Destination Maternity Corporation (NASDAQ:DEST)
Q3 2014 Results Earnings Conference Call
July 30, 2014 09:00 AM ET
Judd Tirnauer - EVP and Chief Financial Officer
Ed Krell - Chief Executive Officer
Chris Daniel - President
Brian Roenik - DLR Capital Partners
Good morning, and welcome to the Destination Maternity Corporation Third Quarter Fiscal 2014 Earnings Release Call. At this time, all participants are in listen-only mode and later we will conduct a question-and-answer session.
I would now like to turn the conference over to your host for today Mr. Judd Tirnauer, Executive Vice President and Chief Financial Officer. Please proceed sir.
Thank you, operator. Thanks everyone for joining us this morning for Destination Maternity's investor conference call for the third quarter of fiscal 2014 ended June 30, 2014. I am Judd Tirnauer, Executive Vice President and Chief Financial Officer of Destination Maternity.
The earnings release was disseminated this morning and everyone should have received a copy. If you haven't, please call us at 215-873-2247 and we will get one right out to you or you can go to the Investor Relations section of our website at destinationmaternitycorp.com to get a copy of the release. The earnings release contains definitions of various financial terms as well as reconciliations of certain non-GAAP financial measures we will be discussing in today's call.
Before we get started this morning, I need to remind everyone that certain statements in today's management presentation and Q&A session will contain forward-looking statements within the meaning of the federal securities laws. This includes statements concerning management's current expectations estimates and projections dealing with expected net sales comparable sales, Internet sales, free-cash flow or other results of operations, liquidity and financial conditions, expense savings, potential stock repurchases, the continuation of the regular quarterly cash dividend, the trading liquidity of our common stock, gross margin, operating income and operating income margin, adjusted EBITDA and adjusted EBITDA margin, adjusted earnings per share, capital expenditures, competition, various business initiatives and operating results generally.
Actual results might differ materially from those projected in the forward-looking statements. For additional information concerning factors that could cause actual results differ materially from those projected in the forward-looking statements. Please refer to the company's filings with the SEC.
Also I would like to remind you that today's call cannot be reproduced in any form without the expressed written consent of destination maternity. Joining me this morning is Ed Krell, Chief Executive Officer; and Chris Daniel, President of Destination Maternity. Ed will open with some overview comments I will follow with the review of our third quarter financial results and provide guidance with respect to the remainder of fiscal '14 and full year fiscal '15 and we'll then turn the call over to Chris for additional comments.
Ed will then provide closing remarks after which we'll be available to take your questions. I would now like to turn the call over to Ed.
Thank you, Judd and good morning to everyone. We are very disappointed in our sales and earnings results for the third quarter. Our sales for the third quarter were considerably weaker than planned. We attribute the sales weakness to the following factors: One, a continued difficult overall economic and retail environment resulting in decreased store traffic for us and many retailers; two, weaker consumer reception than expected to certain portions of our merchandise assortments reflecting continued opportunity to enhance our merchandise assortments; three the negative sales impact from the current popularity of many looser-fitting fashion trends in the non-maternity women’s apparel market, such as maxi dresses, baby doll dresses, active bottoms with elastic waists, other soft knit elastic-waist bottoms and shorts, and oversized peasant-style woven tops, all of which can more readily fit a pregnant woman than typical non-maternity fashion and could thus be purchased in numerous non-maternity retail stores, and not only in our stores; fourth, the later arrival of warmer spring-like weather versus last year throughout much of the U.S. which shortened the full-price selling season for spring and summer merchandise and led to our higher than planned price promotional and markdown activity to manage inventory in the face of lower than planned sales and earlier and deeper price promotional activity among our maternity apparel competitors; and lastly, some increased competitive activity in the maternity apparel space compared to last year.
Our sales for the quarter were well below the low end of our expected sales range and as a result of this sales shortfall, as well as weakness in gross margin due to higher than planned price promotional and markdown activity, our earnings for the third quarter were significantly below the low end of our prior earnings guidance range that we provided in our April 24th press release and were significantly lower than our third quarter fiscal 2013 earnings.
We have seen improvement in our sales trend in July compared to our third quarter sales performance. And we expect to realize additional improvement as we move into the fall product selling season later in our fourth quarter and beyond.
I would now like to turn the call over to Judd to review our financial results and our financial guidance.
Thanks, Ed. I will now take you through a review of our third quarter as well as provide guidance with respect to the remainder of fiscal ‘14 and full year fiscal ‘15. Net sales for the third quarter of fiscal 2014 of $134.0 million, was a decrease of 5.5% from last year’s third quarter. Decrease in sales versus last year resulted primarily from the decrease in comparable sales and decreased sales related to the company’s continued efforts to close underperforming stores. Our total sales of a $134.0 million were below the low-end of our sales guidance range of $138 million to $142 million provided in our April 24th press release.
Comparable sales for the third quarter of fiscal ‘14 decreased 5.3% versus a comparable sales increase of 4.9% for the third quarter of fiscal ‘13. Our comparable sales performance for the third quarter was below the low-end of our guidance range of comparable sales of between a decreased of1% and an increase of 2% for the quarter.
Our Internet sales which are included in our comparable sales decreased 0.3% for the third quarter versus 14.2% increase for the third quarter of fiscal ‘13. Net sales of $394.9 million for the nine months period were 4.2% lower than last year’s first nine months sales. Comparable sales decreased 3.3% for the first nine months of fiscal ‘14 versus a comparable sales increase of 3.0% for the first nine months of fiscal ‘13. Our internet sales increased 2% for the first nine months of fiscal ‘14 on top of a 12% increase for the first nine months of fiscal ‘13.
Gross margin for the third quarter was 51.9% of sales, a decrease of 260 basis points from last year’s third quarter gross margin of 54.5%. Gross margin for the first nine months of fiscal ‘14 was 53.0%, a decrease of 70 basis points from last year’s first nine months gross margin of 53.7%.
SG&A expense for the third quarter decreased 2.6% from last year’s third quarter. Our third quarter SG&A expense percentage of 45.8% of sales this year was approximately 140 basis points higher than our last year’s third quarter figure of 44.4% of sales. SG&A expense for the first nine months of fiscal ‘14 was 1.4% lower than last year’s first nine months expense. Our first nine months SG&A expense percentage of 47.5% of sales this year was approximately 130 basis points higher than last year’s first nine months figure. We incurred store closing, asset impairment and asset disposal charges of approximately 0.5 million for the third quarter versus 0.2 million for the third quarter of third quarter of fiscal ‘13.
Operating income for the third quarter was 6.3 million versus last year’s third quarter operating income of 14.1 million; operating income for the first nine months of fiscal ‘14 was 18.4 million versus last year’s first nine months operating income of 30.2 million.
We present adjusted EBITDA to enhance the understanding of our operating results. Adjusted EBITDA represents operating income before deduction for the following non-cash charges; depreciation and amortization, loss on impairment of intangible assets, gain or loss on disposal of assets, lastly stock-based compensation expense.
Adjusted EBITDA before other charges which related to relocation and the proposed business combination for the third quarter of fiscal 14 was $12.5 million, a decrease from last years' third quarter adjusted EBITDA before other charges of $17.8 million. Our adjusted EBITDA before other charges margin of 9.3% of sales for the third quarter is 320 basis points lower than last year's third quarter margin of 12.5%. Adjusted EBITDA for the third quarter of fiscal '14 was $11.4 million, a decrease from last year's third quarter adjusted EBITDA of $17.8 million. Adjusted EBITDA before other charges which is related to relocation and the proposed business combination for the first nine months of fiscal ‘14 was $34.6 million, a decrease from last year's first nine months adjusted EBITDA before other charges of $42.3 million. Our adjusted EBITDA before other charges margin of 8.8% for the first nine months of fiscal ‘14 was 150 basis points lower than last year's first nine months margin of 10.3%. Adjusted EBITDA for the first nine months of fiscal ‘14 was 33.2 million, a decrease from last year's first nine months adjusted EBITDA of 42.3 million.
Interest expense, net of interest income for the third quarter of fiscal '14 was 0.1 million compared to last year's third quarter net interest expense of 0.1 million.
For the nine months period interest expense is 0.3 million versus last year's first nine months expense of 0.4 million. We present adjusted earnings per share to enhance the understanding of our operating results.
Adjusted EPS represents GAAP diluted EPS before certain charges of credits when applicable such as; one, other charges; two, loss on extinguishment of debt; and three, certain infrequent tax adjustments. Our adjusted EPS for the third quarter was $0.35 decreased compared to last year's third quarter adjusted EPS of $0.64.
This earnings performance was lower than our previous guidance range of $0.56 to $0.65 provided in our April release. Our diluted earnings per share for the third quarter was $0.40 versus last year's third quarter diluted earnings per share of $0.64. This earnings performance was lower than our previous guidance range of $0.53 to $0.62 provided in our April release.
Our adjusted EPS for the nine month period was $0.92 versus last year's first nine month adjusted EPS of $1.37. Our diluted earnings per share for the nine months period was $0.96 versus last year's first nine month earnings per share of $1.37.
The approximate $0.04 difference between diluted EPS and adjusted EPS are result of the filing; A $0.14 per share reduction of state income tax expense, net of federal expense related to settlements of uncertain income tax positions partially offset by; one, a charge of approximately $0.07 per share related to the company's plan relocations; and two, a charge of approximately $0.04 per share related to the company's proposed business combination with Mothercare.
As of June 30, 2014, we have a cash balance of $16.4 million no debt no outstanding borrowings under our credit facility and approximately $54 million of availability under our credit facility. We had no borrowings during the first nine months of fiscal ‘14.
I will now provide guidance for the full year fiscal ‘14. We are targeting net sales for fiscal ‘14 in a $519.5 million to $524 million range representing between a projected sales decrease of 3.0% and 3.8% versus fiscal ‘13. This sales guidance range is based on a projected comparable sales of down 2.3% to down 3.0%. Our targeted sales for fiscal ‘14 reflect our plan to open 21 to 23 new stores, including 7 to 8 new multi-brand Destination Maternity nameplate stores and our plan to close approximately 51 to 54 stores with 7 to 8 of these planned store closings related to openings of new multi-brand Destination Maternity nameplate stores.
In addition, we distribute our Oh Baby by Motherhood collection through a licensed arrangement at Kohl’s stores throughout the United States and on kohls.com. We are targeting our gross margin to decrease by approximately 90 to 110 basis points to be between 52.8% and 53.0% of sales in fiscal ‘14 from 53.9% in fiscal ‘13.
Total SG&A expenses are planned to decrease between zero and 1% versus fiscal ‘13 in dollar terms and to be somewhat higher as a percentage of net sales. The slide projected SG&A expense decrease for the full year reflects cost reductions resulting from the company’s continued closure of underperforming stores, decreased variable incentive compensation expense and continued tight expense controls partially offset by additions of talent to drive sales and other inflationary wage and wage related expense increases and increased marketing and advertising expenses.
As detailed in today's earnings release, FY14 other income is projected to be a net pre-tax income amount of 0.2 million. We are targeting operating income before other charges in the $21.8 million to $24.0 million range compared to our fiscal '13 operating income of $37.5 million. And we are projecting operating income for fiscal '14 in the $22.0 million to $24.2 million range versus our fiscal '13 operating income of $37.5 million.
We project depreciation expense to be approximately $15.4 million for the year versus the $12.4 million figure for fiscal '13. We project charges for impairment write-downs and loss on disposal of fixed assets to be approximately $2.1 million for fiscal '14 versus the $1.3 million figure for fiscal '13 and project charges of approximately $3.6 million for stock compensation expense versus the $2.8 million figure for fiscal '13.
As it relates to the relocation of our current home office and distribution center, we expect to close on the sale of our current headquarters and distribution facility by the end of fiscal '14 and expect to realize a gain from the sale of this facility. We'll also incur some charges to earnings in fiscal '14 and '15 related to the closure of our current facilities and the preparation for occupancy of our new facilities.
We project that our other charges or income related to our facilities relocations including both the projected gain on the sale of our current headquarters and distribution facility and the charges associated with the facility’s relocation be approximately $1.4 million of pre-tax income and approximately $0.9 million of after tax income for fiscal ‘14. This represents a projected after tax earnings benefit of $0.06 per share for fiscal ‘14. As a point of reference for fiscal ‘15, we expect charges of approximately $2.4 million pre-tax, approximately $1.5 million after tax. This represents a projected charge of $0.11 per share for fiscal ‘15.
We project that once we are fully operating in both our new headquarters and distribution center facilities which we expect to begin during the latter part of fiscal ‘15, our ongoing annualized after tax earnings benefit from the relocations will be approximately $0.10 per share and our ongoing annualized after tax cash benefit from the relocations will be approximately $4 million.
Based on these assumptions, we are targeting fiscal ‘14 adjusted EBITDA before other charges in the $41.8 million to $44.0 million range, a decrease compared to our fiscal ‘13 adjusted EBITDA before other charges of $54.0 million. We are targeting fiscal ‘14 adjusted EBITDA in the $39.4 million to $41.6 million range versus $54.0 million in fiscal ‘13. We expect interest expense net of interest income to be approximately $0.4 million for fiscal ‘14, a decrease from our fiscal ‘13 expense of $0.5 million.
We are assuming an effective tax rate of approximately 31.0% in fiscal ‘14 versus 35.2% in fiscal ‘13. As previously stated, our significantly lower than historical tax rate in fiscal 2014 was due to a reduction of state income tax expense related to settlements of uncertain tax positions. Our lower than historical effective tax rate in fiscal 2013, reflected the benefit of reductions of state income tax expense due to changes in certain state income tax regulations. On an ongoing basis, we expect our normalized effective tax rate to be approximately 38.5%. We project average diluted shares outstanding for earnings per share calculation purposes of approximately 13.6 million shares. Based on these assumptions, we are targeting adjusted EPS of between $0.97 and a $1.07 per share, a projected decrease versus our adjusted EPS of $1.69 for fiscal ‘13. We are targeting diluted earnings per share of between $1.11 and $1.21 per share versus our full year fiscal ‘13 earnings per share of $1.78.
We are planning our fiscal ‘14 capital expenditures to be between $43 million and $48 million compared to $15.1 million in fiscal ‘13. This includes approximately $20 million to $22 million of planned fiscal ‘14 capital expenditures associated with the relocations of our headquarters and distribution facility with nearly $4 million of this amount expected to be offset by construction allowance contributions from our landlord. As a point of reference, we project fiscal ‘15 capital expenditures associated with the relocations to be approximately $16 million.
Excluding capital expenditures related to the relocations, we are targeting fiscal ‘14 capital expenditures between $23 million and $26 million. After deducting projected tenant allowance payments to us from store landlords, we expect our net cash outlay for capital projects excluding capital expenditures associated with the relocations of between $18 million and $21 million versus $12.7 million in fiscal ‘13.
Our planned capital expenditures include significant investments for the relocations of our headquarters and distribution operations, store enhancements, store remodels, relocations and new stores as well as continued investments in information systems and technology.
We expect our inventory at fiscal ‘14 year-end to be approximately 5% to 7% higher than fiscal ‘13 year-end. Based on these targets and plans, we expect capital expenditures to exceed net cash provided by operating activities of between $13 million and $20 million in fiscal ‘14. Excluding the approximately $20 million to $22 million capital expenditures related to the relocations, we project full year fiscal ‘14 free-cash flow of between $1 million and $7 million.
Based on the company’s current quarterly dividend rate of $0.20 per share, the dividend will use approximately $10.8 million of cash flow for fiscal ‘14 and uses approximately $11.0 million on a pro-forma annualized basis. For the fourth quarter of fiscal ‘14, we are targeting net sales in the $124.5 million to $129 million range, based on an assumed comparable sales change of between a decrease of 2.5% to an increase of 0.5% on a reported basis.
We are targeting diluted earnings per share for the quarter of between $0.16 and $0.26 per share compared to the EPS of $0.42 per share for the fourth quarter of fiscal ‘13. We are targeting adjusted EPS for the quarter of between $0.04 and $0.14 per share versus last year’s fourth quarter adjusted EPS of $0.33.
As we look forward to fiscal ’15, we’re confident that we can drive growth and adjusted earnings while also positioning our company for continued future growth. We project our fiscal ‘15 net sales to be between flat and up 3.5% versus fiscal ‘14 sales. We project our comparable sales for fiscal ‘15 to be between flat and up 3%. We project our diluted earnings per share to decrease between 7% and 19% from our fiscal ‘14 EPS and we project our adjusted EPS to increase between 3% and 15% from our fiscal ‘14 projected adjusted EPS.
This concludes my comments about Destination Maternity’s financial performance and future financial guidance.
I would now like to turn the call over to Chris.
Thank you, Judd. Good morning everyone. We are very disappointed by our sales results for the third quarter. Although we acknowledge conditions in the macro retail environment that likely contributed to our weak sales trends and we believe our ongoing strategy to focus on factors which we can’t control is sound. We’ll continue to concentrate our efforts in merchandising and marketing on three key initiatives, improving products and presentation in all merchandise brands and store format, leveraging our brand value and market position as the leader in maternity apparel and three strengthening our merchandising and marketing and design teams and developing and attracting top talent at all levels.
In our Motherhood brand, we’re focused on improving comp sales and retaining positive sales momentum in key areas of the business through a consistent focus on delivering the right fashion at the right price for the value oriented mom to be. We are particularly focused on driving the Motherhood business relevant to our customers needs at each stage of her pregnancy and in her first few months as a new mother.
In the third quarter just ended, we believe that our Motherhood brand assortments were two fashions focused at the expense of more debt in key items in bottoms and the tops. We feel this has been corrected going forward and our assortments are more balanced as we head into the fall selling season. Also, we have invested and we'll continue to invest resources to enhance every relationship with each customer in a personalized way through numerous CRM initiatives in all of our brands.
We believe that as we continue to focus on updating the content of our brand portfolio, improving brand equity, offering versatility and creating exceptional value, we will drive sales improvement and deepen our relationship with the Motherhood customer. We're excited by the sustained and continued growth of Jessica Simpson Maternity brand which is available exclusively in all Motherhood and Destination Maternity stores as well as many of our lease department shop and shop locations. Next month, we'll watch exclusive Maternity partnership with noted designer Wendy Bellissimo in stores and online.
In our A Pea in the Pod assortments, we are focused on leveraging our position as the market leader in contemporary and better maternity fashion to retain sales momentum both in stores and online. We are just satisfied by the results that A Pea in the Pod for both the third quarter and year-to-date. We are actively working to improve and balance the content and fashion point of view of our assortments, particularly in our internally designed A Pea in the Pod brand which performed well below expectations. I believe this is largely the result of too much focus on the most fashion forward customers and to limited a color palette in both fashion and key item styles. Our focus in this brand going forward is to serve a more diverse, better clientele through a wider offering of trend rate fashion for both traditional and updated customers.
In A Pea in the Pod collection, we are introducing exciting new collections for fall¸ from Rebecca main cost equipment and Pam. And we will continue to expand our assortments of BCBG, Seraphine and Isabella Oliver to offer more styles including styles exclusive to A Pea in the Pod in more locations.
We believe that our effort to create a more boutique like environment for our A Pea in the Pod customer creates stronger visual impact for new items, brands and key looks and resonates well with this upscale customer. At both Motherhood and the A Pea in the Pod, we remain focused on consistently improving the in-store experiences for each of our brands, as well as in our larger format multi-brand Destination Maternity nameplate stores.
As we have added merchandising initiatives in new brands through our assortment, we recognized the critical importance of balance and focus on all of the customers we serve. We are keenly focused on making shopping easier for our customers through specialized store environments and knowledgeable friendly customer service, designed to serve moms to be what no one else can.
We continue to make significant changes in signing, visual imagery, fixturing and item adjacencies as we leverage learnings from the two design prototype stores which opened at the end of this past summer. We are reducing skew count and adding depth in most wanted items and categories. We have added more mannequins larger lifestyle graphics and new display options in order to show offsetting and make it easier for our customers to understand what they need and how to put it all together.
We are also actively engaged in translating our in-store experience to remember online experience as part of our omni-channel focus. Our ongoing goal is always to exceed our clients' expectations during the very special time in their life and reinforce our position as the maternity expert in all of the markets we serve including online. We believe that our unique product assortments, compelling promotions and exceptional service during the course of each customer's pregnancy and transition to motherhood clearly differentiates us from competitors and reinforces our position at the place where expected mom can expect at all.
Thank you. I'd like to turn the call back to Ed for closing remarks.
Thank you Chris. While we recognized that over the past several years, we have faced the dual challenges of a deep recession, followed by a weak recovery as well as an 8.3% decrease in annual births in the U.S. since 2007. We have achieved success during this time by remaining focused on the things that we can control, not on external factors that we cannot control.
We continue to remain focused on driving improvement in our merchandize assortments, merchandize presentation, store environment, customer engagement and customer experience. Despite our disappointing third quarter results, we believe these continuing sales driving initiatives position us well to improve our sales performance during the remainder of this year and beyond.
I want to take a minute to recap the Mothercare situation. On July 2nd, we made an announcement confirming our interest in a possible combination with Mothercare. This announcement was required by the UK Takeover Code in light of press speculation at the time regarding our interest in Mothercare.
While we believe that our proposal was compelling, it is clear that the shareholders of Mothercare believe that only a very significant increase in the value of our proposal would have been acceptable. As a result, on July 25th, we announced that we would not make an offer for Mothercare and we withdrew our proposal for a possible combination. We believe that there was a strong strategic rationale for a combination with Mothercare which would have created a global leader in maternity, baby and childrens apparel end products capable of accelerating the growth and long-term development of both businesses across channels and in markets around the world.
Our proposals to Mothercare without a possible combination show up our willingness to pursue potential opportunities to help drive shareholder value for destination maternity and are consistent with our stated strategic objective to enhance our position as a global leader in maternity apparel including through international expansion.
At the same time our decision to withdraw our proposal demonstrates that we will continue to maintain strict financial discipline in evaluating potential initiatives and opportunities. I believe we continue to have the opportunity to significantly increase shareholder value by continuing to implement our strategy and by continuing to improve our merchandizing and marketing execution.
Our current total equity market capitalization is $306 million and our enterprise value including the impact of our cash balance is approximately $289 million. This implies an enterprise value to adjusted EBITDA before other charges valuation multiple of 6.2 times on a trailing four quarters basis and between 6.8 and 7.2 times based on our fiscal 2014 guidance range.
Also our current annual dividend rate of $0.80 per share represents a highly attractive dividend yield of 3.5%. We see significant opportunity to continue to increase shareholder value based on our ability to meaningfully growth EBITDA in the future and generate strong free-cash flow. The potential for valuation multiple expansion and the ability to continue our ongoing return of capital to our stockholders via a regular quarterly cash dividend and potential stock repurchases.
Finally, with the planned relocations of our corporate headquarters and distribution operations, we will not only generate significant ongoing future cash flow and earnings benefits beginning towards the end of next fiscal year and beyond, but we will be moving into the type of expanded and improved facilities we need to help us achieve our full potential as the global leader in the maternity apparel business.
And as a management team, we are very focused on turning around our results and achieving this potential for our company and our shareholders.
Thank you for joining us this morning. Operator, we’re now ready to take questions.
(Operator Instructions). At this time, gentlemen, we have no audio questions.
One just came in sir, I do apologize.
And it comes from the line of Brian Roenik. Please proceed.
Brian Roenik - DLR Capital Partners
Hi. How are you doing guys? Judd, what do you project your year-end cash to be?
We generally don’t provide year-end cash projections, only to the extent that we provide free cash flow.
Brian Roenik - DLR Capital Partners
Okay. Well I figured it at about $6.5 million. And what do you say your 2015 CapEx was going to be net of tenant allowances?
We have not yet disclosed our fiscal ‘15 CapEx. Only disclosure that we’ve provided thus far is related to the relocation. We expect to have $16 million of CapEx related to relo in addition to this year.
Brian Roenik - DLR Capital Partners
Is that net of tenant allowances?
Brian Roenik - DLR Capital Partners
Okay, got you. So based upon that and what’s been doing with the business, it looks like your possibly going to have to suspend the dividend?
We don't anticipate that.
Brian Roenik - DLR Capital Partners
Can you go through the math of why you figure that?
Just as we go through we expect to maintain cash balance into the end of this year and then based on our projections for next year, we do not believe that we’re going to need to suspend or reduce the dividend and that we’ll be able to continue it and that's kind of good use of fund. Keep in mind, a lot of what we’re financing here, a lot of the capital expenditures that relates to the relo operations and the new facilities that that’s a total of about $36 million to $38 million.
So, those are really financing permanent assets there and we will be getting ongoing significant cash flow benefits from that to the tune of $4 million a year. So we’re comfortable overall with our plan moving forward. We think that this is a great investment for the company moving forward and we believe that we will be able to continue the dividend at the current level.
Brian Roenik - DLR Capital Partners
And with all due respect, you are not going to be realizing any benefits of $4 million which in this whole scheme of things $4 million is immaterial, until the end of ‘15. I believe the earnings this year, I know you projected them around $2 at the beginning of the year, you are looking like about half of that this year, if the business is on its current trend, I mean you could be half the earnings that you are at this year or next year. That all being said, don’t you think a more conservative approach being that you are at a such a small cash balance would be more prudent than paying out cash to shareholders in the form of dividends instead of sustaining your existing business?
When we report next in November, that’s when we will provide kind of more detail in terms of our guidance for next year. And I think at that point then that we’ll be able to give you more of a quantitative answer to your question. So in November, as we kind of then walk through more detailed guidance, at this point we have just given kind of top level guidance on earnings that we see adjusted diluted EPS growth of 3% to 15%. But in November, we will be able to give you kind of more quantitative flesh on the bone. But as I said, I am comfortable that we are going to be able to continue our dividend at the current level while also pursuing the company strategy of turning around sales and continuing to then grow the business.
Brian Roenik - DLR Capital Partners
So based upon your projections for next year, what is it that you are planning on doing in order to get to an increase in obviously in same store sales as well as earnings based upon what’s been happening with the business over the course of last year?
Yes. In terms of we think that there was -- we know there was significant drop in traffic in the third quarter we were also going up against our strongest quarter in many, many years. We were going up against up 5% and we were down 5%. We start the anniversary of much easier comparisons for Q4, going up against an up 1% and next year Q1 we go up against an up 1% than in Q2 and Q3 we go up against down 5%. We also think that some of it was self-inflected that we could have done better on some of the merchandised assortment choices, that we probably needed to be deeper in some of key item areas and on the A Pea in the Pod brand a broader color palette and not so much neutrals and not so much at the ultra-high end.
So, we think that we have addressed some of those issues going forward and as we said. We have seen some improvement in July compared to Q3 and we think we continue to see more improvement as we get it into fall. So, we think we've addressed the issues on the merchandising assortments. We've got some additional marketing initiatives that have really just kicked in, which is with our new CRM initiatives, we have just started those. So we think we're going to get some benefit from that.
And we think that as we've been kind of get back on inventory plan that we also won't have as much pressure on markdowns as we did, as we move forward into the next year, because we ended up taking significantly greater markdowns than planned this past year particularly in Q2 and Q3 and Q4. So, as we go into next year not only are we going to have easier sales comparisons with having corrected some of the things that we saw were self-inflected on the merchandizing side but we'll also go up against easier comparisons on gross margin percent because of the much higher than normal markdowns and promotions this year and then we'll also have the benefit of some of the new marketing initiatives kicking in including our CRM initiatives.
Brian Roenik - DLR Capital Partners
I mean just because you have easier comparisons, I mean in my 30 years of watching retail businesses easier comparisons don’t necessarily mean you are going to beat them?
That’s right that's why the easier comparisons was done a one of the approximately five or six things that I mentioned that we think that we have addressed some of the issues in terms for the merchandize assortments and we think that we're going to have more powerful marketing behind this including the CRM initiatives.
Brian Roenik - DLR Capital Partners
Just because you go up against the easier comparisons there is no guarantee that you will do better but that's I wasn't pointing that out as the only reason why we think we're going to be able to get some comp increase back for next year.
Brian Roenik - DLR Capital Partners
I mean I heard all your reasons and I appreciate your efforts in trying to make a stand for the company. But I mean you talked about easier compares this quarter versus last, but yet your guidance is actually worst and it was at the beginning of last quarter on an easier comparison of over 400 basis points. So when you say business is better, your guidance doesn't really show that.
Right, our business is better than the down five that we were running at and keep in mind in this quarter which is the July, August, September quarter there is still significant impact from moving through spring and summer product and having to do so at a lower margin than a year ago.
So that is significantly impacting the Q4 results both in terms of the comp guidance as well as the underlying earnings guidance which reflects lower gross margin than a year ago.
Brian Roenik - DLR Capital Partners
Yes, which is based upon the inventory levels being up 5ish or sorry inventory is up 7.6% at the end of the quarter and comps down negative 5 or so. I would understand the gross margin pressure. All right, thank you very much.
Okay. Thanks Brian.
And at this time, we have no further audio questions.
Okay. We'll just wait a few more seconds to see if there is any additional questions.
Okay. Thank you very much folks and we appreciate your time.
Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect. And have a great day.
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