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Saks Incorporated (NYSE:SKS)

Q2 2012 Earnings Call

August 14, 2012 9:30 am ET

Executives

Stephen I. Sadove - Executive Chairman and Chief Executive Officer

Kevin G. Wills - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Ronald L. Frasch - President and Chief Merchandising Officer

Analysts

Charles X. Grom - Deutsche Bank AG, Research Division

Barbara Wyckoff - CLSA Asia-Pacific Markets, Research Division

Deborah L. Weinswig - Citigroup Inc, Research Division

Lorraine Maikis Hutchinson - BofA Merrill Lynch, Research Division

Paul Swinand - Morningstar Inc., Research Division

Matthew R. Boss - JP Morgan Chase & Co, Research Division

Kimberly C. Greenberger - Morgan Stanley, Research Division

Jennifer M. Davis - Lazard Capital Markets LLC, Research Division

Dana Lauren Telsey - Telsey Advisory Group LLC

Lizabeth Dunn - Macquarie Research

Michael Binetti - UBS Investment Bank, Research Division

Michael B. Exstein - Crédit Suisse AG, Research Division

Operator

Greetings, and welcome to the Saks Incorporated Second Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Steve Sadove, Chairman and CEO of Saks Incorporated. Thank you, sir. You may begin.

Stephen I. Sadove

Thanks. Good morning. This is Steve Sadove, Chairman and CEO of Saks. I'm joined on the call today by Ron Frasch, our President; Kevin Wills, our CFO; and Julia Bentley, our SVP of Investor Relations. I'd like to thank each of you for taking the time to join us.

First, let me note that some of the comments on the call today, as well as some of the information presented in our release, related to future results or expectations, are considered forward-looking information within the definition of the federal securities laws. The forward-looking information is premised on many factors, and actual consolidated results might differ materially from projected information if there are any material changes in our assumptions or in the various risks related to our industry and our company. For a description of the risks and assumptions related to these projections, please refer to the release and our filings with the SEC, including our most recent Form 10-K/A.

Today, we'll discuss the financial results for the second quarter ended July 28, 2012, our outlook for the balance of the year, and give you a general business update. At the end of the call, we'll be glad to respond to your questions.

Before I turn the call over to Kevin to discuss the financial results, let me just make a couple of comments. While our second quarter results, excluding certain items, were approximately flat with the prior year, we were able to post a modest increase in year-over-year net income, excluding certain items, for the 6 months in spite of a challenging economic environment.

Our comp store sales increases of 4.7% in both the second quarter and 6 months were on top of very strong 15.5% and 12.7% increases in the second quarter and first 6 months of last year, respectively. As expected, we experienced gross margin rate deterioration and modest SG&A deleverage, excluding certain items, during the quarter and first half, which Kevin will discuss in more detail in a few minutes.

While the overall near-term macroeconomic environment remains uncertain, we continue to be optimistic and excited about the future of Saks and our ability to generate continued growth. We remain focused day in and day out on executing our core merchandising service and marketing strategies. We're also taking a long-term view by strategically and prudently evolving our business to fully embrace omni-channel retailing through a series of infrastructure and systems enhancements over the next several years. This is a transitional time for retail and for our company, and we believe these investments will position us for the future and allow us to deliver incremental sales and improve operating margins over time.

I'll talk more about the outlook for the balance of the year at the end of the call, but I will note that we are reaffirming our assumptions for the fall season.

I'll now ask Kevin to make a few comments about the results for the quarter and 6 months and also give some balance sheet highlights. Kevin?

Kevin G. Wills

Thanks, Steve, and good morning, everyone. For the second quarter, we posted a net loss of $12.3 million, or $0.08 per diluted share. The results included after-tax charges totaling $4.3 million related to preopening costs associated with the company's new fulfillment center in Tennessee, asset impairments and store closing cost. Excluding these items, we would've reported a net loss of $8 million, or $0.05 per share, for the quarter. This compares to last year's second quarter net loss, before certain items, of $7.6 million or $0.05 per share.

For the 6 months ended July 28, 2012, we recorded net income of $19.8 million, or $0.13 per diluted share. The results included after-tax charges totaling $4.8 million related to our new fulfillment center, asset impairment and store closing cost. Excluding these items, we would've reported net income of $24.6 million or $0.16 per share for the 6-month period. This compares to last year's net income, before certain items, of $22.9 million or $0.14 per share for the same period.

Let me note that for both the current and prior year second quarters and 6 month periods, the company's 2 convertible debt instruments were not dilutive. Therefore, the applicable shares and after-tax interest expense were not considered in the fully diluted earnings per share calculation. Also, all the numbers we will discuss today exclude the previously mentioned call-out items detailed in today's release.

As Steve noted, we had solid comp store sales performance for the quarter and 6 months on top of very strong prior year numbers. Several merchandise categories showed strength during the quarter, including women's and men's contemporary apparel, women's and men's shoes, fashion and fine jewelry, and cosmetics and fragrances. The New York City flagship store sales performance was positive but modestly below the comparable store sales performance of the company's Saks Fifth Avenue stores in the aggregate during the quarter.

For the second quarter, our gross margin rate declined 80 basis points to 37.2% compared to 38% last year. For the 6 months, our gross margin rate was 40.9% compared to 41.1% in the first 6 months of last year. As you might recall, on our first quarter earnings call, we outlined an anticipated 100- to 125-basis-point decline in our second quarter gross margin rate, so our actual results were a bit better than those expectations. Year-over-year gross margin rate deterioration was primarily attributable to incremental second quarter markdowns of certain merchandise categories needed to sell through inventory and move through the normal clearance cycle. Ron will discuss the specifics in a minute.

As a percent of sales, SG&A expense, excluding certain items, were 27.1% in the second quarter this year compared to 26.9% in the prior year second quarter and 26.1% for the current 6 months compared to 25.7% in the same period last year. As expected, we incurred modest deleverage during the quarter due to incremental SG&A expenses to support our omni-channel strategies and our information technology systems enhancements initiatives, which we're calling Project Evolution.

Inventories at quarter end totaled $749.1 million, an 8.7% increase over the prior year. On a comparable stores basis, inventories increased approximately 5.3%, in line with our expectations. We also strategically accelerated certain OFF 5TH merchandise receipts to take advantage of some early fall selling, and this increased our comparable store inventory levels by about 1% at quarter end.

We had approximately $139 million of cash on hand at the end of the quarter and no direct outstanding borrowings on our $500-million revolving credit facility. During the quarter, we repurchased approximately $79 million of common stock with cash on hand, equating to approximately 8 million shares at an average price per share of $9.90.

Funded debt, including cap leases, senior notes and the debt and equity components of the convertible debenture at quarter end totaled approximately $405.9 million, and debt-to-capitalization was 26.5%, without giving effect to cash on hand.

During the past few years, we've taken a number of actions to strengthen our balance sheet and to de-lever the business. As a result, our debt currently consists of only 2.1 million of senior notes in [ph] 2013 and our 2 convertible note issues totaling $350 million and capitalized leases of approximately $53.8 million. We remain very comfortable with our capital structure, our liquidity position and our overall financial flexibility.

Our net capital spending for the first half totaled approximately $37.8 million.

Let me now pass it to Ron to update you on some of our full line initiatives.

Ronald L. Frasch

Thanks, Kevin. Our focus remains on differentiating the Saks Fifth Avenue brand through our merchandise, service and marketing offerings. We continue to believe we are on the right track with our merchandising initiatives and have been encouraged by our overall performance over the past couple of years.

We are continuing to build several powerful branded businesses like shoes, handbags, Wear Now and women's contemporary apparel by strategically investing inventory and capital in these areas. Some of these outsized investments showed meaningful sales growth but negatively affected gross margin performance in the second quarter. In spite of the near-term gross margin rate pressure, we remain confident that these strategic inventory investments are the right ones for the long-term.

As we discussed on the last conference call, we expected gross margin rate deterioration in the second quarter, not only related to these outsized investments I just mentioned, but due to specific issues in certain women's apparel areas, including women's designer apparel, where sales were not as strong as expected in the first quarter. This primarily has been a fashion issue. Contemporary, interestingly, and fashion-forward styles are selling, while traditional conservative styles are not. We knew that going into the second quarter these areas would require incremental year-over-year markdowns as we move through the traditional end-of-season clearance period. We have worked with our vendors to address these fashion issues and have adjusted for our receipts where we had the flexibility.

Overall, we believe that we have the proper assortments and have appropriately rebalanced our inventories, which will allow us to return to generating year-over-year gross margin rate improvement in the fall season. We remain committed to increasing our overall assortment of differentiated and exclusive merchandise. Our private brands remain a part of our differentiation strategy, but we are still very early in the process.

Our Saks Fifth Avenue men's collection has been a success since its introduction the 3 years ago. We have made some successes and challenges as we work to get our women's private brand assortments correct. It can take several seasons or even years to develop successful private brand programs. We are comfortable with our progress to date, but know that we will continue to make needed adjustments to these assortments and evolve the products over time to assure that they are an appropriate complement to our branded offerings.

Our Hold & Flow system continues to drive the allocation effectiveness. Currently, over 10% of our total inventory has a Hold & Flow component to it, and we expect this to increase over time. On a longer-term basis, we are confident that we can drive sales through our differentiated merchandise assortments and that additional gross margin rate expansion is possible through continued inventory discipline, systems and process enhancements, and the expansion of Hold & Flow, among other things.

On the marketing front, we've been working on a number of initiatives. We have been focused on leveraging our consumer analytics and insights to drive marketing effectiveness and have been testing targeted marketing programs and promotional events using our customer segmentation data. We have been working to enhance our SAKSFIRST loyalty program by improving our in-store associate trading, clarifying our SAKSFIRST customer communications and offering unique fashion experiences to our best SAKSFIRST customers.

We're also creating more online, mobile and social digital marketing programs, developing integrated multimedia campaigns across our channels and further expanding our reach through social media. In addition, we are working to enhance our ability to attract the international customer by improving our in-store experience with multi-language selling associates and multi-language language directors, for example, and testing international marketing and social media. Of course, our associates and stores are fully engaged in executing the associate and local business development plans.

And finally, we have recently introduced our new creative campaign, Shop Saks, [ph] with new catalogs, advertising, in-store signage and shopping bags. Since 2008, we have been on an evolution with our creative campaigns, starting with Want It!, then moving to Think About It, [ph] then to "I'm Going To Saks," then to @Saks and now Shop Saks. [ph]

Over the last year, we have made meaningful improvements in our customer service scores and are committed to providing our associates with the right tools, including emerging technology and expensive training, to deliver on our service promise. We want to build personal relationships, create excitement and fun, and provide special moments and memorable experiences to all of our customers. Our sales associates have embraced our selling initiatives and the importance of omni-channel selling. They know that offering great in-store experiences builds loyalty and that loyal customers spend more.

Turning to the stores. As we discussed on the last call, we have identified several key high-growth-potential Saks Fifth Avenue stores and are supporting them through strategic capital spending, targeted staffing plans and key inventory investments. It is important to keep our stores looking fresh and exciting. Here we are renovating the main floors of our Troy and St. Louis stores and the main floor and lower level of our Chevy Chase store. We're also close to completing the substantial renovation of our Bal Harbour store, which began in 2011. Each of these renovations will include our 10022-SHOE concept, bringing the total number of stores with that concept to 14. We are also renovating a portion of our Beverly Hills Men's Store. These are all very productive stores, and we believe these renovations will even better position us in the marketplace.

In addition, other minor store renovations are underway, and we are adding and renovating over 100 vendor shops and stores across the country, providing an enhanced shopping experience for our customers.

Of course, there's always something happening in our New York flagship store. Over the last 5 years, we have renovated nearly every floor, solidifying our position as a key shopping luxury destination in New York City. This month, we will unveil our expanded 10022-SHOE department, taking over the eighth floor that previously housed gifts, which have moved to the ninth floor. This move will increase the department size by over 40%, essentially covering the entire eighth floor with shoes. The renovated space will included the first Louis Vuitton shoe shop within the department store and distinctive assortments from both our core designers and a host of new emerging designers.

We will support the 10022-SHOE launch with a comprehensive targeted marketing, advertising and social media campaign. 10022-SHOE is a true traffic driver in our store and is the second most productive floor in the New York City flagship. Steve?

Stephen I. Sadove

Thanks, Ron. Let me update you on OFF 5th. We see a lot of opportunity to increase sales in our existing stores through our merchandise offerings, including growing our pillar brands, adding new categories of merchandise and continued expansion of our private brands, which have been very well received by our customers and now comprise about 25% of our revenues. Our MORE! loyalty program and our service initiatives also are driving sales and loyalty. In addition, our real estate expansion strategy will help us deliver on our promise of being a leader in the off-price sector.

There are a lot of attractive opportunities for the new OFF 5th stores in upscale outlet malls and lifestyle centers throughout the country, but we're being very selective in our expansion process. We expect to add a number of new OFF 5th stores annually for the foreseeable future, all designed in our "luxury-in-a-loft" format, which debuted 4 years ago in Orlando, Florida. Currently, 26 of our 63 stores are in the format.

In the aggregate, our new and newly renovated stores continue to outperform the remainder of the OFF 5th store base. This year, we've reopened our Nashville, Tennessee store, which was closed due to the May 2010 floods, and opened new stores in Syracuse, New York and Merrimack, New Hampshire. We'll open a store in Grand Prairie, Texas this month and one in Livermore, California in November. Earlier this year, we completed our Anaheim, California renovation, and we'll open a replacement store in Westbury, Long Island this month. We've already announced plans for 6 new OFF 5th stores in 2013.

Now let's turn to saks.com. We're very focused on delivering a seamless omni-channel experience for our customers, which I'll talk about -- more about in a moment, but there are many exciting things going on at Saks Direct specifically that warrant mention. We expect that saks.com sales growth will continue to outpace the company average in the future as it has in the past. The investments we've made in the organization infrastructure, site design and site content continue to pay dividends. As we continually improve and expand our product offerings, enhance our website shopping experience to improve conversion, optimize our digital and creative marketing features, drive mobile sales and sell and ship to more international customers, we expect to continue deliver outsized growth. Our site continues to rank among the very best in customer service, which is key to that growth.

During the second quarter, we began fulfilling saks.com orders out of our new state-of-the-art fulfillment center located in Tennessee. The center is now completely up and running and includes an automated Kiva robotic system, allowing us to serve our customers cost-effectively, quickly and accurately.

Of course, saks.com is a very important piece of delivering a seamless omni-channel shopping experience to our customers. There will be more and more linkage between merchandising and marketing of our full-line stores and saks.com going forward. We know that our omni-channel customer's a more loyal one to us and spends several times more than the customer just shopping one channel. Our best customers use both channels with fluidity. These customers want the advantages of personal service, the ability to touch products and shopping as an experience that in-store shopping provides. And they also want the advantages of online, such as broad merchandise selection convenience, rich product information and customer reviews and tips. We're working to blend these experiences.

As you recall, we're proactively making systems and process changes that will be necessary to evolve to a more fully integrated omni-channel retailing approach and to improve our competitive positioning. These include investments in our inventory platform, which over time will lead to increased sharing of inventory across channels, which should result in increased inventory productivity and efficiency.

Additionally, with our upgraded systems that allow us to see a single view of our customer data, we're developing programs and processes to improve marketing and selling to the omni-channel customer. In order to fully transform into an omni-channel retailer and position Saks for the future, we're working with Oracle on what we're calling Project Evolution, a substantial, multiyear transformation of and investment in systems technology. Project Evolution will deliver new merchandising, finance and human resources systems and capabilities on an integrated application suite for the entire business, and will supply us with a modern technology platform to support omni-channel for the future. We're in the early stages of this process, and we're implementing the systems conversions in a very methodical phased approach through 2016.

In the fall of 2013, we'll implement various new retailing merchandising applications of Project Evolution, which will include price management, stock ledger, purchase order management, assortment planning and store inventory management. Benefits will include inventory integration along a common platform, improved planning collaboration and functionality between full-line stores and Saks Direct, and improved reporting and analytics. By fall 2013, we expect to be able to fulfill online orders out of our Saks Fifth Avenue stores. Since this is a multiyear project, it will take some time before we realize the full benefits from the investment.

In this morning's press release, we reaffirmed our assumptions for the balance of 2012. Keep in mind that variation from the sales trends, up or down, could materially impact our other assumptions in the second half. Let me go over a few of the highlights:

Comp store sales are expected to grow in the mid-single-digit range for the second half of the fiscal year. Comp store inventory levels are expected to be up in the mid-single-digit range throughout the balance of the year.

Based upon current inventory levels and composition, planned receipt flow and our promotional calendar and permanent markdown cadence, we expect our year-over-year gross margin rate to increase approximately 25 to 50 basis points in the second half of the fiscal year. We anticipate that the year-over-year improvement will be concentrated in the fourth quarter, with the third quarter year-over-year gross margin relatively flat. As a reminder, our fourth quarter 2011 gross margin rate declined 20 basis points year-over-year, so we are optimistic that we'll be able to improve against that level of performance in the current year.

As a percent of sales on a year-over-year basis, we expect approximately 50 to 75 basis points of SG&A expense leverage in the second half of the fiscal year, with the leverage concentrated in the fourth quarter. In the fall, we'll begin to anniversary some of the incremental spending in investments we began last year. SG&A dollar increases primarily are expected to rise from incremental variable costs associated with planned sales growth, primarily sales associate commissions, and investment spending to support the company's omni-channel initiatives and Project Evolution.

We expect our other operating expenses, which are comprised of rent, depreciation and taxes other than income taxes, to increase to approximately $165 million to $167 million for the second half of 2012. The year-over-year increases primarily are driven by higher depreciation on incremental capital spending; higher equipment rental related to Project Evolution and new OFF 5th stores; and higher taxes other than income taxes, primarily payroll sales and use and property taxes.

Net capital expenditures should total approximately $110 million to $120 million in 2012. This total will include approximately $30 million to $40 million for Project Evolution and between $50 million and $60 million for store renovations and vendor shops. The balance is primarily maintenance capital.

As a reminder, fiscal year ending February 2, 2013, contains a 53rd week. This 53rd week is included in the assumptions I just outlined. We estimate that the 53rd week will represent approximately $40 million in incremental revenues and incremental earnings per share of approximately $0.04.

One other thing I would like to note: consistent with the many other retail companies, we will no longer report monthly comp store sales results on a go-forward basis.

We continue to be excited and optimistic about the future and the opportunities for our business. We're focused on executing our core strategies but are also remaining agile and responsive as we meet the continually changing needs and wants of our customers. It's an exciting time to be in retail, and we believe we have the right people, focus and strategies in place to meet the changes and challenges that are ahead. We're confident that the steps we're taking will lead us to achieve our long-term financial and operating goals and to further improve shareholder value. In fact, these investments and strategies give us even more confidence that we'll be able to reach our moderate-term operating margin goal of 8%.

At this point, we'd like to now open up the call to questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Charles Grom with Deutsche Bank.

Charles X. Grom - Deutsche Bank AG, Research Division

Just on the promotional front, just wondering if you're seeing any unusual activity from your peers. And did you guys elaborate on your decision to add the EGC in July and extend the consolidations till here in August?

Stephen I. Sadove

Yes. I think that we're seeing a more relatively normal promotional environment from our competitors. I mean, we're seeing some promotions that change a little bit on a year-on-year basis. But I'm not seeing major changes. I mean, we tweaked the promotion calendar a little bit. We took the cosmetics out of our Friends & Family earlier in the spring. We had a cardholder-only event at the end of July that was a little bit of a change from what we had done in the past. But I don't see major changes in the promotion calendar.

Charles X. Grom - Deutsche Bank AG, Research Division

Okay. Good to hear. And then when you dissect the slowdown here in Manhattan, what do you think is driving the softness? Is it people that live in Manhattan? Is it tourism?

Stephen I. Sadove

Yes, I think it's a combination of both. I mean, certainly, the number is still positive. It's not quite as robust as I've seen in the past. Part of it's due to the international side of it, because in the -- historically you were seeing outperformance driven by the international tourist customer. Now you're seeing international performance is essentially in line with the overall store performance. So in the past, it had been a positive driver. Right now, it's a neutral, is what I would probably characterize it as. And you're seeing essentially European tourism a bit weaker. I'm seeing a decline there. And you're seeing an increase in the Chinese, the Brazilian, the Russian that are substantially more than offsetting the European decline. But overall, it's more or less a neutral, whereas in the past, it had been more of a positive driver. I think the domestic customer -- there's probably a little bit of -- certainly not the same positive overage that you're seeing on, let's say, the Wall Street customer. But I think that it's more or less -- that's a neutral.

Charles X. Grom - Deutsche Bank AG, Research Division

Okay. And then just one for Ron. Just the inventory is a little bit higher than sales growth in the quarter. Could you just -- could you give a little bit of color on the currency, then inventory position?

Ronald L. Frasch

Sure, Charles. I think we feel pretty good about our inventory position. I think we -- I'd called out we had moved some OFF 5TH inventory forward -- fall inventory forward, which impacted the quarter to about 1% level. So I think if you take that out, we're in pretty good shape.

Stephen I. Sadove

Yes, I think the average -- the aggregate of 5.3%, with 1 point coming from the OFF 5TH acceleration, so we're in the low 4s, is in line with where we thought we would be, and certainly feel good about the currency.

Operator

Our next question comes from the line of Barbara Wyckoff with CLSA.

Barbara Wyckoff - CLSA Asia-Pacific Markets, Research Division

Can we talk about the status of closing more underperforming stores? I just really would love to clean up that and see that store base cleaned up. And then, Ron, if you could give us some update on the performance of private labels -- your private label efforts in women's.

Stephen I. Sadove

Sure. Let me start on stores, and I'll turn it over to Ron. Clearly, we've had a number of underperforming stores that we continue to monitor and close where we can. If you look over the last couple of years, we've managed to close 8 of the underperforming stores. And in some cases, it's easy. When you have a lease coming due then -- and it's an underperforming store, we're able to close that. And there are several examples of that. There are also underperforming stores that we work with the developers to be able to close and there it's a situation, a negotiation, working on them. I can't tell you exactly when they are going to come to fruition because there are a few that we're looking at. And I -- hopefully, we'll be able to close a few of those in the nearer term. So stay tuned on that. But it's not a huge number. But I do believe that there are some that we can close and are appropriate to close over the moderate term. But again, until you reach resolution with the developer, it's hard to tell you exactly when that's going to happen.

Ronald L. Frasch

Women's private brand, Barbara?

Barbara Wyckoff - CLSA Asia-Pacific Markets, Research Division

Yes.

Ronald L. Frasch

This was our first real full season with it -- we've done commodity categories before -- but with the collection. And I think it's -- initially, we felt we had some good things with it and some learnings from it, so -- which we'll need to correct. We like the positioning of it. We think it's -- we like what we see for fall. Early fall selling, quite frankly, has been quite good, so -- but it's going to take a few seasons. This is not -- developing, as you know, a private brand, is not a slam dunk. We have a lot of learnings: regional learnings, category learnings, flow learnings, design learnings and pricing learnings. So I think we have done a good job. We're doing what we did not do well with, and we're doing what we did well with. And we're making the necessary adjustments. But I feel quite positive about that, I'd have to say.

Stephen I. Sadove

Ron, just comment a little bit on the men's private brand as well because we made some progress there.

Ronald L. Frasch

The men's is -- we've made a number of infrastructure enhancements with our team, and both on the design and management, and feel quite good with the direction of -- we balanced the quality of it, and we've had our store base become much more engaged in the actual process. Have changed some of our factories and upgraded piece goods in some cases. So we're feeling very, very strongly about it.

Stephen I. Sadove

All right. And I think the numbers on our men's private brand, it's getting to the point of being essentially our -- one of our largest brands. So still very encouraged and optimistic about the future on that.

Barbara Wyckoff - CLSA Asia-Pacific Markets, Research Division

Yes. And what about accessories, private brands?

Ronald L. Frasch

We've dabbled in it to date. We've dabbled in it in women's shoes. We have a program -- we've got a co-branded program this past season with a young designer, Jerome Rousseau. And I think it's going to evolve and develop. It's just right now, we have so many initiatives going on with the branded part of our business that it's hard to get this one high on the radar screen. I investigated some handbag manufacturers in Italy when I was there this summer. We're looking at some new shoe manufacturers. Probably we'll go a little slower on this than we will with the apparel.

Stephen I. Sadove

Barbara, I'll just comment. You hadn't asked about the OFF 5th side of it. But remember on the OFF 5th side, we're tracking it -- essentially 25% of the business is owned brand at this point, and that's cutting across essentially almost all categories.

Operator

Our next question comes from the line of Deborah Weinswig with Citigroup.

Deborah L. Weinswig - Citigroup Inc, Research Division

Steve, can you just -- can you guide us [ph] the possibility for OFF 5th growth to accelerate from here?

Stephen I. Sadove

Yes. I'm encouraged by OFF 5TH. We don't disclose the specific comp numbers on the business. We feel good about it. As I mentioned, historically if you go back to some of our prior calls, we've talked about 3 to 5 a year. And we've already announced that we're going to be doing 6 next year. I think there is an opportunity to accelerate that. We're looking at it closely. And it's a combination not just of opening up new stores, and that's dependent just largely on, are there good new malls being built and are there good strip center opportunities? And both of those seem to be the case right now. And the deal -- the terms that we're able to get are attractive. It also is an opportunity on the remodels. We're we've been remodeling, and examples would be Woodbury Commons, Riverhead, Bergen in the New York area, we've been seeing very positive results on the remodels. It tends to be that capital on the remodels tend to be on our nickel, so we're being a little bit cautious. But the returns have been attractive. So I think there's an opportunity to accelerate the remodels as well as perhaps accelerating the rate on the new store openings.

Deborah L. Weinswig - Citigroup Inc, Research Division

Okay. And then can you tell us some of what you learned in New York with 5one and how that's impacted sort of what you've done for your customers?

Stephen I. Sadove

Yes. I'm really excited about what -- the work we've done with 5one. And as you may recall, 5one is a marketing firm that we've been working with -- they're a competitor to dunnhumby -- that is working with us on marketing segmentation, better understanding market segments, targeted personalization in terms of really getting down to a local customer level. And I think what we're finding is that it's allowed us to really start to target our marketing at a much more micro level. We have a lot of tests that we've been sending out. And what it's leading us towards is an ability to move from a little bit more, as we had in the promotions, of moving towards local store marketing, it's allowing us to start moving in a direction of national, to much more targeted promotional activity. So it might be geared towards if somebody uses -- buys one category, doesn't buy another category, to be able to move that customer in a direction. It can go towards frequency of use, onetime to two-time, those kinds of things. So I think that it's -- it also can go after lapsed customers. So they've doing some very good work with us in terms of much more in the way of better understanding how to target the marketing dollars. I think that we're still in the earlier stages. We've done the segmentation work. It's now really about what works, what doesn't work and how do the pilots play out and how do you roll them out. So I think you're going to see that being an integral part of the 2013 plan.

Deborah L. Weinswig - Citigroup Inc, Research Division

Okay. And then lastly, can you just discuss the performance of women's designer in this quarter? And it seems like it improved from the first quarter and the fourth quarter of last year.

Stephen I. Sadove

Yes. I'll comment and then let Ron talk about it. I think that clearly, within women's designer, you had a little bit of the haves and have-nots, and so I wouldn't want everything together. There were some brands that performed well and some brands, as Ron characterized them, that didn't perform as well. I think we got a handle on it, and we're going to continue to evolve our mix of product over time. But I think that we understand the issues that we've had to deal with on some of the brands. I don't know. Ron, do you want to comment?

Ronald L. Frasch

Sure. Yes. It's really been interesting. It's been -- the more classic brands have been challenging. The more fashion-forward brands have done well. It's almost as simple as that. The brands that have more color, more embellishment, have done quite well also. So we adjusted as much as we could kind of on the run during the spring season for the fall buys. We have now planned the buys for spring 2013, which start coming in, in November. I think very -- we have a lot of intelligence and a lot more knowledge about what we had, about what was working and not working. And I feel pretty good about how the team is really rallied to the challenge.

Operator

Our next question comes from the line of Lorraine Hutchinson with Bank of America.

Lorraine Maikis Hutchinson - BofA Merrill Lynch, Research Division

What inning are we in, in terms of e-commerce spending and investment? And I guess, how do you balance the need for the investment with your longer-term operating margin goals?

Stephen I. Sadove

Gosh. I think that we're still in a very, very good growth phase for our .com business. Whether you're in the fourth inning, the third inning, I don't know what inning it would be. It could be -- maybe it could be the fifth inning. But it's not the first inning and certainly not the seventh inning. I think that the opportunities for integration, and this -- what we're doing with Project Evolution to allow us to more seamlessly integrate the inventories, to be able to ship from .com business, being shipped from the stores, to be able to start shifting inventory around from one channel to another, early stages. I mean, that's in the earliest stage. We haven't started doing some of that yet. In terms of better understanding the behavior of our customers across channels, we're in the early stages. We now -- we're only several months into having a single view of our customer data, where we can start looking at the behaviors across channels. The prior question that Deb asked relative to segmentation and understanding how to move that, work the behavior, early stages. I thought one of the most fascinating things was when we were spending digital dollars, for example, on Google, we've been targeting our spending largely based upon of the impact on the website. We've now -- because of the single-view data, we're able to look at the impact in the stores, and there's a market impact when we advertise on digital in the stores as well. That's leading to a shift. In fact, the impact is greater in the stores than it is on the website. So that's now leading to a reallocation and rethinking about how fast -- how you integrate and how you ought to be marketing. So those kinds of things. We've been ramping up our capabilities on the technology side, continuing to make sure that we're best-in-class relative to the experience. We just opened the fulfillment center -- that actually just completed within the last week or so -- to be able to fully support the business there. And as an aside on international online, we're basically -- that we're in our infancy. We can now ship to over 100 countries. And while still small, it's -- I would tell you the growth rate there is substantially faster than the growth rate on the online business, which is obviously much faster than the total. So lots going on. If you ask, are we in a mode where we're ready to stop investing in the online business, the answer is no. Is it going to -- I think that -- is it something that we balance? Absolutely. Could we spend more? I'm sure we could. But we're balancing the spend level to make sure that it's not de-levering the total company substantially so that we can still get to the kind of growth numbers we're talking about.

Lorraine Maikis Hutchinson - BofA Merrill Lynch, Research Division

And then could you just give some updated thoughts on the capital structure here and uses of cash going forward?

Stephen I. Sadove

Yes. I mean, I'll talk and then I'll let Kevin -- I think that we have been generating excess cash. As we noted in the -- on the release, we're in the market buying shares this past quarter. So we feel good about buying the shares back. And we did it in a managed basis over the course of the quarter. I think that on -- we feel very good about our debt position. Our debt-to-capitalization ratio at 26.5, we feel good about. So that as we generate excess cash, we've been -- obviously, we have a share repurchase authorization. And we'll -- not going to say exactly what we're going to do because that wouldn't make sense, but I think we've been prone to be able to do share repurchases. When we've done asset sales, et cetera, we've distributed dividends. So I don't know. Kevin, do you want to comment?

Kevin G. Wills

I think Steve did a good summary. Overall, we feel very good about our liquidity and capital structure. And as you know, we've made a lot of progress on that over the last few years. And when you think about capital location, our first priority is to making sure that we're continuing to reinvest back in the business. So whether that's the omni-channel investment Steve talked about or store remodels, that's always our first priority. And then after that, we evaluate just the economic performance or trend. And as Steve indicated, we've at times went back and distributed capital vis-à-vis share repurchases. And you may recall, we repurchased some shares last year in the third quarter as well. So if you look at it on an LTM basis, we've repurchased about 11.5 million shares right at $108 million. So we periodically are in the market over the last 12 months. But as a matter of practice, we don't comment on future expectations or activity around share repurchases.

Stephen I. Sadove

I think, to Kevin's point, it's very important to note that we continue to invest in the business. And some of the capital investments, whether it's Project Evolution, it's $30 million to $40 million, or the $50 million to $60 million that we are putting into the shops and the renovations of specific parts of stores, the expansions of the shoe floors, the first floors in the Troys, or the St. Louises or the Chevy Chases. That growing the core business is our first priority.

Operator

Our next question comes from the line of Paul Swinand with Morningstar.

Paul Swinand - Morningstar Inc., Research Division

Just with all the discussion of the investment and the online -- and obviously, you've got a number of renovations going on -- and the distribution center, would CapEx start to actually go down at some point in the future? Or should we think about the current spend as the ongoing run rate?

Stephen I. Sadove

Kevin, do you want to...

Kevin G. Wills

Sure. We've not given any guidance relative to future CapEx expectations. But it's really a -- be a function of the opportunities that we see. And we've guided to $110 million to $120 million this year, which includes a sizeable investment, as we talked about, in our Project Evolution. But on a go-forward basis, we'll see what the number is. I don't expect it to be dramatically higher or dramatically lower, but we've not given specific guidance.

Paul Swinand - Morningstar Inc., Research Division

Okay. Let me frame that question a little differently. Is the number of renovations you're doing next -- this year and next above -- it's above what you did in the past. But is that just what's required to run the business? Or is it [indiscernible]...

Stephen I. Sadove

Let me try it. You have an underlying maintenance capital that you need to run the company. Let's call it $30 million, $40 million of maintenance capital. We've got the Project Evolution, which is a multiyear project. We said it's a little more front-loaded in the first couple of years, so you're now in the year 1, which is a big expense. And year 2, next year, should also have a reasonably hefty capital expense. The capital that we're spending on store renovations, remodels, et cetera, really are -- it's very different than was done historically at Saks. There was a period of time when we were doing total store renovations, the Bostons or the Atlantas, where you would spend $30 million, $40 million renovating a store. These are much more targeted at, let's call it, maybe a first floor, the accessories area, the shoe departments. And they're focused investments. I think there are a few more of those that we're going to continue to be doing. We're going to -- as you're dealing with some of the luxury brands, you've got to keep the handbag shops in good order over time. You're going to continue to see some of that. So I would expect that you're going to see a -- and by the way, we feel that our store base looks terrific, so -- but you're going to continue to see what I call that kind of remodeling going on over the next couple of years. As Kevin said, we're not going to give specific guidance, but I would not expect to see the $110 million to $120 million go down to $50 million over the next year or 2. I also wouldn't expect it to see go up to $150 million, either.

Paul Swinand - Morningstar Inc., Research Division

Okay, great. It's important for the long-term cash flow mile, so appreciate that color there. And then, just talking about the marketing, I know you had several comments about digital and online social media. And you did mention international. How are you -- since most -- a lot of your marketing goes through your associates and their market plans, how do they connect with the international customer? And could you give us more color on how social media is going to come into play there?

Stephen I. Sadove

Well, there are a lot of aspects to the marketing. We try to be as much local as we possibly can. So each of our associates has what we call the associate business development plan, and they're building their customer base. They're doing one-on-one marketing. They're working with their clients and bringing their clients' friends in. And it's very much a grass-roots type of marketing activity. We also are doing international. We're in what I would call not so much at an associate level. What we're doing is, in the stores, making sure that we're able to represent and service the international customer with foreign-speaking associates of many languages, et cetera, things like that. In terms of international marketing per se, we're in the earlier stages of that. We're going to be, for example, accepting the CUP card, which is a Chinese debit card, starting in September. We're looking at some marketing alliances and programs that we're doing primarily as it relates to China and Brazil. But these again are just what I call pilots, tests. The core of our marketing is much more towards the -- it's local, but it's more toward the domestic customer. We've -- over time, we've redeployed a lot of our national dollars into the local markets. You see it in local -- whether it's local market media, whether it's partnerships, charity events, programs. And I think that you're going to continue to see more of that. Social media, we clearly are playing as it relates to whether it's Facebook, blogging, Twittering, Pinterest, Instagram, things like that. I think that, that's more for building the branding, the imagery. It hasn't been as much about monetization of that. I think over time, you'll see more of that monetization.

Operator

Our next question comes from the line of Matthew Boss with JPMorgan.

Matthew R. Boss - JP Morgan Chase & Co, Research Division

Steve, you spoken to the omni-channel opportunity larger than you initially thought when you set out. Can you speak to some of the recent findings and progress and also the margin opportunity as you integrate across your 3 channels of distribution, how big this could be?

Stephen I. Sadove

Well, I think it could be substantial. The margin opportunity, if you think about it in terms of shipping a product, think -- let's assume you have a bucket of inventory. The ability to send it to the most -- from the most efficient place, so if something is selling online and it's perhaps not selling in the stores as well as online, and you could be able to ship the product from the store and get better utilization of the inventory. That's something that we think represents a substantial growth opportunity from a gross margin perspective. It could lead you to more full-price selling. As opposed to marking off an item, you can sell it full price via the web or vice versa. And it's not selling in the other channel, then it will be a full price sale versus a markdown sale, so -- and the ability to move the product around I do believe is going to represent a good opportunity going forward. So I think that as we've gotten into it, it's interesting. We started with a pilot in the shoe arena, where we looked and got the organization working together differently than they had in the past. And just by the collaboration, sharing best practices, going to the vendor community differently, planning differently, looking at what's required in terms of the assortment of one business versus another, because the customers are different between the channels in terms of the mindset and taste level, that I think that we are seeing substantial opportunities in terms of working together. From a marketing perspective, as I mentioned the example earlier of the impact of when we spent on Google, one channel to another, in terms of the impact, in terms of the e-mail and the search, we're finding that the optimization across channels is helping. Mobile is driving behavior to not only the -- and mobile for us largely being iPad, driving behavior across the channels. So I think that we're just scratching the surface on this omni-channel and as we do it, the associates are starting to embrace it. They are starting to use technology like the iPads in their everyday behavior. And I think that you're going to find that this becomes an everyday part of how we end up doing business.

Matthew R. Boss - JP Morgan Chase & Co, Research Division

That's great. And then from an in-store perspective, the New York City shoe floor expansion is on tap for September. Can you speak to initiatives rolling out across the chain and anything that -- for us to think about on the agenda?

Stephen I. Sadove

Yes. I'm so excited. I think that New York, first of all, we kicked it. It's hard to believe it's been 4 years or so -- it's been 5 years since we launched that shoe floor. And giving it a whole new addition and bringing in the Louis Vuitton shop and others -- other ideas that are part of it. And there's technology that's going to be a part of this. So it's going to be an experience going in there. So we're as excited today about the changes there as we are in the -- as it -- when it kicked off 5 years ago. But the new expansions -- Ron has talk about the renovation in Chevy Chase. St. Louis is being renovated. Troy is being renovated. Those are all going get new shoe floors, 10022-SHOE floors. We'll have now 14 of them. The marketing behind this is exciting, so -- and it's not just a physical. Part of it is the physical space. But it's also breadth and depth of product, the fashion component of what goes along with the 10022-SHOE, so I think it's very exciting. Clearly, shoes has been an area of a high level of activity. Others have been renovating and adding space to their shoe floors. And I think this is a part of our staying one step ahead of the -- in terms of the marketplace. I don't know. Ron, what do you...

Ronald L. Frasch

The only thing I'd probably add to this, Steve, thanks, would be maybe a little more color around some of our men's projects. We're starting to invest really on our men's business from a CapEx point of view. We are -- we have a number of renovations going on in the New York store right now, some new major shops for Ralph Lauren and for Armani Collezioni that are underway that will be done hopefully within the next month. We're also renovating these -- we have a standalone men's store in Beverly Hills. We have a very significant project there, where we're capturing the lower level of the store for a men's denim bar and John Allen Salon and a pool table. That will be a very cool place to shop. That will open up in the fourth quarter. As well as renovating the first floor and creating what we think will be largest men's shoe assortment in the marketplace, a greatly expanded men's shoe area. We've also renovated or in the process of renovating part of our Houston men's floor and our Tysons men's floor. So a lot of good things there, and a lot of good things on the horizon for all of these categories.

Stephen I. Sadove

Matt, what excites me on all these capital investments that Ron's describing in the shoes, is they're very targeted and very focused on where we think we can get a good return on the investment.

Operator

Our next question comes from the line of Kimberly Greenberger with Morgan Stanley.

Kimberly C. Greenberger - Morgan Stanley, Research Division

I was wondering if you could help us understand the drivers in your comp, if it's being driven by an increase in transactions in existing stores or rather a higher transaction value. And if you can offer any color on the growth in your e-commerce business either in the second quarter or year to date. And then lastly, I'd just love to understand the difference between your total inventory growth rate of 8.3% and your comp inventory growth of 5.3%. There is a 3% differential. Is that in the distribution centers? Or is that e-commerce inventory? If you could just help me understand that, that would be great.

Stephen I. Sadove

Sure. If you look -- let me just take each of the pieces. Traffic is, I think, probably flat to down a little bit. We don't do traffic counters in all of our stores, so that's not of the driver of growth. And transactions wouldn't be the driver of growth. I think that the bigger driver of growth is going to be dollars per transaction, driven by both full-price selling and a trading up in terms of consumers moving from the good-better zone into the better-best zone. So that would be more of the driver of growth than it would be from number of customers coming into the store. E-commerce is clearly a driver of growth. We're not going to break out the specific growth trend of the e-commerce business. I would tell you that it has been a -- as you've seen -- the last we reported it, it was the end of last year when you saw growth close to 30%, high 20s type of number. What I would say is that we're continuing to see, as the industry has continued to see, very outsized growth at saks.com. And we expect to see continued growth, outsized growth, going forward, but we're not going to give the specific numbers. And there's a reason for it. It's not that we're trying to be coy with it. It's really that there's such a convergence of -- so somebody -- for example, somebody buys online, returns in the store. When they return in the store, they may buy other things from the store. They may -- there's so much -- it's difficult to, I think in some ways, to really understand exactly whether it's a -- the item is a being driven for a full line or direct purchase, and there's such a convergence in how the customer's behaving that we just -- that we believe that it's actually a little bit misleading just to give the straight .com growth number. But it's very substantially above the aggregate. If I look at inventory, your last question, bear in mind, remember, we do have growth in OFF 5th stores -- in the number of OFF 5th stores. That would be new inventory coming into the system. That would probably be the biggest factor driving the differential between the comp growth and the total inventory growth.

Operator

Our next question comes from the line of Jennifer Davis with Lazard Capital Markets.

Jennifer M. Davis - Lazard Capital Markets LLC, Research Division

Quick question on the gross margins. I was wondering if you could help us understand, at least directionally, how much of the decline was due to kind of the investments you're making in those of traffic-driving categories like shoes and how much was due to higher markdowns. And when should -- remind us when you'll anniversary kind of those increased investment in those categories.

Stephen I. Sadove

I think it's a combination of both. And you'll start to see those coming up into the latter part of the fall. I mean, that's when you started to see some -- started to see some of the investments in some of those categories like shoes. And I think you'll also start to anniversary when you saw -- the latter part in the fall when you started to see some of the issues emerge in the women's designer's -- in the women's designer area. So I think you'll start to see those lapping. That's one of the reasons as we looked -- we talked about improvement in the fourth quarter, gravitating towards the fourth quarter because that's when you'll start to see the lapping on some of that. I don't know. Ron, do you want to add anything?

Ronald L. Frasch

No, no. I think you hit it. I think the thing to understand is that when we roll out 10022-SHOE, it's not just a decor package. It's a -- we have a very serious commitment to the breadth of SKUs, the number of collections, the fashion quotient, the introduction of new brands every season. So it can become margin-challenging in the first couple of seasons of a 10022-SHOE store being open. So that would be [ph] added color I'd throw on it.

Jennifer M. Davis - Lazard Capital Markets LLC, Research Division

Okay. All right, great. And then can you guys comment a little bit on the online, the FASHIONfix and some of the Drop Ship that you started doing last year?

Stephen I. Sadove

Yes. I think both of them, early stage. Drop Ship, I think we're learning. I think it's an opportunity, continues to be an opportunity. We're getting some traction in a number of the categories, some of them bigger than others. But we've done bedding. We've done some food. We've done, I think, other in terms of electronics. So it's not a shoes -- actually it's interesting. Some of the biggest response we've seen has been with several vendors in the shoe arena. And that we've gotten a lot of traction on. I think it's an early stage, but it's an opportunity. We have to learn how to -- decide how to market some of it because in some categories, we're not known for that. So it will be a slower growth. But I think it's an opportunity going forward. And it's certainly -- you don't own the inventory so it's a positive from that perspective. FASHIONfix is -- I think that FASHIONfix, there's been a lot of learning from it. We said that it was going to be an experiment. It's not a core of our business. It's something that some things have worked well. I think there's clearly a customer that wants flash sales. It's not transforming the industry. It's going to be a segment of off-priced product, just as OFF 5TH is a segment. I think that the customer who wants off-priced product whether it's in the outlets or whether they want it in flash sales sites, then it's going to complement the full-line business. I reiterate, it's a very different -- the overlap of customers, for example, in the outlets in terms of the volume is still in that less -- not substantial, in the less than the 10% range. I think that there's still learning to be done for us relative to, how do we want to best play within the flash sale arena? I do think that there's an opportunity there. I wouldn't say it's been a needle mover, one way or the other, and not material in terms of the impact on the business.

Operator

Our next question comes from the line of Dana Telsey with the Telsey Advisory Group.

Dana Lauren Telsey - Telsey Advisory Group LLC

Can you talk a little bit about on the OFF 5TH side of the business, what are you seeing there? The impact of the newer designs that you have in the stores, how does the performance there relate to the other stores you have? And then also, any updates on credit card stats of your own card customer spend versus average?

Stephen I. Sadove

Thanks. I'm very excited about OFF 5TH. I think that as I said, it's a different customer. It's a different mindset. You go into a regular store and you want the latest trends. You want service. You go into the OFF 5TH store and you want brands and a deal. And I think that what we've created in the new format is very exciting. We're seeing -- you asked about the trends. We're seeing substantially better trends in the remodeled stores than we have in the old format. The overall margins of the business, operating margins, aren't materially different than the full-line stores. So we're -- we feel good about the financial aspects of it. The returns that we're seeing on the new stores are very attractive. So that's why we're continuing to see a number of new openings. I really am excited about what we've been doing in the owned brand arena, where we're at about 25% penetration and attractive gross margins. That's continuing to evolve and improve. I was actually in our Riverhead store this weekend, and I thought it was -- get out -- people get out to Long Island. I think that the store is a great representation of where it's going. It's a remodeled store. So if you haven't been in one of the remodels, it's a great way to look at the old versus the new. And the performance is very strong on all these. Essentially every one of the remodeled stores that we've done are seeing substantial improvement, uptick in trend, versus the prior and versus the aggregate. So it's -- I think -- and you can see -- we're not going to report specific numbers for OFF 5TH, but you can see the overall trend that you see in the outlet sector, and you can get a sense of how we're doing there. And Kevin, do you want to...

Kevin G. Wills

Yes. On the credit card trends, if you recall, we don't own that portfolio. Cap One owns that. They recently bought HSBC. So I can't comment on specifics. But you're seeing probably the improved trends there are no different than you've seen other companies report. So I mean, we're continuing to try to grow that business. We -- our penetration decreased over the last few years with the recession. Some of the activity are actions that HSBC took. So we're in the process now of trying to improve that private label...

Stephen I. Sadove

Yes. And I think one of the -- somebody earlier on the call asked about the promotion that we added in July. And that really is part of our -- which was a cardholder-only event. And that's part of our strategy as well, which is to increase the card penetration through specific events geared towards the card holders. And I think that especially if we do targeted programs that are much more efficient, we think that's part of the strategy in terms of targeted activities against credit holders -- credit card holders.

Operator

Our next question comes from the line of Liz Dunn with Macquarie.

Lizabeth Dunn - Macquarie Research

I guess my first question relates to footwear and handbags. I know you've had a lot of positive comments on the call about these 2 categories. But I was surprised to see some of -- some footwear and handbags, pretty high-end stuff, included in some of the clearance activity through June and July. Has there been any slowdown at all in those businesses?

Ronald L. Frasch

Well, there's always going to be -- I mean, we don't sell through everything we buy. So there's always going to be designer products on sale at the end of the season. So it wasn't -- our sell-throughs were in the same range as we have historically achieved.

Lizabeth Dunn - Macquarie Research

I guess, I mean, I saw like a 30% off all shoes in a particular brand in like a Chicago store. And I don't mean to make one -- a big deal out of one store, but it was Louis Vuitton, so I was just a little confused by that.

Stephen I. Sadove

You're going to always see -- if you take a brand like Louis Vuitton, you're going to always see at the end of a season, there's going to be fashion goods that you see marked down, whatever the percent is going to -- individual brands will vary. But you're going to see year-end or season-end clearance on some of the brands where you don't have 100% sellout. And I don't think any brand has -- very few brands have 100% sellout, and that wouldn't be any different this year versus last year.

Lizabeth Dunn - Macquarie Research

Okay. And then just kind clarifying some of the earlier comments. So as you look at the level of promotion in total in the second quarter, it seems like it was a little bit better than your expectations. Or was it just that the events that you added were able to kind of clear some of the excess goods more efficiently than you had initially anticipated?

Stephen I. Sadove

Well, the programs weren't materially different than what we had expected. I think you had a little bit better probably first markdown selling versus second markdown selling, and that would have driven the difference versus what we had thought it would be in terms of the overall gross margin rate.

Operator

Our next question comes from the line of Michael Binetti with UBS.

Michael Binetti - UBS Investment Bank, Research Division

So it sounds like from your comments on the New York store and how things trended with the tourism trends from the European consumer -- that was negative in the quarter. Could you maybe tell us how that was front half versus back half in the quarter just so we could think about what's in your guidance for same store sales in the second half of the year based on what you're seeing more recently, I suppose?

Stephen I. Sadove

You'd better say that again. It was just hard to hear you.

Michael Binetti - UBS Investment Bank, Research Division

I'm sorry. So I'm just trying to figure out what you were seeing in the quarter with the tourism trends in New York. It sounds like Europe tourism was weaker. Maybe you could give us some comments on front half versus back half so we can think about what you're seeing more recently that might be reflective of the guidance for the second half of the year.

Stephen I. Sadove

Okay. I don't think on the international side you saw material difference between the first quarter and the second. I mean, you've clearly saw -- and it shouldn't surprise us, given the weakness in Europe right now, a little bit of a weaker trend in the European customer. I didn't see a big difference first quarter to second quarter in terms of that trend. And you've seen a very substantial increase on the Chinese, Brazilian, Russian, the Chinese numbers. And this isn't just in New York. We're seeing it in other markets as well, that have been increasing. I wouldn't read into a first quarter, second quarter, therefore it's going to be dramatically different. I would expect that in the back half of the year that you're going to continue to see stronger out of those 3 countries, the China, Brazil, Russia, for example, than you would out of the European-based tourism. What I did say was that it's not that international was a negative. Don't read it wrong. It would be if we were growing x in the total New York Store, that your tourism would be more of a neutral as opposed to in the past it had been a positive driver.

Michael Binetti - UBS Investment Bank, Research Division

Okay. And then if I could just follow that up. It sounds like, from your earlier comments on where we are as far as the longevity of Project Evolution investment, that, that will be a multiyear investment project. And I know it's early to think about 2013, but should we expect that to step up again next year? Or should we think about that stepping up with sales? Or can that start to grow by less than sales next year, be a bit more contributor to leverage as we get past year 1 of the launch of that project?

Stephen I. Sadove

Well, we've said that it was a multiyear project. We're not giving guidance yet for '13. But we said that the years 1 and 2 would be where the bulk of the spending would be. So I would anticipate that you're going to see good numbers, relative, in terms of the amount of spending in 2013 to support Evolution. But we have a lot of moving parts relative to the development of the 2013 plan. But as we said, it was somewhere, let's call it an $85-million, $95-million investment over a time frame. And in the first couple of years, you are going to see a substantial portion of the investment.

Operator

Our next question comes from the line of Michael Exstein with Crédit Suisse.

Michael B. Exstein - Crédit Suisse AG, Research Division

A quick -- couple of quick questions. Can you give us an idea on what your units are up year-over-year, as opposed to your inventory dollars, number one? Number two, as it turns out, as we're watching your results today, we actually got an e-mail coupon for online sales, 15% off just about everything. And we're wondering why the promotional programs between e-commerce and stores is different substantially. And...

Stephen I. Sadove

The first question in terms of units, units are relatively flat. So it's more $1 per unit. But units are relatively flat. We have -- I'm not sure, which event you're talking about. We do have an online-only event that's a mystery money event this week, so that may be the one that you're talking about. I think it's a very important question. And I'm not going to talk forward-looking because you're never going to talk in terms of what promotions we will or won't run on a forward basis. But if you look over the spring season, we -- our strategy was to run very few promotions that were different between the channels. By and large, most everything that we did in the stores was online and vice versa. Some of our competitors had more programming that was very different on the online channel versus the in-store channel, but our strategy has been largely to have comparable programs between the channels.

Michael B. Exstein - Crédit Suisse AG, Research Division

Is that changing in the second half of the year?

Stephen I. Sadove

I'm not going to give any guidance in terms of the second half of the year, obviously.

Michael B. Exstein - Crédit Suisse AG, Research Division

Okay. And then finally, I'm just curious as to why you decided to stop reporting comps midyear.

Stephen I. Sadove

We debated this at the end of the calendar -- at the end of last fiscal year. We weren't ready -- quite ready to do it. The more -- I've seen a number of other retailers who have all -- who have moved away from the monthly reporting of comps. Part of the thing that -- I don't know. You can argue either side of this one. But I'm not so sure that monthly comps give you a truly accurate portrayal of what's going on in a business because it's only half the story. It's -- you get the comp, but you don't get the margin. So you can buy the sales at a very low margin, or it could be at a high margin. You really don't know just giving a comp number. You might have an overall number that looks good, but it might be -- have been bought or not bought. And the more we looked at it and thought about it, we just didn't think that the monthlies were giving -- we'd get all the calls from the analysts, but you wouldn't really be able to give them the flavor in terms of what was happening on the margin side. And we just decided that now was the right time to -- there was nothing. We were reaffirming the fall season, we were over-delivering versus the consensus on the earnings, so we thought now was the right time to just bite the bullet and get it to where think is the right place to be for the longer-term.

Michael B. Exstein - Crédit Suisse AG, Research Division

You just want to take some work load off of Julia.

Stephen I. Sadove

Absolutely. And we wanted to make it easier for you guys.

Operator

Our next question is a follow-up question from Barbara Wyckoff with CLSA.

Barbara Wyckoff - CLSA Asia-Pacific Markets, Research Division

Could you just comment on Puerto Rico? Is that still planned for 2014?

Stephen I. Sadove

I think that it's more likely -- if it is, it's going to be the end of '14 or '15, I think. But it's still planned. We still feel very good, very excited. We've been working with the vendor community. We think that, that's going to be a real positive. I just want to make -- my guys are telling me I'm a little bit off on my comment on the units for Michael. Units versus -- when I said units are relatively flat, it might be slightly up on units. I was thinking relatively flat. It might be up a little bit.

Operator

Mr. Sadove, we have no further questions at this time. I would now like to turn the floor back over to you for closing comments.

Stephen I. Sadove

Thank you very much. I want to thank everybody for their interest in the call, and we'll be looking forward to talking to you again next quarter. Thanks a lot.

Operator

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.

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