Cache Inc. Q1 2008 Earnings Call Transcript

| About: Cache, Inc. (CACH)

Cache Inc. (NASDAQ:CACH)

Q1 2008 Earnings Call

April 30, 2008 9:00 am ET

Executives

Tom Reinckens - Chairman & CEO

Maggie Feeney - EVP & CFO

Allison Malkin - IR, ICR

Ashok Gandhi - VP of Finance

Victor Coster - Treasurer and Secretary

Analysts

Neely Tamminga - Piper Jaffray & Co

Margaret Whitfield - Sterne, Agee & Leach, Inc

Liz Dunn - Thomas Weisel Partners

Liz Pierce - Roth Capital Partners

Robin Murchison - SunTrust Robinson Humphrey

Jeff Van Sinderen - B. Riley & Co

Alex Rosenfeld - Brean Murray, Carret & Co

Chris Kim - JPMorgan Chase & Co

John Pinto - Brightleaf Capital

Harry Ikenson - Berman Capital

Mark Montagna - CL King & Associates

Operator

Welcome to the Cache, Inc. first quarter fiscal 2008 results conference call. At this time, all participants are in listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ms. Allison Malkin of ICR. Thank you. You may begin.

Allison Malkin

Thank you, good morning. Today's conference call includes comments concerning Cache's business outlook and contains forward-looking statements. These particular forward-looking statements and all other statements that may be made on this call that are not based on historical fact are subject to risks and uncertainties. Actual results may differ materially.

Additional information concerning a number of factors that could cause actual results to differ materially from the information that will be discussed is available in Cache's filings with the SEC, including Cache's report on Form 10-K for the fiscal year ended December 29, 2007.

And now, I would like to turn the call over to Tom Reinckens, Cache's Chairman and CEO.

Tom Reinckens

Thank you, Allison. Good morning. And thank you for joining us. Here with me today are Maggie Feeney, our Executive Vice President and Chief Financial Officer; Ashok Gandhi, our Vice President of Finance; and Victor Coster, our Treasurer and Secretary.

I will begin today's call by providing an overview of our first quarter results and provide the strategy behind our announced store closures, while updating you on the priorities we are implementing to provide for our growth in the current year. Then Maggie will review our financial highlights and I will provide closing comments and turn the call over to the operator to conduct the question-and-answer portion of the call.

As many of you are aware, Cache is known as a destination store for long special occasion dresses; dresses which are often purchased for prom, which is a business that typically builds as a percentage of our total month sales in January and February, and peaks in March and April, then significantly diminishes as a percentage of our sales in May and June.

This year were certainly uncharacteristic in that the long special occasion dress business did not develop as expected, which may have been caused by the soft consumer environment. As a result, during the first quarter, we achieved lower-than-anticipated sales and recorded higher markdowns, as we worked aggressively to maintain clean inventory levels.

Our performance in the long special occasion dress category overshadowed a particularly strong sportswear business, which we attribute to the success of our pricing strategies and our vastly improved merchandise assortments. We are confident that as we exit out of the 2008 long special occasion spring dress season, our overall sales trends will improve during the balance of our second quarter.

In April, we are reporting our comparable store sales were down 1% for the month, a similar result to our flat comps in March. While we were disappointed with our April sales results, we are excited about our prospects in May and June, with both month sales primarily driven by sportswear classifications that are performing very well. As a result, for this year, we are planning low single-digit positive comp store sales gains in both May and June.

Briefly touching on the numbers, first quarter net sales increased 5% to $67.7 million, and comp store sales increased 3%. Net loss for the quarter was $2.1 million or $0.15 per share, and included $0.14 in one-time charges.

As we announced previously, after careful evaluation, we made the decision to close approximately 14 underperforming stores. These locations were not profitable on a four wall basis, and while this was a difficult decision, we knew our time and energy would be best spent on focusing on initiatives, that are expected to advance our growth.

We also incurred $0.03 per share cost relating to a change in management we announced in January. Excluding these costs and losses, results relating to the operation of the stores slated for closure, first quarter fiscal 2008 results were $0.01 per share. And again, that does not include the $0.02 to $0.03 losses that we incurred for those stores, the 14 stores that we are closing. This compares to the first quarter diluted earnings per share of $0.01 in last year's first quarter, which includes about $0.01 loss for those stores that were going to close.

We are pleased to experience the positive results of our key strategies, which are working and driving intended results. As you may have heard me say before, Mission $500 is our company's top priority. We believe achieving $500 in sales per square foot is well within our reach and will allow us to attain our profitability goals that includes double-digit operating margins.

We believe we have tremendous potential to increase our current sales per square foot from the mid $400 level to $500 and even higher. To accomplish this, we have begun to implement a good/better/best pricing strategy, which is assisting us to increase transactions and shopping frequency. We have also expanded our sportswear assortment to include lifestyle assortments, such as those appropriate for work settings.

Our customers have responded favorably to these moves. In fact, sportswear sales in the first quarter were up double-digit on a comp store sales result basis, and this positive performance has continued in April. Again, as sportswear becomes a greater majority of our overall sales, we expect our comp store sales performance to accelerate nicely. We are also excited about our plans to relaunch Contour in August, adding new fabrics, improved quality, and fit to the line, to further enhance its appeal.

Regarding marketing, we continue to demonstrate success with our monthly catalogs, and postcards with prominent offers. We believe this is the right strategy for the current environment. To continue to generate customer loyalty, we plan to introduce a new generation catalog in June, with improved features and better quality design. As it relates to sourcing, we have begun to utilize offshore sourcing to a greater extent than in years past. Currently, we are beginning to produce goods in Central America for the very first time in the company's history, and will continue to ship more of our sourcing offshore, which is expected to offset higher labor costs we have incurred here in the domestic US production.

During the quarter, we opened three stores and closed six stores, ending the period with 294 Cache and Cache Lux store locations. For the year, we continue to expect to open between 10 and 13 new stores, while closing between 20 and 23 locations, including the 14 stores announced as part of our efforts to improve overall company profitability. At year-end, we expect to operate a total of approximately 287 stores.

Finally, we begin to return value to our shareholders by utilizing $12.6 million in cash to fund the repurchase of 1.3 million shares. This brings total shares repurchased under the $3.5 million share authorization to 3 million shares. We are comfortable with our current cash balance, which is more than adequate to fund our future growth.

As we begin the second quarter, we recognize that the overall consumer spending environment remains extremely difficult, yet we are optimistic regarding our business prospects.

Our positive outlook is based on the following: First, the increasing percentage of sportswear to our overall mix, 60% of the total by the end of Q2, which is currently generating double-digit sales increases, and is expected to continue given our initiatives.

Second, the great styles our design teams have created, third, the positive impact of our strategy in pricing, category expansion, and sourcing.

And finally, we believe we have identified a stronger catalog to help grow our customer base and increase our store traffic, sales, and customer loyalty. At the same time we will remain diligent in our spending and continue to maintain tight inventory discipline.

Taken together, we believe these strategies have us poised to achieve our second quarter guidance and importantly elevate the Cache brand with customers. We look forward to updating you on our progress in the months ahead.

With that, I would like now to turn the call over to Maggie to review our first quarter results and guidance in more detail.

Maggie Feeney

Thanks, Tom. As Tom mentioned, our first quarter results reflect certain costs related to store closures and a management change. Pretax, the store closure costs were $2.3 million. On an after-tax basis, the store closure costs were $1.5 million or $0.11 per share.

The management changes cost is a total of $616,000 pretax, and are included in general and administrative expenses. On an after-tax basis, the management change cost is $388,000 or $0.03 per share.

Finally, operating losses for those stores that will be closed, the 14 we mentioned previously, were $355,000 or $0.03 per share in the quarter. With that, I would like to begin the review of the first quarter.

For the first quarter, net sales totaled $67.7 million, up 5% from the $64.4 million last year. This was primarily driven by a 3% increase in comparable store sales. Our quarterly sales increase also reflected a 6% increase in transactions, a 3% increase in units per transaction, which more than offset a 3% decrease in average dollars per transaction.

Our good/better/best price strategy is expected to slightly lower ADF for rising transactions that you can see. Which we believe places us in a good position along with other merchandising moves to achieve our Mission $500 goal. We are pleased with the performance of this initiative. During the quarter, we opened three stores and closed six locations.

Gross profit dollars were $28.4 million, a decrease of $600,000 from last year's gross profit of $29 million. Gross profit margin declined 300 basis points to 42% of net sales, from 45% last year. This was primarily due to higher-than-expected markdowns as we moved aggressively to clear inventory. In addition, our costs now reflect expense related to the July 2007 acquisition of Adrienne Victoria Designs.

Turning to expenses, in total, expenses were $31.9 million or 47.1% of net sales compared to $29.5 million or 45.8% of net sales in the first quarter of last year. To break this down further, store operating expenses totaled $23.9 million, or 35.3% of net sales, compared to $24 million, or 37.3% of net sales in the first quarter last year. This is an improvement of 200 basis points.

General and administrative expenses totaled $5.7 million or 8.4% of net sales, compared to $5.5 million or 8.5% of net sales in the first quarter last year. This year's amount includes $616,000 in expenses associated with the management change. Excluding this cost, general and administrative expenses declined over $400,000 from last year.

Store closing costs totaled $2.3 million or 3.4% of net sales. Operating losses for the stores to be closed approximated $563,000, compared to a loss of $390,000 in the first quarter of last year.

Excluding the store closure charges, losses for the stores to be closed, and expenses related to the management change, operating income was $7,000, an improvement of $106,000 from a loss of $99,000 in last year's first quarter.

Net interest income totaled $222,000, compared to $726,000 in last year's first quarter. The decrease was primarily due to lower cash balances, given the utilization of $12.6 million in the quarter to repurchase 1.3 million shares during the quarter, as well as a decreased interest rate as compared to the first quarter of 2007.

On a GAAP basis, net loss was $2.1 million or $0.15 per share, compared to net income of $145,000 or $0.01 per diluted share, in the first quarter last year. On an adjusted basis, excluding store closure costs, losses related to the store closures, and management change costs, net income was $144,000 or $0.01 per diluted share. This compares to adjusted income of $384,000 or $0.02 per diluted share in the first quarter of last year. In the first quarter of 2007, adjusted net income excludes the $390,000 or $0.01 per share related to losses for stores to be closed.

Now, turning to key balance sheet highlights; we ended the quarter with a strong balance sheet. Specifically, at March 29, 2008, cash and marketable securities totaled $30.7 million, compared to $61 million in cash and marketable securities at March 31, 2007. As I previously mentioned, we utilized $12.6 million to fund the repurchase of 1.3 million shares during the quarter.

Average inventory per store at cost decreased 32% at quarter end from the prior period. In addition, total inventory declined 10% to $32.5 million from $36.1 million. We believe our inventory level leaves us well-positioned for the summer season. Also, at March 29, 2008, the company had $5.5 million of debt related to its purchase of Adrienne Victoria Designs.

As to our forward guidance, for the second quarter, we currently expect net sales in the range of $72 million to $73 million as compared to net sales of $71 million in the second quarter of fiscal 2007. This sales guidance assumes comp store sales of flat to an increase in the low single-digit range.

Second quarter diluted earnings per share are currently estimated in the range of $0.12 to $0.14 per diluted share. This compares to actual diluted earnings per share of $0.08 in the second quarter of fiscal 2007.

Finally, we expect to open five to six Cache stores and close approximately three stores during the quarter.

And now, I would like to turn the call back over to Tom.

Tom Reinckens

Thanks, Maggie. In conclusion, we believe Cache is a stronger company today, better positioned to achieve its targeted goal of sales per square foot of $500, and double-digit operating margins. Our initiatives have already proven successful and we believe we will further our positive sportswear trend as we continue to evolve our product offerings and improve our pricing and fit.

Further, we expect to benefit as we move more of our production offshore. We continue to expect to improve our profitability excluding charges this year, and importantly create a platform for sustained growth in the future.

And now, I would like to turn the call over to the operator to begin the question and answer portion of the call.

Questions-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Neely Tamminga with Piper Jaffray.

Neely Tamminga - Piper Jaffray & Co

Great, good morning. And good luck to you guys here in the second quarter. But just want to get a sense here, on the comp guidance that you have given for Q2, I mean obviously, I think you guys are doing a good job of trying to be conservative out there, especially in this environment. But if your underlying sportswear comp is running double-digits, and you have some pretty decent visibility that continues to be the case, are you being a little too conservative on what Q2 comp could be? And I will just have a follow-up after that.

Tom Reinckens

Neely, that's a good question. And I would like to walk everyone through it. And the answer could be yes. But I don't want to say anything more than what we originally expected. But let me walk you through the impact that we are seeing in the business now. If you were to visualize a U-curve, and you look at our comps, starting off in January, up 7, up 4 in the month of February, and flat in March, and then down to 1% in April. And then you look at the other side of the "U" is what we are looking at in May and June right now, and basically, we are making those decisions based upon the strength of the sportswear.

The long dress portion, the special occasion dress portion was down significantly, high double-digits. We managed the inventory. But it still was a huge percentage of our business in the months of March and April. And I think you know that from all of the years following the business.

Just to give you an idea, I just took a look quickly at the percentage of our contribution of sportswear to the months of April, May, and June. And in the months of April, this is last year I am illustrating for you -- last year; it was roughly 40% of our business in April was driven by our sportswear assortment. The remaining 60% was short dresses. The majority of it was really in the long dress category, the balance, along with accessories. As it shifted from that 40% last year in April, in May, sportswear became 50%. Slightly higher, 52% of our total mix in sales for the month of May. And in June, it became 60%, as I mentioned earlier in the call.

So you can see -- and the drops in it are not in short dresses, and it is not in accessories. It is primarily in the long portion of the business. And so we are through the worst of it. And I was commenting earlier today to the group, in our first three days in fiscal May, last year, on those first three days of a four-week month for us, 20% of our volume in that long category was done on those three days.

So it is almost, even when you look at it in a microcosm on a daily basis, it really falls off the face of the cliff, so to speak, as we move days out here further into the second quarter. So that is why we are optimistic. But it is still a very difficult retail environment. But I think the strategies that we outlined earlier, our great assortments the design team has put together, coordinated looks, with a good value, a good/better/best pricing strategy. It is really taking hold, and we are gathering and garnering more transactions. But right now, we are satisfied to guide within that $0.12 to $0.14, with comps in that mid to low single-digit, and hopefully, hopefully we will do better but there is no guarantees.

Neely Tamminga - Piper Jaffray & Co

I think that is the subtext for everything these days. There are no guarantees. I totally agree. But I think it is just a good job that you guys are converting on what traffic is actually in the mall. But moving bigger picture, Tom, could you help me understand, I don't think you have actually outlined a timeline, unless I missed it on the commentary as to the path to $500. And as I think about your business and have it modeled out as a low single-digit comp increase, I don't even have you guys hitting $500 per foot over the next three years. Do you think it is actually feasible that you could? Or even earlier than that?

Tom Reinckens

I would be extremely disappointed if we did not within the next three years. I can tell you that now. I mean we are closing some unproductive stores. Clearly, they're not anywhere near the chain average. You can imagine that. So that will help us in a natural elevation right there. But I think we are really repositioning the company. We are making solid changes in our strategies to gather more market share. And it seems to be working. There is no question about it.

And when you look at the company, and historically last year was a blip. For a lot of different retailers, short dresses was a strong component of the business for the last couple of years. And so when you look at our percentage of business broken down between dresses, accessories, and sportswear, it shifted a little bit more to the dress category last year. But you're going to see a big shift back in sportswear this year. And we are getting more transactions, more customers, and I think we have an opportunity to do it sooner than later.

Neely Tamminga - Piper Jaffray & Co

That's great. Good luck, you guys.

Tom Reinckens

Thank you.

Operator

Our next question comes from the line of Margaret Whitfield.

Margaret Whitfield - Sterne, Agee & Leach, Inc

Good morning, Tom. Congratulations.

Tom Reinckens

Thanks, Margaret.

Margaret Whitfield - Sterne, Agee & Leach, Inc

I was wondering, given what happened with prom in the long dress business this year, have you given any thought to whether or not you will shrink it in your stores next year?

Tom Reinckens

We usually do a recap of our businesses by category. And we will take a look at it fairly soon. And we will start our thought process on that. I don't know the exact answer to it. But I would speculate that over the past years we have tried to de-emphasize it, and I think we probably will try to look at that again this year, or I should say in 2009.

Margaret Whitfield - Sterne, Agee & Leach, Inc

I am guessing you might have had some disparity in some of your better doors versus your B or C doors in prom?

Tom Reinckens

We identify each location individually. Some did better. Some -- most did not do well. And again, we are not sure why, whether it was more economic conditions or the climate that we are in, or was there a trend to more short. Probably the answer is both of those. But it is not our real core business. Our core business really is for the missy customer, and we are going to try to focus on that, certainly for the rest of this year, and into next year.

Margaret Whitfield - Sterne, Agee & Leach, Inc

I wanted focus in on the gross margins. Could you -- the 300 basis point decline, you listed three major factors. Could you break it down as to how much was markdowns, how much was AV, and how much was the new pricing? Because of course, the new pricing may continue along with possibly costs high to the AV acquisition.

Tom Reinckens

This year versus last year, it is kind of difficult to look at, because now for at least the first six months of this year we have the AVD costs up in our equation up in the gross margin. But saying that, the primarily the number one factor, Maggie, is the markdowns. Our markdowns were a third more in the first quarter than they were a year ago, and that's a factor of keeping dresses under control, cleaning out older sportswear and doing the right things from a promotional standpoint, and really going after aggressive coupons to get customers to come in.

And offsetting that, in the future, and this is an important element, our production with AVD probably was close to about 60% of all of the goods that we received in the first quarter in our stores, was goods that we sourced through the AVD channels. Of that 60% was really produced here domestically, in the United States. So the IMUs on that product are not as good as the 40% IMUs that we sourced of our product offshore of the AVD portion of our domestic -- of our overall received.

So moving forward, we are optimistic that A, the markdowns, we are not anticipating the markdowns at the levels that we incurred in the first quarter. And that is primarily our inventories are down very -- really clean. And we managed them very well. It's never been at this level -- I can't remember this in quite some time.

In addition to that, we have, as I said, the opportunity to improve our IMU by shifting more offshore. And for the very first time in the company's history, we have some piece goods being produced in Central America. So had better IMUs than what we incurred here domestically. So those factors will play in, as we move throughout the year. So we would expect the gross margin to improve.

Margaret Whitfield - Sterne, Agee & Leach, Inc

Starting in Q2 or later in the back half?

Tom Reinckens

I think you will see it in Q2. Naturally, you will see it in Q2 because of the higher volume overall in Q2. As well as, just our outlook on how we are seeing things unfold. We really repositioned the company. You guys may remember, we talked about introducing $58 T-shirts in the third and fourth quarter of last year, and that was a new classification for us, at a new price point. And now if you look in the store, you will see great tops in the mix at $68 and $78 and $88 and they are performing very well.

Margaret Whitfield - Sterne, Agee & Leach, Inc

Any new classifications for the summer or the back half?

Tom Reinckens

We did mention we have some great new fabrics coming in Contour. It looks unbelievable. We will probably launch that in the month of August. We have improved the quality. And we have also improved the fit. I know the group in our accessories group are working very diligently for our fourth quarter and coming up with some great gift-giving ideas. And we are going to work on that as well.

We are trying to plan the business out a little bit further so we can take advantage of stronger opportunities on the IMU side, as well as just based on our knowledge that the design team has learned since the AVD acquisition in July. They have done a fantastic job in giving us great styling. And that's number one. It is all about the product first and foremost.

Margaret Whitfield - Sterne, Agee & Leach, Inc

The product looks great. Congratulations. Thanks.

Tom Reinckens

Thank you.

Operator

Our next question comes from the line of Liz Dunn with Thomas Weisel Partners.

Liz Dunn - Thomas Weisel Partners

Hi, good morning. You mentioned that you are pleased with how this pricing strategy is impacting your business. Can you give us a sense of what you're seeing AUR trends versus unit trends in the stores, how that is flushing out with the comps?

Maggie Feeney

The average unit is up 3% in the quarter.

Tom Reinckens

The average unit.

Liz Dunn - Thomas Weisel Partners

Average unit retail is up 3%?

Tom Reinckens

No…

Maggie Feeney

No, the unit retail is down but the average -- I am sorry, the number of [UTTs] is up 3 and the average unit trend is about down 3%. But we are seeing a 6% increase in transactions.

Tom Reinckens

So we are selling more units to more people. At a widely lower price.

Maggie Feeney

But widening our base is what we wanted to do, so we are seeing more traffic.

Liz Dunn - Thomas Weisel Partners

Okay. I don't mean to be obtuse. I know there were a couple of questions on this. But the lower pricing, is it IMU neutral or are there lower IMUs on those lower-priced items? I know it was a small impact to the gross margin, but it is in the press release that it impacted the gross margin, so are you telling us that those lower-priced items have lower IMUs?

Tom Reinckens

Well, there is no question that -- look, you can't get it both ways. You have to do what is right for the business. You have got to give value to the consumer. Our IMUs are down a tad from where they were at the end of the year on our purchases. And that does not mean just in opening price points. It is giving the consumer value, and some of our surveys that we conducted, one of the number one things -- our consumers said that they were not pleased with our price, that we were too expensive and did not think the value was there. And so what we have done is we've looked at each style, regardless of the price, and said what is the value to this garment, for this style. And that is how we are approaching it.

So while our IMUs are down slightly, we really firmly believe, based upon what we are seeing in the unit comps as well as the dollar comps right now, that the decisions that we are making for the business ultimately will improve our market share and allow us to get to our Mission $500 goal or even higher. And so we are sacrificing a little bit on the IMU side, but by far, the biggest impact in the first quarter was the markdowns. It was a third higher than it was a year ago. But we don't foresee that happening to that extent in the second quarter and into the third quarter, and the balance of the year, given our inventory positions, and just how much we've repositioned the company. So I think you're right, we did hit a little bit on the IMU. It is not necessarily just to the lower priced items. More on a style by style basis.

And in addition to that, by shifting our production to more offshore, we are going to get back some of that IMU in the months ahead. As a matter of fact, as I said, we produced 60% of all of the goods, came through our sourcing channel, our supply chain, in the first quarter. I would expect that slightly higher level in the second quarter, and the mix will be more shifted to offshore.

So we will get those benefits, reduced labor costs, on the offshore receipts that we get in the second quarter. So we are looking at it carefully. But we are very comfortable in what we are doing with the consumer right now.

Liz Dunn - Thomas Weisel Partners

Okay. And just one more, if I may. Is there any benefit to gross margins to selling less dresses? And as you look at inventory position being extremely lean, you can give us some sense as to how much of that decline is in the long dress category versus sportswear?

Tom Reinckens

The long dress category, we are down year-over-year significantly. We were down more in the sportswear. So our short dress business is down slightly as well. Our inventories -- all inventory classifications are down.

Liz Dunn - Thomas Weisel Partners

But sportswear is down more than dresses?

Tom Reinckens

Yes. And there is a reason. Because I think we never anticipated the sell-through percentages and the success that the great design team gave us and the product and with our pricing strategy. So we are playing catch-up a little bit. We did not anticipate planning our business up 10% in sportswear. It just wasn't on the cards for us. We wanted to be more conservative given the economic environment. Now that we have a little confidence, we are kind of excited that we are looking to increase our open-to-buy commitments, and that's what we are doing a little bit.

So, but keep in mind, when we are down 30% on a per store basis, I am not talking about increasing the inventories anywhere to that level. I don't need to do that, but I certainly can afford to pull them to 20%, year-over-year declines. And if it is in sportswear, in which the biggest declines have been, that is going to help us, our turns have been too fast, literally too fast. And now that we are catching up, our May receipt flow is a solid group of receipts in May are coming in the sportswear arena. So that is going to help our business.

We have a great new catalog coming out in June. And I think that is going to help our June business. And as I said earlier, 60% of our business in the month of June last year was in sportswear. And I said roughly 40% of it last year was -- in the month of April was sportswear. To give you an idea, in April, 48% of our business was in sportswear this year. So, I think you're going to be looking at our June mix, probably more like 65% of our business will be in sportswear, versus 60% last year.

Liz Dunn - Thomas Weisel Partners

Okay.

Tom Reinckens

So that's encouraging, if we are double-digiting, comping, that side of the business right now, that's encouraging to us.

Liz Dunn - Thomas Weisel Partners

Okay. Got it. Good luck. Thanks.

Tom Reinckens

Thank you.

Operator

Our next question comes from Liz Pierce with Roth Capital Partners.

Liz Pierce - Roth Capital Partners

Thank you. Nice job, you guys. Tom, in terms of Contour, and it seems like it is, from what I understand, it has become somewhat lifestyle driven, because it did not really stand out in the first quarter. Is this a year-round product? And if so, is it going to be marketed under Contour?

And secondarily, if you decide to downsize the long occasion dress, can it make up for it? It would seem like it could, in terms of like price point.

Tom Reinckens

I think Contour is an evolving lifestyle collection here at the company. And certainly with the launch last year, we have learned an awful lot about it. As I said earlier, we are launching new fabrics in it, we are improving the fit, we are improving the quality. We are trying to widen the scope to get market share. That's the name of the game. We all know this business in the missy segment is very difficult. It is not going to probably get better. It is not going to grow over the next year. I don't see that happening. But we have to expand our offering and I think not only does it -- Contour really was stuff and merchandise you can wear to work. And something that maybe was void in the Cache assortment for a while. And I think that's our focus. We are going to continue to make our styles wearable, and affordable to more people, so that we can get market share, and improve our overall financial formula.

Liz Pierce - Roth Capital Partners

So the original -- I am sorry. Can I go ahead?

Tom Reinckens

Go ahead.

Liz Pierce - Roth Capital Partners

And so when we think about the original fabrication that it came out when -- there seems to me that there would be options to evolve that fabric in for like a lighter weight spring/summer type of wear to work category, right?

Tom Reinckens

Yes, I think you are going to see some of that part of business come into the -- it is easier said than done.

Liz Pierce - Roth Capital Partners

Right.

Tom Reinckens

The guys have been working on it very diligently. And we do have some new things as I said coming to play with the Contour line. And we expect to do a little launch of it in August, in conjunction with some marketing. The marketing team is working very hard in coming up with some ways to introduce it.

Liz Pierce - Roth Capital Partners

So what of the pricing strategy on good/better/best? If I understand correctly, that will be reflected storewide, through all categories?

Tom Reinckens

That's, yes.

Liz Pierce - Roth Capital Partners

Okay. And then real quickly, if I could, also, just get some -- if you could share with us what exactly some of the changes are in the catalog? Is it going to be a bigger catalog? Coupons still the same? Kind of cadence like you said, drop the catalog with coupon then postcard. I guess my question is more about marketing?

Tom Reinckens

Yeah well, I could see that. Clearly we are going to continue postcards and the catalog. The catalog will be improved paper. It will be improved image. It is a much more luxurious piece. And I think it showcases the merchandise of great styles that we have, a lot of prints, we have been doing very well with the prints, and you will be able to see them more clearly. It is just a much, much better product from a standpoint visually.

So we are excited about that. It will be out in March. We -- I am sorry, in June. And it will also show some of our great combination pieces that we now have in the store, our square neck and some of our camisoles -- a couple of our different camisoles will be illustrated as well.

Liz Pierce - Roth Capital Partners

Is it going to cost more? And if so, are you going to…?

Tom Reinckens

It costs slightly more. You can't get better quality and better paper. It is going to cost slightly more, but we will still be able to touch our -- the majority of our customers and we will make sure that once every other month, they are going to get our catalog. Our best customers will always get our catalog and we will supplement it with postcards.

Liz Pierce - Roth Capital Partners

So, I presume if you're touching majority, that means there could be just a tad drop-off in circulation?

Tom Reinckens

Yes, not much.

Liz Pierce - Roth Capital Partners

Okay.

Tom Reinckens

Not much.

Liz Pierce - Roth Capital Partners

All right. Thank you. Good luck.

Tom Reinckens

Thank you.

Operator

Our next question comes from the line of Robin Murchison with SunTrust Robinson Humphrey.

Robin Murchison - SunTrust Robinson Humphrey

Thanks and good morning. Okay. Wondering if you can give us a little, am terms of the second quarter EPS guidance $0.12 to $0.14, does that include losses from the stores to be closed, the 14 stores? And could you also address that in terms of how much did those stores lose last year, and what you think the impact might be on full-year results? Thanks.

Maggie Feeney

It does include those losses, Robin. Last year, those stores lost about $0.02 to $0.03 in the quarter. And they lost $0.07 in the full year. In the first quarter, they lost $0.01.

Robin Murchison - SunTrust Robinson Humphrey

Okay. And I am sorry, Maggie, you said it does include…

Maggie Feeney

Excuse me?

Robin Murchison - SunTrust Robinson Humphrey

The $0.12 to $0.14, it does include?

Tom Reinckens

Yes, it does. That's what we expect to report on the bottom-line in the second quarter.

Robin Murchison - SunTrust Robinson Humphrey

Okay. And then secondly, I just want to explore this, the dress part of the business, and going back for a second to gross margin, you indicated that by the way, you had a third more, I think, markdowns, and attributable to dresses. Was that was more prom dresses than short dresses? And where are we on the dress -- where do you think we are on the dress life cycle?

Tom Reinckens

The dress life cycle, I mean short dresses still are very strong for us. Not as strong as sportswear, but still very strong. We are working diligently to add more of what we call daytime dresses into the assortment. We've always been noted for our evening, our cocktail dresses, both short and our long formal dresses, special occasion dresses. But I am not sure.

There is a lot of people in that business now, the short business. But people know us for dresses. We are going to continue to support that. That business was positive in the month of April , the short business and it was positive in the first quarter. And we will continue to still offer that as part of our assortment. So it is an important part of our overall mix.

Robin Murchison - SunTrust Robinson Humphrey

So the markdown, I am just focusing on this, because you haven't had a 42 -- I mean last time, you had a gross margin that was close to around 42% I think was in 2003, and with all of the initiatives, I mean obviously, we are expecting the margins to increase and I am just trying to…

Tom Reinckens

I think, Robin, the number one thing is, we took 33% more markdowns in the first quarter of this year than we did a year ago. And a year ago, we just look at the overall numbers. We reported $0.01 profit for the company than it was a year ago, correct?

Maggie Feeney

Yes.

Tom Reinckens

And now we are saying we have $0.01 loss, with $0.14 of losses. So when you see that, the biggest impact really in the gross margin is from that cost. So markdowns were huge for us in the first quarter. And I think we really managed our inventory, and took our dresses down, took our nonperforming sportswear and accessories down. And we cleaned up. We have significantly lower inventories right now today in markdown merchandise in our store, and despite that -- and that's a part of our business. We don't have outlets for the most part, we have one outlet. We clear all of our markdown merchandise in our stores, and we are significantly below those levels from a year ago.

So when you look at it, the gross margin, there is no question, the gross margin got hurt primarily by the markdowns in the first quarter, and we were aggressive with our coupons. That is part of the cadence in gross margin as well.

So we did what we think was right. If you look at our overall numbers and really want to measure us year-to-year, it was really $0.10 profit versus $0.01 loss and when you take 33% more markdowns, year-over-year that is well more than $0.01. I can tell you that. A lot more. Does that make sense to you?

Robin Murchison - SunTrust Robinson Humphrey

Yes, I mean it does. It is just trying to reconcile. I mean you came into the quarter with significantly lower inventory, and your sportswear did well. Prom did not do well. And I am just trying to kind of get to where the majority of the markdowns, balancing that against knowing that prom was not good, sportswear did relatively well, trying to get a sense of where the biggest risk was to the margin. And my supposition is that it is more in prom, but…?

Tom Reinckens

Well, there was some of it, there is no question, but I am not going to say it was all prom, no. It was managing our overall inventories. Our inventories came in even lower at the end of the first quarter, on a per-store basis than we did at year end. We did what was right for the business and I think we are well-positioned right now, and we are very excited about what is happening in the sportswear part of our business. And when that really takes hold, and we are through.

The prom season is over now and the long special occasion dress business is over. And so when we are very comfortable with our guidance of $0.12 to $0.14 and we are actually in our fiscal May already, and our first three days, we are ahead of our sales plan, not that three days means the whole month. But we are very encouraged, knowing the level of new goods that we have coming in, along with the great catalogs our marketing department has for us, in the month of May.

And our May catalog will be in home a week from today. That is later than it was a year ago. So we are confident that that is going to drive some business. It looks great. And then we have a June catalog in home in the first week of our fiscal June. So we are very optimistic. We think the margins will improve.

We are not going to be taking the markdowns going forward in this quarter certainly that we took last year. And then there is another element of markdowns. For quite a while, we have been running our markdowns, taking an additional 50% off already reduced goods. We basically stopped that for the entire month of April. We are managing our markdown on a style by style basis. And we are equalizing and turning each style on a week's supply that is proper for those clearance goods.

We are being more disciplined. We have not run the 50% off clearance at all. And I don't intend to do that. We might do it Thanksgiving weekend or something as a traffic driver, but I don't intend to do that right now. I think the group is -- we are very pleased with the performance of our markdowns, in terms of our markdown goods.

Robin Murchison - SunTrust Robinson Humphrey

Thank you very much.

Tom Reinckens

Okay.

Operator

Our next question comes from Jeff Van Sinderen with B. Riley & Co.

Jeff Van Sinderen - B. Riley & Co

Good morning. First, I want to say nice work on sportswear. How much of the assortment is really affected by lower price points at this point? And on a percentage basis, how much are price points down overall?

Tom Reinckens

I haven't calculated specifically, but I would guess somewhere about a third of our assortment is in these opening price points now. You can get an idea, if you look at it, if you keep our catalogs and you look at the catalogs, certainly when you get the May catalog on the 7th. You can take a look at it year-over-year.

And that is what I have been doing, and with the group, as I said, we have $68 and $78 price points, we brought in our square neck top which is a combination piece that we've carried for quite some time historically in the company, and previously it was priced at $58 and now it is at $48 and doing extremely well. We introduced $18 camisoles into the assortment and they're doing well.

So we made an effort to give some value to the consumer. We still have great performance at tops at $118, and $128, and $138, and $158. But again, this is good/better/best pricing strategy and we opened up a new level of business for the company.

Jeff Van Sinderen - B. Riley & Co

And so along the lines of the good/better/best pricing strategy, maybe you can talk a little bit more about how you're thinking about brand positioning from the customer's perspective, and how you address merchandise quality or how you're addressing merchandise quality for the customer that is accustomed to your higher prices? It sounds like you still have the higher price point merchandise, but just kind of looking along those lines?

Tom Reinckens

You are right. We still have that in the assortment. You will see it even advertised in our catalogs. One of our best-performing tops was a $158 price point in our catalog that we issued. I think it was in our March catalog. We are focused on quality. We are focused on fit. That is the number one priority for us. We have been playing catch-up, and this whole transition of the AVD production arm into our business, and producing 60% to 65% of our merchandise through those supply channels, puts some strain on us, because it was -- any transition always is going to be -- that's usually never easy. And I think this transition, we worked our way through it.

The designers and the merchant team are getting more confident in seeing the results of the business in both the dresses and accessories and the sportswear, and they're really focused on executing to a better degree, both in quality and fit.

We did not really talk about fit. Fit is a real opportunity for us. As fast as we are turning our sportswear, we are looking at turns in our fit area, and in our sizing, where we have opportunities to equalize our turns on our sizes. We have been -- probably avoid a little bit in some of our large sizes, and we are working on that.

But the quality overall is not going to diminish. The square neck top I mentioned to you, which is $48 it is the same quality piece goods this year as it was any other year. We are just giving more value back to the consumer. And by sourcing it through our production arm, we are able to get advantage of some improved IMU and not giving all of the IMU away. But it goes back to value. You can't fool the customer. They want value and I think that's what we are doing.

Jeff Van Sinderen - B. Riley & Co

Okay. Hey, Tom, have you looked at what the customers that are buying your high-price point merchandise are also buying? In other words are they're buying -- if they're buying $148 or $158 top, are they also maybe buying some of your opening price point like a $48 T-shirt? Have you looked at that all?

Tom Reinckens

We have been focusing on our units per transaction. And that is going up. We talk to the stores all the time and they are excited and they talk to the customer, and we are seeing just more units being sold in each transaction, which is a good sign.

Jeff Van Sinderen - B. Riley & Co

Okay. Good.

Tom Reinckens

So the answer is yes.

Jeff Van Sinderen - B. Riley & Co

Thanks very much. And good luck.

Tom Reinckens

Thank you.

Operator

Our next question comes from the line of Eric Beder with Brean Murray, Carret & Co.

Alex Rosenfeld - Brean Murray, Carret & Co

Hi, this is Alex Rosenfeld for Eric. I actually think all of my questions have been answered already, so thank you.

Tom Reinckens

Thank you. That was an easy one.

Operator

Our next question comes from the line of Chris Kim with JPMorgan Chase.

Chris Kim - JPMorgan Chase & Co

Hi, guys. Good morning.

Tom Reinckens

Hi, Chris.

Chris Kim - JPMorgan Chase & Co

So it looks like you guys gained some pretty substantial improvement on the store operating line of SG&A. Could you kind of go through some of the drivers of that for the first quarter, whether it was more on the marketing component, or store level SG&A? And how we should be thinking about that for the second quarter?

Maggie Feeney

It was purely the marketing curve was the biggest component there that we pulled back from last year.

Chris Kim - JPMorgan Chase & Co

And did you give the actual dollar amount, year-over-year? Is it disclosed in the Q?

Tom Reinckens

No. It is really not disclosed.

Chris Kim - JPMorgan Chase & Co

Okay. And I mean we should be looking for a similar level of decline in the second quarter? I know you talked about kind of more expensive catalogs, higher quality, etcetera. And curious how that's going…?

Tom Reinckens

It will be down in the second quarter.

Chris Kim - JPMorgan Chase & Co

And for the remainder of the year?

Tom Reinckens

Fairly flat in the back half.

Chris Kim - JPMorgan Chase & Co

Just back half?

Tom Reinckens

And as far as the store expenses, we recently made a conscious effort to really take a look at our payrolls and to really manage those carefully, and we have made some adjustments there to try to reduce some expense as well. And we will continue to watch all of our store expenses.

Chris Kim - JPMorgan Chase & Co

Okay. And I know, Tom, you talked about this good/better/best strategy. I was wondering how the Lux component plays in, and what your thoughts behind this kind of work-in-progress is.

Tom Reinckens

Well, Lux right now is -- a good portion of the stores we intend to close are Lux stores. We will continue the Lux line in our best stores. We think it is a way for our good/better/best. We have come up with a term called Ultimate, which is our ultimate price, and we have identified about 30 doors that we think can support these price points, including some existing Lux stores and some existing Cache stores. But our thought process is to incorporate the Lux line into those doors.

Chris Kim - JPMorgan Chase & Co

And finally, just regarding some of the sourcing, it sounds like you guys are going to do a little more offshore. What's the timing of that exactly?

Tom Reinckens

It's really started in the second quarter.

Chris Kim - JPMorgan Chase & Co

Okay.

Tom Reinckens

And we will see some benefits. As I said, we are doing lots of things in China.

Chris Kim - JPMorgan Chase & Co

Okay.

Tom Reinckens

We are also doing some in Central America. But as I said, of our own production, roughly 60% of it was produced in the first quarter, was produced here in the United States.

Chris Kim - JPMorgan Chase & Co

Okay.

Tom Reinckens

40% offshore. And I would expect that you will see that flip in the second quarter.

Chris Kim - JPMorgan Chase & Co

Okay. And how does that kind of impact the inventory levels or in-transit inventories? I know there have been some companies where people have been spooked by some spike in the inventory levels and a lot of that was in-transit.

Tom Reinckens

You won't see that happen with us in-transit. And I don't expect you will see that at all.

Chris Kim - JPMorgan Chase & Co

Thanks, guys. And best of luck.

Tom Reinckens

Thank you.

Operator

Our next question comes from John Pinto with Brightleaf Capital.

John Pinto - Brightleaf Capital

Hi, Tom. Two questions, quick questions. The first one is on gross margin. And I know you have been asked this a lot, Tom, but I guess your comment on improvement in the gross margin, I am assuming or can I assume you're talking about improvement over last year in the second quarter? Or are you talking about improvement over the first quarter?

Tom Reinckens

It certainly will be improved over last year, because last year, I think our overall earnings were only $0.08, and we are projecting $0.12 to $0.14. And yes, it will be better. We would expect our margins to improve over last year.

John Pinto - Brightleaf Capital

I don't have the model right in front of me, but I think last year first quarter you had 47 plus gross margin. Is that right?

Tom Reinckens

Yes, that's right.

Maggie Feeney

For the second quarter.

John Pinto - Brightleaf Capital

For the second quarter. So you're saying you're modeling better gross margins over last year?

Tom Reinckens

Similar levels. Let's put it that way.

John Pinto - Brightleaf Capital

Okay. And I guess when you talk about your markdowns being 30% higher than they were last year in the first quarter. That to me, doing some rough numbers, if I interpret that right -- that is a 300 plus basis point belt-up.

Tom Reinckens

I don't know about that. I would have to look at my work papers, to be honest with you.

John Pinto - Brightleaf Capital

I am just looking at average markdowns. I am thinking of average markdowns on initial margin, on full margin, and you are saying 30% more. I mean am I totally off or is the magnitude about right?

Tom Reinckens

You're not totally off.

John Pinto - Brightleaf Capital

And so I guess what I am trying to figure out is because we were -- I think a number of people, I think at one point were looking at gross margin expansion, we certainly were. And I guess I am trying to figure out when -- are we close to getting that now? And I guess then my next question is, on the inventory dollars, when you talk about -- if I just take your actual inventory on the balance sheet versus last year, it is about a 10% reduction.

Maggie Feeney

Right.

Tom Reinckens

But don't forget now we are producing our own goods. So we have piece goods there.

John Pinto - Brightleaf Capital

So you're taking out the piece goods, and so much you have got then, what is it, about $4 million to $5 million of piece goods in there or…?

Tom Reinckens

I don't have the numbers in front of me but you can do the math and figure that out.

John Pinto - Brightleaf Capital

Okay. When the Q comes out, we will see that and that might be good detail to put out in your press release if you're -- because obviously you can't see that without that, correct?

Tom Reinckens

Your hunches are right, this year versus last year -- because this quarter, and the second quarter, you won't see that, because it is apples and oranges. Last year, we did not have piece goods in the number.

John Pinto - Brightleaf Capital

Right.

Tom Reinckens

And work-in-progress, you are right. This year, we did not. And clearly, we are looking at our retail and our inventories on a per-store basis. All of our merchandise reporting is done that way. And that is how we are measuring our…

John Pinto - Brightleaf Capital

Right, in-store plus back stock. If it is finished goods in back stock, you shouldn't have much back stock, but…?

Tom Reinckens

You're right there. There is nothing in the backroom.

John Pinto - Brightleaf Capital

Okay, backroom or -- okay. Understood. Then I guess, I am trying to get at, what are the issues that could hold you back from finally flowing through. If your store inventory is 30% lower than last year?

And you are feeling pretty good about the positioning of your sportswear. What are the concerns that you have that might not allow you to finally get year-over-year significant improvement in merchandise margin? Or what are the places that you're at this point saying you're maybe feeling a little cautious about?

Tom Reinckens

I think you hit it on the head with the gross margin. I would be happy to come in at that 47.5% gross margin level in the second quarter, which would be a major improvement over where we are today in a strategy defined by giving better value to the customer. You can clearly see that in the stores, if you go in and take a look at the product.

And from my mind, the upside is that, almost the first question that Neely Tamminga asked, what could happen to the comps? I don't know. I am hopeful that they will be better than what we are estimating but I can't say for sure with any definitive answer that they will be.

And I think it is better to be a little bit more conservative, and even seeing what we see in the business today, it is all about the topline here. In our business formula, we have not delivered, and the primary reason we haven't delivered is because of the topline performance of the company. On a per-store business, and per-square foot basis, we needed to change what we put forth, and how, and when, and what we were marketing.

And the clothes need to be wearable. They need to reach more people. And they need to have value. And that's what we are trying to do today. And I think -- I don't know. I am not going to stop at $500 a foot. There are several of our competitors that do in excess of $600 to $800 a square foot. And there is no reason to think that ultimately we shouldn't be at those levels as well. So that's our goal.

And it will come, I think, because we are making the right decisions within our merchandise, and the design team has done a great job.

And could it be better? Yes. Could it be worse? Yes. The wild card is in my 21 years at Cache, I have never seen an economic climate as difficult as I see it today. And that could be a function of I am a little older, but it is certainly not good out there, as you know. And look at the March numbers that came across the wire for all of the retailers, for the specialty guys, the department stores, everyone. And I think you have to be realistic about that.

But I think the things that we are doing are certainly getting us more market share. That's the best way I can answer it.

John Pinto - Brightleaf Capital

All right. Great. Good luck in the second quarter, Tom.

Tom Reinckens

Thank you.

Operator

Our next question comes from the line of David Berman with Berman Capital.

Harry Ikenson - Berman Capital

Hello

Tom Reinckens

Hello?

Harry Ikenson - Berman Capital

Hello. Hi, it is [Harry Ikenson]. Sorry. It is a mix-up. Good morning.

Tom Reinckens

Good morning.

Harry Ikenson - Berman Capital

Merchandise looks great. And I think the strategy is really a good one for this tough environment that you just described. I would like to follow up on a couple of things, just for a little clarification. First, on when the analyst was asking a question from, I think it was Chase -- when you were talking about marketing expenses and store expenses, what are you referring to flat for the second half? Is that marketing or store expenses?

Tom Reinckens

Marketing.

Harry Ikenson - Berman Capital

Okay. Now, with marketing, can we go a little further in reference to how are you doing changes for this year versus last year on frequency of catalog and also on the postcards? And any other changes this year versus last year, and how the cadence will be?

Tom Reinckens

Well, the major changes is the quality's been improved starting in June for our catalog. That is number one. The cadence will be about the same. We don't do a catalog in July. We don't usually do catalogs in January. We will do some sort of offer and a marketing piece. It probably won't be a full catalog in August. But we will introduce…

Harry Ikenson - Berman Capital

I am sorry, but what did you say about August?

Tom Reinckens

We will have a marketing piece in August. But it won't be a full catalog.

Harry Ikenson - Berman Capital

Okay.

Tom Reinckens

And we will definitely have something in home, a catalog, after Labor Day, which is really the kickoff of our fall. And we will probably -- we will definitely have marketing pieces in the balance of the third and fourth quarter.

Harry Ikenson - Berman Capital

You will have one in December?

Tom Reinckens

Yes, we haven't really put it to bed yet, Harry.

Harry Ikenson - Berman Capital

Okay.

Tom Reinckens

It will be a combination of postcards and catalogs.

Harry Ikenson - Berman Capital

And will there be any change in the amount of the postcards?

Tom Reinckens

I am not sure yet. I don't think so, because we are talking about flat spending year-over-year. So maybe it could be slightly more postcards, and slightly less catalogs. I don't know yet. We will have to see how the budget stretches out and how we can best use it.

Harry Ikenson - Berman Capital

Okay. And just going back to following up on Robin's question, I think she was trying to get a better handle on the markdowns being so great in the first quarter. Are you -- could you give us a little breakdown of how that occurred as far as by category? I mean was 80% of in long dresses? Just give us some magnitude of that. Because that's what we are trying to get at, a little of some more handle on. You were sort of alluding to it. You did not give us any granularity.

Tom Reinckens

I think it is what it is, and I don't really want to get into specifics other than that right now. I mean clearly, we were more aggressive in our promotional strategies and our coupon offerings. That had a bearing on it. And I think that spread across, equally across all categories. But we were careful to manage the inventories. We cleaned out a lot of merchandise and took hard markdowns where we felt we needed to, and managed the inventory, we think, to a better level.

Harry Ikenson - Berman Capital

Okay. That brings me to my next question. Then on inventories, though, obviously sportswear did much better than you anticipated. How long will it take you to get to a level where you want to be on sportswear inventories, and what is your goal on inventories for the end of the next quarter and going forward? Where do you want to see them?

Tom Reinckens

It is all about the turn. We are turning our inventories very fast right now. And we would like to keep turning them fast. We don't want to build up inventory. As I said earlier, being down 30%, could I be down 20%? Yes, on a per-store basis. I would be happy at that level? I don't really want to build them up. It is kind of nice in a way.

We have been meeting with the group, and actually buying a little bit more goods, as we go out. But again, we are still being a little bit more on the conservative side. We would rather chase the business. And that's what we are going to do. Because it is just too tough of an environment to say, okay, let's add 20% more inventory in our sportswear. We are pleased with the turns. I would like to keep everything out of the backroom and have new boxes arriving daily at the stores.

Harry Ikenson - Berman Capital

If you're down 20% overall…

Tom Reinckens

We are down 30% overall.

Harry Ikenson - Berman Capital

But if your goal is to get it down 20%, where would you go then on sportswear?

Tom Reinckens

I think at that level.

Harry Ikenson - Berman Capital

Okay. And then also, any particular things that you would highlight where some of your best successes are in sportswear? And then after that, could you talk a little bit about geographic regions. Any changes, and more recently, and just give us a little feedback on geographics? Thank you.

Tom Reinckens

Classification; wovens, prints in the top arena are doing very well. On the bottom arena, it is mainly grounded by neutrals and [frocks] are doing extremely well. We had a high-wasted pant earlier in the season that did extremely well. I think from the dress standpoint, we talked about it earlier. Our short dress business has been very strong. Our new accessories that we launched with putting accessory tables in all of our stores is starting to gather some steam, and we are seeing improved results there. So that's pretty much on the assortment side.

On the geographic side, we are seeing a little bit of weakness now in more of the resort areas. Hawaii, and not that it is a big market, but Las Vegas certainly which is a big market for us. We've seen a little softness in Vegas, in Nevada, a little tougher in the state of Massachusetts. Florida, a little bit soft on the West Coast of Florida, the northern part of Florida, up in the Panhandle.

We've done very well in the South of Florida, Dade county, Dadeland. a mall, we do extremely well there. South Beach area. And California has been okay, a little bit softer in the month of April, but still positive overall on the year for us. And that's pretty much it.

Harry Ikenson - Berman Capital

What has been your strongest area?

Tom Reinckens

The strongest area? I would probably say Texas has been pretty good for us. Houston, New York has been good for us, New Jersey. Chicago actually has been good for us. Detroit maybe a little bit tougher. But I don't have the reports right in front of me, but it has been pretty well balanced.

Harry Ikenson - Berman Capital

Okay. Thank you very much. Good luck.

Tom Reinckens

All right. Thanks.

Operator

Our next question comes from Mark Montagna with CL King & Associates.

Mark Montagna - CL King & Associates

Hi, a couple of questions. The second quarter guidance you're saying $0.12 to $0.14, but that's going to include the losses from the store closures, whereas the first quarter results, you're portraying it as $0.01, but you're not including those results. I am trying to understand why the guidance for the second quarter would not exclude the results from the stores that are being closed.

Tom Reinckens

Mark, what I said earlier is, and I was pretty clear with this in one of the questions. Last year we earned $0.01. This year, we lost $0.01. This means a $0.02 swing. We are reporting $0.15 loss. And we include $0.14 of charges. So it was $0.02 delta year-over-year. What we said for the second quarter is that we expect to earn and report on a bottom line $0.12 to $0.14. So I don't know how clearer I can be.

Mark Montagna - CL King & Associates

Well, I mean that was clear at that point. But I am just trying to understand why, with the guidance of the second quarter, you would exclude it, but in the first quarter, you were essentially trying to report it as -- you're excluding it for the first quarter but reporting it for the second.

Tom Reinckens

I don't know what the question is. We are reporting a loss of $0.15, with $0.14 of charges. I am not sure, are you clear with that?

Mark Montagna - CL King & Associates

Yes, but...

Tom Reinckens

But in the second quarter, on a GAAP basis, we are projecting or estimating our earnings of $0.12 to $0.14.

Mark Montagna - CL King & Associates

Right. But for the second quarter, I just want to make sure, are you excluding, or you're including the losses from these 14 stores?

Tom Reinckens

If the bottom line says $0.12 to $0.14, it includes everything. It includes every loss, every profit.

Mark Montagna - CL King & Associates

Okay.

Tom Reinckens

In GAAP earnings.

Mark Montagna - CL King & Associates

But the first quarter, you're saying $0.01.

Tom Reinckens

A $0.01 loss. We reported $0.15 loss, with $0.14 of charges, as I answered in the call. And we were talking year-over-year on gross margin, I said look at it this way. We reported a profit of $0.01 last year in the first quarter of 2007, and this year, in 2008, excluding one-time charges of $0.14, we are reporting a loss of $0.01. That's $0.02 swing. And I can tell you right now, that on a markdown basis, of 33% more markdowns than a year ago, it is a heck of a lot more than $0.02.

Mark Montagna - CL King & Associates

Okay. I will just move on. First quarter, the sportswear, it sounds like it has done pretty well. Is the merchandise margin above last year?

Tom Reinckens

I really -- in sportswear, I don't have that in front of me. I can't answer that question. But I would say probably no, because we took 33% more markdowns.

Mark Montagna - CL King & Associates

Okay. Then last year, I think in the second quarter, you had about $2 million of legal costs related to California lawsuits. I am assuming that whole thing goes away, you are not going to have any of that this year, so that is an opportunity for this year, is that true?

Tom Reinckens

Yes, that could very well be true, yes.

Maggie Feeney

Yes, that one is the general and administrative.

Mark Montagna - CL King & Associates

Okay. And then last year, I think your marketing expense was up about $2.3 million in the second quarter. So about how much of that do you expect to save for this year's second quarter? Should I think you're trying to reduce some of your marketing expense.

Tom Reinckens

We don't disclose that.

Mark Montagna - CL King & Associates

Okay. Then moving on to sourcing, moving to Central America, so that gives you a lower cost -- how are you confident that you're not going to have hitches? Because it is a new -- I mean there is certainly some risk with that, if you haven't been in Central America before, because I know some of the larger retailers had gone to Central America a couple of years ago, pulled out, just because they had quality issues. And you have a pretty high quality product that -- what gives you the confidence that you're not going to run into quality issues from these types of vendors?

Tom Reinckens

Well, first, let me make it clear that we are not shifting over the majority of our production to Central America. We are shifting over a portion of the program for the third quarter -- for the second to third quarter delivery of structured merchandise. We certainly went to the factory on more than one occasion, with our sourcing and production personnel. And we kind of had counter samples done and we are pleased with the quality that we have seen.

But again, we are certainly not -- we take your point very wisely, we are not putting the entire programs there. The biggest shift is not into Central America. It is clearly into China, where we have experience and where we have sourced goods before. And as I said earlier, we would expect this shift to be, instead of 60% being produced domestically, in the first quarter, we are going to see a shift of more like 60% produced offshore.

So it is not that we are just throwing the baby out with the bathwater. We are using all of our supply chain to get what we feel is the best product. We are not going to put inferior quality in our stores. And we are going to improve the fit. We are working very diligently on quality, and we will continue to do that every day that we operate this business.

Mark Montagna - CL King & Associates

Okay. So of the 60% that you are moving offshore, can you give us an idea as to how much of that is going to Central America and how much just goes out to China?

Tom Reinckens

No, it is not a majority, anywhere near a majority.

Mark Montagna - CL King & Associates

Okay. Then also I just want to check on your fit. And I understand, you had some issues with fit recently. I think you addressed that at the SunTrust conference. Are the fit issues solved? When did you discover it? Is the current product in line with the expected fit?

Tom Reinckens

I think two elements of the fit. One is that we were turning certain sizes much faster than other sizes, which led us to an allocation or really breaking out our commitment on a per-style basis, a little differently. And there is something in the business called vanity sizing. I am not sure if you're familiar with that.

Mark Montagna - CL King & Associates

Sure.

Tom Reinckens

But with our bottoms I think all along have been vanity-sized, so to speak, so that if you wear a size six in our store, and you went into a junior or contemporary line, you probably would have to go larger in size than a size six. We probably -- we were very good with that in our bottoms and always have been. And where we felt we needed to address that was more on our tops and our jackets. So we have tackled that.

As soon as we saw some trends and key indicators, we are seeing some improved results from that, on our products that are coming in today. So again, that leads us to believe that we have some upside just by working and addressing those. It will certainly be fully implemented by the end of the second quarter with the third quarter receipts flowing in.

Mark Montagna - CL King & Associates

Okay. And also, what about -- I had heard about production problems. Have there been any or/and if there were, what were those problems?

Tom Reinckens

I am not sure I have heard of any production problems. I am not aware of any.

Mark Montagna - CL King & Associates

So nothing related to production?

Tom Reinckens

No. The only thing is that our business has been so strong, as I said earlier, in the sportswear side, that we were a little [light] in inventory on new receipt flow because of the strength of the new styles coming in, and the way they were selling. We never anticipated selling at greater than 10%, in certain classifications the way we have seen it.

So we needed -- our plans weren't at that level, and as you transition a sourcing arm into a retailer, and you are going from 30 to 40% of your production to 60 to 65% of your production through those sourcing arms, and your business gets stronger, it just puts a little pressure on the supply chain, because you just can't snap your fingers and adjust for your plans of receipt flow.

It takes a little while to react and I am thankful now in the month of May that we have healthy receipt flow, and we are making adjustments to it every day, like we should, one way or the other, up and down, based upon the trends and classifications that we see in the business.

Mark Montagna - CL King & Associates

Okay. And then regarding AVD, at this point, are you fully staffed that you are not going to need to add any more payroll to that operation and that expense line hopefully stays about flat?

Tom Reinckens

I don't think we are looking at major adds over there. But as the business improves and as we have needs, we will look at it. But we are not talking, mountains of people.

Mark Montagna - CL King & Associates

Okay. And then just the last question, related to the 14 closures. Are you -- is this going to pull forward closures from 2009? Therefore 2009 we would not expect to see any other store closures?

Tom Reinckens

Yes, I can't answer that. I don't think -- I think we looked at the business realistically, we wanted to. We are really changing the business. We are repositioning the company, and it was a decision that the Board made, and I agree 100% with, and encouraged them to make that decision, to put up on firm stand ground moving forward. I am happy with the 280-plus stores that we have after this process is completed. And I think we have a tremendous opportunity to -- the profitability will increase. Because I think the things that we are doing are driving topline, which every single store will benefit from.

Mark Montagna - CL King & Associates

Okay. And actually just lastly, you had mentioned in the press release the higher productivity. Can you tell us what the productivity was per square foot this year versus last year for the first quarter?

Tom Reinckens

I don't know if I have that number. We were up 3% comp.

Mark Montagna - CL King & Associates

Right.

Tom Reinckens

So you could probably just…

Mark Montagna - CL King & Associates

Do the math.

Tom Reinckens

…3%. We haven't given that yet.

Mark Montagna - CL King & Associates

Okay. All right. That was all I had. Thanks.

Tom Reinckens

All right. Thank you.

Operator

Seeing as there are no further questions, I would like to turn the call back to management for concluding remarks.

Tom Reinckens

Thank you again for joining us. We look forward to speaking with you on our second quarter earnings call in early July if not sooner. Thank you very much.

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