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Christopher & Banks Corporation (NYSE:CBK)

Q1 2014 Results Earnings Conference Call

June 10, 2014 08:30 AM ET

Executives

Megan Crudele - ICR

LuAnn Via - President and CEO

Pete Michielutti - SVP and Chief Financial Officer

Analysts

Neely Tamminga - Piper Jaffray

Jeremy Hamblin - Dougherty & Company

Jay Li -Trafelet Brokaw

Operator

Good morning ladies and gentlemen, thank you for standing by. Welcome to the Christopher & Banks Corporation First Quarter 2014 Earnings Conference Call. At this time, all participants are in a listen only mode. Following the presentation, we will conduct a question-and-answer session instructions will be provided at that time for you to queue up for question. As a reminder, today's conference is being recorded.

And now I would like to turn the conference over to Megan Crudele of ICR. Please go ahead.

Megan Crudele

Thank you operator and good morning everyone. Joining us on the call today are LuAnn Via, President and Chief Executive Officer and Pete Michielutti, Senior Vice President and Chief Financial Officer. Today's call is being recorded and will be available for replay later today. Information on accessing this replay is described in today's press release. We would like to remind participants that remarks made by management during the course of this call may contain forward-looking statements about the company's plans and future results.

These forward-looking statements are subject to risks and uncertainties that could cause the actual results and implementation of the company's plans to vary materially. These risks and uncertainties are referenced in today's press release as well as in the company's most recently filed form 10-K. At this time I would like to turn the call over to Mr. LuAnn Via. LuAnn.

LuAnn Via

Thank you, Megan. Good morning everyone and thank you for joining us today to review our first quarter results and our outlook for the second quarter and full year. We are pleased to report a solid start to fiscal 2014 financial highlights from our first quarter include flat same store sales comps despite challenging traffic trends due to a worst weather across much of our store base for the first half of the quarter.

Merchandise margins were up 280 basis points as compared to last year's first quarter; a 250 basis point increase in gross margins as compared to last year; and substantial year-over-year growth in both operating income and earnings per share with EPS more than tripling. During the quarter we benefited from increases in conversion and quality of sales with both UPTs and AURs reflecting customers' positive response to our merchandise assortment enhancements. Increased inventory investments in our core and go forward merchandise which carried lower mark down risk allowed us to realize significant improvement in our merchandise margins versus the first quarter of 2013.

At the end of the quarter approximately 78% of our inventory consisted of core or April go forward fashion versus 74% last year. Our MPW strategy has shown strong results the MPW stores continue to generate higher sales per square foot an increased store profitability as compared to the overall chain.

Sales per square foot in MPW stores increased 8.1% compared to last year's first quarter and their margins continue to be higher than the company average. Given the healthy ROI they are delivering we are accelerating the MPW rollout. We now expect to have approximately a 190 MPW stores by the end of fiscal 2014. We added CJ products to 53 stores in May and saw an increase in new customers at these stores as compared to the prior two months. We planned to add CJ product to another 32 stores late in the third fiscal quarter.

In light of the recent changes in the marketplace, we have a heightened focus on acquiring new customers to gain market share in addition to increasing engagement with our loyal customers. These efforts include research that will help inform us as we attract new customers to our brand. This includes commencing our first brand awareness study as well as conducting several focused groups to better identify what potential customers are seeking.

Now let me walk you through in more detail some of the progress that we made on our strategic initiatives. As we evolve our merchandise offerings, we're very pleased with our customers' response. We will continue to capitalize on these opportunities through frequent review and adjustments to our assortment. This will ensure that we're giving her the compelling, versatile, quality fashion that she wants at the value that she expects. These efforts also support our focus on acquiring new customers.

Core offerings continue to be a key initiative. Our core programs which include long-leg pants, jeans and layering tees continue to provide sales growth as we remain in-stock on all these essentials all season long. Our denim and long-leg bottoms have been expanded to offer her increased fit and style choices to round out her wardrobe.

In addition, our core [knit] business is consistently generating positive results through a more balanced range of color options and reduced number of styles. Additionally, new synthetic options have been introduced core tops to allow us to capitalize on a more polished casual and wear-to-work business. All of these key categories are expected to deliver sales increases in the back half of the year.

We are also encouraged with the response we are seeing in our new business categories introduced late last year. Our solution based programs including signature slimming bottoms and wrinkle-resistant shirts have been well received. Both our casual weekend wear and our travel knit dressing collections are generating strong sell through. We've gained key learnings from these programs which we've incorporated into our assortments during the back half of the year. And they are expected to provide further growth into next spring.

Finally, our accessories business continues to exceed our expectations and we see additional opportunities to expand the business going forward. Importantly, as I said earlier, we are in a very good inventory position with an improved balance between basics and fashion. We are ensuring that we meet her everyday needs by maintaining our in-stock position on key styles and sizes in core categories while adjusting our fashion assortment to offer greater breadth and a little less depth overall creating a stronger sense of urgency for fashion and mitigating markdown risk.

On the marketing side, we continue to refine our strategy in order to more effectively engage her through our store fronts, promotional events and direct marketing campaigns.

During the quarter, we held two significant events, our Friends and Family promotion in March and our Spring Fashion Show in April, both of which continue to create a strong connection with our customer.

As compared to last year, our active customers are visiting more frequently and spending more each visit. Additionally, we saw increased customer retention in the aggregate with larger gains in our new and reactivated customers. We also saw healthy increases in the number of multi-channel customers, spending both in-store and online.

Based on our direct marketing efforts yielding increases in sales per name mailed, we intend to further expand our direct mail campaigns. The private label credit card program continues to grow. We ended the quarter with more than 620,000 accounts purchases with the card accounted for nearly one-third of net sales for the quarter.

Given the success of our [targeted] PLCC events in gaining new cardholders and lifting spend on the card, we plan to offer these types of promotions periodically going forward.

Now let's turn to our e-commerce channel. Our sales for the quarter were down 5.5% compared to last year. While we saw fewer top line sales our e-commerce gross margin rates for the quarter increased 350 basis points and gross margin dollars were up 2.3%. Similar to last quarter the sales decrease was due primarily to the fact that nearly one-fifth of our e-commerce sales are generated in store and we experienced an overall decline in store traffic during the quarter.

Sales were also impacted by the significantly reduced level of clearance inventory, we offered online as compared to last year. As you may recall, we began reducing the level of our clearance inventory last year's fourth quarter which is a reflection of our efforts to reposition our e-commerce site to be more profitable.

More recently we have experienced an acceleration in sales as the weather improved in March and April, our customers responded favorably to our spring assortment. We continue to upgrade our site to enhance our shopping experience from start to finish. Work is underway to consolidate our separate website into a single store front selling missy, petite in women sizes to align with our in store MPW format. This project is anticipated to launch in the fall.

We are also streamlining the navigation to make it easier for her to find what she is looking for, enhancing the visual display and easing the checkout process.

We continue to refine our targeted paid digital operating investments to drive customer acquisition resulting in increase sales while optimizing these advertising dollars. Overall, our ongoing e-commerce initiatives are intended to drive sales both online and in-stores.

Finally, we are on track to optimize our real estate portfolio. As I mentioned earlier, we are accelerating the rollout of our MPW concepts and Pete will discuss this in more detail shortly. Additionally our outlet concepts continued to yield positive results due to several factors, including an accelerated clearance strategy with that sits all off with higher retail and increased need for outlet product both of which are producing increased gross margin dollars.

We opened two new outlet stores during the quarter and expect to open the total of 13 outlet stores during 2014. Overall, we are very pleased with our results in the first quarter and we believe that we are making good progress toward our long-term goals. Importantly, our strategies are driving strong results. We are gaining valuable insights on the shopping behavior both our current and perspective customers.

With these insights, we are evolving our merchandise assortments to solidify the loyalty of our core customer while attracting new customers to our [arena]. And we are successfully implementing our real estate strategies to increase store sales and margins. While we are proud of what we have accomplished, we are also excited about the opportunities that lie ahead as we are poised to deliver another year of growth for the company in 2014.

I will now turn it over to Pete for a more in depth review of our financial results.

Pete Michielutti

Thank you, LuAnn, and good morning everyone. My financial review today will cover the 13 week periods ended May 3, 2014 compared to the 13 week periods ended May 4, 2013. I will also provide some general comments regarding our outlook for the second quarter and for fiscal 2014. Let's start with the first quarter results, total sales were 103.4 million in the first quarter of fiscal 2014 compared to 108.5 million for the same period last year, a decrease of 4.7%. We operated on average 8.9% fewer stores in the first quarter of this year and during the comparable period last year.

Same store sales decreased 22% from the 13-week period ended May 3, 2014 as compared to the 13-week period ended May 4, 2013. This compares to a same store sales increase of 23.4% in the first quarter of last year.

The decrease in sales versus last year's first quarter was primarily a result of temporary store closings, delayed openings and lower traffic through the unseasonably cold weather and snow that impacted much of the country in February of this year. Nearly two-thirds of our store base was impacted of one point or another by weather during the first half of the first quarter.

During the quarter we saw a decrease in transactions per store of 5% as a result of lower traffic partially offset by continued improvements in conversion. We saw favorable response to our assortments as evidenced by average unit retails increasing 5.3% and an increase of 3.8% in units per transaction.

E-commerce sales during the quarter were 11.6 million down 5.5% from 12.2 million during the first quarter of last year. The decrease is primarily a result of the lower marks in clearance inventory that LuAnn mentioned resulting in a $1 million drop in clearance sales.

Despite being down 600,000 in net sales e-commerce gross margin dollars grew by 120,000 as compared to last year. Gross profit increased slightly to 37.9 million in the first quarter as compared to 37.1 million in the comparable period of last year.

Gross margin was up 250 basis points to 36.7% as compared to 34.2% in the first quarter of last year. This was ahead of our expectations as our strategy to increase the level of core merchandise led to improved IMUs and lower markdowns. In addition to comp store sales and gross margin rate, we're measuring both sales per square foot and gross margin per square foot; improvements in these metrics are key in validating the success of our strategic initiatives. For the first quarter, sales per square foot for all stores increased 3% compared to last year and gross margin per square foot increased by approximately 10%.

Selling, general and administrative expenses decreased slightly to $32.2 million or 31.2% of net sales compared to $32.7 million or 30.1% of net sales in the same period last year. We continued to investment in marketing, particularly direct mail in the first quarter. Marketing as a percent of sales was approximately 2.7% for the quarter as compared to 2% last year. Offsetting this increase were reductions in our store payroll expense, reflecting lower mall traffic trends as well as lower store counts.

Depreciation and amortization expense was $2.9 million in the first quarter compared to $3.4 million in the comparable period last year. Operating income was $2.8 million in the first quarter compared to operating income of $800,000 in the first quarter of 2013. The provision for income taxes totaled $124,000 in the first quarter.

At the end of the first quarter, we maintained a full valuation allowance at our net deferred tax assets. Our income tax provision in the first quarter was the result of the assessment of minimum fees and taxes in certain jurisdictions.

In the first quarter of the prior fiscal year, we recorded an income tax provision of $90,000, which also was primarily due to the assessment of minimum fees and taxes. Net income for the quarter totaled $2.6 million or $0.07 per share. Net income for the first quarter of last year totaled $600,000 or $0.02 per share.

Now turning to our balance sheet, we ended the quarter with approximately $41 million of cash, cash equivalents and investments. This compares to $40.5 million at the end of the first quarter of last year.

Total inventory was $50.2 million as of May 3, 2014 versus $43 million last year, an increase of 16.7%. At the end of the quarter, inventory per square foot, excluding in-transit and e-commerce inventory was up approximately 28.8% as compared to last year. The increase in inventory is primarily attributable to our investments in the core programs mentioned earlier by LuAnn.

Total inventory per square foot at the end of the quarter was $21.06 compared to $16.35 at the end of the first quarter last year. Core inventory increased by $5.09 per square foot while fashion and seasonal inventory declined by $0.38 per square foot. Note that the inventory levels at the end of first quarter of a year ago was lower than planned as a result of the 23.4% comp increase we achieved in last year's first quarter.

As LuAnn noted, the composition of the inventory at the end of the first quarter was very current.

We had no outstanding borrowings on our revolving credit facility during the 13-week period ended May 3, 2014; we have not drawn on the facility other than to open letters of credit in the normal course of business. Capital expenditures for the first quarter totaled $4.2 million.

During the first quarter, we closed 25 stores. 16 of the stores that were closed were converted into 10 MPW stores. We also opened two new outlet stores. As of May 3, 2014, we operated 547 stores, consisting of 317 Christopher & Bank stores, 126 CJ Banks stores, 71 MPW stores, and 33 outlet stores.

Now, I'd like to update you on our outlook for the second quarter of fiscal 2014. We expect same-store sales for the second quarter to increase in the low to mid single-digit range as compared to last year’s second quarter. This follows a comparable store sales increase of 7.7% for the second quarter of last year. Just as a reminder, we held a fashion event in May of 2013 and due to the Easter shift did not repeat this event in May of 2014.

We expect approximately 100 to 150 basis points of gross margin expansion in the second quarter as compared to the comparable period last year, largely driven by improved merchandise margins. We expect SG&A dollars to be between $32.5 million and $33 million compared to $31.5 million of SG&A expense reported in the second quarter of last year.

Included in the second quarter of 2014 is approximately $400,000 of increased marketing expense in support of increased direct mail, first time investments in public relations and social media along with expanded customer research. We expect to recognize a nominal tax expense for the second quarter, and this expense represents minimum taxes and fees. We expect our inventory levels to remain higher than the prior year level -- prior year at a level similar to the dollars per square foot increase at the end of the first quarter. This is due to a couple of factors. Adding CJ product to approximately 53 CB stores at the beginning of the second quarter will alleviate the inventory in these stores on an ongoing basis, driving incremental sales; second our investment on additional core inventory will not anniversary into the fourth quarter.

In the second quarter, we anticipate opening six new outlet stores and three new MPW stores. We also planned on converting 14 CB and CJ stores and seven MPW stores, closing four CB stores and replacing them with four new MPW stores and converting 53 CB stores MPW stores adding CJ product in the assortment during the second quarter.

Now, I’d like to provide you with some of our expectations for the full fiscal year. We expect average store count to be down approximately 8% for the full fiscal year and average square footage for the full fiscal year to decline by approximately 5%.

Capital expenditures are expected to be approximately $23 million to $25 million, reflecting new store openings, MPW relocations, and adding new fixturing in all stores. We expect to have a significant amount of store activity for the full fiscal year. We plan to close 22 CB and CJ stores and convert them into 11 MPW stores in an existing store location; to close 22 CB and CJ stores and relocate to 11 new MPW stores; to close 11 CB stores replace each with a new MPW store in new nearby location.

In addition, we expect to open 23 new stores in 2014; 10 MPWs and 13 outlets. We also anticipate adding CJ product to additional 32 CB stores during the third quarter on top of the 33 we add to in May. We expect to end the fiscal year with 545 to 550 stores, which will equate to a 1% increase in total square footage as compared to the end of fiscal 2013.

This is down slightly from our prior guidance due to the acceleration of collapsing and combining CB and CJ stores into MPW stores. Depreciation and amortization for the year is expected to be between $12 million and $12.5 million. The effective tax rate for the year is subject to minimum fees and taxes, reserve releases, and an evaluation of the need for a continued valuation allowance on our deferred tax assets.

While we'll not be paying any cash taxes other than minimums, the potential exists given our return to profitability as evaluation reserve may be reversed in fiscal 2014. We will provide a status update at our next earnings call.

Overall 2014 is off to a positive start for a strong momentum in the business and we believe we are well positioned to meet our goals for the year.

Now I would like to turn the call back to LuAnn.

LuAnn Via

We are very encouraged by our strong start to 2014 and we believe that the momentum in the business will continue to build. Importantly we are on track to deliver on both our financial goals for 2014 and on our three year growth plan.

Now I would like to turn the call over to the operator for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). And we will take our first question from [Jennifer David of Buckingham Research Group].

Unidentified Analyst

Sorry can you hear me now?

Pete Michielutti

Yes.

LuAnn Via

Yes.

Unidentified Analyst

Good morning, sorry.

LuAnn Via

Okay.

Unidentified Analyst

Congratulations on a great quarter especially you intervened the location of your store base and the difficult retail environment. LuAnn could you talk a little bit about some of the merchandised initiatives, denim and some of the travel wear, what percent of sales is that now and how large do you think that can grow? And then sorry if I missed this but I think you have said that most of the comp was driven by conversion so was that new customers or existing customers any detail around that? Thanks.

LuAnn Via

Okay so let me start with the product initiatives. So as I have said from the beginning we have an opportunity to drive the bottoms business in the company as the tops business is over penetrated not only compared to where we had previously been, but also to the industry. And a big portion of that bottoms business is of obviously denim and woven long legs. So as we look at our denim business this is where we’ve made a major investment in our wall presentations and we’re getting a significant return on that investment, not only from a sales and comp perspective but also from a margin perspective, obviously because of the lower markdown rate in core denim.

The other piece of it is we see that there is still as an opportunity to grow this business, it’s about 6.5% of our bottoms business right now in total. But, overall -- bottoms is about 6.5% of our total business. Our denim business is running still about 10 points lower than the industry average. So we do believe that we have further growth opportunity as we’re really fine-tuning the assortments on the in-stock positions on the store-by-store basis. So we do believe we have significant growth still to come in that area.

I think to Jen, if you remember last year we did not carry woven long legs for the entire year and this was a big opportunity as well for us. And that business continues to grow and has significant comp increases as well. We still are delivering strong increases in our core knit top business. We have launched the new programs which I think you remember is relaxed, restyled which is a little bit more casual we can wear which has performed well as well as our easy-wear everywhere business. So along with our wrinkle resistant shirts in those core categories that business really still gives us an opportunity to drive the bottoms portion of the business as it relates to our total.

Does that answer your question?

Unidentified Analyst

Yes, thanks. And Pete what about new customers, existing customers, what are you seeing there?

Pete Michielutti

So, as we close stores, we do lose a few customers or we are down 8.9% in store base year-over-year. The active customers’ list was down, I think in the 5% to 6% range, but those active customers are spending more. You discussed -- asked about conversion, the real big drivers were UPTs and the AUR increases. AURs increased by 5.3% and UPTs increased by 3.8%. So, that’s really what's driving the sales performance. And that's really a result of more core and the initiatives that LuAnn has discussed.

LuAnn Via

One of the other things to Jen, which we're very pleased with is the response of new customers in our 53 at CJ products. So we have about 4,000 new customers. And if you look at the month of May, when we added plus 5 to the CB stores, we had a significant increase in new customers from the prior two months, we were up about 39%. So, we were pretty pleased with that as it was basically flat in the chain. So that's really encouraging. And I don't think it's a surprise, because of our cross shopping between CB and CJ as we talked about which is about 23% to 25%. So, that's very encouraging for us as well as the profitability and sales which were put, obviously those new customers are certainly an opportunity for us to go forward too.

Unidentified Analyst

Right, great. And then if I could squeeze in one more. Pete, could you talk a little bit about your three year plan to deliver mid single-digit comp, 300 to 400 basis points of gross margin expansion and SG&A leverage to get to a high single-digit operating margin. I guess could you walk through maybe some of the margin components or some of the -- where you see the 300 basis points to 400 basis points of gross margin expansion coming from and then…

Pete Michielutti

Sure. Also we are -- I mean, if you look at the margin expansion, about 20% -- 20% to 25% is going to be on occupancy leverage and that leverage is coming from the MPW strategy and classic combined and really lowering our overall square footage just to go to the CB and CJ stores. So to-date in aggregate those stores have about 7,000 square feet and in some cases, we are tabbing the square footage and in other cases, we are reducing the square footage to about 4,500 all of which is including increasing sales productivity which gives you a lot of leverage on the occupancy.

The other 75% is coming from the things that we’ve been continually to improve through the [IM] use, [IM] user improving because of some of our sourcing initiatives as well as our movement of core up to about 40% of the overall business which also reduces the markdown risk and also improves margin. So those are really the components of the 300 to 400 basis points.

Unidentified Analyst

All right, great. Thanks and best of luck.

Pete Michielutti

Thanks.

Operator

Our next question comes from Neely Tamminga of Piper Jaffray.

Neely Tamminga - Piper Jaffray

Great, good morning and my congratulations, good job, well done. I have just two quick well housekeeping questions for Pete. And then LuAnn, I want to talk to you about the competitive landscape if I may. So Pete, real quick on with all the different conversions going on, can you help us figure what the end goal is in terms of store breakdown this year, how many CBs by end of year you expect, CJs, MPWs and outlets? And then also D&A, what should be expected for Q2 and for the full year?

Pete Michielutti

Okay. So at the end of year as LuAnn mentioned, we'll have about a 190 MPW stores, approximately 44 outlet stores, a 108 CJ stores and 203 CB stores that adds up to about 545.

Neely Tamminga - Piper Jaffray

Okay. I’ll double check my math on that. And then on D&A?

Pete Michielutti

$12 million to $12.5 million for the full year with the really each quarter inching up a little bit from the prior quarter, based on our investments that we're making on the new stores.

Neely Tamminga - Piper Jaffray

Thanks Pete. LuAnn from a competitive landscape perspective [wear] business [store of] weekend and noticed a fairly large competitor with [GOB] sales going on 40%, 50% off original ticket. There seems to be a lot of activity in your stores but at the same time it doesn't seem to be disruptive for business. Can you speak to any sort of what market-on-market potential traffic disruption and whether or not you are expecting that more as an opportunity versus point of disruption would be helpful?

LuAnn Via

Yes. Neely, so yes there are about 200 stores from a sales perspective that overlap in that market by thing that obviously we’ve heard from analysts that there is about $600 million up for graft for competitors and to gain market share. There is a strong overlap I think you know between our customer and Coldwater Creek. Right now we have about a 100 on mall stores that overlap, we are obviously monitoring that. We have not seen any deterioration in sales in those markets.

Neely Tamminga - Piper Jaffray

And I guess from an opportunity perspective LuAnn as I think about some of the more significant investments you guys are making and kind of the core category look like wrinkle-resistant, woven shirting and things like that that might have been long held by Coldwater Creek are you seeing some of your new customers adopting some of those other higher [earnings] as a pricing structure within your assortment?

LuAnn Via

We are. And I think that is reflected in regular price denim sales, not only in basic but also in fashion. We are also seeing in our tops business as it relates to more novel key driven and in our jacket business. We do believe that there is an opportunity and we have said this before that we really need to go back to balancing out our casual and our wear to work business. So there definitely is an opportunity to really go forward with that.

Also as we talked about our marketing spend we are investing in customer research. We have several focus groups I actually attended two a couple of weeks ago. Here at Minneapolis we have a couple of more going on today and then around the country we have several others that are really looking at the overlap of our customers within the marketplace. We have also just started at this point looking at market share at the NPD data that we have entered into an agreement with them on to really determine what’s the starting point of our market share and really what’s the growth and opportunity.

So as we look at the data that we gets from them already this is where we see the opportunity in the wear to work business and in the bottoms business and so much of that obviously was significant within our Coldwater competition.

Neely Tamminga - Piper Jaffray

Best of luck, [outstanding] guys, you are doing a great job. Thanks.

LuAnn Via

Thank you Neely.

Operator

(Operator Instructions). And our next question comes from Jeremy Hamblin of Dougherty & Company.

Jeremy Hamblin - Dougherty & Company

Good morning and thanks for taking my questions. And let me just add my congratulations on some really traffic results in a tough environment.

LuAnn Via

Thank you Jeremy.

Jeremy Hamblin - Dougherty & Company

So I wanted to just see if you could give me a little bit more color, you talked about in terms of the flow of business throughout Q1 and I think Pete you’d mentioned that February was particularly tough. Could you give us a sense for just the flow of your comp sum throughout the quarter whether or not you know it was April the best month for you? How did your customer respond I guess as the weather started to improve?

Pete Michielutti

Sure. I think we’ve got to break it up in the chunks. So, for the first five weeks of the quarter we were through that period of time we were down low double-digits due to the weather. Then certainly the weather started improving, but if you look at March and April combined. And right after the first five weeks we held our friends and family event which was comparing to our fashion event for the prior year.

And then friends and family events were strong with the exception of one day where we had a snow storm and that day basically caused us about 60 basis points of comp for the entire quarter that’s the much we loss in the one day. Because of the flipping of Easter and the total flipping of the friends and family and the fashion show March was actually better than April, but only because of the flipping of the events. So looking at those two in aggregate, we did really see some acceleration of sales as we move through the quarter as we move through the quarter when we normalize those changes.

Jeremy Hamblin - Dougherty & Company

Great. And I might have missed it, but did you provide traffic and conversion numbers for the quarter?

Pete Michielutti

No. as we keep on adding these MPW stores, which do not have traffic counters in there, our traffic numbers are getting distorted. So what we think, a more relevant number’s really going to transactions per store and they were down 5%, conversion was up a little bit, traffic was down a little bit more. So therefore traffic was down more than 5%.

But our traffic counters is no longer representative of where our activity is on a store basis especially as we have 53 CJ add stores that we did in May, one of them has a traffic counter right now. So, we're really looking at the transactions generated from those stores as the key metric.

Jeremy Hamblin - Dougherty & Company

Okay, great. And then let me come just back to the online sales which I think you said were down about 5% for the year. And could you just go into -- I think I might have missed some of the commentary around that, but in terms of I think you mentioned that about a fifth of the sales are originated in stores and part of that was impacted from the weather. But what did you learn in the quarter, I think it was surprising to hear that that was down in the quarter, I think you mentioned that it since has picked back up in April and May, but I just wanted to see if you could go back to some additional color on online.

Pete Michielutti

It's the biggest impact in the quarter, while we have the impact on the online sales that are generated from the store and the traffic reductions in the store in the first five weeks of the quarter. The biggest issue is our strategy to have a domestic clearance vehicle and more a full price selling vehicle. So the clearance inventory was down substantially in the quarter as compared to year ago. So clearance sales were down $1 million during the quarter as a result of -- and we started this process in the fourth quarter of last year then I think if you remember when we talked on the fourth quarter conference call, we said that the clearance inventory was down.

Even though the net sales in total were down $600,000, but gross margin dollars were up 120,000. So we are looking to make it a more profitable channel and focus both on top line and on the gross margin line.

Jeremy Hamblin - Dougherty & Company

Okay. And can you give me a sense of how much of your online sales are clearance versus more regular price items?

Pete Michielutti

I believe last year, it was closer to 20% and this year it is more like 10%.

LuAnn Via

Yes, okay.

Jeremy Hamblin - Dougherty & Company

Great. And then if I could just come back to the gross margins which are obviously really incredibly strong, I think Pete you had said that March margins were up 280 basis points?

Pete Michielutti

Correct.

Jeremy Hamblin - Dougherty & Company

How much then -- I guess there is a couple of additional points here. So in terms of looking forward occupancy leverage, where do you need the comp to get leverage on your occupancy going forward given the number of puts and takes that you have on [lease mapping] how your real estate is looks both as well as how it is categorized? And then the second question I would have is that I think last year you really started this program of shifting the number of goods that you have directly sourced, I think it was maybe 27% in 2012 and maybe 38% last year. What is the goal for this year and what kind of impact can that have?

Pete Michielutti

As it relates to the first piece of that what do we have do to leverage occupancy, obviously there is a lot of moving parts going on right now with the MPW conversions. The occupancy component of margin year-over-year is actually flat. So, we didn't delevereged on occupancy, we’ve done some of the buying -- the buying costs that we had the slight deleverage on in the quarter. So, we don't have to have a significant comp increases 1% or 2% really to start leveraging occupancy ex the fact that we're doing all this collapsing, combining which is saving us occupancy expense in itself by increasing store productivity. So, I’ll LuAnn talk about the direct piece.

LuAnn Via

So, from a direct perspective, we should be around 70% similar to where we were last year. We don't really have a goal in place, but as you grow the core businesses, obviously those businesses better served on a direct basis, because that's where we’re yielding obviously the leverage from fabric perspective which is really enhancing the initial mark-ups. But there is no real goal but I see it to be between 65% and 75% as a healthy penetration for specialty stores as ours.

Pete Michielutti

And the difference between the 38 and the 60 that we have some cause I direct, we are using an agent.

LuAnn Via

That's right.

Pete Michielutti

But they’re going really direct factory.

LuAnn Via

Not direct factory, we have a balance of that one of our major agents gives us the higher penetration that relates to an [SLB] perspective.

Jeremy Hamblin - Dougherty & Company

Right. And I wanted to also ask about the credit card program. I think you said that a third of your Q1 sales came through that which I think is kind of the new high I think the prior was maybe 26%. And you're continuing to get really robust sign-up. In fact I think in Q1 you had an acceleration from the number of sign-ups that you had in Q4. Is there anything different in terms of what you are doing to market that program that’s making people responder, does this have to do with the conversions to MPW format and just seeing some newer customers coming in and you are getting great sign-up from those customers?

LuAnn Via

Well, I think Jeremy there are several things. I think first of all, we are seeing consistent sign-ups. And I would attribute a lot of that success to our store associates who do a terrific job really enhancing the program from a customer service perspective and really letting the customer understand the benefit for being in the program. So, I would say that’s probably number one. Then we did do targeted events, similar to a lot of our competitors where we offered two events, one in the fourth quarter and one in the first quarter where if you are a credit card customer, during the event you get 35% off versus if you are non, you get 25% off. That event was very successful, both in the fourth quarter and in the first quarter and we see to continue that. And then obviously, the additional customers that are coming in with the MPW strategy and obviously with the CJ customers coming into now what was once a CB store that also really drives additional sign-ups. So we are very pleased with the ongoing results of that program.

Jeremy Hamblin - Dougherty & Company

Okay. Last question, in terms of inventory levels which obviously elevated, Pete, can you maybe help me think about how much of that was really related to the conversion the 50 stores that were being added into MPW format versus how much is just the basic programs that you are shifting into whether it’s denim, wear-to-work, slim fit pants et cetera? And then also where you expect your year-end inventory levels to be at the end of Q4?

Pete Michielutti

Sure. So, if you look at the CJ add stores, which I think we are doing from [2004], so that was about $0.80 a square foot that we had at the end of the quarter for the CJ add stress. So, of the -- that is obviously a seasonal piece of that but more of a core piece of that. So that’s one component of that. And that’s going to be -- and that actually could go up as we see some of these CJ add stores based on their performance, we’re going to give them more inventory because of the way they’re performing over the first months for some of these stores. As we move through the year, I think our first big inventory per square foot increase was at the end of the fourth quarter and I think will normalize by the time we get to the end of the year on a per square foot basis to be comparable year-over-year. And so it will flatten out in the acceleration and the increase in inventory will stop.

Jeremy Hamblin - Dougherty & Company

Right. Thanks so much for taking all my questions and best of luck for the rest of the year.

Pete Michielutti

Thanks Jeremy.

Operator

Our next question comes from Jay Li of Trafelet Brokaw.

Jay Li -Trafelet Brokaw

Hey, great quarter.

LuAnn Via

Thanks Jay.

Pete Michielutti

Thanks Jay.

Jay Li -Trafelet Brokaw

So, I only have one question which comp came in pretty much in line with your expectation. You outperformed the gross margin by close to 200 basis points. What was different from your expectation versus what ended up happening that drove that?

Pete Michielutti

I mean the biggest component of the success really is the core product and how well that is performing. We added a lot of new products in the first quarter and we continue to move through the fashion products at a pace that's appropriate. But core continues to become a bigger part of the overall mix; from an inventory standpoint it's close to 40, from a sales standpoint it's in mid 30s. And given the acceptance of that product, there is no markdown and so we're not discounting that product in order to push it through, because it's not -- its shelf life is longer than seasonal. So we maintain our prices down that without having to do a substantial amount of discounting.

Jay Li -Trafelet Brokaw

Okay. So am I fair in characterizing it as being driven more by less discount than you expected rather than improved sales of other higher margin products such as accessories or…

Pete Michielutti

Yes.

LuAnn Via

Yes, a combination.

Pete Michielutti

And there is a lot of components that we have [provide].

LuAnn Via

Right.

Jay Li -Trafelet Brokaw

Okay, great. Thank you very much.

Pete Michielutti

Thanks Jay.

Operator

Next question comes from [Rich Shea of Vardon Capital].

Unidentified Analyst

Good morning. LuAnn, one question for you, one question for Pete. First for you on the new customer front, could you talk about the most fertile areas where you think you will likely to be successful there and message and timing? I know you talked about the private label credit card but I was just curious what else you had. And then Pete, I was just curious on the thoughts on uses of cash and return of capital as we go forward into next year.

LuAnn Via

Sure. I think obviously the biggest opportunity for us for new customers is the expanded and evolved assortment that really balances out our casual business with wear-to-work business. So we were pretty narrowly focused into brand with casual product and we have missed some of that wear-to-work where our competition plays much stronger. So we are really starting to balance that out, I think which is really about getting the new customers. Plus with this research that we have, we are asking her to tell us, really what is missing from the assortment. We know based on industry data that our bottoms business is underpenetrated that we over penetrate in tops. And is there an opportunity for us to continue to maintain our tops business but accelerate and grow our bottoms business, so that ratio comes more in line. And obviously the bottoms business drives the higher AUR as well and generally more margin due to the nature of the product.

So I think it’s really about the assortment that is going to not only draw her in, but then also really retain her as a customer.

Pete Michielutti

As it relates to use of the cash, we are using the cash and investing it back into business in both opening up new stores, converting them to CB and CJ stores and MPW stores and adding the appropriate fixturing to properly display the merchandise in the stores. And that’s we are doing, so we have no other -- we are not thinking of doing anything or buy back which I think is the question you are really asking at this point in time. And we are still early in our three year plan. It’s quarter one really in our three year plan, so we are going to continue to execute against our strategies and as time goes by, if that changes, we’ll let you know.

Unidentified Analyst

Okay, great. Thank you.

Pete Michielutti

Thanks.

LuAnn Via

Thanks.

Operator

We have no further questions at this time. I would like to turn it back over to our speakers for any additional or closing remarks.

LuAnn Via

Thank you very much operator. And thank you very much everyone. We look forward to speaking with you on our next call and we wish you have very pleasant day. Thanks again. Bye, bye.

Operator

And that does conclude today's conference. We thank you for your participation.

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Source: Christopher & Banks' (CBK) CEO LuAnn Via on Q1 2014 Results - Earnings Call Transcript
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