts just on the timing of Mike's replacement?

Scott King

Sure. I will be happy to. This is Scott. The CEO search is being handled by Russell Reynolds. We’ve been in the process of interviewing quite a few candidates. We are not in a hurry to get to compromise ourselves to get -- we are trying to get the best to you a candidate we possibly can. I’d say it’s going to take another 90 days approximately. And as far as Mike Morand replacement, as far as merchandising that search is underway and we are screening resumes right now and I guess it’s going to take us 60 to 90 days also.

Mark Altschwager - Robert W. Baird

Okay. Thanks. And then bigger picture, we've seen SG&A increase several hundred basis points as a percentage of sales in recent years. Do you see a pathway back to a mid single-digit operating margin? And along those lines, how much opportunity is there on the cost side and I know you named a number of initiatives, but -- and then what are the key levers beyond just better top line trends? Thanks.

Scott King

We do see a path back to higher operating margins but it’s really positioned on sales. The issue that we’ve had in the last couple of years obviously has been at the comparable store sales issue. We are in the process of trying to turnaround. In addition, we have looked at our cost structure and we have identified up to $3 million this year in fiscal 2014, which will annualize obviously more than that as it rolls into 2015, to try to bring that cost structure back in line with where our sales volumes has been.

Mark Altschwager - Robert W. Baird

Thanks. Just a quick follow-up there. Maybe I missed it, did you quantify the one-time costs in the quarter?

Mike James

One-time cost, it was about $0.02 in EPS primarily related to the personnel cost.

Mark Altschwager - Robert W. Baird

Perfect. Thank you.

Operator

Thank you. (Operator Instructions) And we will now hear from Kayla Berg with Piper Jaffray.

Kayla Berg - Piper Jaffray

Great. Thanks. This is Kayla on for Neely Tamminga. Just wondering if you could talk a little bit more about what is and isn't working in home and within the apparel categories? In home, are you balancing the offering cost pricing trends? And as it relates to apparel, do you think you're missing out on key brands or price points or is it tied more to the broader weakness in juniors’ apparel?

Scott King

Geoff, do you want to?

Geoff Ayoub

Yeah. Thanks, Scott. So some of the things that we are seeing in the apparel, let me just start there right now. So career looks across both misses and juniors have been performing well, dresses, maxi skirts, prints, separates, some of the feminine details, laces, crotchets, things like that we have been working on.

But yeah, overall there has been some weakness in the juniors, so we continue to look toward opportunities within those categories to look at the scores. Brands are always a part of our expansion, and part of our -- a key strategy as part of our expansion. So in addition to some of the brands that were called out, I mean, we are seeing success this quarter with brands like Silver and Buyer. I think we called it out in Calvin Klein and Jordan, Puma, Carters, XOXO. So there are some brands that we're seeing strong growth but we continue to always look for new brands.

Kayla Berg - Piper Jaffray

Okay.

Geoff Ayoub

Within home, we are seeing casual looks in home, particularly soft storage is also performing very well in addition to some of the categories that we called out earlier across pets and décor pillows and home gifts and things like that so. But yeah, we are always looking again to balance price points, good-better-best strategies, looking for branding opportunities as well.

Kayla Berg - Piper Jaffray

And as you think about the launch of potential eCommerce sites down the road, are you guys giving any thoughts to a mobile optimized site or a mobile app to launch in tandem with that or what are your thoughts there?

Mike Wirkkala

This is Mike Wirkkala. We view the site as an opportunity, not only to do business online but also to drive traffic into the store. So we are envisioning a full omnichannel site that would allow the guest to shop when they want, where they want and in the way they want, potentially having from store fulfillment as well as in-store pick up.

Scott King

And mobile is a big part of it.

Mike Wirkkala

And mobile is a key component. Are there additional questions?

Operator

Thank you, Ms. Berg. We will continue on to Evren Kopelman with Wells Fargo.

Evren Kopelman - Wells Fargo

Thank you. Good afternoon. A few questions, the first one, is you talked about expecting gross margin improvement in the back half due to tighter inventory. Can you quantify where you expect inventory to be at the end of the second quarter?

Geoff Ayoub

Yeah. Hi. This is Geoff again. We are targeting a greater than 10% inventory reduction on an average store base by the time we get to the end of Q3.

Evren Kopelman - Wells Fargo

Okay. On an average store basis you said?

Mike James

Correct, yes.

Evren Kopelman - Wells Fargo

Okay, great. And then the SG&A savings you talked about $3 million this year. Two piece question on that. One is should we expect to that mostly in the back half or mostly in the fourth quarter? And then, what is the magnitude of these savings on an annualized basis that we should expect to see next year?

Mike James

We will see -- most of that’s going to be in the back half. There will be a few hundred thousand in the second quarter, but mostly of it’s in the back half of the year. On an annualized basis, the number is around $5 million that we will see annualized in 2015.

Evren Kopelman - Wells Fargo

Okay. And what areas will that be coming from?

Mike Wirkkala

This is Mike Wirkkala. It’s really a -- we’ve done a comprehensive review. It really involves all aspects of the business. The focus has been on things that will not impact the guests. So things like delivery efficiency, looking at the efficiency of our direct mail efforts, travel, some structural opportunities, insourcing certain things that we had done externally particularly in IT, utility initiatives, a lot of different areas all across the company.

Evren Kopelman - Wells Fargo

Okay, great. That's very helpful. The other question is you talked about comp improvement towards the end of the first quarter. Can you give us a little bit more color that you see with the Easter shift a significant improvement in April? Is that part of what drove the improvement or did you see more of some of your initiatives start to play out in the comp improvement?

Mike Wirkkala

I think part of it was obviously due to the Eater shift moving at the end of April this year and we don’t disclose comp by month, but we did see they were within a pretty tight range February to April, but April did show improvement over February and March.

Scott King

And some of things that we are doing with the email blast, we increased the frequency from two to three weeks to six to seven. It’s having very good results on item basis. We’re up about 30% on featured items, and it’s been pretty consistent. So that’s what gives us the kind of intestinal fortitude to go forward and broaden that out, the FSI and also TV. We are trying to push fashion, value, urgency and it seems to be responding.

Evren Kopelman - Wells Fargo

Okay, great. And then lastly on the capital expenditure plan this year, any changes or is it still the $27 million to $30 million you talked about before?

Scott King

It will still be in the 27 to 30 million range.

Evren Kopelman - Wells Fargo

Okay, great. Thank you very much.

Operator

And we will take our next question from Laura Champine with Canaccord.

Laura Champine - Canaccord

I had some follow-up questions about the CEO and CMO search. Can you talk a little bit more specifically, Scott, about what skill sets you're looking for there? And also why it sounds like you made the decision to hire the CMO before you bring a CEO on, sort of why that is the trajectory? And also sort of how those merchandising managers are going to report into you in the interim? Thanks.

Scott King

Sure. Well, firs of all, the purchase of the CMO and CEO are kind of being run simultaneously. So I don’t know which one is going to come in first or get here first, but we certainly would like to have a CEO in place before we hire the merchant but that doesn’t always happen forward as you plan. So that’s one thing.

The second is from a talent standpoint the first quality that we are looking forward is the very strong strategic leader. We would like to have that person have a merchant background, but I am fine within an operator also, but the reality is here they we have a very strong leader that can provide great guidance to improve really thing and we are -- that’s really how we expect to job.

Laura Champine - Canaccord

Got it. And then in the interim how you're managing the merchandising functions?

Scott King

Well, this is all just happening as we speak. Right now the merchandizing functions with DMMs will report to me. We are going to work very closely with them. And I think it’s a very challenging group and a lot of new really challenged merchants that we brought in a last six months work hard on their strategy by category and albeit getting a lot of my time to product revenue.

Laura Champine - Canaccord

Thank you.

Operator

We will go to James Fronda with Sidoti & Company.

James Fronda - Sidoti & Company

Hi, guys, how are you?

Scott King

Good, how are you.

James Fronda - Sidoti & Company

Could you just talk a little more about realigning the merchandise mix, I guess just what that entails?

Scott King

Cam up be a little more specific in your question?

James Fronda - Sidoti & Company

Right, you said in the press release that you're going to be focusing on realigning the merchandise mix, so I was a little curious what that exactly was?

Scott King

In terms of, well there is a couple of different things. One is there is a focus on some real growth opportunities within misses and mens sportswear that we’ve identified as these are pretty underpenetrated business relative to where we fit today specifically relative to we sit today.

James Fronda - Sidoti & Company

Okay.

Scott King

So that’s one area where we’re going to consider that we’re looking to drive growth. The other one specifically refers to pricing peers that fix at a bet.

Mike James

And within good, better, best, we feel that part of our sales challenge does come from misalignment between what percentage of the business is done in good pricing versus better pricing versus best pricing. So there is a real concerted effort across the entire business to better align and to drive the growth of good, the opening price point, lower price point, even as we continue to pursue brand. So those two things are not mutually exclusive, but we feel there's a really opportunity to grow the business.

James Fronda - Sidoti & Company

Okay. Thank you.

Scott King

You are welcome.

Operator

Thank you. Our next question will come from Samantha Swerdlin with Stifel.

Richard Jaffe - Stifel

Hi. Richard Jaffe for Samantha. Just I guess a bigger picture thought about the business that it was sort of a modified off price business. Is there an opportunity to become more truly off price, more aggressive on pricing, a greater value component to the business and then more opportunistic in the marketplace than you've been to evolve the business a bit. Is there any thought that the model maybe needs a rethinking?

Geoff Ayoub

Well, I think it’s need a little modification. We spoke a little bit about our focus on the good price points and we’re saying that when we lead with really great value she responds to it, just even through our e-mail blast strategy. We’re also looking at door busters where we’re unleashing our merchants and going to the market and defining great value product. We’ve just started that. The initial results have been very strong.

And I think both of those efforts are going to underlying for us a real value preposition in the consumers mind. I think that has waned a little bit over the last few years and we’re really reinforcing it and that's why we're accelerating on doing so many ways of communication vehicles through our existing customer base and also focusing on getting new traffic into the store vis-à-vis TV, FSIs and direct mail.

Richard Jaffe - Stifel

But on the other side of the equation is your buying team, sort of up to the task to continue to the merchants that they are for the business that they have and also spend an hour a day chasing down great opportunities in the marketplace? Is there that kind of flexibility in their day or is there staffing challenge that you're going to be facing?

Geoff Ayoub

Hi, this is Geoff. I think the simpler answer to that is yes, they are up and no there’s no staffing challenges there. That's an ongoing part of what these guys do everyday to search out, especially with the guidance and the direction of looking for those door buster items, looking for great value items that we can introduce that. We may not have done that as aggressively as we needed to over the last period of time but with the focus on that now, we’re getting, we’re building portfolios of product that we can go forward with that within those prices.

Scott King

And I would just add to that. We’re actually very excited about it and they are challenging each other to give the best door buster and who’s going to get the best penetration. But it’s not taking away from their daily activities at all.

Richard Jaffe - Stifel

Got it. Thank you.

Operator

And we’ll take our final question from Bill Dezellem with Tieton Capital Management.

Bill Dezellem - Tieton Capital Management

Hi, thank you. A group of questions, first of all, would you talk a little bit more about the aged inventory and where you see the biggest issue whether it is department related, regions of the country related, et cetera, please?

Geoff Ayoub

So the aged inventory is really an accumulation of the overall sales trends that we’ve been seeing and so it’s more across the board than it is specific to a particular region of the business. And particularly we’ve seen some issues within teen, children and some accessories. But really every one of the businesses has had issues to date just due to the general overall trend.

Bill Dezellem - Tieton Capital Management

And so the implication is that you did not pullback the buying of inventory enough as sales waned or with the management transition, have you just made a decision that you're more comfortable with a generally lower level of inventory than prior management?

Scott King

Well, I think, first and foremost there is a lag time between when the buys are committed to versus the way the sales trends are. So I think the team has done a really pretty aggressive job of adjusting receipts to match sales plans but there's a carryover effect. And there's a lag effect with some of the inventory. So we’re at a point where we feel like its necessary to go ahead and take the markdowns to address the aging so that we can better (indiscernible).

For the second part of your question, I think we absolutely feel like we can operate more effectively on a lower average level of inventory than we have been over the past recent time period. So that we can get more frequency, little more freshness into the business on a more consistent and frequent basis so that we give the guest the best opportunity for sure.

Bill Dezellem - Tieton Capital Management

Thank you. And continuing down that path, there was a bit of pressure on gross margin in the first quarter as that was referenced in the press release specific caused by markdowns. Was that the beginning of this clearing of the aged inventory process or was that something distinctly separate from what you're discussing now?

Scott King

That would be step of somewhat we’re discussing how the primary issue with markdowns in the first quarter were promotional markdown related. On a positive perspective, we’re seeing some in Q1 versus the prior quarter, a significant increase in our loyalty program. And we’ve seen more rewards redeem and more rewards earned which is processed in the quarter to increase our reserve for reward that have not being redeemed yet.

So that was part of the markdown chart in the first quarter. Associated with that, we continue to utilize promotional markdowns with coupons just in an attempt to drive traffic into the stores (indiscernible). So we had a combination of the two and overtime some of those promotional markdown that are not related to loyalty, we would see those being reduced as loyalty increases.

Bill Dezellem - Tieton Capital Management

Thank you, that's helpful. And then continuing down the markdown front, you are planning for comps to decline in the second quarter and yet on the surface, it does appear as though your additional promotional activity to liquidate inventory, that should be driving comp sales. And so it seems as though your guidance is in line with what we would normally see on a seasonal basis rather than getting any benefit from the extra sales with inventory liquidation push. Would you please help me reconcile what I'm missing there?

Mike Wirkkala

This is Mike again. I think the biggest issue is was normally you would expect promotional markdown drive comp sales, drive traffic. The charges that we’re looking to take in the second quarter are related to aged clearance inventory. So those are goods that are basically all related, have been -- were purchased sometime last fall. While we do hope that that drive additional business into the store and not something that we’re currently forecasting from a guidance perspective.

Bill Dezellem - Tieton Capital Management

Thank you.

Operator

Thank you. Ladies and gentlemen, that was the time we have for questions. I’ll go ahead and turn the thing back over to our presenters for any additional or closing remarks.

Scott King

I just want to thank you on behalf of the entire management team and our 5,000 plus associates and our storage distribution centers and corporate office. Thank you for your continued interest and support of our company.

Operator

Thank you. And ladies and gentlemen, again, that does conclude today’s conference. Thank you all again for your participation.

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