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Pacific Sunwear of California (NASDAQ:PSUN)

Q1 2011 Earnings Call

May 24, 2011 4:30 pm ET

Executives

Michael Kaplan - Chief Financial Officer and Senior Vice President

Gary Schoenfeld - Chief Executive Officer, President and Director

Craig Gosselin - Senior Vice President of Human Resources, General Counsel and Secretary

Analysts

Lee Giordano - Imperial Capital

Dorothy Lakner - Caris & Company

Travis Williams - Stephens Inc.

Christine Chen - Needham & Company, LLC

Betty Chen - Wedbush Securities Inc.

Paul Lejuez - Nomura Securities Co. Ltd.

Charu Sharma - KeyBanc Capital Markets Inc.

Pamela Quintiliano - Oppenheimer & Co. Inc.

Andrew Burns - D.A. Davidson & Co.

Jeffrey Klinefelter - Piper Jaffray Companies

David Griffith - Roth Capital Partners, LLC

Unknown Analyst -

Operator

Good evening. My name is Zatania, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q1 2011 Earnings Conference Call. [Operator Instructions] Mr. Craig Gosselin, you may begin your conference.

Craig Gosselin

Thank you. Good afternoon, everyone, and welcome to the Pacific Sunwear of California Conference Call announcing our fiscal first quarter 2011 financial results. My name is Craig Gosselin. I'm the Senior Vice President, General Counsel and Head of Human Resources. This call is being recorded, and a playback will be available starting today, approximately 2 hours after the call through midnight on May 30, 2011. It can be accessed at (800) 642-1687 or (706) 645-9291, passcode 67094074. The call will also be archived on the PacSun website at www.pacsun.com through midnight on August 24, 2011.

Your speakers today are Gary Schoenfeld, Chief Executive Officer; and Michael Kaplan, Chief Financial Officer. Today's call will be limited to one hour and questions will be limited to one per participant.

Before I turn the call over to Gary, I'd like to note that statements and discussions during today's call will contain forward-looking information about our future financial performance and prospects. Our actual results could differ materially from those contained in our forward-looking statements. Risks and uncertainties that could cause our business and financial results to differ materially from those in the forward-looking statements are included in our fiscal 2010 Form 10-K and in subsequent filings we made with the SEC, as well as in the earnings press release we issued today. These documents can also be found in the Investor Relations section on our website at pacsun.com.

All information discussed on the call is as of today, May 24, 2011. Pacific Sunwear undertakes no duty to update this information to reflect future events or circumstances. This call, the webcast and its replay are the property of Pacific Sunwear. It is not for rebroadcast or use by any other party without the written prior consent of PacSun.

With that said, I'll now turn the call over to Gary.

Gary Schoenfeld

Thank you, and good afternoon, and thanks for joining us as we discuss our results for the first quarter and our outlook for Q2. I think in many cases, 2 of the toughest parts of any turnaround have to do with the challenging cultures and reversing, what by definition, is a systemic decline in sales. I'm pleased to say over the past 18 months, we've hired 8 new executives across multiple functions, and I have the opportunity today on this call to introduce you to Michael Kaplan, who just joined us as CFO 3 weeks ago.

During this period, we've also completely transformed our Women's merchandising and design, our vast field leadership team and several other functions within the business, including marketing, online and human resources. We've closed nearly 100 stores, rebuilt critical brand relationships and perhaps, most importantly, we are creating a new culture within PacSun based upon creativity, collaboration, trust and a huge desire to win.

We have succeeded in attracting a broad range of passionate, creative and experienced people who all share our high aspirations for PacSun, once again becoming a favorite place to shop for girls and guys in high school and college, featuring great brands and a strong sense of style, grounded in our third year heritage of California and action sports.

So as we look at our first quarter results, we are still a long way from popping any champagne, but I have to say it felt pretty good to end the quarter with a plus sign in the comp sales column for the first time since Q4 2007. The biggest change during the quarter was in our Women's business, which had a positive 4% comp. I said previously that I believe it's critical that we reestablish ourselves as the top destination for spring and summer, and we are beginning to see progress towards that objective.

Within our Men's business, we had a negative 3% comp, which fell short of our expectations, largely due to softness in our most seasonal categories of board shorts and sandals. Those of you who know me know that in general, I hate to talk about weather, but the reality is that it does affect our business at certain seasonal times, and there was a clear difference in the performance of our Men's business, with positive comps in the southern half of the country compared to the northern half, where the kickoff for spring and summer has yet to really materialize.

So I'll sum up by saying that I'm generally pleased with the progress for our business in the first quarter and hope that we can continue to build momentum as the year progresses. There's no question that the merchandising and execution in our stores has vastly improved, yet we know we still have a lot of work ahead of us. Customers have many choices. We still have real estate challenges to resolve. Consumer response to higher prices this fall is hard to predict, and having made so many organizational changes internally, it will still take some time for our team to consistently execute at the levels that I believe we are capable of.

I would now like to introduce you to Michael Kaplan, Senior Vice President and Chief Financial Officer, who will speak more to our Q1 results and Q2 guidance. As we said in our press release previously, Michael brings 20 years of experience and insight gained from his roles at Disney and Gap, and rounds out our executive team, I think, in an excellent fashion. He has a strong operations focus as a financial executive, which is exactly what I've been looking for. And I'm confident that he will be a valued contributor as we continue to tackle the turnaround of our business.

Michael Kaplan

Great. Thank you for that introduction, Gary, and good afternoon, everyone. Our fiscal 2011 first quarter financial results were as follows: Total sales were $186 million this year versus $190 million last year; same-store sales increased 1%; we ended the quarter with 827 stores versus 883 a year ago. On the gross margin side, which includes buying, distribution and occupancy costs, we were at $35.5 million or 19.1% of sales this year versus $42.5 million or 22.3% of sales last year. Occupancy costs were roughly equal to last year in dollars, but deleveraged 30 basis points on a lower sales basis. Merchandise margins were 270 basis points below last year, primarily driven by increased markdowns. Buying and distribution costs were relatively flat in dollars and as a percentage of sales.

SG&A expenses declined to $66 million or 35.6% of sales this year versus $73 million or 38.4% of sales last year. The $7 million reduction in SG&A expenses was led by store payroll and depreciation savings. Noncash asset impairment charges decreased to $2 million this year versus $5 million last year.

Income tax expense was $276,000 for the quarter as a result of the continuing impact of the valuation allowance against our deferred tax assets. Our net loss for the quarter was $31 million or $0.48 per share versus our guidance of a loss of $0.46 to $0.55 per share. On a non-GAAP basis, using a normalized income tax rate of 36.5%, our net loss for the quarter was $20 million or $0.30 per share versus our non-GAAP guidance of a loss of $0.29 to $0.35 per share. We ended the quarter with $25 million in cash and no borrowing base debt.

Switching gears to earnings guidance, for the second quarter of fiscal 2011, we were pleased with the 1% sales comp in Q1, yet May has started slower due to a combination of factors, including a late Easter shopping season, along with cooler temperatures and rainy weather across all of our regions.

Our sales guidance for Q2 will remain the same at the minus 3% to plus 2% that we targeted for Q1. We are targeting gross margin rate, including buying, distribution and occupancy costs to be in the range of 19% to 21%, which is at or above the 19% we realized in Q1. We anticipate SG&A expenses to be in the range of $67 million to $69 million. This translates to a GAAP net loss range of $0.36 to $0.46 per share, including the continuing impact of having a very low tax provision. On a comparable non-GAAP basis, using a normalized income tax rate of approximately 36% to 37%, this translates to a non-GAAP net loss range of $0.22 to $0.29 per share for the quarter. Operator, we will now take questions.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from the line of Stacy Pak. [Barclays Capital]

Unknown Analyst -

This is Ed. I just wanted to ask in terms of the Juniors business, how are you guys seeing it in terms of the Denim's performance? And if you could comment on board shorts and if you've seen any progress in that regard? Is it picking up in the northern end of the country?

Gary Schoenfeld

So Denim is obviously a smaller part of our business this time of the year. We did see some improvement in denim in the first quarter versus how it trended in the back half of last year. And with regards to board shorts, as I indicated, board shorts is one of the categories that has lagged this year, but has performed better in the southern half of the country versus the northern half of the country.

Unknown Analyst -

Okay. Just one quick question, in terms of the inventory levels, how are the inventory levels in the Juniors business?

Gary Schoenfeld

In general, we're comfortable with our inventory levels, as we move through the Spring/Summer business. And as we set our sights for where we want to be for back-to-school. As you'd imagine, as we go through the transitioning of Juniors business, there's some categories that are more productive than others as it relates to inventory. But as a whole, we're comfortable with the way we're moving through our inventory and obviously delighted with the shift in the run rate of that business, where it was to Q4 to get into that positive comp in Q1.

Operator

Your next question comes from the line of Paul Lejuez. [Nomura Securities]

Paul Lejuez - Nomura Securities Co. Ltd.

Paul Lejuez. Just wondering how deep you plan to tap into the credit facility this quarter, and can you just remind us of the capacity you have there? What kind of rate you're looking at and just the timing of when that expires? And then I was also just wondering about the gross margin in Men's versus Women's during the quarter?

Gary Schoenfeld

So our credit facility runs through spring of 2013. It's a $150 million facility. That is an asset-based formula-driven tied to inventory. To give you a rough idea in terms of second quarter, we'll have probably end the quarter with about $100 million availability. And at this point, it's not our expectation to tap into the line in the second quarter, although if we ended up at the lower end of the guidance, it's possible that we could be into the line for a relatively small amount for a relatively short period of time.

Paul Lejuez - Nomura Securities Co. Ltd.

Sorry, you would or would not? You will or won't tap into it in the second quarter?

Gary Schoenfeld

I said we don't anticipate it, and yet if we end up at the lower end of the guidance, it's possible that we could be into it for a relatively small amount for a relatively short period of time.

Paul Lejuez - Nomura Securities Co. Ltd.

Okay, but you said it's a $150 million facility and you would only have $100 million availability at the end of the quarter?

Gary Schoenfeld

Correct. It's asset-based tied to inventory.

Paul Lejuez - Nomura Securities Co. Ltd.

I got you. And then on the gross margin, in the Men's versus the Women's business?

Gary Schoenfeld

I don't think we've historically break it out between gender. So I don't think that's something we're going to get specific about.

Paul Lejuez - Nomura Securities Co. Ltd.

Not looking for specifics. Just wondering if you're seeing improvement in the Women's business with that positive comp.

Gary Schoenfeld

Yes, we are. No, very pleased as I said, the turn in the Women's business that we've been, for a year, focused on really relaunching our Women's business this spring/summer and quite pleased with initial response that we've seen so far.

Operator

Your next question comes from the line of Dorothy Lakner. [Caris & Company]

Dorothy Lakner - Caris & Company

Gary, I wondered if you could provide a little bit more color on the turn that you've seen in the Juniors business. Last quarter, you talked about really wanting to go back to the Heritage category in swimwear. But I imagine that had to be a lot more than just swimwear that they got you to that nice comp in the quarter. So I wonder if you could just elaborate a little bit on that.

Gary Schoenfeld

Yes. I think that we really have revamped the approach to the Women's business and recognizing what she's looking for from a fashion perspective and what it means to be on trend in the various categories, and probably T-shirts is one of the best examples of that. PacSun, for a long time, it's Women's business in T-shirts meant a very simple, traditional, basic T-shirt with a brand logo or brand graphics. And clearly, the high school and college-aged female customer that we're targeting, to a large degree, has moved well beyond that. And she's looking for different fabrications, different fits within a category like that. And I think you could see the difference in terms of the way we're executing in that category. And I think that's representative of overall direction in terms of the business. We need to be more nimble, we need to be more fashion and trend-right. And I think we're taking some good steps in making that happen. Additionally, the strategy that we took in reducing price points in swim, that has worked out well also. So we're encouraged a lot more to accomplish in that category, in Women's as a whole, dresses and sweaters, accessories being other categories that we've seen nice improvement also.

Operator

Your next question comes from the line of Christine Chen. [Needham & Company]

Christine Chen - Needham & Company, LLC

I was wondering in your stores, you've continued to increase the penetration and the display of Accessories. I was wondering how Accessories were doing? And then in the Girls' business, you had mentioned that you were trying to get a slightly older customer, so she would be more similar in age to the guys customer? And with the success in your sales this quarter, I'm wondering if you're seeing that.

Gary Schoenfeld

Sure. Yes, we are seeing improvements in our Accessories business. And I think we're getting a lot smarter in terms of how we approach the Accessory business, both in Men's and Women's. On the Men's side, it's most important to reclaim serious presence in Footwear and making very good progress on that front. And you'll see us continue to add additional brands as we go into back-to-school. On the Women's side, there's a number of areas where Accessories can be relevant. I think our team has done a very good job of really thinking through what are the important year-round categories versus what tend to be more seasonal, and then just more trend opportunities and how we fluctuate our business based on how those trends are unfolding. So we're still learning and getting smarter. But yes, I'm encouraged by what we're seeing in Accessories. Many years ago, it was a big part of PacSun's business. And I think we're taking some good steps towards reestablishing that as we move forward.

Christine Chen - Needham & Company, LLC

And then with respect to the older customer in Girls?

Gary Schoenfeld

Anecdotally, we believe that, that is very much linked to the progress that we're making in the overall performance. When we look at the styling and who we see shopping the stores, we think it is very much of a high school and college-aged customer versus the middle school customer that I think a year or 2 ago was much more of the sweet spot for PacSun.

Christine Chen - Needham & Company, LLC

And then how does the Volcom acquisition by PPR impact you, if at all, do you think?

Gary Schoenfeld

I think it's exciting. Volcom's a fantastic brand. I've had great admiration for Willie that goes back well over a decade and great heritage brands is fundamental to PacSun's future. And I think that their acquisition with PPR, I think, not only makes them exciting from a global perspective, but I think gives them more resources on the horizon to invest in their business and grow domestically. So excited for him personally and excited for them as a business, and I think it can only be good news for PacSun.

Christine Chen - Needham & Company, LLC

Thank you. It's great to see the improvement in the Girls business. Good luck.

Operator

Your next question comes from the line of Betty Chen. [Wedbush Securities]

Betty Chen - Wedbush Securities Inc.

Gary, I was wondering if you can talk a little bit more about some of the trends you're seeing in May. Are you also seeing some of the regional variances because of the weather issues that we've been having and that's why you were talking about, perhaps, May being a little bit slower? And then I also was wondering in regard to the gross margins, the guidance for, I think, 19% to 21% in the second quarter, at what level is it comps or inventory can we begin to see gross margin recovery, as now we're starting to near or trend into the positive comp store sales territory?

Michael Kaplan

So I'll take the second part first with regards to margin comps. Not in a position to give you any more guidance beyond the second quarter. But obviously, we all look forward to progress on both fronts, meaning top line and the margin line, obviously, is critical. So we hope to have more to talk about that in the future. As to the first part of your question, with regards to regional performance and performance in May. In the past, when I've been asked about regional performance, I really haven't responded because there really hasn't been meaningful variation. This spring, for the first time, we really have experienced quite significant variation and that certainly has continued into May. So the answer to your question is yes, we have seen that continue. And in terms of May, in general, yes, I think that in addition to other factors, I think the late Easter shift and the strength that a lot of us experience in terms of traffic and sales in April, I think, has had some impact on the first part of May.

Betty Chen - Wedbush Securities Inc.

I guess back to the inventory composition, it looks like it's almost double digits per square foot at the end of Q1, up double digits per square foot end of Q1 according to our calculation. I know earlier you mentioned you're comfortable with the Juniors inventory composition. How do you feel about the Men's? And is that part of the issue why merchandise margin was down in Q1 and why we're kind of looking for it to be down in the second quarter again?

Gary Schoenfeld

So to clarify, overall, comfortable with the inventory position. Do I wish we went into the quarter a little bit lighter? Yes, I do. But overall, comfortable with how we approach the quarter. And as I said, comfortable with how we see inventory flowing as we head into back-to-school and transitioning spring, summer merchandise into fall merchandise. As to the impact on Q1, we definitely carried some additional inventory from fall holiday into Q1 that impacted that. And I think we've just got to see how summer really materializes. We'd love to hear that it's hot and humid across the country as we head into Memorial Day, would be great. But as I said, net net, we'd like it to be a little bit lighter than it currently is. But in general, very comfortable and comfortable, as I say, with our plans of working through our inventory and heading into back-to-school.

Betty Chen - Wedbush Securities Inc.

Is there an inventory level that we should be looking for at the end of second quarter, Gary?

Gary Schoenfeld

Yes, comfortable sharing with you our internal target is flat to a low single-digit increase and included in that, frankly, is some earlier deliveries of back-to-school products that will hit the books at the end of July, the year ago flowed in August. On a pure apples-to-apples basis, if we excluded that, we would actually be targeting a flat to negative inventory comp going into back-to-school.

Betty Chen - Wedbush Securities Inc.

And that's on an absolute basis or per square foot?

Gary Schoenfeld

Same-store basis, which would then closely mirror to per square foot.

Operator

Your next question comes from the line of Lee Giordano. [Imperial Capital]

Lee Giordano - Imperial Capital

Can you talk a little bit about your merchandise localization strategy, how far along are you now in implementing that and what kind of benefit have you seen thus far?

Gary Schoenfeld

Yes, good question. I'd say we're partway along. We implemented that first at back-to-school and each season, we continue to learn and see benefit from that. I think there is certainly more learning. We've implemented some tools that are giving us good insights. One of the next steps as it relates to that is get into localized markdown opportunities as well. So very excited as we peel that back. So yes, we've seen progress, but we've still got, I think, room to go to get even better in terms of how we refine and maximize localization opportunities.

Operator

Your next question comes from the line of David Griffith. [Roth Capital Partners]

David Griffith - Roth Capital Partners, LLC

It looks like 25 net store closings in the first quarter seems a little bit ahead of the pace at what you've talked about. Are you actually a little bit ahead of where you'd like to be in terms of store closings this year and how is that progressing?

Gary Schoenfeld

No, still on track with our previous guidance of 40 to 50 stores and that's just the timing of when leases came up.

David Griffith - Roth Capital Partners, LLC

And are you having to deal with any particular concessions as you're doing that or are things fairly normal?

Gary Schoenfeld

Those just reflect lease expirations that we're exiting from.

David Griffith - Roth Capital Partners, LLC

And then could you talk on how your private label's performing?

Gary Schoenfeld

We don't break out private label and branded. We continue to see -- I think our business strategy remains the same of a pretty good balance between Men's and Women's and similarly a good balance between branded and proprietary; branded being the bigger piece of the Men's side and proprietary a bigger part of the Women's side.

Operator

Your next question comes from the line of Andrew Burns. [D.A. Davidson & Co.]

Andrew Burns - D.A. Davidson & Co.

Just wanted to hopefully get some more detail in terms of how you're viewing the success of the Dress Irresponsibly marketing campaign and the other initiatives that you guys have been working on here. Are you seeing any difference in traffic whether in the stores or online or anything that you can point that demonstrate a return on those investments?

Gary Schoenfeld

Well, the TV campaign kicks off this week. So to the extent you've noticed it. That's a nice to hear, but that will either be online, which we started last week, or in print. There's been a little bit of presence of it, but the bulk of the campaign really launches this week and then runs through the summer. So don't really have anything to comment on yet in that regard other than anecdotally, starting to get e-mails and feedback and hearing comments out there that people think it's pretty cool.

Andrew Burns - D.A. Davidson & Co.

And then any thoughts on the Modern Amusement product that's been showing up in stores? And thoughts about the potential for putting more of that product into stores in the coming seasons?

Gary Schoenfeld

Yes, we're pleased with the start of Modern Amusement. We've featured it in our Casual Short product in Men's for this spring and very pleased with the initial response to the product and the brand. We've got a smaller collection that's going into 50 stores and initial reaction to that is good. It's not a brand that everyone is familiar with, but those that are hold it, I think, in very high regard. So we are excited about continuing to build that and what that rounding out our brand portfolio and continue to find Mossimo a very creative individual to work with, with a lot of good insights. So happy with the initial launch but want to put it in the right context of it's not something that at this time has the scale or awareness that comes anything close to our other key heritage brands. But we do think, over time, it speaks to the style aspect of PacSun that we think can help differentiate us as we go forward.

Operator

Your next question comes from the line of Charu Sharma. [Keybanc Capital Markets]

Charu Sharma - KeyBanc Capital Markets Inc.

Just wanted to clarify, when Christine Lee joined your team early last year, does the women's spring and summer collection now fully reflect her influence?

Gary Schoenfeld

Yes, it does.

Charu Sharma - KeyBanc Capital Markets Inc.

And then on the [indiscernible] (37:14) trend, the slowdown that you mentioned, can you just break that down between men's and women's? Are you seeing slowdown on both ends of the business?

Gary Schoenfeld

No, we've said as much as we're going to say, it's a few weeks into the quarter. For reasons that we've already articulated and we're not going to dive deeper into what's happened in the first few weeks. I think more important is the overall direction of the business that's reflected in our Q1 results.

Charu Sharma - KeyBanc Capital Markets Inc.

Okay, fair enough. Just last quick question, can you update us, Gary, on the Footwear business? How many doors is it in now and what are you looking at as your target penetration there?

Gary Schoenfeld

Yes, for Men's we're in a little over 400 doors and continue to be pleased with how that's performing. We're getting smarter about that business and rebuilding some institutional knowledge, if you will, on the Shoe business. As I mentioned, excited about adding a couple more brands as we go into back-to-school and pleased with how that's evolving on the women's side. We're looking at the branded business, at back-to-school in probably around 150 doors, as well as the private label business that will cross in some respects across all doors.

Operator

Comes from the line of Travis Williams. [Stephens Inc.]

Travis Williams - Stephens Inc.

Just wondered if you could provide a little color on the E-commerce business during the quarter. I know you guys have spent a lot of time sort of revamping that side and sort of integrating social marketing and so forth. Just wondered how that maybe performed during the quarter or if you can provide us any color on that.

Gary Schoenfeld

Yes, so we we've got about $50 million E-commerce business. That, among the things that we've concentrated on, candidly hasn't gotten as much attention as other things required during my initial time here. In the last 6 months, with Mondy Beller joining us as our VP of E-commerce, I think we've begun to get after that the way that we really need to. Obviously, with this generation, it goes without saying, it has to be an absolute priority and it is for us. So looking out, we do see exciting growth opportunities within the business. We relaunched the website in April and since that time, we've seen very good response and growth in the business. We just launched our first mobile app this month and continue to be committed to growing that business as we go forward. In total, E-commerce business was roughly flat for the quarter and we look forward to getting some energy behind that and starting to generate some meaningful growth.

Operator

Our next question comes from the line of Pam Quintiliano. [Oppenheimer and Co.]

Pamela Quintiliano - Oppenheimer & Co. Inc.

Two quick questions for you guys. First, you had mentioned about the shift in the timing of some of the back-to-school flows. I was wondering if you could comment a bit more on that and just the rationale behind it. And then the second question is on input cost and just how you plan to navigate them in the back half of the year.

Michael Kaplan

Sure. Yes, the first question is just simply we found that we had peak back-to-school inventory hitting the stores right at peak sales periods in second, third, fourth weeks of August and made the determination having nothing to do with the fiscal calendar that it made sense to get that inventory in a couple of weeks earlier and get it into stores prior to that real peak period of August. So that's what that shift is that we were alluding to. But it's not changing any merchandising strategies other than like I say just timing of getting it into stores before the peak of customers being in the stores. As to your second question, with regards to cost increases that we're all facing, I thought we were going to get through the call and nobody was going to ask. So obviously, critically important issues, something that's all been on all of our radar screens for many months now. What I'll say is this, I think that there have been some very high numbers discussed of late, some well into the teens and potentially even higher, cost increases. We don't anticipate seeing numbers that high. So what we're anticipating is single-digit increases in terms of overall average unit costs in the back half of the year.

Pamela Quintiliano - Oppenheimer & Co. Inc.

Wow, that's very impressive. And then can I just follow up on the back-to-school inventory. I'm assuming it's going to be Wear Now that you're going to have in the stores, though, flowing in earlier as opposed to more traditional back-to-school assortment.

Gary Schoenfeld

I'll let you make that distinction and then I'll comment. Your view of Wear Now versus traditional means what?

Pamela Quintiliano - Oppenheimer & Co. Inc.

I guess I'm showing my age, Wear Now meaning what the kid would wear during the summer or when it's still warm out versus, say, when I was shopping for back-to-school, when you'd be buying sweaters even though it was still hot out.

Gary Schoenfeld

Yes, fair enough. The answer to that is yes and back to the question earlier about localization, that becomes an important part. But absolutely, we recognize that just to your point, people are not buying heavy sweaters and jackets in July and early August. So the answer to your question is yes, we think we're merchandised appropriately for back-to-school given people buying closer in to when they need to wear it.

Pamela Quintiliano - Oppenheimer & Co. Inc.

And I'm assuming you are able to navigate somewhat based on some of the success you've seen with the Girls' impact back-to-school?

Gary Schoenfeld

Yes.

Operator

Your next question comes from the line of Jeff Klinefelter. [Piper Jaffray]

Jeffrey Klinefelter - Piper Jaffray Companies

Gary, I just wanted to dive a little bit further into real estate. Can you just more broadly address where you stand today in terms of your performance of the different store classes so to speak? How many stores are sitting at close to your negative four wall threshold or negative cash flow threshold? And how do you view the store negotiations over the next couple of years?

Gary Schoenfeld

Sure. So I was in ICSC in Vegas yesterday meeting with key landlords and as we spoke to on the last call, we've been in active discussions on looking to secure some additional rent concessions as we work through our portfolio. And it would be my hope on the next call that we can be more specific about the progress and outcomes of those discussions over the last few months. We still sit in a position where we've got probably a good 100 to 150 stores that are significant underperformers that we need to address, and I'm hopeful that we are going to make meaningful progress in finding some resolution. I think the more likely outcome of that continues to be one where we get some near-term rent concessions while agreeing still to operate some of those stores, but we eliminate the negative cash flow drain from those doors, as well as reduce increases that we might otherwise see in other stores. So again, still probably 30 to 60 days from being able to be more specific, but I do look forward to being able to articulate some progress as we continue to work to rationalize the portfolio. And so, yes, that's probably as much as I can say right now.

Operator

[Operator Instructions] .

Gary Schoenfeld

Okay, well, without any other questions, we appreciate the interest and look forward to speaking to you at the end of Q2. Thank you very much.

Operator

This concludes today's conference call. You may now disconnect.

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