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Cache, Inc. (NASDAQ:CACH)

Q2 2014 Results Earnings Conference Call

August 11, 2014, 04:30 PM ET

Executives

Allison Malkin - Senior Managing Director

Jay Margolis - Chairman, President and CEO

Anthony DiPippa - EVP and CFO

Analysts

Alex Fuhrman - Craig-Hallum

Jeff Van Sinderen - B. Riley & Company

James Fronda - Sidoti & Company

Harry Ikenson - Ikenson Research and Consulting

Brian Gaines - Springhouse Capital

Operator

Greetings, ladies and gentlemen, and welcome to the Cache Second Quarter 2014 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host Ms. Allison Malkin of ICR. Thank you. You may begin.

Allison Malkin

Thank you. Good afternoon, everyone. Today’s conference call may contain forward looking statements. Forward-looking statements inherently involve risks and uncertainties that could cause actual results to differ materially from those predicted in such forward-looking statements.

Statements made on this call should be considered together with the cautionary statements and other information contained in today’s press release and our most recent periodic reports filed with the SEC, including our most recent Annual Report on Form 10-K for the fiscal year ended December 28, 2013, including the section contained therein entitled Risk Factors. A copy of our press release is also available in the Investor Relations section of Cache’s website at www.cache.com.

Now, I would like to turn the call over to Jay Margolis, Chairman and CEO of Cache.

Jay Margolis

Good afternoon, everyone. The second quarter was the highly productive period for our company. While our financial results were impacted by the challenges we identify in the first quarter, we made significant progress towards to the key priorities we outlined at the start of the year.

As I have mentioned on prior calls, our team is going through a great deal about our customer and while we endorse some pain along the way, we feel we’re in a good position to capitalize on our niche in women’s retail, simply put to be the resource for all the events in a women’s life. During the later part of the quarter, we began to see our actions lead to a meaningful improvement in our sales trends.

Our comparable store sales are positive in the first six weeks of the third quarter, following a 6% increase in the third quarter of last year. As we may recall, we have been focused on four key priorities.

The first is product. Having the right trends and the right balance across category gearing to a specific needs of our stores. The second is brand and enhancing strategies that drive sales with less reliance on markdowns and markdown related promotions.

Third is our real estate. We implemented a strategy to capitalize our Omni-channel opportunity. The goal is here to increase sales productivity by closing stores that are not as relevant as they have been in prior years and transfer these sales to nearby locations, the web and mobile.

And fourth, is to maintain expense discipline and balance sheet strength to increase our flexibility, to continue our turnaround and position our company for long-term sustain profitable growth.

Let me share with you our progress and our priorities in more detail. First product; during the quarter, we maintain our strength in dresses highlighted by a successful prom season and we saw solid growth in our casual and cocktail dress categories, as we both of these growth opportunities for us going forward.

We are most excited about is the progress we’ve made on several other fronts. We improved the balance of our category mix between dresses and sportswear. We correctly identified the interpreted trends for our customers seeing strength in rompers, jumpsuits, denim sweaters and with the move to one centralized distribution center combined with the collaboration between merchandising, planning and allocation.

We’ve had the ability to customize what we ship and the quantity ship to our stores. This is very important to us, given the difference in product needs across our north, south, west resort and tropical locations. Combined which I mentioned these improvements led to a positive change in our business in June which continued into the first six weeks of the third quarter.

So now our customers continue to love us for dresses. But at the same time, they are now come to cache for denims, legging's, sweaters, outwears and we meet their expectations in these key categories.

Looking ahead I feel really good about the direction of our product across our categories of Dresses, Sportswear and Accessories under the direction of our new design team leader Jennifer Ehrenfeld. And believe this is just a beginning with the full impact of her design direction you've seen in the fall season.

Second, brand enhancing strategies reducing our depends on markdown. As you know, prior to my joining Cache, the Company sold majority of its assortments on promotion and if I may add, deep promotions which was necessitated by continuous product methods. The Company also rely on its e-commerce site to clear product as well.

My philosophy is been to use promotion strategically, drive brand awareness and traffic with great product and effective marketing. So last year, we began to reduce our reliance on markdown in our stores and develop a plan to elevate our positioning online and in store.

During the second quarter, we brought on a – we brought on board a veteran marketing executive to accelerate our marketing efforts with bloggers, TV personalities, and magazines to meet to gain more exposure for our brand. And we already see progress there.

Gaining new loyal customers is crucial for us. In fact our loyalty program treasures continuous to build its customer base following it's re-launch early in the year. Since it's re-launch in March we signed up 300,000 TREASURED map customers, half of which – of which are new customers.

We expect these efforts to allow us to see increase store business from existing customers and attract new customers to our brand without need to discount. To address our e-commerce in June we re-launch cache.com within elevated looking feel and improved functionality. We introduced web exclusive which have net within a scoop and enthusiastic response and our navigation is easier which make check out of breeze.

In addition, consumers have responded well for our new design that's easily accessible from mobile device or tablet. And even as recently as June 30, our new website launch day, we have seen steady improvement in conversion. We also expect to open a shop in shop with Amazon and a separate outlet site later this year. This is proven to be very successful for other respective retailers.

So while on the second quarter we would still up again significant promotional activity from last year, we will begin the adversely the change in our promotional practice during the second half of this year and we also expect our marketing activities and improved website functionality to drive traffic and conversion.

Third, real estate optimization, its strategically elevated all of the sales product which is available to us across channels with only to shop focus on delivering incremental sales per activity and profitability gains. You heard me say many times we have a strong base of stores and that continues to be the case today.

That said, the growth of e-commerce, the challenging economy and the expansion of outlook have all laid changed in our consumer shop. So we strategically evaluate our store fleet with the goal of closing locations that are not as relevant as in prior years with the expectation that we will see some transfer sales to neighboring locations and the web and mobile.

By closing these locations, we expect to save $3 million in fiscal 2015 and approximately 3.8 million on an annual basis. Also powerful as the growth in sales productivity that comes from this move.

We also continue to believe in outlets. The strategy here is twofold. Channels give us a high-return on investment and with outlets we can quickly move clearance out of our closed five stores and flow in new merchandise, which will strengthen the store performance overtime. Currently, we have three outlet stores opened and performing well.

Fourth, expense and balance sheet management. As it relates to expenses, we continue to be disciplined regarding all areas of our business including capital spending. We do not expect to reinvest the savings from our store closures and we look to continue to bring down expenses without impacting the activities that position us to achieve our turnaround goals.

In conclusion, I’m pleased to have made progress in all this fronts during the quarter as really set up nicely for the balance of the year. I also remain convince we have the talent, strategies and focus to continue our improve trends and capitalize on our Cache brand, a brand that is loved by women for its differentiated sophisticated style. I look forward to updating you on our progress on our third quarter call in early November.

And now, I'd like to turn the call over to Tony to go over our financial results in more detail.

Anthony DiPippa

Thanks, Jay. Beginning with the income statement, second quarter net sales totaled 54.1 million compared to 60.1 million in the second quarter last year. Comparable store sales decreased 8.8%, reflecting a 22% decline in transactions, partially offset by a 14% increase in average dollars sale. As Jay mentioned our comp trend improved in June and continued to improve in the third quarter. Comparable store sales are positive nearly half way through the third quarter, following a 6% increase in the third quarter of fiscal year 2013.

Gross profit decreased to $17 million, or 31.6% of net sales, and $22.4 million or 37.2% of net sales in the second quarter of last year. The decline in gross profit margin was primarily due to the deleverage of fixed occupancy expenses given lower sales as compared to the prior year.

Total operating expenses were $24.7 million or 45.7% of net sales as compared to $24 million or 40% of net sales.

Breaking this down further, store operating expenses increased $1.4 million or 7.7% $19.7 million or 36.5% of net sales from $18.3 million or 30.5% of net sales in the second quarter of last year. This increase is primarily driven by increased in marketing related expenses.

Employee separation charges totaled $235,000 compared to $956,000 in the prior-year period, primarily due to the separation charges in connection with the separation agreement with our former CEO as well as other corporate employees in the second quarter of 2013.

General and administrative expenses were $4.7 million, which is essentially flat compared to the second quarter of last year. As a percent of net sales general and administrative expenses increased 8.7% and 7.9%, primarily due to reduced sales.

Operating loss totaled $7.8 million and included employee separation charges incurred of $275,000. This compares to an operating loss of $1.6 million in the second quarter of fiscal 2013 and included employee separation charges incurred of 156,000. Net loss totaled 7.9 million or $0.33 per diluted shares compared to a net loss of 1.6 million or $0.09 per diluted share in the prior year period.

Turning to key balance sheet highlights, we ended the quarter with no debts and no borrowings under our credit facility. Total inventory cost increased 17.9% from the year ago period, increased inventory values as a result of the increase in the mix of adjusting inventory this year in an unusually low inventory last year, given the efforts to liquidate in non-performing inventory in fiscal 2013.

During the second quarter, we closed three stores, ending the period with 239 stores in operation. We expect to open 20 stores including locations and closed four additional stores during the balance of 2014. As Jay mentioned in the continuation of our real estate optimization strategy, the company plans to accelerate the closing of unproductive locations, majority of which are expected to close in the first quarter of fiscal 2015.

We expect to close unproductive locations to translate into an increase of approximately $0.10 in earnings per share for 2015 and $0.12 EPS on annualized basis given the number of shares outstanding as of August 7, 2014.

In addition to the real estate optimization strategy, we also initiated several cost savings in the latter half of second quarter by reducing corporate overhead and operational expenses and will continue to focus on maintaining expense discipline in balance sheet strength to increase our flexibility to continue our turnaround and position the company for long-term sustained profitable growth.

And now I’d like to turn the call over to Jay.

Jay Margolis

We just hold our district sales manners at meetings and I am convinced more than ever that one of greatest assets is our field team in our stores. This was a sharing of September to end of the year in terms of product, planning, allocation, how we think about design, how we think about each and every store, and the communication and the energy was just amazing. I believe so much in our mission, in our strategy and we just to have – we have to now execute flawlessly.

It is about winning over new customers and embracing our very loyal Cache customer and getting Cache to the forefront of a great brand. This brand is unique and the space that occupy has many competitive advantages, and I know we can get it to a place; we are performing to the level of expected view into us.

I appreciate so much to support given by our Board, our landlords, investors, the manufacture – our manufacturing community, our supply base and an amazing team of associates. I thank you so much for calling in and turn it over to the operator now for questions.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. [Operator Instructions] Our first question is from the line of Alex Fuhrman from Craig-Hallum. Please proceed with your question.

Alex Fuhrman - Craig-Hallum

Great. Thanks for taking my questions, guys. This cost savings, can you talk a little bit about some of the specific initiatives there and what we could expect to see there in the back half of the year maybe in terms of dollars?

And then thinking about the cash burned in the back half of the year, I mean, what would that if we were kind of in a flat comp environment in the back half of the year, What do you think that would look like?

Jay Margolis

Okay. The cost savings program is cross a number of different areas in the business. First and foremost headcounts, we reduced some of the headcounts, kept all positions open.

But we've actually restructured some of the organization and move some people out of the organization, put restrictions on capital, spending, travel, to a lesser extent we have lowered some for our marketing investments that was being non-critical. And we're actively managing our brand expense and making sure that we pull as many as much as of our product as possible versus air freight.

I'm not going to give you a specific guidance in terms of what I expect another than the fact that I do expect some of our G&A expenses. I do expect to whole the line and some pricing that actually come down in some of our key areas.

In terms of our cash burn for the back half of the year. We entered the quarter with no borrowing as I said in our line of credit. We have robust tax management plan. We will probably continue to see an operating cash burn in the third quarter of this year. We do expect to see our fourth quarter larger. We do expect to see substantial improvement versus the third quarter and versus the first half of the year.

At some point, our real estate when we getting through the first quarter of next year, our real estate plan further reduces our cash burn. And actually as we close a lot of those stores, the liquidation of inventory will be – will see us to be a positive impact on – a significantly positive impact on cash in the first quarter.

Alex Fuhrman - Craig-Hallum

Great. That's helpful. Thank you.

Operator

Thank you. Our next question comes from the line of Jeff Van Sinderen with B. Riley & Company. Please proceed with your question.

Jeff Van Sinderen - B. Riley & Company

Hi, everyone. Jay, maybe you can kind of walk us through, give us a little more color on how that comp progression is trended over the last few months what metrics improved, what you see really as being the drivers of the business and then also maybe just touch on your traffic versus what you hearing about shopping center traffic, mall traffic and then anything you can give us on what you see in August so far?

Jay Margolis

I just go back with a little bit – January we thought it was a pretty good month and accounts February and I personally have never seen traffic patterns February through I would say end of May the way they all resulted. We had you know dialog will be forge by name all the things that is impacted you know our business that I transferred, I feel I would not bore all of you in the field with all those details including World Cup and amount of other things.

It just with in consistent it was down double digit decrease and even during prom season. And prom for us we know we have more traffic than most people in the mall and they have just such a consistency.

First quarter leading is a second quarter we couldn't chase the business so there was nearly not lot of opportunities in the January, February time period, we're watching Florida stores, we're watching our Rome weather stores and you know chasing and the things till April, May and June and it really got to the point where it was just hard to chase simple things because of the level of business and how business was moving.

We started going after Rob jumpsuits and some certain, we saw certain glimpse of the both in our dress business and we start chasing that in to June July and that really started impacting our business in positive way.

We start to seeing traffic patterns in the very beginning of June start going to more of a normal level, still not great, but normal and we felt that has continued all the way through into now even couple of weeks August. Traffic is then I would say up or down 5% over last year so we see consistency now. We are feeling really good about newer fees coming in.

We are getting through our off price goods in a way we feel comfortable with taking normal promotions along the way, while the season is just back to what we felt -- what I felt last September, October, November, when I first -- I had first started, it was kind of my first the beginning of product that I had worked on. Starting to see that same consistency come back in terms of sell-through and how we planned our business.

We're just modern now in terms of how we're planning the business. So we are watching our bottoms business, be a lot better than a year ago, where we didn't jeans, we didn't have the right balance of legging in jeans and other things in place. Tops to bottoms ratios rather lack. I keep going back to those planning and our locations being a major factor for us in terms of getting this business on track.

We just didn't have a ton of time in the first quarter and even in the second quarter to get that right. We're starting to see the combination of how that team is working with the stores, getting the right goods to right place, right time and right quantity. I can't emphasis enough how much that means to profitability, sell-through factors.

And I would tell you one other ones I know Tony didn't touch on with one warehouse has given us such flexibility in terms of replenishment programs, getting the right goods back out there with that start. We are starting to see that happen right now. There are so many things like that that are getting us to a different place.

The first and second quarter was so challenging and you were sitting with inventory, you were not able to move and make the moves you need to adjust to what we are doing. Even Alex's first question, I feel so good about to speak to market now in how we are making decisions, a tighter team is making us more effective moving quicker. And I think that's going to also result in more efficiencies and better results for our company.

Jeff Van Sinderen - B. Riley & Company

Okay.

Jay Margolis

Traffic over the last -- just give you one other -- traffic over the last couple of weeks has been really I want to say up about 4%, 5% over last year. So we are seeing again at least it's up, So we are not seeing that it’s great everywhere.

We are hearing that again, we are in 238 locations across the country, so it does fluctuate. California is a little bit better than North East. Florida came back lot later, so the later Easter really did impact first and second quarter in some ways. And I’ve been saying – I think that was actually worse than the ever

And that’s later Easter for whatever reason we didn’t act with South American traffic, we didn’t have the people coming up from Mexico that we normally have, and that goes from Vegas to the border towns to Florida. We are starting to see that business come back pretty dramatically.

Jeff Van Sinderen - B. Riley & Company

Okay. So now you are actually going up again, so arguably most challenging comparisons in terms of comps and your business is comping positive. Maybe you can just touch on the – I guess how we should think about promotions and markdowns for this quarter, how you sort of being trending, I mean obviously it’s very promotional out there for everyone, but maybe you can frame that for us a little bit?

Jay Margolis

We just had our Monday meeting which we are doing all day meeting. We go through current sales, new receipts really checking, really well as a percent to total. We need to – we still happens casual dresses that came in later that we will take our markdowns on.

We don’t think that’s very different than the rest of the market, we feel really good about. We will have a new floor set the week before Labor Day and going in to September we feel good that really our less trends promotions that way, couple of key items promotions along the way.

As you work towards October – it’s kind of a normal cadence now getting towards the Black Friday and weekend before Black Friday. We feel that we don’t have any real big slug with inventory that we have to get through. We are pretty comfortable with our balance of products.

So we don’t see any big distortions there from last year in any way. September going against – or August was really good for us – August was pretty good for us last year. We think we’re going to be fine against last year’s comparison. September, October, November gets a little bit easier actually for us in terms of what we accomplish last year.

I really look forward to November, December and that we weren’t set for gift giving. I talked about that. I talked about a lot last time that the brand wasn’t in a place for gift giving. Our accessories team has done a really amazing job in a lot of different categories of the business and I feel good about how we’re set for holiday.

And we’re very good for self purchasing when people going out for cocktails and dresses and gowns and that’s the niche in our business that we feel strongly that Christmas to New Years is great for us, last year will be great for us this year. So I don’t know if I am answering your question.

You don’t see any real big promotional…

Anthony DiPippa

July is typically very promotional than it was and I think August is going to be a little less promotional. That’s just a standard cadence in our business. As we get into the fall, we don’t expect to be as promotional up to the transition. So that’s I would say.

Jeff Van Sinderen - B. Riley & Company

Okay. And then I know you mentioned that inventory was up somewhat due to mix and I am just wondering how we should think about inventory per foot going forward? Maybe any sense you can give us where we should think about that shaking out at the end of Q3, should be up as March up less, any color there would be helpful?

Jay Margolis

The only one I would point out is lot of our dollars – the shift to dresses from sportswear, so on a unit basis, we don’t think our inventory is significantly increased on a dollar basis. It goes up – could be more dollars than dresses. We made – they are mistaken in Q1 where we moved too many dollars into dresses and too much out of sportswear. So I think our balance was off. We feel really good about our balance now in terms of both, casual, sportswear products as well as our dress inventories.

Jeff Van Sinderen - B. Riley & Company

Okay.

Jay Margolis

Yeah. I think it’s – I think in terms of a comparison point, this quarter will be more – should be more extreme in the end of the third quarter. We always have relatively -- in terms of our seasonality higher inventories in the third quarter versus end of the second quarter. But the comparison quite this year is a comparing a business that we transitioned into more of a dress oriented business versus last year, looking at this point.

In last year we were, Jay had just arrived in February and carried a lot of product, but he really needed to promote very drastically and it really wasn’t until July. It’s a very earliest in August. We started seeing more of his products. So there was a huge liquidate strategy at the end of Q2 last year and that what you see in terms of the differential year-over-year.

Jeff Van Sinderen - B. Riley & Company

Okay. Yeah. That's extremely helpful. Thanks very much. I’ll let someone else jump in.

Jay Margolis

Thank you.

Anthony DiPippa

Next question.

Operator

Thank you. Our next question comes from the line of James Fronda with Sidoti & Company. Please proceed with your question.

James Fronda - Sidoti & Company

Hi, guys. How are you?

Jay Margolis

Hey, James.

James Fronda - Sidoti & Company

Do you think, I guess, the comps that you are seeing – the improvement in the comps and you are seeing is more related to the product mix or the speed to market that you talk about or is it a mix of both?

Jay Margolis

I think it is a mix of both.

James Fronda - Sidoti & Company

Okay.

Jay Margolis

It’s no speed to market right now because again, we only could chase certain things, certain categories of the business. In the future, we will – no, it should be a bigger part of our business. It should be how we could plan and shapes quicker. And we’re working really hard to do that. We still be chasing into November, December currently.

James Fronda - Sidoti & Company

Okay. All right. And Tony that share count for going forward is it going to be around that 24 million?

Anthony DiPippa

That's a weighted average per share count as of the end of the quarter. Its 31 million shares, 31.83 million shares.

James Fronda - Sidoti & Company

Okay.

Anthony DiPippa

This is the product offering late this quarter.

James Fronda - Sidoti & Company

Right, right. Okay. All right. That makes sense. Thanks, guys.

Jay Margolis

Thank you.

Operator

Thank you. [Operator Instructions] Our next question comes from the line Harry Ikenson with Ikenson Research and Consulting. Please proceed with your question.

Harry Ikenson - Ikenson Research and Consulting

Good afternoon. Congratulations again, there's some improvement going in a difficult environment. I would like to know, would you drilled down a little further, you given some – on comp improvement some of it obviously you said traffic improved, where did the rest come from? Was in units or was it more in average ticket price? Could you break that down a little bit? And then I have couple of questions as well.

Jay Margolis

Well, I think in our business the shift in dresses is extremely important when hit the metrics. So in terms of unit in transactions, we're seeing dress averaging at retail is probably three times averaging at retail they average sportswear that is an aggregate number.

So we're still seeing very high numbers in the AUR in the average dollar sales and that's offsetting some of what a decline in units and somewhat it decline in transactions. As we've seen throughout the first half of the year it's just that now the transactions in units are getting – are improving as traffic improves. We're still seeing – seeing a high AUR drive of our business.

Anthony DiPippa

Harry, it comes from a little bit – I don't have a luminous leading for us in that even today, I mean, I think we've had a really – we feel pretty good about of July and early August. But what we're against $9 jewelry, $19 shorts, $15 T-shirts from the year ago.

So we're competing against some really cheap things. And we're actually winning over –winning that against some you know we had to get rid of. We decided and you heard us in the first half, because we decide not go after shorts and T-shirts and cheap jewelries and upgrades, what we're going to do.

And so we knew we were going to comp negatively against really bad things that we had to move off at the store and on to different products and I think we've done that and done a pretty job in getting there.

It doesn't mean there is still not challenges, accessories are finally getting to a better place so we think units per transaction is going in the direction, true version is going in the right direction in terms of how we are winning over consumers and getting something their hands to buy. So I think but the big one is definitely UR2 to the Toni’s point. We are gaining customers to spend more money, per transactions with us.

Harry Ikenson - Ikenson Research and Consulting

Okay. But on AUR though you've already pay us to the promises and so what you say in the AUR still mostly due to other dresses or is it of combination…

Jay Margolis

Combination of dresses first of all sudden its Jeans and the date top, it's getting again, per transaction higher and the average hours ticket, door sale is higher so even after comp seasons that's happen.

Harry Ikenson - Ikenson Research and Consulting

Right so there is some possibility and sustainability since you have the bottom you and other things you don’t waste here?

Jay Margolis

Yeah. Lot…

Harry Ikenson - Ikenson Research and Consulting

Yeah, I understand there is a lot of cost in the wheel that helps a lot. Okay. And then for next year couple of questions. You spoke about closing most stores in Q1, could you give us an idea with the number of new stores and what you feel is the ideal number of stores to half of the change and the ideal size and I have another question after that?

Jay Margolis

Okay. So we are careful not to disclose any exact number of stores for providing, We do have the

Anthony DiPippa

New stores.

Jay Margolis

Oh, new stores. Yes.

Harry Ikenson - Ikenson Research and Consulting

No, no, no. I wanted to know how many stores you will close next year, you said you can accelerate in the first quarter I need to get an idea of that.

And then also get an idea of what you think is the right store number for the chain, and also what's the best store size you think at this point, whatever you can comment in those areas or can you just help on that?

Anthony DiPippa

I don't think we can help you. But first of all on balance of next year that will close a great many more stores to new stores. There are still opportunities for additional outlets. There is always a one or two -- one ups in terms of traditional A&B [ph] malls, but it's not going to significantly offset the number of stores we close. We actually think of more balanced business between outlets A&B malls, ecommerce is literally the direction we want to go.

Jay Margolis

I think it's a really important question Harry. I’m glad that Tony answered that way because I think that the numbers changed over the last year in terms of what people are looking at. And we think we have -- the brand is in a place where we have to relook at our distribution, and is it just bricks and mortar in specialty retailer -- as a specialty retailer in malls or is it online, mobile, is it international, is it shopping shops, what is the right number, we just know that they have to be profitable, they have to be cash flow positive.

Harry Ikenson - Ikenson Research and Consulting

And you need to look at them?

Jay Margolis

Yeah. And I think we have to look at all these opportunities and say, we have a brand that we control. We got to get the brand right. We got to get it to the cool factor and then we had to find the right channels of distribution. We think there unlimited international opportunities. We think there are other places for Cache, but we have only been in one channel. And we've been women's fashion one channel.

We haven't even really had a significant outlet strategy, but you know how profitable that is the most helpful. But to Tony's question and to your question, we need to rebalance the total fleet in terms of what we look at. It doesn’t mean that we can’t have a bigger store. We think Lenox just reopened, you have seen Garden State. We looked at Houston Galleria as renewed stores. The store in Vegas, we’ve done 12 stores. I think 90% of those new stores are really performing better than expectation.

If we don’t have the task to put into a lot of those stores to all of our stores, but we think as we can invest in those stores and get them to a different place that will be great.

Some of them can even be bigger than they currently are, but some should also go away because there are just too many in the given market.

Harry Ikenson - Ikenson Research and Consulting

Let me ask one more question is why that. Would it more than six stores that you might be closing in the first quarter?

Jay Margolis

Yes, depending in the normal sector. There is no question.

Harry Ikenson - Ikenson Research and Consulting

Okay. As I want to get some idea. Okay, all right. Two other quick follow-ups. You talked about distribution, the new warehouse and one distribution center you said they are helping you. Last time when the company opens up a new center though initially there are some course to take while together to capacity. So is that hurting you near-term course or not hurting your near-term course?

Jay Margolis

It’s exactly not. I’ll explain a little more detail. So last year this time we had few distribution centers to support stores, and we had one distribution center to support picking and packaging from our online business. So we facilitate it into one facility. It’s not our facility, it’s actually UPS facility based in Hebron, Kentucky.

And as most people know UPS is a world class distribution operations. They carved up 15,000 square foot, dedicated their face for our business, and there is no significant fixed cost upfront to have that up and running.

Harry Ikenson - Ikenson Research and Consulting

Okay, all right. That makes sense. That sounds pretty smart. Okay. Then finally, let’s go back to – you know the magic number on stores, you talked about where you’re going to have different savings, let’s say if you can go very close to what your plan is and let’s say we’re talking about 12 months from now – second quarter next year after you close whatever the numbers of store it is.

What do you think you will need to get on breakeven and comps when you add retail level that you need to reach?

Anthony DiPippa

Yeah I think it’s going to be high single digits, but it has to be coupled with an incremental margin, right. So the whole -- the turnaround relies on the entire business running more effectively and that includes [indiscernible] to the right place at the right time which need to fuel markdowns, less promotional cadence, higher margins and productivity at the same time.

Also meaning the fleet of underperforming stores, we think we’ll significantly enhance our sales productivity per square foot. On a rough basis that’s $30 per square foot, how many stores have identified, which is fairly significant in our business.

Harry Ikenson - Ikenson Research and Consulting

No, that is significant. Okay, alright. I took enough time in you, very helpful. Thank you very much. Good luck.

Jay Margolis

Thank you.

Operator

Thank you. Our next question comes from the line of Brian Gaines with Springhouse Capital. Please proceed with your question.

Brian Gaines - Springhouse Capital

Hi guys. You’ve been really helpful in giving a lot of color about the third quarter and the positive comp. Can you actually give us what the comp is quarter-to-date?

Jay Margolis

No, we’re not going to talk about the quarterly comp. I think it tends to lead towards making a – or calling out what we think the comp is going to be. I think why we felt like it’s important in our business, last year by-far third quarter was the strongest quarter.

So having comps that we have in first half of the year, and then coming in the third quarter and facing what amount to a 11% comps in store, negative comp online that was planned last year for net comp of plus 6%. And then being able to be positive on top of that, I think is every encouraging for us. But we're not at this point telling, you know, disclosing exactly how positive and what we think the quarter is going turn out to be.

Anthony DiPippa

We were also told that we didn't give enough information, forward information the couple of times. So we feel at least let’s give you some insight in terms of some more recent events that are going on. But we don't want to be misleading in any away. It's early in the game, and we feel good about what's happening, but we thought it was just good to just update you a little bit in that respect.

Brian Gaines - Springhouse Capital

Okay. That's correct. Can you give us since its historical can give us what June comp was?

Anthony DiPippa

No. We're not splitting out, I mean, the quarter at this point. We are able to tell you that stores comps last unit about 12%. And we were positive on top of that.

Brian Gaines - Springhouse Capital

Okay. And then, can you give us any kind of direction for 3Q gross margin? Should we expect that, I know in the first half of the year, trends were down kind of 300 basis point-ish, but obviously comp was negative, should we – what can we expect for the third quarter for a gross margin?

Anthony DiPippa

It's too early on. I mean to say that where we're going to be. I mean it's a careful balancing act in terms of our inventory and how promotional we are in the environment we face. So July was fairly promotional, August is less promotional, but I don't want to at this point give any real clear guidance on what our margin looks like. I mean it's one of our parameter these things we look at.

Brian Gaines - Springhouse Capital

Okay. And then, are there any cost associated with closing the stores in 2015 or this is just natural lease expirations?

Anthony DiPippa

It's a combination of a variety of things. We have a lot of stores that are on a short-term lease cycle. There will be some payouts, the landlord in some cases, but it's not really that significant at this point. Mostly is a actual lease expiration, the extra cost are surprisingly very low considering – what we're looking in terms of our program.

Jay Margolis

Our landlords are pretty great out there. They realized Caches unique brand as I’ve said in all locations we are in. We are obviously in A Malls, then we are in The Malls. And I think we are important to landlords then they are to us.

And so they’ve been very good to us in terms of just looking – working together, working very closely with us to just right size the fleet and right size with them. So we do thank them very much for how they – how this will all come about.

Brian Gaines - Springhouse Capital

Okay. Thank you.

Jay Margolis

Okay.

Operator

Thank you. Our next question is a follow-up from the Jeff Van Sinderen with B. Riley & Company. Please proceed with your question.

Jeff Van Sinderen - B. Riley & Company

Thanks. Just wanted to clarify a bit more, can you give us a little more color what you are seeing in sportswear because you sound more upbeat on that? I'm just wondering if you feel like you are starting to hit some milestones there early milestones. And then maybe you could just touch on what you’re experiencing an accessories handbags, et cetera, lately?

Jay Margolis

So I would say some of the excitement is the contracts from first quarter and second quarter where we really didn't have the right balance sheet of sportswear as it related to dresses and gowns and formal, the other things. And just as we’ve chased into denim and as we chased into crocks and different kinds of jeans and bottoms, I'm the big believer of tops bottom ratio is an important numbers.

So all the sudden they are buying date top to go back to a dress to your bottom. And that is something that we were missing on. We kind a kept away from the word, casual, and what casual meant. And we chased into casual dresses and the casual – and chased into more slightly more casual lifestyle.

We are little too sophisticated, a little too dressy and I think we also had dedicated the opening price points. So I think were we've gone after the bottoms category in the smart way our top business trending the right way. We feel good about you know the second half of the year, that we really don't have the sweater business last year.

In accessory, while we have a really good jewelry business. We have not had a big handbag business, this been kind of a niche handbag business and we've been testing with the local supplier, some of them are actually manufacturers in New York that can openly manufacture in the far east, but something where we testing bag in many locations and trying some new moves there. We think as we getting some good feeling, nothing that again is going to are the big parties. We're looking forward where the brand is getting some traction in terms of some different other product categories in accessories.

We feel good about shorts business in the second half of the year. As I said the jewelry and different expansions the jewelry are important for us in terms of gift giving and I think we didn't get the bag business right that could huge homerun for us and we are testing that.

Those just some other time try to give you some outerwear the category is something we tested last year had some success with some of the manufacture for us, so a big suppliers did a really good job for us, we have expanded that this year, that will be important online opportunity but we think it’s going to be another big plus opportunity for us in the store side as well.

We have even testing in that 20 stores, we are testing for cheap product, so we've taken 10 dresses our best dresses and actually done them into cheap sizing and getting kind of good read early, read on that is an opportunity you would have thought over the years that would have been a category that we would played in. So we are testing moving a lot of different areas, all of them based on getting more traffic in the store, getting more consumers to the brands and obviously converting them into being a Cache customer at many product categories.

We were more promotional in accessories, while I talked about last year getting with $9 jewelry. In the last month or so, we have been a little bit more promotional in the jewelry category, plan promotions, and we think that was really effective for us. Lot of the jewelry business in specialty retail is I want to say BOGO or discounted to some degree and it is a good traffic driver.

It was -- we ran at about 50% off over the last month of so and it's been really good for us on a consistent basis. We'll get off of that, but eventually we will go back to little bit of that as well. So again, we are looking for the balance for full and off price, testing things moving on different strategies and we are feeling good about of what these test are resulting for us.

Jeff Van Sinderen - B. Riley & Company

Okay. Good to hear. Thanks very much. And good luck for the rest of the quarter.

Jay Margolis

We thank you.

Anthony DiPippa

Thank you.

Operator

Ladies and gentlemen…

Jay Margolis

We value your continues support and expect to have more progress report to you as we report the third quarter. We thank you so much for taking time today.

Operator

Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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Source: Cache's (CACH) CEO Jay Margolis on Q2 2014 Results - Earnings Call Transcript
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