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Gordmans Stores, Inc. (NASDAQ:GMAN)

Q2 2014 Earnings Conference Call

August 27, 2014 4:30 p.m. ET

Executives

Andy Hall – President and Chief Executive Officer

Mike James - Chief Financial Officer

Mike Wirkkala - Chief Operating Officer

Tracie Wickenhauser - Senior Vice President, Stores

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

Brendon Frey – ICR Inc., Investor Relations

Analysts

Neely Tamminga – Piper Jaffray & Co

Evren Kopelman - Wells Fargo

Jacob Wire – Robert W. Baird

Jason Smith – Canaccord Genuity

James Frondo – Sidoti & Company

Bill Dezellem – Titan Capital Management

Sean McGuirk – Amica Mutual Insurance Co

Operator

Good day and welcome to the Gordmans Stores, Inc., Second Quarter Fiscal 2014 Earnings Conference Call. Today’s call is being recorded. My name is Shannon and I will be your operator for today's call. At this time, all participants are in a listen-only mode, but we will be conducting a question-and-answer session at the conclusion of today’s presentation. (Operator Instructions)

I would now like to turn the call over to your host for today, Brendon Frey of ICR. Brendon, please go ahead.

Brendon Frey

Thank you and good afternoon. Before we begin, I would like to remind everyone that the information contained in this conference call, which is not historical fact, may be deemed to constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual future results might differ materially from those projected in such statements due to a number of risks and uncertainties, all of which are described in the company's filings with the SEC and our earnings release.

Now I’d like to turn the call over to Andy Hall, Gordmans President and CEO.

Andy Hall

Thanks Brendon. Let me start by saying how excited I am to be part of Gordmans. I was immediately won over by all of our associates’ passion, energy, friendliness, positive outlook and desire to win. Gordmans has a tremendous relationship with our guest and is a great growth platform. Our guest relationship, coupled with the skills of our associates, and the initiatives that are underway, will result in our turning the business around. On the call today is Mike James, our Chief Financial Officer; Mike Wirkkala, our Chief Operating Officer; Tracie Wickenhauser, our Senior Vice President of Stores; and Geoff Ayoub, our Senior Vice President of Planning, Allocation and Analysis.

I will start the call with an overview of the second quarter and an update on our expansion plans. Next, Mike James will present our financial results for the quarter and the first half of the fiscal year in more detail, as well as discuss our guidance for the third quarter. I will then speak briefly to some of our initiatives for 2014 that will contribute to improved operating results in the second half of the year. We will conclude by answering any questions you may have.

Obviously we had a challenging quarter, most notably reflected in our comp store sales and our gross profit rate. Our comparable store sales declined by 6.8% and our gross profit rate decreased by 100 basis points. As we indicated in our first quarter earnings call, we expected this decrease in gross profit rate as we needed to aggressively mark down excess clearance merchandise. In addition to this mark down, throughout the second quarter we took steps to reduce our base inventory operating levels. Average store inventories are down 11% at the end of the second quarter. This was accomplished by reducing second quarter receipts by 17% year over year. This receipt reduction contributed to our second quarter comparable store sales results.

I’m happy to report that the right sizing of the inventory is complete and should result in improved sales and margin trends in the fall season. Despite the overall softness of the business, a number of businesses had positive comparable store sales performances in the second quarter, including, missy and junior, junior skirts and leggings, junior woven tops, plus sizes, jewelry and home classification of gifts, décor pillows, pets, wall décor and toys. We had a successful introduction of a missy contemporary department in July and it has been well received and contributed to a missy comparable store sales increase during July.

We remain confident in the scalability of our business model across new and existing under-penetrated markets throughout the country. During the quarter, we opened two new stores in two new markets at Grand Rapids Michigan and Saginaw, Michigan and relocated an existing store in St. Louis We opened five new stores in the first half of the year and relocated an existing store. We have also closed two under-performing stores this year and will likely close a third store in the fourth quarter. In the third quarter, we will open a store in the new market of Tyler, Texas. Texas will represent our 21st state. At the end of 2014 Gordmans’ will operate 97 stores.

Lastly, construction of our second distribution center was completed in the second quarter and began servicing stores late in July. This state of the art new facility doubles our distribution capacity and will improve our distribution efficiency in the long-term. Mike will now present more detail of our financial results for the second quarter and the first six months as well as our guidance for the third quarter. Mike?

Mike James

Thank you, Andy. Net sales for the second quarter of fiscal 2014 increased $4.3 million or three 3.1% to $141 million as compared to $137 million the same period last year. The increase was due to the seven new stores opened in the last three quarters of fiscal 2013 and the five new stores opened in the first six months of this year, including the opening of two new stores in the second quarter.

Comparable stores sales decreased 6.8% in the second quarter of fiscal 2014 due to the decrease in comparable transactions and a low single-digit decrease in the average sales per transaction.

For the first half of the year, net sales increased $15.9million or 5.9% to$284 million as compared to $268 million last year. This increase was due to the 10 new stores open last year and five new stores opened in the first half of this year.

Comparable store sales for the first half of fiscal 2014 decreased 4.8%, due primarily to a decrease in comparable transactions, partially offset by a low single-digit increase in the average sales per transaction, which was due in part to the roll out of our guest loyalty program gRewards to all stores in the second quarter of fiscal 2013.

Gross profit, which includes license fees, increased 0.9% to $59.7 million and license fees from leased departments were $1.9 million for the second quarter of 2014, compared to $1.8 million for the same period last year.

Gross profit margin was 42.3% for the second quarter compared to 43.3% last year, a 100 basis point decrease driven by additional mark downs taken in the second quarter to address our inventory content due to our recent poor sales performance and clear age merchandise headed into the fall season. Note that the additional mark downs represented a 180 basis point impact to margin for the quarter. For the first six months of the year, gross profit increased 4.1% to $123 million and license fees from leased departments increased 12.8% to $4.2 million. Gross profit margin was 43.3% for the first six months of the year compared to 44.1% last year, an 80 basis point decrease due to higher merchandize mark down to address our inventory content and higher promotional markdowns associated with our royalty and rewards program which was launched last year.

SG&A expenses for the second quarter were $63.5 million or 45% of sales versus $57.6 million or 42.1% of sales in the prior year, a 290 basis point increase.

In addition to a lack of sales leverage associated with the comparable store sales decrease, store level expenses increased by 80 basis points, primarily due to higher occupancy and maintenance costs. And distribution center expenses increased by 80 basis points due to higher rent expense associated with the second distribution center, higher payroll expense associated with temporary labor prior to the opening of the second distribution center, and charges associated with lower capitalized spread in the prior quarter due to lower merchandize inventory levels and lower average delivery charges as a percent of inventory receipts during the quarter.

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

Corporate expenses increased by 40 basis points primarily due to certain non-recurring costs related the retirement of a former Executive and higher payroll expenses.

Advertising expenses increased 40 basis points due to a lack of sales leverage associated with the comparable store sales decrease and new store marking expenses.

Reopening, closing expenses also increased by 10 basis points due to the second distribution center opening in the second quarter and the closing of an existing store in the second quarter.

SG&A expenses for the first half of the year were $126.9 million or 44.6% of net sales versus $111.3 million or 41.5% of sales last year, a 310 basis point increase driven primarily by a lack of sales leverage which accounted for 110 basis point increase in corporate level expenses and 80 basis point increase in store level expenses and a 60 basis point increase in distribution center expenses. Corporate expenses also included certain non-recurring costs related to the retirement of two former executives while distribution center expenses also included delivery charges associated with lower capitalized spread. In addition, depreciation expense increased 40 basis points and pre-opening expenses increased 20 basis points due to the second distribution center.

Interest expense for the second quarter was $1.3 million compared to $100,000 for the same period last year. And for the first half of the year was $2.5 million compared to $200,000 for the same period last year. The increase in interest expense was primarily driven by interest on the $45 million senior term loan we entered into in August 2013 to partially fund the special cash dividend paid in September 2013.

The net loss for the second quarter of 2014 of $3.2 million compares to net income of $0.9 million last year. Note that approximately half of the loss is the result of the additional mark downs that we took in the second quarter.

Our combined federal and State tax rate for the second quarter this year was 37.4% compared to 37.5% for the second quarter last year.

The diluted loss per share was $0.16 for the second quarter based on 19.4 million weighted average diluted shares outstanding which met the low end of our guidance. Diluted earnings per share were $0.05 in the second quarter of 2013 based on 19.4 million weighted average diluted shares outstanding.

The net loss for the first half of fiscal 2014 of $3.9 million compares to $4.2 million of net income last year. Our income tax rate was 37.5% for both the first half of fiscal 2014 and the same period last year. The diluted loss per share was $0.20 for the first half of fiscal 2014 based on 19.4 million weighted average diluted shares outstanding compared to earnings of $0.22 on 19.3 million shares last year.

I would now like to turn to our balance sheet. Cash and cash equivalents at the end of the quarter decreased by 75% to $11.1 million compared to$43.6 million a year ago primarily due to the special cash dividend of almost $70 million paid in September last year.

Inventory was $96.1 million at the end of the quarter, down 4% compared to $100 million at the end of the second quarter last year, which also represented a 10.9% decrease on an average store basis.

Our working capital was $30.4 million, 60% lower than at the end of the second quarter last year.

We had $5.3 million of borrowings outstanding on our $80 million revolving line of credit at the end of the second quarter and continue to have significant availability under the facility.

With respect to forward looking guidance, we are projecting third quarter fiscal 2014 net sales to be between $150 million and $153 million, which reflects a mid-single digit comparable store sales decrease versus a 4.5% comparable store sales decrease incurred in the third quarter of last year.

As a result of our successful efforts to address our inventory content by clearing out aged merchandize in the second quarter, we expect a 40 to 50 basis point increase in gross profit margins compared to the third quarter of last year as lower inventory levels will allow a better flow of new receipts in the fall season.

We expect additional selling, general and administrative expenses related to depreciation and expenses associated with the company’s second distribution center and opened in the second quarter to result in some deleveraging in expenses. However, a thorough review of our expense structure resulted in cost savings from plan in the second quarter that will continue into the third quarter.

As a result, we project diluted earnings per share for the quarter to be between a loss of $0.11 and $0.07 using a weighted average diluted share count of approximately 19.4 million, which also includes the impact of interest expense associated with the term loan of approximately $0.03 per share compared to earnings of $0.06 per share in the third quarter of fiscal 2013, using a weighted average diluted share count of approximately 19.4 million which included $0.02 per share of interest expenses.

For the 52 week fiscal year ended January 31 2015, comparable store sales are forecasted to be down mid-single digits. But we expect to see improvement as the second half of the fiscal year progresses based on our inventory positions and initiatives that we’ve put in to place.

In addition we expect an improvement in gross margin in the back half of the year as we tightly manage our inventory levels.

SG&A expenses will deleverage due to the addition of the second distribution center and we expect that depreciation expense will increase by 40 basis points in 2014. And preopening closing expenses will increase by 10 basis points for the six new stores and one relocated store, the second primary distribution center and three existing store closures this year, versus 10 new stores that opened in fiscal year 2013. Our diluted share count is expected to remain at 19.4 million shares for the year.

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

Andy Hall

Thank, Mike. I just wanted to take a few minutes to give you some color on strategic initiatives. We continue to focus our efforts on a number of initiatives that we believe will positively impact comparable store sales and our profitability for the remainder of 2014 as well as the future. We will continue to task and execute new initiatives throughout the second half of the year. Here are a few of those initiatives. Number one, we brought on board Amy Myers, a seasoned marketing executive to oversee marketing and we will continue to revamp our marketing plans throughout the back half of the year. We tested a number of new initiatives in the second quarter, including revising the creative content of our email advertising to focus on key merchandize offerings and our value pricing preposition.

We also increased the frequency of our email blasts and our expanding the audience receiving the emails in order to increase frequency of visits and their overall spend accordance. Additionally, we modified our TV commercials and reintroduced print media with free standing inserts or FSIs throughout the year as opposed to only holiday period last year. Again the creative content of TV and FSI advertising is focused on highlighting fashion and selection, value and creating a sense of urgency.

We now have over 2.8 million registered loyalty guests, which represent over 60% of our sales and we are focusing on increasing the penetration level as well as increasing the number of guests enrolled in the program.

Second, we are focused on improving our brand portfolio with the addition and intensification of nationally recognized brands. For the fall, we will introduce our guests to Jessica Simpson, Kensie, Gloria Vanderbilt, BB Dakota, Spider, Aero, Under Armour, Callaway, Rampage and Madden girl. Very exciting stuff.

Third, in addition to the right sizing of our operating inventory, we are increasing our sourcing of great products in the off price market. These goods will be marketed as door buster merchandise or special buys which represent incremental savings for our guests that will drive daily traffic to our stores.

Fourth, we are revitalizing our product presentation and the shopping experience for our guests by reallocating selling space to keep categories of merchandise that have significant growth potential, including the missy and men’s businesses and rolling out signage, visual merchandising and an in store announcements to highlight our merchandise offering and our value proposition. The launch of our missy contemporary that I discussed earlier is a good example.

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

Sixth, we are focused on driving cost reductions and efficiencies through a thorough re-evaluation of our cost structure, leveraging investments made in technology, distribution and support facilities and through the evaluation of opportunities to reduce our investments in new locations through a process of value engineering.

Seventh, as I mentioned earlier, we have completed the construction of our second distribution center in Indianapolis. We are currently working through a few growing pains that are typical with a new facility. Once running at full capacity, this new distribution center will allow us to double our current store count and reduce our outbound transportation cost to stores and will allow us to backward engineer new technology into our current distribution center.

Eighth, we have started to build our in-house e-commerce team and are working on developing our e-commerce strategy. We believe our business model is right for an Omni-channel approach and we are excited about the potential 2015 e-commerce launch.

Lastly, we have commenced the search for a new Chief Merchandising Officer. We have contacted several very qualified candidates and feel good about our progress to date. We believe these initiatives will strongly position our company for long-term growth and we will continue identifying other strategies to drive performable as the year progresses.

Now with that, we’d like to open up the floor for questions, operator.

Question-and-Answer Session

Operator

Yes, sir. Thank you. (Operator instructions).we will take our first question from Neely Tamminga with Piper Jaffray.

Neely Tamminga – Piper Jaffray & Co

Great. Good afternoon and welcome Andy to Gordmans.

Andy Hall

Thank you. Great to be here.

Neely Tamminga – Piper Jaffray & Co

Great. So a couple of questions around your arrival just a little bit. I would love to know your process for onboarding kind of how have you gone about getting to know the organization and any sort of potential highlights you want to offer in that process would be really helpful. And then as you kind of rethink some of the strategic initiatives that you’ve put forth, you ticked them off like one two, three, four, five. Six. Is that in order of priority or magnitude or if you could just reframe for us just a few of those initiatives where you think you can have more of an immediate impact on the organization from a magnitude perspective, that would be really helpful for us. Thank you.

Andy Hall

Okay, great. So first on the onboarding question, we thought it would be great for me to start four days before our board meeting and an earnings call and conference call, I’m just kidding, but it’s been quite a whirlwind for the first seven days. I think I’m on day eight or nine now. Our approach to onboarding is for me to get as exposed as I can to all areas of the business and all levels within the organization and that kind of fits in with my style. I’m a very open door kind of manager. I manage down two or three levels. I don’t like a hierarchical approach where our folks have to talk to their boss who talks to their boss who talks to their boss. That tends not to be the best way to run a retail organization. I was very happy when I got here last week and all of my exposures have been that Gordmans is a very open communicative family type organization. It’s not a parochial organization where people are building walls around their pyramids. It’s a very much a team atmosphere around here. I think our new office that we moved into a few months ago helps facilitate that. None of us have offices.

We are out in the bull pen, which I think is great, including myself. I don’t know if my bull pen partner Mike Wirkkala enjoys it, but so far I have. What I told the organization is that I firmly believed in getting out into the operations. So for the first year, my goals are to get to all 100 stores, approximately 100 stores that we have, both distribution centers. We had our board meeting at the distribution center yesterday. So, I was able to see the new distribution center. I think that’s important to be visible and to increase the communication to the organizations. So we have a lot of plans for my onboarding and so far so good.

To answer your second question regarding priorities, they are not in priority order. I would tell you that the magnitude of the impact that these initiatives will have will vary in totality, but it will also vary in timing. So for example the last one that I talked about was finding a CMO and that is probably going to be the quickest of the priorities that we talked about to get accomplished. In a perfect world we’d get a new CMO on board in 60 to 90 days. We are going to try hard to do that. It would be nice to get the chief merchant in here so he or she could experience what a fourth quarter is at Gordmans. That’s an example. The order in which I listed them isn’t necessarily the order in which they will be completed or the magnitude. But I would tell you all the priorities are very important. There’s been a lot of work and a lot of good thought put into these priorities. You will see some impact and results from these priorities in the fourth quarter. Certainly number one, Amy Myers and her marketing team are making a great impact and changes to our marketing plans. You’ll see the impact of that in the second half of this year.

Certainly the brand portfolio roll out, you’ll see an impact in the second half this year. Certainly the right sizing of the inventory, we will start to see an impact of that in the third quarter for sure and a bigger impact in the fourth quarter. When we had to reduce our receipts in the second quarter to right size the inventory, I won’t get into a lot of retail speak here, but clearly sales -- receipts drive sales. And so when we had to pull back receipts, which was very necessary to get our inventory levels in line with what thought the right turn levels should be going forward, we had to pull down second quarter receipts, but for the back half of the year, our receipts, our plans flattish versus last year. We will have a lot more fresh receipts offered to the guests and I think they will clearly have a positive impact on the trend of the sales performance.

Product presentation, the shopping experience continues to get worked on in the stores and here at the corporate office. We will see some impact of that in the second half of this year and certainly into 2015. Conversion at the store level and building traffic information to the labor management system, we’ll see some impact in the second half. We’ll probably see more impact in 2015. Driving costs reductions has really already started. We saw some significant cost reductions in the first half of this year and that will certainly continue into the second half as well. Obviously the construction of the second distribution center, it’s up and it’s running. The growing pains that we’re experiencing with a brand new workforce into a brand new facility, was you tend to expect that in a retail distribution center.

It will take us a little time to ramp up the productivity and the skillset of a brand new workforce out in that distribution center. But we are working hard at that and certainly going through the second half of the year we are going to get better and more productive and get closer to our long term productivity standards out in that building. E-commerce is probably one of the things that will not have an impact in the fall of 2014. We are working hard at that and that’s a complicated, intensive process to go through. We are going to make sure that we go through and do it right and launch with a complete product. That’s going to be 2015 benefit. Neely, I hope that helps.

Neely Tamminga – Piper Jaffray & Co

It sure does, Andy. Thank you very much. We look forward to watching the progress.

Operator

And we’ll take our next question from Evren Kopelman with Wells Fargo.

Evren Kopelman - Wells Fargo

Thanks. Good afternoon. Welcoming from me as well, Andy. My question is, I’m sure you’ve done your due diligence before joining the company, and like you said you’ve been there for a few days. But based on your due diligence, what do you think have been the primary issues driving the underperformance in comp growth over the past 12 to 18 months?

Andy Hall

I think clearly -- I think like most retailers out there, it is a traffic issue. That is the number one issue that’s driving traffic. Now there’s a lot of different reasons why traffic may not be being driven to the store. It could be the consumer, although I think the consumer frankly is in a pretty good place. I think -- I can’t speak for the past because I wasn’t here and you really need to be in bowels of a retail organization quite frankly to dissect and understand, but I think that our inventory assortments got a little off kilter and there’s a couple of things that we are working on and are pretty close to having fixed as well. And to give you a little color on that, we are working on an assortment theory called good, better, best and what that good, better, best should look like, I would tell you that we as an organization over the last couple of years got into a inverted triangle or sometimes called a diamond where we had more or better and best and better products and not enough good.

And for our core customer we probably should flip that and be traditional triangle or more of a long rectangle where you’ve got a stronger presentation of good, good and better and then best is maybe representing 12% to 16% of your inventory assortment depending on which family of business that you are talking about. That’s one example. The other assortment example that I would is that I think that we got too out of balance with our basic and fashion components and I think we got too skewed to fashion and stepped away from basic. Now this is a broad brush answer and that it would be different for different families of business within the store. But I think we are working on rebalancing our assortments so that we have more of a basic offering as well as the fashion element.

We are known as a fashion house for our customer and we will continue to be. But as an example, I would tell you that in lingerie for example and foundations that the number one and two colors are – one, two and three are white, beige and black. And when we looked at our floor it was very much skewed to the fashion side multicolor. So things like that we are working on. We got a little out of kilter over the last couple of years I think from an inventory level and that’s why Jeff and his team led the charge in the spring to right size our inventory levels.

What happens when your inventory starts to grow is and it’s a philosophy that if you’re looking at inventory to drive sales, you may get out of balance with the customer, because as the inventories grow and if that inventory is aged inventory or older inventory and not fresh receipts, then you can have all the inventory you want. It’s not going to generate sales. It’s current fresh receipts that drive sale. So, that’s why we had to take our medicine in the second quarter. We took the mark down on the excessive clearance merchandise we had, but we also pulled down our inventory levels to create a quicker turn so that we’ll have -- our component of inventory going forward is going to be a larger component of fresh receipts to help drive those sales.

I think communication to the customer from a marketing stand point frankly got a little stale and wasn’t talking about the right things. Branding is very important, but we’ve got also talk to the merchandise. We have to talk to the fashion element and we’re the fashion headquarters for that customer. And I think that our marketing message got a little bit standard deviation to a way of probably where we should have been. All things that are sometimes easy to diagnose and difficult to affect change, but I think the one thing that I have been very pleasantly, not surprised, but pleasantly reminded of, because I did do my due diligence on the company as this is a company with folks that want to win, are very open to change and are born winners and I’m excited about that. I think we are going to be able to get this thing turned around and make everybody happy.

Evren Kopelman - Wells Fargo

Thank you. That’s really helpful. And a follow up question is, when you look at the kind of competitors that are out there, where do you think are the biggest areas of opportunity for Gordmans, either in certain product categories or geographies where it may be? And where do you think are -- what are the strengths of the company? Where are the biggest opportunities? Thank you.

Andy Hall

Sure. I think the company has a lot of strengths. I think one of the strengths of the company quite frankly is the fact that we are not a national chain. So when our customer looks at Gordmans, they almost view Gordmans as their hometown department store, whether that’s in Omaha or whether that’s in the other 19 or 20 states that we operate in. So I think that’s a competitive advantage that we that we can take advantage of. We don’t want to be all things to all people. But I think we can be a lot of things to a lot of people. And what I mean by that is our core business model is an everyday low price business model. I think our guests appreciate that and understand that. Now the challenge with an everyday low price format is driving traffic to the stores because an ever day low price tells the customer that the price you see today is going to be the same price tomorrow, is going to be the price 10 days from now, and two weeks from now and it may not convey a sense of urgency.

What we are after is trying to change our approach a little bit to convey more a sense of urgency to the customer, change those marketing messages to talk about fashion, to help drive that in. But we are also, as I mentioned in my script, looking at buying more off price merchandise. And what we are going to be able to do with that off price merchandise is it’s generally going to be branded. It’s generally going to be in season fashionable goods and it’s going to be one heck of a value to the customers. So as we start to build our sales component of that type of merchandise to say 10 to 15, it’s going to take some time to build it up to even 20%, we are going to give the customer another reason to come into the store every day, because we are going to teach her that we’ve got this off-price buyers coming into the store. They’re certainly bought to sell out and sell out quickly. That’s going to be one of our hooks to get the customer into the store to help supplement that everyday low price format that we run. If I had to give you -- I’m six or seven days in. I’m still working on some things and we are still doing some work on who our core customer is. I’ll probably defer and talk to you about that maybe on the next quarter’s call or sometime in the interim. Hopefully that’s helpful.

Operator

We will move to our next caller. We’ll take Mark Altschwager with Robert W. Baird.

Jacob Wire – Robert W. Baird

Thanks. This is Jacob sitting in for Mark. How do you feel about the company’s current store footprint and the real estate environment out there? I guess going forward do you expect a similar number of openings and closures next year and does the pace depend on the progress made on some of these comp and margin initiative?

Andy Hall

I think that -- I’ll start and then Tracie if you want to jump in feel free. I think that we are going to be in the five to six range next year for new stores. We are going to be close to that this year. I think we are going to be what, six plus a reload.

Mike James

Yeah, six including the reload.

Andy Hall

Six including a reload this year. We don’t see a major change in the expansion. We do think that -- as I mentioned I think that the brand and the format does have some runaway and lends itself to expansion. I don’t think right now we are comfortable expanding that number. I think we’re a patient company. We are working on some of these initiatives and we’ll be better off getting some of these initiatives behind us or certainly a ways down the road and be able to continue to open stores to take advantage of them. I think from a geographic footprint, I think our store and our format, which is a little unique I think can play wherever in the country. I think it is a pretty flexible format. So I think it can slide into most metro areas. It works sunburn versus urban and it works mall versus strip center. I think that’s great news because that helps and makes the real estate process way easier to find opportunities out there. Tracie, did you want to add anything to that?

Tracie Wickenhauser

No, I think that’s very accurate. We are also looking at different size buildings as well to make ourselves more versatile. But we certainly have a lot of ground that we can fill in, in market. So from right now we are just looking at where opportunities are within markets that we already live in as well as where we could expand from a global prospective without moving too far from a transportation cost. We’re really trying to look at everything holistically and make great decisions and make sure that our real estate decisions are in connection with what we are doing from an expense standpoint as well as our new initiatives.

Jacob Wire – Robert W. Baird

Okay, great. Thank you. And then also SG&A growth has been trending a bit above sales growth for the last several quarters. I guess how should we think about that pace of growth in the back half of this year and next year I guess with some of these profit initiatives? Should we expect some relief on out quarters?

Mike James

Jacob, this is Mike James. Certainly our deleveraging in SG&A is primarily driven by the deleveraging we are getting in sales. We have gone through and identified a number of areas where we can trim expenses, but most of the expense increases in dollars is coming from the new stores that we’ve opened. But our comp sales decrease has deleveraged our base fixed cost. We need to get back to generating comp sales increases and once we do we’ll be leveraging our SG&A again.

Operator

We’ll take our next question from Laura Champine with Canaccord.

Jason Smith – Canaccord Genuity

How are you doing guys? This is Jason Smith on for Laura. I appreciate the color you’ve given us on some of the initiatives, the merchandizing initiatives and just want to follow up a little bit and look at a timeline or what not. Can you give us a guess as to what you think some of the quick fixes are and what are some of the initiatives where you think it is going to be more longer term?

Andy Hall

Sure, I’m going to reiterate some of the things that I said earlier. I think on the merchandizing side obviously the inventory levels are fixed. That’s great news going into the fall. I think from a marketing perspective we are making changes to our marketing message and approach and frequency with which we are communicating to the customer. So I think some of that has happened already and it will continue and accelerate in the fall season. I think the assortment planning that we talked about, the good, better, best in the basic fashion, some of that has been done. Some of it is a work in process. I think other than things like e-commerce, which there’s not going to a benefit in the fall, and maybe the labor scheduling in the store, integrating traffic information into the scheduling, I think everything else we can expect to see some benefits for in the back half of the year.

Operator

Next, Mr. James Frond0 with Sidoti & Company

James Frondo – Sidoti & Company

Hi guys, how are you?

Andy Hall

Well. How are you?

James Frondo – Sidoti & Company

Good, thanks. Just question on the in-house e-commerce, do you have an estimated annual cost of what that might be for fiscal ‘15?

Mike Wirkkala

This is Mike Wirkkala. We are still developing that. We are in the process of identifying a platform. We’ve narrowed it down to two contenders and then we are currently working on who the 3PL will be to support of business.

James Frondo – Sidoti & Company

No sense of what the cost would be?

Mike Wirkkala

No, not at this point.

James Frondo – Sidoti & Company

All right. Right I can follow up to it. All right, thank you. That’s all I had.

Operator

(Operator Instructions) and we’ll take our next question from Bill Dezellem with Titan Capital Management

Bill Dezellem – Titan Capital Management

Thank you. A couple of questions. First of all, I believe in your opening remarks you referenced that you had a new missy department. And unless we totally are misunderstanding, you had a missy department before. So is there something that you are referencing that’s new that we are not fully appreciating? The second question is relative to inventory. Would you please break out your inventory by aging category this quarter versus last quarter and versus the year ago quarter please?

Geoff Ayoub

Okay Bill, this is Geoff. Let me -- so I’ll jump in and address the first question first on the new missies department. It’s a department within the missies division that we’ve launched at the end of July called contemporary, and some of the brands that Andy referred to Jessica Simpson, Kensie, BB Dakota, those were three of the anchor brands that are driving that contemporary department within the missies division.

Mike Wirkkala

So it’s really a customer that we felt we were missing.

Bill Dezellem – Titan Capital Management

Thank you.

Geoff Ayoub

So does that answer -- okay, great. And with respect to inventory aging, quarter on quarter at the end of Q2 versus the end of Q1, our aging ownership of freshness, inventory less than sixty days is in a better position than we were at the beginning of – or at the end of the first quarter by a number of points. And we are on par with where we’ve been in the past years, the past couple of years going into August. The real benefit we’ll see from an aging perspective is now that we’ve taken the medicine as Andy referred to earlier and cleaned up the inventories, is as we go forward now, because of the inventory is clean going into Q3 and as we then focus more on receipts and less on managing the inventories, we should continue to see improvement going forward.

Bill Dezellem – Titan Capital Management

And taking that one step further, given that your inventory is back to a more normal level now, are you incorporating a degree of caution or cautiousness into the guidance that you’re providing for the third quarter?

Geoff Ayoub

I’m not sure I follow exactly the question.

Andy Hall

Bill, this is Andy. I would tell you that we always -- we are in the retail. So we’re always going to build some conservatism into our estimates. I would tell you that we thought we built in some conservatives into the second quarter guidance as well and we came in at the lower end. I don’t think it’s at an egregious level, but I would tell you there’s a range of -- we look at it as a range of potential out there. So the guidance that we’ve given is not at either end of that range.

Bill Dezellem – Titan Capital Management

Thank you,. And I’d actually like to follow up on the first question relative to the contemporary department within the missies. You had referenced earlier in the call that you had really diamond shaped the business and had too few goods and were too largely skewed on that best end. And it seems as though what you’re describing for that contemporary missies customer is a little high end customer just as the customer that would be looking for the better, pardon me, the best end of the inventory skewing for any particular product. Am I mixing up a couple of thoughts or are you somehow at risk of trying to move too upscale with your customer with the contemporary? And I’m not even sure that I’m being clear with my question.

Andy Hall

No, your question is clear, I would tell you that contemporary doesn’t denote best, I mean, even within contemporary there is a good, better, best within contemporary. So I think you’re mixing up good, better, best with lifestyles, but certainly there is -- I understand your question and I think that there’s a missed connotation between what contemporary is.

Operator

And we will take our final question from Sean McGuirk with Amica. Please go ahead.

Sean McGuirk – Amica Mutual Insurance Co

Thanks guys. Andy, quick question for you, I know it’s a long call here. In regards to off price, I know it’s historically been kind of a tough nut to crack and there’s been a lot of other smaller retailers that have been unsuccessful getting into that business. So I guess just what gives you confidence that you can be successful in making off price a bigger component of your business, and also what percentage of sales that has been historically been for you guys?

Andy Hall

Historically it’s been pretty small. So this is kind of new territory for us. So it’s actually a very good question. I would tell you that buying off price is different than buying traditional department store buying. So with that in mind we are starting this process with Doniga. Doniga has got an off price service that they provide. So we are working with Doniga to source some off price, but we also supplementing that with what our merchants can find in the off price market. so our merchants were at magic last week out in Las Vegas and concurrent with magic there’s an off price market that runs at the same time. So our merchants spent some time with the traditional magic vendors, but also spent some time in the off price magic market as well. And then we are also going to – there’s some resources out in the industry that we know and have relationships with and we’re going to take advantage of their knowledge and pick as many brains as we can to make sure that we can buy the off price appropriately. And mostly what that means is that we buy it at the right price.

I think that we spent time at the distribution center. The other thing about off price that’s very different is the way we receive those goods. So that off price may not necessarily come in neatly in case packs into the distribution center. And we’ll also look at off price in a couple of different ways. We’ll look at off price that results from another retailer that cancelled an order with the vendor. So it’s current season off price. We’ll look at the end of the season where there’s seasonal merchandise that didn’t sell, that didn’t get pushed out to vendors that we’ll buy that. It will be we call pack and hold, and we will have to push that into the distribution center, hold it into the distribution center for a season and pull it back out when the appropriate season comes around. When you buy pack and hold, you need to understand that there is a holding cost to that inventory. So we will work with our merchants to make sure that we are building the appropriate margins into that buy to make sure that we’re taking into consideration the cost of money in holding those goods in the distribution center. So we think that -- this year I think it’s still going to be relatively low percentage of our penetration as we get more comfortable and have success with it. It’s going to grow. Geoff, you want to add?

Geoff Ayoub

I was just going to say I think that the other reason -- the thing that gives us confidence is that we are liquid. We are very liquid from a receipt stand point. So we have the opportunity to take advantage -- as those opportunities come up, we’re in a position to make a decision right away and we have that flexibility.

Operator

Ladies and gentlemen, with no further questions in queue, I will turn the conference back over to Mr. Andy Hall for any closing remarks.

Andy Hall

Thank you. On behalf of the entire management team and our 5,000 plus associates in the stores and distribution centers and our corporate office, thanks for your continued interest and support of the company. We enjoyed the questions and we look forward to visiting with you on the next call. Thank you.

Operator

That does conclude today’s conference call. We thank you for your participation. You may now disconnect. Have a great rest of your day.

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