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Christopher & Banks Corporation (NYSE:CBK)

Q2 2014 Earnings Conference Call

September 3, 2014 16:30 ET

Executives

Jean Fontana - ICR

LuAnn Via - President and Chief Executive Officer

Pete Michielutti - Senior Vice President, Chief Financial Officer and Chief Operating Officer

Analysts

Jennifer Davis - Buckingham Research Group

Neely Tamminga - Piper Jaffray

Jeremy Hamblin - Dougherty & Company

Operator

Good afternoon, ladies and gentlemen and thank you for standing by. Welcome to today’s Christopher & Banks Corporation Fiscal Second 2014 Earnings Results Conference Call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions. As a reminder, today’s conference is being recorded and will be available for replay later today. The dial-in information is included in today’s press release.

And now, I would like to turn the conference over to Jean Fontana of ICR. Please go ahead.

Jean Fontana - ICR

Thank you, Ann and good afternoon everyone. Welcome to the Christopher & Banks’ second quarter fiscal 2014 conference call. Hosting today’s call are LuAnn Via, President and Chief Executive Officer and Pete Michielutti, Senior Vice President and Chief Financial Officer and Chief Operating Officer as well.

Before we begin, we would like to remind participants that remarks made by management during the course of this call may contain forward-looking statements about the company’s plans and future results. These forward-looking statements are subject to risks and uncertainties that could cause the actual results and implementation of the company’s plans to vary materially. These risks and uncertainties are referenced in today’s press release as well as in the company’s most recent filing with Form 10-K.

With that, I would like to turn the call over to LuAnn Via.

LuAnn Via - President and Chief Executive Officer

Thank you, Jean and good afternoon everyone. Thank you for joining us to review our second quarter 2014 financial results and discuss our outlook for the third quarter and full year. We delivered solid results for the quarter in a difficult retail environment and we expect those challenges to continue this quarter. During the second quarter, we generated $106.6 million in net sales, up from $104.2 million last year despite operating 9.3% fewer stores.

Comparable store sales increased 2.6%. Our comparable store sales base, excludes new MPW and outlet stores and MPW conversions, which represent about 20% of our current store base. Therefore, we believe a more meaningful measure of our stores performance is sales per store, which was up 9.9% for the quarter as compared to the same period last year.

Gross margin improved 180 basis points to 35.3% and operating margin was up more than 300 basis points. This resulted in EPS of $0.09 for the quarter as compared to a loss of $0.01 per share in the second quarter last year. Our performance reflects continued progress on our long-term growth plan as we executed on our strategic initiatives. Our MPW stores continue to exceed our expectations.

Comparable store sales in the MPW stores included in our comp base increased 7.6% and we saw an overall increase in sales per square foot of 11.4% for all of our MPW stores. At the end of the second quarter, we had 41 MPW stores in our comp base and 138 MPW stores in total. Of the 138 MPW stores, 53 were stores that we added CJ product to in the second quarter. This resulted in both incremental sales growth as well as attracting new customers and reactivating former customers. While we have made considerable strides thus far, we still have significant opportunities and challenges ahead of us.

With that, I will now review some merchandise highlights from the quarter. Our customers continue to respond well to our refined merchandise assortments and we remain focused on maintaining a balance of core and fashion. We consistently review and adjust our product mix in order to provide her a versatile offering at compelling prices. Our core programs remain our primary focus.

Our denim offering has been one of the better performing category since we expanded it in Q4 last year. We saw strong double-digit growth and increased gross margins in all of our denim bottoms during the quarter, including long legs, capris, shorts and skirts. We will continue to drive our denim business with the expansion of year-round vests, jackets and basic skirts beginning later this quarter. Our woven bottoms assortment was also favorably received driven by strong growth in long leg pants. As with denim, gross margin in this category expanded significantly and we are pleased with the momentum of our overall bottoms business.

In addition, our newer programs such as wrinkle-resistant shirts, signature-slimming bottoms, weekend wear and travel-knit dressing continue to perform well. Our customer appreciates the ease of these collections as they are compelling foundational wardrobe pieces which provide great style options. Going forward, we will look to further expand these categories in order to provide her with additional solution based offerings that are relevant to her. We also saw strength in core knit tops as well as jackets and accessories. The accessories category had a double-digit increase in net sales during the quarter and an above company average gross margin increase as compared to last year. Leading performers in this category were scarves, rings and necklaces.

Our outlet stores continue to have a strong performance. We continue to expand our penetration of outlet exclusive product ending the quarter in the mid 20% range on our way to a goal of one-third of the mix by the end of the year. The outlets also continue to be a great avenue to move through clearance goods at healthy rates of sale. To support our merchandising strategy, we are maintaining a highly disciplined approach to inventories. We ended the quarter with more than 80% of our current inventory consisting of July go-forward and core merchandise. Our goal is to maintain the level of core that ensures we remain in stock in key styles and sizes and offer a greater breadth of fashion that turns faster mitigating markdowns.

We continue to seek feedback and learn from our customers. During May and June, we held focus groups in three cities, which helped validate our merchandising initiatives are on point, including the importance of our bottoms solutions around set. Additionally, the research confirmed the importance of visual display of outfits and key trends which we are working to enhance through improved inventory and SKU planning. We believe there is still an opportunity to further enhance our merchandise assortment. These improvements will be focused around extending categories that are working well for us like denim and testing new product categories including active wear. Overall, our merchandising initiatives are on track and we continue to see additional opportunities going forward.

Now, turning to our marketing efforts. We continue to refresh our promotional offerings, store fronts and direct marketing campaigns to effectively engage consumers. During the quarter, we implemented key findings from previous testing into our current direct mail programs and this approach is proving effective. These key findings included the types of offers and customers segmentation that generate a higher number of return visits and purchases as well as the appropriate timing for follow-up with new and reactivated customers. We sent two direct mail pieces, one in May and one in July, which both produced strong returns as well as additional learnings to consider for future mailings.

Our private label credit card continues to grow and we ended the quarter with 685,000 accounts. These customers continue to shop more and spend more per visit and cardholders accounted for almost one-third of sales during the quarter. We held our third cardholder event in early May to great response. We plan to hold these events periodically to incentivize customers to sign up for and to use their credit card.

Now, turning to e-commerce. E-commerce sales were up more than 30% compared to last year with higher traffic and conversion rates as customers responded well to our spring and summer offerings. In addition, gross margins for the direct channel expanded 490 basis points for the quarter and the operating income dollars almost doubled as compared to last year. You will recall that we have rebalanced the e-commerce inventory mix, which has reduced the penetration of clearance items. This is part of our efforts to reposition our e-commerce sites to be more profitable and this strategy continues to work well.

As we mentioned last quarter, we will be launching an MPW site for e-commerce by combining our two e-commerce sites into one. As part of this launch, we are making a number of enhancements to the site to improve its shopability and conversion rates. These include making it easier for her to find what she is looking for and finding the right fit, enhancing the visual presentation of our products with improved page organization, sharper images and a quick shop page option, and improving and simplifying her ability to checkout. This project is well underway and we plan to launch the new site by the end of September.

We have remained focused on our targeted paid digital marketing initiatives and continue to make investments in this area to drive e-commerce sales and customer acquisitions. As we expand our programs around paid marketing, we intend to optimize the individual paid channels in order to enhance the overall sales return associated with these programs. We continue to optimize our real estate portfolio by converting stores into the MPW format. During the quarter, we opened three new MPW stores and converted 71 existing locations to 64 MPWs. As I stated earlier, these stores are generating higher sales per square foot and increased profitability compared to the overall chain. We now plan to end the year with almost 200 MPW stores. Ultimately, we expect all of our full price stores to be MPWs. Also during the quarter, we opened six new outlets and their performance is ahead of plan.

Lastly, we are on the initial phase of a long-term omni-channel strategy and which we anticipate making significant investments in and upgrades to our e-commerce, customer relationship management and point-of-sale systems. As part of this multi-phased omni-channel project, we intend to dramatically improve the integration of these three systems to enhance the customer experience. The key objective is to exceed the customer’s expectations in each interaction with us. Overall, we are pleased with our strong results in the second quarter.

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

Pete Michielutti - Senior Vice President, Chief Financial Officer and Chief Operating Officer

Thank you, LuAnn, and good afternoon everyone. My financial review today will cover the second quarter ended August 2, 2014 compared to the second quarter ended August 3, 2013. I will also provide some general comments regarding our outlook for the third quarter and for the full fiscal year.

Let’s start with the second quarter results. Total net sales were $106.6 million, a 2.3% increase compared to $104.2 million for the same period last year. We operated on average 9.3% of fewer stores in the second quarter of this year than during the comparable period last year. Same-store sales increased 2.6% for the second quarter and this is on top of a same-store sales increase of 7.7% in the second quarter of last year.

During the quarter, we saw a 113 basis point improvement in conversion and higher average dollar sales partially offset by lower traffic. Average dollar sale increased by 9.8% as a result of an increase of 4.6% in UPTs and a 5% increase in average unit retail. E-commerce sales during the quarter were $11.4 million, up 31% from $8.7 million during the second quarter last year. Remember that we launched our upgraded e-commerce platform in the second quarter of last year and sales during that quarter were negatively impacted as we work through issues associated with the transition. After adjusting for the impact caused by the post-launch issues last year, the channel is still up 11.4% compared to last year.

Gross profit for the quarter increased 7.8% to $37.6 million as compared to $34.9 million in the second quarter of last year. Gross margin was up 180 basis points to 35.3% as compared to 33.5% for the same period last year. This was ahead of our expectations largely due to our strategy to increase the level of core merchandise, which led to improved IMUs. In addition to same-store sales and gross margin rates, we are measuring both sales per square foot and gross margin per square foot. Improvements in these metrics are key in validating the success of our strategic initiatives. For the second quarter, sales per square foot for all stores increased 7.3% compared to last year and gross margin per square foot increased by 10.2%.

Selling, general and administrative expenses decreased slightly to $31.3 million or 29.3% of net sales compared to $31.5 million or 30.2% of net sales in the same period last year. We continue to invest in marketing in the second quarter. Total marketing spend, which includes direct mail, in-store and digital was approximately 2.1% of sales for the quarter as compared to 1.8% last year. Offsetting this increase were reductions in our store payroll expense reflecting lower mall traffic trends as well as lower store counts.

Depreciation and amortization expense was $3 million in the second quarter compared to $3.4 million in the comparable periods last year. Operating income was $3.3 million in the second quarter compared to an operating loss of $703 in the second quarter of 2013. We realized an income tax benefit of $165,000 in the second quarter due primarily to return to provision adjustments partially offset by minimum fees and taxes. At the end of the second quarter, we maintained a full valuation allowance in our net deferred tax assets. In the second quarter of the prior fiscal year, we have recorded an income tax provision of $227,000, which was primarily due to the assessment of minimum fees and taxes.

Net income for the quarter totaled $3.4 million or $0.09 per share. Net loss for the second quarter of last year totaled $265,000 or $0.01 per share. For the 26 weeks ended August 2, 2014, total net sales were $210 million as compared to $212.8 million for the 26 weeks ended August 3, 2013. Same-store sales increased by 1% for the 26 weeks ended August 2, 2014 on top of an increase of 14.9% in the first half of fiscal 2013. Net income for the 26 weeks ended August 2, 2014 was $6 million or $0.16 per diluted share. This compares to net income of $364,000 or $0.01 per diluted share for the 26 weeks ended August 3, 2013.

Now, turning to our balance sheet, we ended the quarter with approximately $43.4 million of cash, cash equivalents and investments. This compares to $47 million at the end of the second quarter last year. Total inventory was $48.2 million as of August 2, 2014 versus $40 million last year, an increase of 20.4%. At the end of the quarter, inventory per square foot, excluding in transit and e-commerce inventory, was up as expected approximately $4.67 per square foot from 39.2% as compared to last year. The increase in the inventory is primarily attributable to our investments in the core programs that we have discussed previously.

Total inventory per square foot at the end of the quarter was $16.56 compared to $11.89 at the end of the second quarter last year. Core inventory increased by $4.47 per square foot, while fashion and seasonal inventory increased by $0.20 per square foot. As LuAnn noted, the composition of the inventory at the end of the second quarter was very current. We had no outstanding borrowings on our revolving credit facility during the 13-week period ended August 2, 2014 and have not drawn on the facility other than to open letters of credit in the normal course of business.

Capital expenditures for the second quarter totaled $6.1 million. During the second quarter, we closed 22 stores, 18 of the stores that were closed were converted into 11 MPW stores. We also opened 6 new outlet stores and 3 new MPW stores. Additionally, we converted 53 CB stores to the MPW format by adding CJ product to the assortment in May. As of August 2, 2014, we operated 545 stores consisting of 250 Christopher & Banks stores, 118 CJ bank stores and 130 MPW stores and 39 outlet stores.

As we turned into our guidance for the third quarter, I want to let you know of our change we are making with respect to how we are providing sales guidance while we transition our store base to MPW stores. As LuAnn noted earlier, a considerable percentage of our current stores are not part of the same-store sales base. With the continued conversion of store to the MPW formats in anticipated new store openings, the percentage of stores within the same-store sales base will continue to decline over the next four to five fiscal quarters. By the end of this fiscal year, the percentage of overall stores in the same-store sales basis is expected to be below 70%. As a result for the near-term, we believe same-store sales will not be an accurate measure or a predictor of our performance. And as a reminder for the second quarter, our same-store sales increase was 2.6% while our sales per store were up 9.9%.

Now, I would like to update you on our outlook for the third quarter of fiscal 2014. We expect total net sales for the third quarter to be between $122 million and $124 million and to operate on average 550 stores during the quarter. This compares to $118.1 million in net sales in last year’s third quarter while we operated on average 596 stores. We expect approximately 75 to 125 basis points in gross margin expansion in the third quarter as compared to the comparable period last year largely driven by improved merchandise margins and to a lesser degree by leveraging occupancy.

We expect SG&A dollars to be between $34 million and $34.5 million compared to $32.2 million of SG&A expense reported in the third quarter of last year. We expect to recognize a nominal tax expense for the third quarter and this expense represents minimum fees and taxes. We expect our inventory levels to remain higher than the prior year on a dollars per square foot basis, but at a reduced level compared to the end of the second quarter. This is due to a couple of factors. First, by the end of the third quarter, we expect to have added CJ product to approximately 86 CB stores in total. This will elevate the inventory in these stores in an ongoing basis while driving incremental sales. Second, our investment in additional core inventory will not anniversary until the fourth quarter.

In the third quarter, we anticipate opening four new outlet stores and seven new MPW stores. We also plan on converting two stores to 1 MPW store, closing 3 CB stores and replacing them with 3 new MPW stores and converting 31 CB and 2 CJ stores respectively to MPW stores by adding CJ or CB product to the assortment during the third quarter.

Now, I would like to provide you with some of our expectations for the full fiscal year. We expect average store count to be down approximately 8% for the full fiscal year and average square footage for the full fiscal year to decline by approximately 6%. Capital expenditures are expected to be approximately $22 million to $23 million reflecting new store openings, MPW relocations and the addition of new fixturing in all stores. We expect to have a significant amount of store activity for the full fiscal year. We plan to close 36 stores and convert them into MPW stores in an existing store location, to close 24 stores and relocate to 12 new MPW stores and to close 10 CB stores and replace each with a new MPW store in a nearby new location.

In addition, we expect to open 23 new stores in 2014, 10 MPWs and 13 outlets. We also anticipate converting 84 CB and 2 CJ stores respectively to the MPW formats. We also expect to close a total of 21 stores during the year. We expect to end the fiscal year with 530 to 535 stores, which will equate to a 1% decrease in total square footage as compared to the end of fiscal 2013. This is down slightly from our prior guidance due to the acceleration of collapsing and combining CB and CJ stores into MPW stores. We expect to end the year with close to 200 MPW stores.

Depreciation and amortization for the year is expected to be between $12 million and $12.5 million. The effective tax rate for the year is subject to minimum fees and taxes, reserve releases and an evaluation of the need for continued valuation allowance on our deferred tax asset. While we will not paying any cash taxes other than the minimums, the potential exists given our return to profitability that the valuation reserve maybe reversed in fiscal 2014. We will continue to provide a status update on our next earnings call. Overall, with the strong second quarter and are well positioned as we head into the back half of the year.

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

LuAnn Via - President and Chief Executive Officer

In summary, we are encouraged by our financial performance and the progress that we continue to make on our strategic initiatives. We are gaining valuable insight into consumers and using these learnings to refine both our merchandise and marketing strategies. We are optimizing our retail store base and enhancing our e-commerce site to present a more unified shopping experience across the company. We have made good progress toward our goals in the first half and we remain focused on our key initiatives designed to drive top line sales growth and operating margin expansion. Despite the continuing retail challenges and the highly promotional environment, we look forward to building on our progress thus far.

I will now turn the call over to the operator for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We will take our first question from Jennifer Davis from Buckingham Research Group.

Jennifer Davis - Buckingham Research Group

Hey, good evening and congratulations on a good quarter in a challenging environment. Could you guys talk a little bit about your three-year plan please? I think that it was based on 150 MPW stores at the end of 2016 and it sounds like you will be at almost 200 at the end of this year since margins are about 400 basis points higher on those MPW stores, doesn’t that imply that you should achieve a high single-digit operating margin before 2016? And then also I will go ahead and follow-up. I don’t think your three-year plan considers a whole lot of stores with close down, so doesn’t that also provide upside to your sales goal? And then I will stop there. Thanks.

Pete Michielutti

Hey, Jen. How are you?

Jennifer Davis - Buckingham Research Group

Hi, good. How are you?

Pete Michielutti

Good. Yes, so our original three-year plan had called for a total of 158 MPW stores by the end of fiscal ’16. And now we will be closer to 405 by that point in time. And really by the time we get to the end of ’17 virtually all of our stores will be MPW stores or outlet stores which are in fact MPW stores. So it’s – as it relates to the pacing of hitting the upper single digit operating margin that does have the potential to accelerate. Obviously, we are in an environment where the starting point keeps on having some fluctuation based on the current environment. But we are encouraged which is why we are accelerating that.

We are in the process of really completing our more recent three year plans that incorporate all of these additional changes. And as we – probably as we get to the end of the year, we will forecast those numbers going forward and give some additional guidance relative to that. But we are ahead of pace which I think is what you are saying relative to our original three year plan was. And you are right that there is no – original three year plan did not have any incorporation of Coldwater not being here at this point in time albeit that they are trying to re-launch an online business but that was included and as we get through the back half of this year we will start understanding what the impact is on our sales trends.

Jennifer Davis - Buckingham Research Group

Okay. And then Jean – and you are just I think you have said that sales per square foot were – I didn’t quite get that’s were up 7.3% and gross margins per square foot were up 10.2% is that the productivity and the margin on the MPW stores or is that all of your stores right now?

Pete Michielutti

The 7.3% and the 10.2% are all stores.

Jennifer Davis - Buckingham Research Group

And the 9.9% is the MPW stores?

Pete Michielutti

9.9% was the sales per store.

Jennifer Davis - Buckingham Research Group

Okay, alright.

Pete Michielutti

Not the square footage, just sales per store.

Jennifer Davis - Buckingham Research Group

All stores, okay, got it. Could you just remind us I think you have said that margins are 400 basis points approximately 400 basis points higher on the MPW stores versus the single branded stores, is that still the case and what is the sales productivity like on MPW stores versus the single branded stores?

Pete Michielutti

The operating margins on the MPW stores continue to outperform the rest of the stores. And during the quarter and I think your question is sort of the while we were 7.3% in total sales per square foot increased year-over-year in total MPW stores were up 11.4% on sales per square foot basis.

Jennifer Davis - Buckingham Research Group

Yes. Thanks. Sorry, so what’s the sales productivity on the MPW stores versus the single branded stores, how much higher is that?

Pete Michielutti

It’s running about anywhere 10% to 13% higher.

Jennifer Davis - Buckingham Research Group

Okay. Alright. Great. Thanks. That’s 400 basis points higher margin. Thanks. Good luck guys.

LuAnn Via

Thanks Jen.

Operator

We will take our next question from Neely Tamminga from Piper Jaffray.

Neely Tamminga - Piper Jaffray

Great, good afternoon, let me also add my congratulations to you all on a great job and then Pete to you for that promotion, well done.

Pete Michielutti

Thank you.

Neely Tamminga - Piper Jaffray

Hey hello, hello. Okay still LuAnn products first and whoever wants to tackle some technology questions I will toss that out, but so on AUR was the increase in AUR primarily due to migration to the more refined assortment, is it really about mix and then kind of like – or like a woven knits thing or how should we be thinking about that in the runway for that?

LuAnn Via

It definitely is about mix and as we grow the denim part of our business as well as the jacket piece obviously those are higher AURs to begin with and also they incur less promotional mark downs. So overall it really is about the mix. So when you are changing the penetration from a core knit business and you are bringing in more career and more bottoms obviously that adds to this as well. So accessories which is actually been obviously one of our best performing categories for the time that I have been here not only from a sales perspective, but also from a gross margin perspective and we love that business, but obviously those AURs are lower just by the nature of the product. So, as that mix moves around and it becomes more career, there definitely is that opportunity for us to increase the AUR.

Neely Tamminga - Piper Jaffray

Okay, that’s helpful. And that’s reflective also in your future go-forward inventory investment as well?

LuAnn Via

It definitely is.

Neely Tamminga - Piper Jaffray

Because I would imagine your units of investment look different than your dollars of an investment in inventory as well?

LuAnn Via

They do. Yes, that’s fair. We do have higher units though where we made the investment in denim. And then obviously from a retail perspective, it’s definitely higher because of the higher tickets, but we do have more units in denim as we are anniversarying that in the fourth quarter and we are refining and really looking to see by store what’s the optimum inventory we need to be in stock by size and also by wash and by style in denim. So, that is still in the learning process, but we are really getting some really great insights as to how our customers responding there. So, we do cycle that as we said in the fourth quarter. So, by the first quarter, we should be in much better position as it relates to the units and the dollars in the denim business.

Neely Tamminga - Piper Jaffray

That’s helpful. Thank you. And then in terms of just the cost environment out there, I mean, we are definitely more in the camp of it’s about out-the-door pricing versus initial pricing in retail land, but do you guys have an opportunity on the costing side with some of the raw materials cost coming down or how are you looking at that? How are the conversations with your vendors going?

LuAnn Via

So, we definitely are benefiting from leveraging not only raw materials and fabrication etcetera, but also as we build the core business and we build core commodities, that obviously gives us higher units in production and consistent production for some of our key vendor partners. So that also does help with the costing. The other thing is as we are making investments in the cotton and the cotton prices obviously are substantially lower we are gaining some opportunities there, but mainly that is still offset with increased labor cost especially since most of our product is made still in China. So, generally speaking, it’s really more about leveraging the fabrics in the total unit buys that give us that opportunity. And then as we are increasing our direct business and we are leveraging between domestic importers and direct, there is that good balance there that helps us continue with the fashion piece of it and trends on the domestic side and then also giving us the leverage with our direct partners to really get that cost advantage that we look for in a direct business.

Neely Tamminga - Piper Jaffray

Okay, that’s helpful. Two last questions. I will toss them both out at the same time. One is on the landscape, so we all know the 800 pound gorilla in the room or 600 million pound gorilla in the room is Coldwater going away, doors went dark in August, Labor Day weekend is a pretty impactful weekend for a lot of missy apparel retail. Did you see anything in those 200 crossover stores that give you some signs of life and confidence in the back half? Question number one. And unrelated question number two on technology, what is the projected timing on the single site for MPW? And are you parallel processing a mobile site as well so that her mobile experience will mirror that of her desktop? Thank you.

LuAnn Via

So, just starting with the last question, the MPW site will be up and running we believe at full throttle by the end of September. We are in a great place right now. So, we feel very good about that. We have had our mobile site since the year ago November. So, that site is still our smallest. Obviously, a lot of our customers still as you know like to buy online or shop in store, but that still is a growing segment there. So, that’s definitely been an opportunity for us. And I am sorry, what was the other one? On the Coldwater, so on Coldwater, I still think it’s too early to tell as we look at the stores, there are some stores and it’s a little bit erratic on a week-to-week basis, but we are getting a lot of feedback from our store teams that they are getting customers into the stores now. And their customers shopped about the same amount of times ours does, four times a year.

So as they are coming in for their I would say career etcetera and back-to-school August, September, October when our fashion show is I think we will have a much better indication, but just word from the stores is that we are starting to see some of those customers. But I still think it’s really too early to tell to put a number to it. And there is a significant piece of that $600 million that was in direct marketing which I know as Pete said they are going back after. And we think with the 100 stores that cross over there is probably $100 million to $200 million that’s really probably that number that’s outside of that that total $600 million. But I still think we do believe there is opportunity, but again I think it’s just a little too early to tell at this point.

Neely Tamminga - Piper Jaffray

Okay, it’s very helpful. Thanks guys. Good luck in the back half.

LuAnn Via

Thanks Neely.

Operator

We will take our next question from Jeremy Hamblin from Dougherty & Company.

Jeremy Hamblin - Dougherty & Company

Hi, good afternoon and I will add my congratulations and thanks for taking my question. I wanted to just come back to the gross margins which you continued to deliver upside again, could you just go through the 180 basis points year-over-year improvement, how much of that was merch margin, how much occupancy?

Pete Michielutti

The majority of it was merch margin, and majority of the merch margin was IMU as we have switched to a higher level of core, our IMUs are stronger on the core, so we continued to reap that benefit. So that was about a little over two-thirds of the benefits and the remaining third was more centered around the occupancy and the occupancy leverage that we get from the higher sales per square foot.

Jeremy Hamblin - Dougherty & Company

Great. And then as I think about the longer term plan and the kind of three year plan getting to the high-single digit operating margins, as we look at gross margin and the plan to add 300 to 400 basis points from last year’s figure, from where we are now how much of that do you expect to come from merch margin improvement versus occupancy?

Pete Michielutti

As we still believe the lion share is going to come from merch margin as we continued to balance that was the right mix of core and fashion and probably more going forward from the less mark down side versus more IMU as we are getting there where we think we are need to be on the core piece. So I think we have stated that I think it’s probably 70% to 75% on the merch margin side about 25% on the occupancy side from here to there.

Jeremy Hamblin - Dougherty & Company

Great. And then you also demonstrated some impressive leverage on your SG&A, can you just describe a little bit about that in the context of Q2 but then also as we are thinking about that longer term plan and what was the – and there was a pretty large disparity between which ended up delivering and where your guidance was obviously really good cost control, but can you talk a little to Q2 and then a little bit on SG&A as we think about it on a longer term basis, is it just part of this is just you have in many fewer stores than you had before and that your payroll costs are going to continue to go down, it sounds like your marketing levels are at a rate that you are comfortable with, but how should we think about longer term as well?

Pete Michielutti

I think our model is control what we can control. Obviously, you have the ability to control expenses, so our – we are tight with that as we continued to monitor sales and traffic trends. As our stores get bigger, our square footage is larger and we are probably close to bottoming out as it relates to store count as we are going more to opening up stores and getting through a lot of the collapse and combines from the conversion standpoint. We are not going to see continued reductions in store payroll. You will see leveraging on the store payroll but as sales go up store payroll it means that will start moving up relative to that. Marketing is really something that we looked at on a quarter-to-quarter basis and with our return on investment is and we will spend what we need to spend and what we think is appropriate based on the returns that we are getting. So, we always expect a little bit of leverage moving forward on a quarter-to-quarter basis depending on what’s happening in environment. We will clamp down on expenses to make sure that we are spending appropriately based on what the sales trends are.

Jeremy Hamblin - Dougherty & Company

Okay. And then a follow-up question to that. Now, you have got several different ways that you are getting to the MPW format and it sounds like the initial results from the 53 stores where you added the plus size clothing has performed well. I am wondering if you could provide a little bit of color on that and then also in the context of getting the entire store base into the MPW format? As you look at returns on investment, is there kind of a natural direction as we get into 2015 and beyond of where you would like to move in terms of getting to that MPW format, whether or not it’s just adding the plus size or collapse and combine in an existing store or collapse and combine in a new location? Is there anything in terms of returns on investment that makes it seem like you are going to go more in one direction or the other?

Pete Michielutti

A lot of it is released dependent upon lease expirations, right. So, on the ones where we did the 53 CJ adds stores in May, we have got another 34 slated for the upcoming quarter, those stores don’t have near-term lease expirations. So, we were taking advantage of the fact that we have seen adding new product is getting us incremental sales and paying for the inventory investment, which is really all the investment is on those stores. And so what we would look at subsequent to that is based on the lift that we are getting that we need upon lease expiration to move that to a larger store or is that current store square footage adequate continued to generate good sales per square foot going forward and something that’s going to increase the profitability of that store. Collapse and combines decisions are normally around what’s the total volume that we are converting from to. So, it’s the total volume based on our formula of saying we are going to lose 25% at this resulting sales per square foot is somewhere between $250 or below, then that’s going to be in the same square footage. If it would have to generate higher sales per square foot, we are going to look for a larger space.

So, we are looking at what’s potential volume is and based on the potential volume what’s the right store size and then mirroring that up with lease expirations to make sure that it maybe a multi-phased project to get there. So, the reason that we have accelerated so much than where we were a year ago is really the CJS stores, because everything else is really subject to leases that we are getting out of some leases early just because we are working with the landlords., but the acceleration is the CJ adds. And we are going to continue to do that. We did 53, we are doing 34 in the first quarter, we will do another significant chunk, so that’s how we are getting there faster. I think you asked two questions, so I don’t know if I answered them both.

Jeremy Hamblin - Dougherty & Company

No, I think that’s very helpful. I will jump back in the queue.

Pete Michielutti

Okay.

Operator

And with no further questions in the phone queue, I would like to turn the call back over to LuAnn Via for any additional or closing remarks.

LuAnn Via - President and Chief Executive Officer

Thank you for joining us today. We look forward to speaking with you on our next quarterly call. Have a great evening.

Operator

This does conclude today’s conference. We thank you for your participation.

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Source: Christopher & Banks' (CBK) CEO LuAnn Via on Q2 2014 Results - Earnings Call Transcript

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