Stage Stores (SSI) Michael Glazer on Q1 2016 Results - Earnings Call Transcript

| About: Stage Stores, (SSI)

Stage Stores, Inc. (NYSE:SSI)

Q1 2016 Earnings Conference Call

May 19, 2016 08:30 ET

Executives

Randi Sonenshein - SVP, Finance & Strategy

Michael Glazer - President, Director & CEO

Oded Shein - EVP & CFO

Steven Lawrence - Chief Merchandising Officer

Analysts

David Mann - Johnson Rice & Co. LLC

Pamela Quintiliano - SunTrust

Jeff Van Sinderen - B. Riley

Jeffrey Stein - Northcoast Research

Operator

Good morning, and welcome to Stage Stores Conference Call. At this time, all participants are in listen-only mode. Later, the company will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this conference call is being recorded.

I would now like to introduce your moderator for today's conference call, Mrs. Randi Sonenshein, Senior Vice President of Finance and Strategy. Mrs. Sonenshein, please begin your conference call.

Randi Sonenshein

Thank you, operator. Good morning and welcome to Stage Stores First Quarter Conference Call. With us on the call this morning is Michael Glazer, President and Chief Executive Officer; Oded Shein, Chief Financial Officer; and Steve Lawrence, Chief Merchandising Officer. Michael and Oded will begin with prepared remarks and then Steve will join for questions.

Our comments this morning include adjusted results not derived in accordance with GAAP. Non-GAAP results have been adjusted to exclude the impact of our corporate headquarters' consolidation, impairments related to store closures, and severance charges related to personnel optimization. Reconciliations of GAAP results to non-GAAP adjusted results are included in this morning's earnings release, which is available at stagestoresinc.com in the Investor Relations section.

Our discussion this morning will also include forward-looking statements reflecting our projections for future events and performance. Various factors may cause our actual results to differ materially from those projected in the forward-looking statements. For more information on those factors, please refer to the Risk Factors discussed in our most recent Form 10-K or other filings with the SEC and this morning's earnings release. Forward-looking statements speak only as of today's date and we undertake no obligation to update those statements.

I'll now turn the call over to Michael.

Michael Glazer

Thank you, Randi. Good morning, everyone, and thank you for joining us today. I'll begin by reviewing our first quarter results and then Oded will follow with additional financial detail. As Randy just mentioned, Steve is also here with us to help answer your questions.

Business is obviously difficult with comp sales decreasing 8.5% in the first quarter. Stores in Texas, Louisiana, Oklahoma and New Mexico continue to suffer from the impact of the depressed oil prices and the weak peso. Comp sales in these stores were down 12.4% while the balance of chain was down 3.8%. Given the challenging environment, our team did a great job reacting to the soft sales. Merchandized margins improved slightly and our inventories were well controlled. Thanks to our merchants, with some help from our terrific vendor partners, we ended the quarter with inventories down 1% overall and down 4% if you exclude cosmetics.

Going forward, we are reducing receipts to align our inventories to a lower sales trend. In addition, we have cut expenses and moderated our capital spending to coincide with our forecast for the remainder of the year. Sales were challenging throughout the quarter, although we did have a good week of Easter. The weather was certainly not favorable, it was too warm early when we needed to sell fall clearance goods and it was too cool later in the quarter when we wanted to sell seasonal spring goods. Further pressure came in April with heavy rains and severe flooding, especially here in Texas.

Our best performing categories were once again, the non-apparel areas of home, cosmetics, and footwear. The best apparel areas were denim and active wear. While we face headwinds, we made progress on a number of strategic initiatives that we believe are setting the stage for improved long-term performance. We refreshed 31 stores and we continue to be pleased with their results. We are committed to this important program that began less than 18 months ago. By the fourth quarter, we should have approximately 200 stores or 45% of our sales base updated.

As part of our initiative to shutter underperforming stores, we closed 23 stores in 2015 and expect to close approximately 30 more in 2016. We are definitely improving our customer's online experience. We enhanced the functionality within our app, we are improving our fulfilment capabilities, and we are redesigning the navigation of our site with a plan to implement by online, ship-to-store later this year. In our marketing, we have increased personalized offers, via direct mail, text and email. And we continue to fine tune our localization efforts in our merchandizing. Our private label credit card penetration continues to grow and I'm very excited that we're planning a chain-wide roll out of the broader tender neutral loyalty program that we have been piloting. It is expected to be in place for the important fourth quarter if not before.

To improve assortments we continue to add or expand brands that truly inspire and resonate with our customers such as Lauren by Ralph Lauren in handbags, Vince Camuto sportswear is another introduction that we just launched and we will expand that in the fall. Our customers continue to respond very favorably to these additional high-profile national brands, and they complement nicely our current selection of Calvin Klein, Nike, GY Gesso [ph], Carter's, Chaps, Converse, Skechers, Izod, Estée Lauder and Clinique, and of course Levi's. Another key focus for us in emphasizing the tremendous value we have in our assortments, the supplies both in our stores with visual merchandizing and in our marketing with our new spot on value program.

Having said all of that, these are challenging times overall in retail, and especially in our core geographies. We expect our sales to remain under pressure in the near-term given our exposure to the oil patch in Mexican peso. As a result, we are lowering our earnings outlook after a softer than expected first quarter. We now expect our fiscal 2016 comp sales to be in the range of down 4% to 6% and our adjusted earnings per share to be between $0.20 and $0.40. We were responding to the difficult environment and current sales trends by controlling our inventories, rationalizing our store base, reducing expenses and lowering CapEx.

In working with Estée Lauder and Clinique, we determined our best return on investment in this environment is intensifying ownership in our existing, more developed stores. Therefore, we have postponed cosmetic counter rollouts in many of our lower volume stores resulting in reduced capital expenditures.

Thinking about the rest of the year, we don't expect much improvement in the trend for the second quarter but the sales comps do get easier in the third and fourth quarters. Between our exciting initiatives, easier comparisons and the warm weather that we are up against, we do see an opportunity to drive performance in the fall season. We also do not believe that all of the macro challenges are permanent, and we are operating the business to position Stage Stores favorably beyond this year. We are continuing to move forward on the strategies that we believe are most beneficial to our long-term performance. We know that a strong customer connection is the key for long-term growth which is why we are focused and continue to be focused on providing our customers compelling merchandize at great values in a fun and engaging environment, both online and in stores.

Before I turn it over to Oded, I want to make a special point to thank all of our associates for their ongoing efforts and dedication. They have been working extra hard and digging extra deep to find additional ways to drive business, reduce expenses, make us more productive, and give our customers a fantastic shopping experience. We also appreciate our loyal shareholders who continue to support Stage. The announcement in our press release this morning regarding on our quarterly dividend payment marks 44 consecutive quarters that Stage has paid a dividend. That includes the difficult recession years and it reflects our board's recognition of the importance of delivering shareholder value. We are intensely focused on generating positive cash flows and managing the business for the long-term.

I'd now like to turn the call over to Oded.

Oded Shein

Thanks, Michael, and good morning, everyone. For the first quarter, net sales were $333 million, a decrease of 9.9% to last year. Comparable sales decreased 8.5%, driven primarily by decline in traffic. Average unit retail in the quarter was up, 3% and units per transactions were up 1.6%.

The adjusted net loss for the quarter was $0.56 per share, compared to an adjusted loss of $0.26 per share last year. The merchandise margin rates for the quarter was up 15 basis points, an AUR increase. The gross profit rate decreased 195 basis points due to deleverage from lower sales along with higher cost related to strategic investments in omni-channel technology and stores. Adjusted SG&A for the quarter was $4.9 million lower than last year while the rate deleverage 130 basis points.

First quarter results are adjusted to exclude charges associated with the consolidation of our headquarters and costs related to store closure amounting to $0.4 million or $0.01 per share. We continue to see strong growth in our private label credit card program during the quarter with the penetration rate increasing 330 basis points over last year's range. Our adjusted net loss for the quarter was also impacted by a lower tax rate and a 15% decrease in our share account due to repurchasing shares at the end of 2015. The cumulative EPS impact of tax rates and lower share counts was $0.10 per share decrease compared to last year.

Moving to the balance sheet; we ended the quarter with total merchandize inventories down 1% compared to last year. At quarter end, borrowings under our credit facility were $188 million and total net debt was $178 million. Capital expenditures for the quarter, net of landlord construction allowances, totaled $29 million. We updated 31 stores and closed 9 stores during the quarter. Operating efficiently remains critical in the current environment. We have taken steps to minimize expensive leverage in tightly managed inventory. We are also reducing our expected capital expenditure for the year to $65 million compared to $87 million last year. This will position us to generate strong free cash flow sufficient to cover our dividend without incurring additional debt.

As Michael noted, we are lowering guidance for the year with comp sales expected to be minus 6% to minus 4% which corresponds to total sales of $1.480 billion to $1.510 billion. Adjusted EPS for the year is expected to be between $0.20 and $0.40, given additional expense reductions to offset lower sales. Our share count for the year was projected at $28.2 million.

That concludes my remarks. We would now be happy to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question this morning comes from the line of David Mann from Johnson Rice. Your line is open.

David Mann

Yes, good morning Michael, Oded and Randi. Question on the guidance for the year, I think on the last call you gave us some indication on where you thought gross margin would be sort of flattish and that you thought SG&A would be down $10 million to $15 million. Can you update the metrics for those parts of guidance given your new EPS guidance? Thanks.

Michael Glazer

Thanks, David. When we think about merchandized margin, we actually see continued opportunity, especially in the fourth quarter through higher merchandized margin this year over last year but that's going to be deleveraged by some of the investment activity we are making in the stores and online [ph]. So I would see the gross profits rate to be fairly flat with last year. On the SG&A side again, you see a lot of the leverage with lower sales, so we would see a decline of anywhere between -- deleverage of 30 basis points to 50 basis points for the year.

David Mann

Okay. And then in terms of the private label credit card, can you give a sense on how that performed in terms of the benefit to income in the first quarter? And how would you look at that performance or what's in your guidance for the full year relative to how it performed last year? Thank you.

Michael Glazer

In the first quarter the benefit of the private label credit card program was slightly below last year but we were really encouraged by the performance because as we mentioned in the fourth quarter, credit was well below last year. So we've seen a stabilizing picture in the credit card loss rate and we are pleased about that. For the remainder of the year again, we see similar performance of last year.

David Mann

And then one last question on your store performance, you've obviously identified stores already that you expect to close. Given your first quarter and your new guidance, do you see additional opportunities to close stores in terms of those that are underperforming? Thank you.

Michael Glazer

Again, when we came out with the store closure -- strategic store closure program last year, we reviewed the portfolio and looked for stores that didn't have the growth potential, both from sales productivity and from profitability to make the cut. We are reviewing the portfolio on a quarterly basis and at this point we have not identified any additional stores that we would like to close beyond what we have already done.

David Mann

Thank you. Good luck.

Michael Glazer

Thanks, David.

Operator

Your next question today comes from the line of Pam Quintiliano from SunTrust. Your line is open.

Pamela Quintiliano

Great, thanks so much and thanks for taking my question guys. So I have a few for you, starting out with when you think about the first quarter, I know it's hard to breakout but how much do you think was weather related? Obviously the energy state issues is paper devaluing, some is fairly new, so just trying to figure out the weather portion.

Michael Glazer

I don't think Pam that we have gone in and said we think its worth X amount of basis points. Clearly, weather wasn't in our favor, like most people -- I mean, I've heard a lot of other people's commentary and it seems like our pattern meant equal tab what they saw. So we saw warmer weather in February, when we really needed to be moving through some of our fall holiday clearance. And then as we landed the Spring goods in March and April, it got cold and it made it really difficult for us to sell a lot of seasonal products. So we're off to a slower start there but we haven't really identified a basis point that it hit us with -- certainly wasn't in our favor.

Pamela Quintiliano

Okay. And then can you talk about the performance of your refreshed locations, is there anything you can share with us about the differentials there between your newer and older stores?

Oded Shein

Pam as you know we updated 122 stores last year, and another 31 in the first quarter. And we are continuing with the program to update more than 80 stores this year. The fact that we are continuing to do it is evidenced that we are pleased with the performance we think -- we've got really good reviews from our customers and so far so good, it's early in the program but we feel good about it.

Michael Glazer

Pam, its Michael. I think it's exciting frankly, that we're going to have by the end of the year as I said earlier in the -- we're just talking, 200 of our stores which account for about 45% of our overall volume will have been refreshed by in the time we get to fourth quarter and it's pretty good given we just started this less than 18 months ago. So we feel good about -- I mean, the issue sometimes is where you've remodeled stores in the oil patch, it's hard to see you want them to all go up 10% comp so to speak and that doesn't happen but when you see the rest of the oil patch going down say 12% and your stores are -- the remodeled ones are only down 5% you realize you've made it more appealing than you really helped on your cause for the long-term.

Pamela Quintiliano

That's very helpful. Thank you. And then as far as -- once again, if I keep on asking same questions I'm not sure if they could be quantified or not but when we think about your stores that are most heavily impacted by the oil patch areas versus those that are western patches, is there a way to think -- once again, kind of the same question I've been asking overall with different variables but the way to think about the performance differentials though that had been part of it by the end of it.

Michael Glazer

Well, I think we actually did try to quantify the fact that we said in these oil producing states or in Texas or Louisiana, Oklahoma and New Mexico, we were actually down 12.4% but the balance at remaining states, we were down 3.8%. So the simple math there is it's over 800 basis points difference.

Pamela Quintiliano

Well, I meant to clarify more and I know we've talked about this before even within Texas, not all parts of Texas are created equal, right, within terms of the emphasis we've spent a lot of time talking it out in the past. So I was hoping to drill down further for the possible even within the technically, the energy related state, those parts of the state.

Michael Glazer

I think it's…

Pamela Quintiliano

I think it's all Texas or with Houston better?

Michael Glazer

Not all Texas stores are created equal, obviously and I think the closer you get to the epicenter of some of these small towns, where fracking was really driving the economy, the business gets stopped or I think the further you get away from it, it gets a little better. But when we started looking at designated stores in terms of what was in the oil patch, what wasn't, and what the impact was, it's hard to say that it doesn't impact most of the stores in Texas to some degree which is why we started talking where about state boundaries versus specifics.

Pamela Quintiliano

Okay. And then my last one for you guys -- and thank you for taking my questions is, to talk about some fashion out there, customer responding to, could you give us anymore granularity on the news that the customers are responding to or you're able to sell-through some of the more exciting new [ph] that doesn't have store price. However the margins on those going -- just anything there would be useful.

Michael Glazer

Yes, this is actually a great question. As Michael said, there are couple of macro-friends active that has been a trend in the business, continues to be strong for us. We did see starting the back half of last year Denim really come back and it has been resurgent for us since Spring. And certainly cooler temps while it hurts the ability to sell shorts, it certainly helps the ability to sell long denim. In terms of peer fashion trends within, particularly the female side of the business, we had a great transition powered out there that was really focused on stripes, head grade sell-throughs on that as we got more into the late spring, early summer months. We shifted our focus recalling a garden party with lot of floral out there, very feminine details, lace, curshay [ph], all that's really working well for us. The challenge is, some of that doesn't always offset the large seasonal businesses or we're taking some heads right now.

Pamela Quintiliano

Is there a way to think about what percent of the assortment on the women side would be considered more of that newer fashion assortment year-over-year?

Michael Glazer

We tend to try to think of our business and maybe in three markets there is a basic replenishment piece of it, there would be things like jeans and bra, that's around 20%. We have key items which would be big/short programs, like pre-programs or things like that that could be anywhere depending upon the business 40% to 45%. And then fashion would be the balance between those.

Pamela Quintiliano

Okay, great. Thanks so much. Best of luck guys.

Michael Glazer

Thanks.

Operator

Your next question comes from the line of Michael Eckson [ph] from Credit Suisse. Your line is open.

Unidentified Analyst

Thank you so much for taking my questions and thank you for the detail on what is obviously a difficult quarter. Michael, you talked about not all the problems are macro-related out there, can you sort of talk about the balance of what you're seeing in, there was no real discussion on competition and many of your competitors have not been as successful controlling inventories as you are. And what are you seeing in terms of competitive markdowns that you have to take as they sort of rationalize their inventories?

Michael Glazer

Sure. Steve, maybe you want to talk about the competitors?

Steven Lawrence

Yes, I mean obviously it was a tough fall season and we saw pretty deep clearance pricing, early part of the quarter. And it's promotional out there. I mean we're certainly seeing promotionality really ramp up, particularly around the peaks, around Easter/Mother's Day, we expect that to continue going forward. One of the things we've talked about internally is, we linked pretty heavily in the promotionality, particularly in April, when sales really softened up for us and I think a lot of other people. And quite candidly, didn't get a lot of pay-off on it. So I think the year for us is going to be about being very smart about how we manage our promotional files, we're going to be really aggressive during the appointment shopping time period, the times we know the customer is going to shop with us, whether that's Father's Day, back to school holiday, some of the lows in between where traffic is kind of dying off a little bit, we're going to be a little smarter and try to keep our powder dry from a promotional perspective.

Michael Glazer

Yes, I think Steve just hit it frankly, in terms of the -- those low periods, it's those low periods that are really difficult because you throw money against it and it doesn't seem to have any return to it. So I think hopefully we'll be lot smarter going forward in terms of just trying to really hit it hard when we know there is those natural shopping periods, upcoming Memorial Day or Father's Day or whatever it might be.

Unidentified Analyst

I guess just following up, how much have you had react to what other people have been doing because they have too much inventory because you guys have done -- I mean it looks like on the surface you've done a really good job, on controlling, acting fast on inventory side.

Michael Glazer

I think -- once again, we've been -- I would say very competitive enterprising, we have the same problems to carry over and clearing goods, so I think we're very competitive really in season. We really haven't got deep into the promotionality on our summer product; we know it's going to be a dog fight out there. Summer really kicks off more by the weekend, next weekend, and I think we are pretty promotional and appropriately priced.

Oded Shein

Just a point about the inventory management, we really had to pray the merchant's team for great discipline managing the inventory. As Michael mentioned before, total inventory was down 1% and if you exclude our build-up in cosmetics, it was down 4%. When we managed the inventory we always look forward and you've seen by our guidance that inventory level is pretty much in line with our sales guidance for the future.

Unidentified Analyst

All right, thank you and good luck.

Michael Glazer

Thank you.

Operator

Your next question comes from the line of Jeff Van Sinderen from B. Riley. Your line is open.

Jeff Van Sinderen

Good morning. I'm wondering if you could just give us a little more color on the traffic and conversion, maybe just touch on the monthly progression comps wondering if it was kind of similar to others or February was pretty good and that hit harder in March and April, it sounds like that?

Michael Glazer

Jeff, I would say traffic has quite been our biggest challenge quite candidly, throughout I would argue conversion is flattish, AUR is up, per transaction is dead or up slightly, so really it's getting traffic and we definitely did see particularly right after Easter, a pretty significant drop-off in traffic that continued throughout most of April. So that is one of our biggest challenges right now.

Jeff Van Sinderen

Okay. And then as far as merchandized category opportunities, maybe you can just remind us kind of where you see the opportunities for the rest of the year?

Michael Glazer

Sure. We're leading pretty heavily into the non-accruals. You can tell from our commentary it sounds like you're getting a lot on the industry that apparels will talk, right. So we are leading very hard into cosmetics, we have a very large plan -- the largest plan in the company here as strategy going forward as cosmetics. Our home business is also a key area of focus for us. We're pushing hard in shoes, where our footwear business has been stronger. Certainly with accessory and certain categories that are very motive, like handbags are focus for us, but that doesn't mean that we're throwing in the towel on apparel but we're certainly putting more money into the plan behind the non-apparel categories.

Jeff Van Sinderen

Okay. And then I think you called that home is being one of the stronger categories, just wondering was that actually up for you or was it just kind of not as severe as some of the others?

Michael Glazer

No, we're in an increasing home for the quarter and I think the team has done a very good job there of shifting the mix. We like a lot of people who are very reliant in the past on categories like small explosive [ph], been a little softer, they really shifted the focus towards more gettable ideas and that's really paid off for us and we think will continue to pay-off for us throughout this year.

Jeff Van Sinderen

Okay. And then can you just update us on the e-commerce, how much it grew in Q1 and what the penetration was there?

Michael Glazer

Sure. Our e-commerce business like a lot, like our store business quite candidly was a little softer than we had anticipated. It was up single digits, that's little disappointing coming off [indiscernible] in fourth quarter. We're looking at it, we've started looking at our online customers versus our in-store customers and like most retailers, it's a lot of overlap there. So if they are under pressure and didn't have money to shop and our brick and mortar stores didn't have as much money to shop online as well. And we think that was part of the drop-off in traffic but e-commerce was up single digits for us. Penetration was up as well based off of that because obviously for up -- on brick and mortar down, I mean up online, down in brick and mortar penetration would increase.

Jeff Van Sinderen

Okay. And then just one final one if I could squeeze it in, just wondering and kind of the expense reduction plan, any more specifics you could give us on that?

Oded Shein

It's actually across the board so even when we started doing this, budgeting process, we looked at every line item to justify expense and we had really good traction in doing it. So it includes anywhere from the stores to the marketing activities but a lot of it revolves around overhead from supply chain to the corporate headquarter.

Jeff Van Sinderen

Okay, thanks and good luck.

Michael Glazer

Thanks, Jeff.

Operator

Your next question comes from the line of Jeff Stein from Northcoast Research. Your line is open.

Jeffrey Stein

Hey, good morning guys. So a little bit surprised to hear gross margins -- your merchandize margins were up during the first quarter so just kind of curious from a strategic standpoint, in an environment like this, do you believe it's more important to protect market share or protect your margins?

Michael Glazer

Obviously we're sales driven and we're going after market share. I wouldn't say that we were defensive in pricing to try to protect margin. I alluded to you in one of the earlier comments, we're pretty promotional with you, look at our promotional markdown rate, it was up several hundred basis points, I mean use that as kind of proxy to measure our promotionality. So what we found in lot of cases was that workforce at Easter but after when traffic really died off and we're in those lows being over promotional really didn't help us. What I think you have to think about is, there is multiple facets to margin, right, so obviously promotional markdown I told you were up. As Oded alluded to you in his comments, one of the main drivers of our increasing margin was AUR, our AUR was up. Obviously we worked hard on markup, it being smarter about how we price goods, so markup has been up for us as well and that was a big driver for us of the margin improvement that translated into an AUR increase.

Jeffrey Stein

Okay. And Steven, as we look ahead into the second quarter, given the fact that inventories are pretty blooded [ph], it would seem to me to make more sense from an analytical standpoint, the model -- lower merchandize margins in the second quarter. Would you agree or disagree?

Steven Lawrence

I wouldn't agree that inventories are blooded; obviously you want to have your inventory somewhat in line with sales. As Michael and Oded both mentioned while we were down one, we were down four ex-cosmetics, we were sitting on about 30 more cosmetic stores year ago. So we were actually pretty pleased with the job the teams did controlling margin or number, I mean obviously we did not plan to be down 8.5%, right. So as we got into the quarter with a lot of that business falling off in April, I think that the teams did really lot of heavy lifting to get to that inventory number, we're very focused on putting the right sales forecasting going forward which is -- you can see reflected in the guidance we gave you guys and we're going to control inventories in line with that.

Jeffrey Stein

Right. I was referencing industry inventories, not yours, I mean your inventory is great but given the fact that the industry inventories are probably somewhat loaded coming out of Q1 when that sort of incremental pressure to be more promotional in Q2 driving perhaps lower merchandized margins in Q2?

Steven Lawrence

We certainly expected to be promotional; we think we have the modeled in our guidance. Oded, you want to give any commentary around?

Randi Sonenshein

As you heard Oded say the margins expectations in the later part of the years where we see the opportunity pertains [ph], just given the level of seasonal goods that we had to clear in the back half of last year.

Jeffrey Stein

Looking at Estée Lauder rollout, can you talk about what you are doing this year? I guess, are you opening no Estée Lauder and create departments this year or just sailing with that?

Michael Glazer

No, Jeff, we're actually -- we're still -- we're not going backwards by any means. We're actually still opening some additional counters frankly; I think there will probably be at least five that will do. The problem is as you know, we're already at 320 stores with these counters and when you look at our chain, as you start rolling them out into more stores they get into some of these lower volume stores where the return on investment candidly from both sides, both Lauder side and our side, isn't just necessarily to have to return of your higher volume stores. So what we've decided in conjunction with Lauder is that we probably think we can do with Lauder and Clinique and obviously other divisions, Match Box and Origins, where we can intensify the inventories and some of the strategies within our larger boxes where perhaps in the past we're little more focused on just adding stores, we're going back and thinking about how we can be more productive in some of the existing boxes. So frankly, when you walk into some of our stores, I think you'll even see a greater selection, not only just in fragrance type stuff but more into some of the bath and body type things, and some of the things frankly that our customers are really looking for.

Jeffrey Stein

Got it, got it. Okay. So Michael, as we look at the CapEx reduction, how much of it would be represent a reduction from Estée Lauder? How much of it would be a reduction from core remodels and maybe you can just kind of tell us what the $10 million reduction in CapEx is coming from?

Michael Glazer

So we shared the beginning of the year that we are planning to spend about $72 million, now we're spending $65 million, so about a $7 million drop. Most of it comes from the additional cosmetic doors, there are few minor other things that we look around our budget and see how we can make it more efficient but it's mostly from the cosmetic doors.

Jeffrey Stein

Got it. Okay, thank you very much.

Operator

And your final question today comes from the line of Heather Bolski [ph] from Bank of America. Your line is open.

Unidentified Analyst

Hi, good morning, thank you for taking my call. I was just wondering if you can talk about -- there has been a lot of question about inventory, I had another one. If you're planning -- it sounds like you're planning for sales to improve in the back half of the year, so as you think about your inventory, are you planning inventories to kind of ramp up as you go into that period? And if the environment remains the challenge that is right now, how much flex do you have to pull back on your orders?

Michael Glazer

I don't want to give you the impression that we're going to ramp up inventory, we do think -- Heather, we think there are definite opportunities in the fall season and we think that for a number of reasons we talked about. Obviously the comparisons are easier, God forbid; we get any break in the weather that could be helpful as well. But -- and, down along with some of the initiatives that we're doing, we think that's really where the opportunity lies but as far as the inventory, we'll continue to monitor all along and it will be aligned with however we're feeling at that time.

Oded Shein

Just from a modelling point of view, I would expect inventory this year to beat the low last year for the entire year.

Unidentified Analyst

Thank you. And then with regards to the investment spending and how it's impacting buying an occupancy cost, what is your leverage point right now and kind of where do you stand over the next few years?

Oded Shein

So by doing all the expense reduction activities, we have managed to lower our leverage point. If before it was anywhere between 1% and 2% plus 2% comp, now we're actually under zero, right. So we can still leverage expenses maybe at minus 2%. Unfortunately our guidance called for a minus 4% to minus 6% and that causes some deleverage but it's much less than it would have been otherwise.

Unidentified Analyst

Okay. And then just lastly, in terms of the non-tender royalty program that you've been piloting and you plan to roll out, can you just provide some metrics on how it's been doing, what you're seeing in pilot stores?

Michael Glazer

I don't know if we'll share the metrics on it, obviously we feel good enough about it to roll it out. I think our thinking was that we touch about 45% right now, roughly of our customer base with our CLCC royalty program and we see a greater opportunity to speak to all of our customers and talk to the 55% with a tender neutral royalty program. So we're really excited about that, we see that rolling out in the back half of the year, probably in late third quarter and we can give you more details around what that looks like on the next earnings call.

Steven Lawrence

Heather, I'd also add, I think it goes without saying and I think you hear this from most retailers, if you -- once that customer becomes loyal, they spend -- you obviously see them spending more. So I think it's certainly fair for you to assume that in the test we've had customers signed up for the program, obviously their spend is higher than the person who doesn't sign up for it. So it seems like a win-win and especially in combine with our private label credit card program.

Unidentified Analyst

Got it. Thank you very much.

Operator

I'll now turn the call back over to management for closing remarks.

Michael Glazer

Great. Well, thank you, everyone for participating with us on our conference call. And we look forward to speaking with you again, after the conclusion of our second quarter. Thanks again.

Operator

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

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