Aéropostale, Inc. (NYSE:ARO) Q3 2014 Results Earnings Conference Call December 3, 2014 4:15 PM ET
Executives
Susan Lewis - Vice President, Investor and Media Relations
Julian Geiger - Chief Executive Officer
Emilia Fabricant - Executive Vice President, Aeropostale
Marc Miller - Chief Financial Officer
Analysts
Jessica Schmidt - KeyBanc
Betty Chen - Mizuho Securities
Thomas Filandro - Susquehanna
Susan Anderson - FBR Capital
Rick Patel - Stephens
Janet Kloppenburg - JJK Research
Dorothy Lakner - Topeka Capital
Kimberly Greenberger - Morgan Stanley
Jennifer Davis - Buckingham Research
Paul Lejuez - Wells Fargo
Matthew McClintock - Barclays
Lindsay Drucker Mann - Goldman Sachs
Gene Vladimirov - Nomura
Operator
Greetings. And welcome to the Aéropostale Third Quarter 2014 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]
As a reminder, this conference is being recorded. I would now like to turn the conference over to Ms. Susan Lewis, Vice President of Investor and Media Relations. Thank you, Ms. Lewis. You may now begin.
Susan Lewis
Thank you all for joining us this afternoon. With us today are Julian Geiger, our Chief Executive Officer; Emilia Fabricant, Executive Vice President of Aeropostale; and Marc Miller, our Chief Financial Officer.
We issued our press release earlier this afternoon, announcing our third quarter fiscal 2014 financial results. A copy of this release can be found on our corporate website.
Before we begin, I would like to remind you that during this earnings conference call, certain statements and responses to certain questions may contain forward-looking information, such as forecasts of future financial performance.
Forward-looking information and statements involve known and unknown risks and uncertainties, which may cause our actual results in future periods to differ materially from our forecasted results.
Those risks are described in our annual report on Form 10-K and our quarterly reports on Form 10-Q, all of which have been filed with the SEC and are available on our website. We undertake no obligation to update or revise any forward-looking statements to reflect subsequent events or circumstances. Listeners of this call are referred to those filings.
Before I turn the call over to Julian, I would like to remind everyone that an investor presentation covering our third quarter results can be found on our corporate website. In addition, I would like to ask everyone to limit themselves to one question during our Q&A session to allow everyone a chance to speak. Once we have gone through a round of questions, we will go back and you may queue up again at that time.
I would now like to turn the call over to Julian.
Julian Geiger
Thank you, Susan, and thank all for joining us this afternoon. Today, we will be discussing a variety of subjects. This include, our third quarter performance, our results for the month of November and for Black Friday weekend, my observations and actions during the three months that I have been back at Aéropostale, and my vision of and game plan for positioning and returning Aéropostale to profitability.
As you might have read in our press release, our sales for the third quarter were $453 million, a 12% decrease from last year. Our comparable sales for the quarter decreased 11% versus the same quarter in the previous year. Our non-adjusted loss per share for the quarter was $0.66 per diluted share or $0.45 per share on an adjusted basis. These results were in line with the guidance we had issued last quarter.
We ended the quarter with inventories down 16% on a retail per square foot basis, positioning us well heading into the fourth quarter. Not disclosed in our press release today were our results for the month of November and for the Black Friday weekend.
During substantially all of November, we experienced low single digit percentage increases in both comparable sales and comparable gross margin dollar contributions. These trends continued up until Black Friday.
Over Thanksgiving and the Black Friday weekend, however, we experienced midteens comparable sales decrease as a decline in more traffic in average consumer spending was evident. While we are clearly not happy with these results, we do think that the mid single digit comparable sales decreases we generated throughout the month of October and November.
After a year and a half of predominantly double-digit comparable sales decreases indicates small but measurable steps in the right direction and are the byproduct of approaches and changes made before my arrival and by a variety of initiatives that I’ve directed during my first 100 days back at Aéropostale.
While I believe that all of us will agree with the organization’s focus on and believe that an increase in the average unit retail could be seen as an early harbinger of financial recovery. Increases in the AUR without decreases in our average unit cost and increases in the sales volume is a formula that would yield only limited benefits.
Our goal is clear, drive profitable sales growth. To this end, during the last three months, we’ve continued to support and accelerate a variety of well conceived and executed initiatives that started before my arrival.
These include reading and reacting to the tests that prove successful in our pathway store program, creating a limited number of proprietary sub-brands that complement our Aéropostale assortments in stores, endorsing and increasing our focus on the use of social media influences in order to be more relevant to today’s teenagers, focusing on additional and improved customer engagement within our stores, accelerating the growth of our international store licensing business and strategically and surgically reducing our store base through store closings while pursuing significant rent relief in appropriate remaining stores to become more profitable.
In addition to these existing approaches, significant additional initiatives have been formulated and operating perspectives developed. For the sake of clarity, I will place them into four primary groups. They are organizational change in composition, discipline and confidence building, brand positioning, and assortments, assortment planning and allocation.
First, organizational structure and composition. During November, we implemented a new vertical organizational structure, encompassing both Aéropostale and P.S. from Aéropostale. The entire product development team, merchants, designers, planners and allocators are now focused on specific, more narrowly defined merchandise classifications.
The teams have responsibility for every channel distribution including e-commerce and international for both brands. By narrowing the breadth of focus and by matching the individual merchant’s talent and skill set to the opportunities and challenges that exist in each merchandise clarification, we believe that we will bring greater expertise and insight in the development of our assortment in the U.S., in Canada, in e-commerce and in our international license business.
We believe that this change will have its initial impact on next year's back-to-school assortments and will drive additional sales and gross margins in our stores. In order to propel the accelerated growth of key proprietary sub-brands, we have created a separate, small emerging brands division and hired a new merchandise Vice President to spearhead their development.
We have dramatically reduced the number of sub-brands we’ll be curating, focusing on Tokyo Darling in girls and Brooklyn Calling in guys. We believe that this will create a healthy rivalry between the Aéropostale and emerging brands organizations, leading to greater clarity of who the respective target customers are and spawning greater curiosity and newness in product assortments.
For the sake of clarity, Live Love Dream is already a real brand, not an emerging one and one whose target customer closely parallels the target customer of Aéropostale. As such, its further development will be overseen by the Aéropostale team. In similar fashion, the Aéropostale team will continue to create and manage our key partnerships with Bethany Mota and United XXVI, and new strategic partnerships that may develop.
Second, our discipline and confidence building. On my return, it became acutely clear in a variety of the operating disciplines and approaches that haven’t been historically in place, had been either abandoned or forgotten. For example, Aéropostale always defined itself as an organization in which everyone was encouraged to have a perspective and to be an articulate advocate for his or her point of view.
Internal surveys indicated that many people believed that their voice could no longer be heard and as a result, had lost the ability to contribute to the business. We listened to their comments. Once again, we view ourselves as being entrepreneurial with discipline and we are actively reengaging the organization to think like owners. I can already feel a different dynamic in the office, one of which people are talking about and believing in Aéropostale’s ability to win. I must admit that this is refreshing to hear.
Third is brand positioning. If I’ve learned anything over the course of the last 45-years in retailing, it is that change is inevitable and at many times desirable. I've also learned that the history of retailing is one indelibly linked to patterns of overreaction. While uniquely successful, the Aéropostale we knew between 2002 and 2010 had to change with the times. Changing fashions, evolving market conditions and our own lackluster performance was certainly strong catalysts for redefining who we were and how we were going to maintain traditional levels of profitability.
In no way do I think that we should be the fashion following logo-driven brand that characterized us for many years, not for a second. I do believe, however, that in our zeal to be thought of as being current, we've been overly influenced by the lure of fast fashion. Aéropostale’s profitability is billed on a recipe calling for varying amounts of predictability and spontaneity.
We sell real clothes to real teenagers. While their lifestyles may have changed in the last five years, while they have a craving for the latest technology, while they have instantaneous access to everything that is happening around the world and while they taste in how they shop and what they shop for may have evolved.
I still believe that while they strive for individuality in many ways, at 14 to 17 years old, they still want to be accepted by their friends and peers and that there is still a uniform that they wear that makes them cool and fitting.
I think that our mandate is to be that store that best juggles this dichotomy. From a sourcing perspective, I think that we are better situated today than ever before to achieve this by reaching the balance of great quality and great pricing on goods ordered with longer lead times, as well as having the flexibility, nimbleness and mindset to react quickly to appropriate changes in trends to be fashion right all the time.
Last, we have assortments, assortment planning and allocation. Consistent with our vision of brand positioning, we need to talk about our assortments both in terms of content and distribution among our various sales channels. As you might expect it to my previous comments, I believe that over the last few years, we have lost balance in both our assortment and in our approach to color.
In the past, we always described our assortment as a blend of core, fashion and veneer, a term we coined to describe rich fashion bought in very limited quantities. Regrettably, the term core has developed an extremely negative connotation. One intimately linked with basic and cheap and many times with logo, whether we call it core or fashion basics, properly designed and carefully crafted, its still represents both the foundation of every teenager’s uniform, as well as the fulcrum of our profitability.
We need it because it is most universal, we need it because it is wanted and we need it because it is how we continue to replenish our stores with good looking predictable merchandise and maximize sales and gross margins. And once again to reassure you all, no, this does not mean we are returning to a reliance on logo merchandise to drive the business.
When we talk about merchandize described as fashion or veneer, I think that we have become over assorted. We need to choose what we want to stand for, believe in it, make sure all works together and by it in a manner that enable us to stay in stock in it the time it is intended to be on our floor.
In terms of color, with much of the industry, including us, reverting to a more neutral palette, I think that we have lost some of the excitement and optimism that our stores previously had. Once again, we will not be reverting to the colors of our bubblegum days, but we will be injecting appropriate levels of color back into our assortment to mirror the enthusiasm and excitement of the current generation of teenagers.
In terms of merchandise type, Aéropostale has always believed that its strength was in its tops to bottoms relationship. At its height, we sold almost five tops to every bottom. Today that relationship has dropped to three and a half tops to every bottom. Our goal is to return to a level of at least four tops to each bottom.
In terms of allocation, we have been working hard to develop more sophisticated tools to help us understand how our stores are the same and how they differ regionally and demographically. The Aéropostale today needs to be very different from its earlier counterpart.
When we were growing the brand from 100 stores to 900 stores, our focus was on those factors that made the stores similar, not discrete. Today we need to do both, maximizing universal trends and customizing to the individual store type group.
At this point, I thank you for your patience in listening to this admittedly long monologue and I will now turn the call over to Emilia.
Emilia Fabricant
Thank you, Julian, and good afternoon, everyone. As Julian mentioned in his opening remark, our comparable sales including e-commerce for the third quarter were down 11%. Despite the disappointing sales comp, our inventory management and full price sell-throughs led to our third consecutive quarter of AUR growth at positive 3%.
We also continue to demonstrate progress from our merchandise margin perspective, by achieving our second consecutive quarter of merchandise margin growth, which was up 150 basis points versus last year.
During the quarter, we were encouraged by the performance of fashion graphics, long sleeve knits, outerwear, knit bottom and skirts on the girl side. We were pleased to see resurgence in knit tops driven by the continued momentum of our Bethany Mota and Tokyo Darling sub-brands.
On the guy side, fashion graphics, woven tops, pants and outerwear experienced strength as well. However, make no mistake we are not pleased with our overall performance. Comp improvement is essential to achieving our financial goals and we are focused on improving our business trends.
Coming into the fourth quarter, we make sure, both size and currency of our inventory would position us favorably for the holiday selling season. From a merchandising standpoint, we are driving our business with giftable and must have items such as graphics, long sleeve knit tops, accessories and outerwear.
We are offering our customers saturated both colors and compelling prints and patterns. We also grew our sub-brand such as Tokyo Darling and Brooklyn Calling. And I look forward to the continued development of these brands under the direction of our new VP of Emerging Brands and Product Extension.
From a marketing perspective, we continue to embrace the spirit of our Aero Now plan platform, which we launch during back-to-school. With holiday, the Aero Now philosophy has now embraced the message of live in the present.
I am sure many of you have noticed our newest slogan incorporated in all of our stores and online. As the fight for traffic and market share continues to heat up in the mall, marketing and social media remain among our greatest weapons. We intend to drive demand through exclusive product partnerships with key teen influencers, as well as through an arsenal of compelling promotions.
As evidenced through our most recent collaboration with United XXVI’s Cameron, Nash and Hayes, Aero has proven we can attract today’s top teen influencers. These young men have a combined reach of more than 20 million teens and through partnership such as these, Aero is reestablishing our relevance.
Furthermore, as a result of our speed, creativity and ability to execute, we are becoming a top destination where influencers want to share their vision. During the fourth quarter, we saw 434 million social impressions across Instagram, Twitter and Facebook. We continue to lead the field in new fan acquisitions on both Instagram and Facebook and our positive sentiment continues to grow. As exhibited by the divergent results we saw in November, it is clear that uncertainty remains in the retail environment.
This underscores the work we have ahead of us, as we strive to demonstrate sustained improvements. An important part of our work will be focused on intensifying our curiosity to test. Our pathway initiative will be an important vehicle for testing going forward.
As a remainder on our last earnings call, I discussed the work we were doing with the subset of stores to test the variety of strategies to drive comps through allocation and shopability. As we implement these strategies in our pathway doors, we experienced a substantial lift in sales comp and conversions during the third quarter.
While a full implementation and its consuming benefits will take time to impact our business, we reacted quickly and began expanding certain strategies to a broader group of stores starting with holiday.
First, we established store tiers for fashion in core door, which will begin to enable us to expand the depth of fashion in our fashion doors, while allowing us to protect our core and logo products in our core doors. Second, we are optimizing and refining our inventory to ensure we do not miss any opportunity in sales.
Lastly, we are making improvements to our store environment through fixtures and [key stands] [ph] through a larger group of stores. Going forward, we will continue to leverage our pathway stores to test merchandising, planning and visual strategies that will lead to a greater scalable change across our chain.
Before I turn the call over to Marc, I would like to express my enthusiasm in the direction in which we are headed. Under the guidance of Julian and in conjunction with the recent organizational changes we have implemented, we plan to leverage our strength to achieve profitability. We look forward to demonstrating greater progress with each quarter. Marc?
A - Marc Miller
Thank you, Emilia. As we reported, our third quarter earnings per share results were in line with our guidance. After I review our results for the quarter, I will share our progress against our financial priorities.
Total net sales for the quarter were down 12% versus last year, reflecting an 11% decline in comparable sales, which includes our e-commerce channel. Net revenues from our e-commerce business for the third quarter decreased 15% to $43.4 million from $51.1 million last year. Including our e-commerce channel, our growth business was down 11% and our guys business was down 12%.
Our comparable sales declined for the quarter was driven by a 3% increase in average unit retail, offset by an 11% decrease in transactions and a 4% decrease in units per transaction. During the quarter for our Aéropostale brand, we opened three stores and closed 16 stores, ending the quarter with 911 stores. For our P.S. from Aéropostale brand, we closed seven stores, ending with 141 stores.
On a GAAP basis, gross margins for the quarter were 15.2% versus 17.1% of last year. These include asset impairment charges of $12.5 million and lease-buyout cost of $3.7 million pre-tax in the third quarter of 2014, versus asset impairment charges of $5.1 million pre-tax last year.
On an adjusted basis, excluding these charges, gross margins for the quarter were 18.8% versus 18.1% last year. The 70 basis point improvement in adjusted gross margin was driven by 150 basis points of higher merchandise margins and 50 basis point of lower depreciation, partially offset by 130 basis points from deleveraging of occupancy and buying cost.
On a GAAP basis, SG&A for the quarter was 26.8% of sales versus 25.1% last year. Our SG&A for the quarter includes consultant fees of $1.4 million and severance cost for a former Chief Executive Officer of $2.3 million, offset by the reversal of stock-based compensation related to departure of our former Chief Executive Officer of $2.0 million.
On an adjusted basis, excluding those cost, SG&A for the quarter was 26.4% of sales, versus 25.1% last year. SG&A dollars declined by approximately 7% versus last year and came in better than expected. The primary drivers of the SG&A upside were lower store line payroll, lower benefits and lower corporate expense resulting from our ongoing expense reduction program.
Our GAAP operating loss for the quarter also includes pretax restructuring charges of $1.7 million related to the severance costs associated with the exit of the mall-based P.S. from Aéropostale stores. During the quarter, we incurred interest expense of $3.0 million.
On a GAAP basis, the tax rate for the quarter was 8.4% versus 38.0% last year. On an adjusted basis, the effective tax rate for the quarter was 6% versus our original expectation of 4%, excluding restructuring and other charges and versus 38.0% last year. This resulted in a net loss of approximately $52.3 million or $0.66 per diluted share.
On an adjusted basis, excluding impairment charges and all restructuring and other related charges, net loss for the quarter was $35.2 million of $0.45 per diluted share. Cash and cash equivalents at the close of the quarter were $109 million and long-term debt was $136 million.
Inventory at the end of the quarter was $211 million, down 20% in total or down 16% on a retail per square foot basis. Our capital expenditures for the third quarter of 2014 were approximately $6 million and depreciation and amortization was approximately $12 million.
As Julian mentioned earlier, our entire organization is focused on improving our financial results. As we enter the peak holiday selling season, we believe we're well positioned from an inventory perspective. Before I provide fourth quarter guidance, I would like to share the progress we've made against our financial priorities.
With respect to our real estate portfolio, we've made significant progress with our real estate consultants and we expect to close approximately 75 Aéropostale stores in the fourth quarter, bringing our total 2014 Aéropostale U.S. and Canada closures to approximately 120 stores, which is well ahead of our guidance of 40 to 50 closures this year.
Added to the 48 Aéropostale store closures completed in 2013, we will have completed the vast majority of our estimated 175 store closure program by year-end. In 2015, we are considering potentially closing approximately 50 to 75 additional doors which would bring our total closures to a range of approximately 220 to 240 Aéropostale stores. In addition, as we discussed previously, we will also close approximately 126 predominantly mall-based P.S. from Aéropostale stores by the end of January 2015 including approximately 116 stores in Q4 as we restructure that business.
Second, we continue to execute our expense reduction plan and have achieved approximately $7.5 million savings year-to-date. We are on track to achieve the high-end of our guidance of $5 million to $10 million savings in 2014.
For 2015, consistent with prior guidance, we expect our expense reduction plan to generate savings of approximately $30 million to $35 million on an annualized basis, which includes approximately $15 million in operating profit improvement in our P.S. business as a result of the closing of our mall-based P.S. stores.
Finally, we are focused on maintaining appropriate levels of liquidity as we improve the profitability of the business. In addition to our cash balance, our $230 million revolver remains undrawn. We continue to evaluate all cash utilization carefully and as a result, expect our 2015 capital expenditures to total approximately $16 million versus approximately $22 million in 2014.
I will now discuss our fourth quarter outlook. As Julian discussed earlier, our quarter to-date trends are fluctuated significantly, from positive comparable sales for the majority of the month to negative mid-teen comparable sales over Black Friday weekend. As such, we believe it would be prudent to take a cautious stance with respect to our guidance outlook.
Accordingly, on an adjusted basis, excluding the impact from impairment charges, accelerated store closing costs and anticipated real estate consulting fees, we are initiating guidance for the quarter of 2014 at an operating loss range of $28 million to $34 million, which ties to a loss of $0.37 to $0.44 per diluted share.
This guidance assumes a high single-digit to low double-digit comparable sales decline. Improvement in gross margin rate year-over-year and sequentially, and SG&A dollars down approximately 6% versus last year, due to our cost saving initiatives and tight expense controls. We currently expect the pro forma tax rate to be approximately 4% and a share count of $79.5 million.
Now, I will turn the call over to Julian for closing remarks.
Julian Geiger
Thank you, Marc. As I am sure you will know, nobody at Aéropostale believes that the company’s level of accomplishment is satisfactory, it is not even close. Obviously, it is our intent to change that and to do so as quickly as is reasonably possible.
As you already know, while certain aspects of running a business can be effective quickly, certain lead times prevent instantaneous, meaningful and comprehensive change. We all believe that this remains a turnaround story, one with an opportunity for substantial upside. We believe that we understand what has been wrong with the business, that we know how to fix it and that we have the resources to do so.
The history of Aéropostale is one steeped in determination and overcoming adversity. Today's competitive market is full of aggressive, bright and talented retailers, many of whom have copied or adapted our approaches and allured our target customers more effectively than we have.
I believe that our organization is eager to speak its mind to change, to grow and to win once again. Together, we will solve our current problems and jointly author our future success.
If you have noticed, I've intentionally not use the words excited, happy or pleased even once today and the reason why is fundamental. Well, I fully believe in our ability to accomplish everything we need to do and believe that we will start to see real benefits in the second half of 2015 from the actions we're taking now. I will feel none of those unspoken emotions until we have return to profitability, that is our goal, plain and simple.
Finally, before I turn the call over to the Operator for questions, I would like to thank the entire Aéropostale team both in stores and in our offices for their help and support over the past three months. It has been rewarding to have reconnected with old friends and to get to make new friends. We are united in our resolve, return to profitability.
Operator, we are now ready for questions.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] Our first question is from Ed Yruma of KeyBanc. Please go ahead.
Jessica Schmidt
Hi. This is Jessica Schmidt on for Ed. Thank you for taking my questions. I know you had previously guided to AUCs being up a bit in 3Q but then down in 4Q and now you have been working to reengineer at least some of the core products? Can you talk a little bit about what you expect on AUC and where you are in some of the initiatives that you are implementing? And then how meaningful do you think the master arrangement can be to your plans here?
Marc Miller
Jessica, I’ll give you the metrics on AUC and then turn it over to Emilia and Julian for more color. AUC for Q3 was down slightly, low single digit percent. For Q4, it will be down mid single percent and we expect it to be first half, also down mid signal digit percent.
Emilia Fabricant
As far as core product, well we have found some savings in reengineering. We are committed to actually reinventing core in making it also more relevant to the teenage.
Julian Geiger
In terms of our sourcing partners, the addition of MGF we think is an important one to the -- to us. We’re still early in our working relationship with them. We have seen improvement in how we communicate in what results we are getting. I think the combination of all the people with whom we do business, will create a very dynamic and competitive situation which will lead to lower costs and greater quality throughout the course of the year.
Operator
Thank you. Our next question is from Betty Chen of Mizuho Securities. Please go ahead.
Betty Chen
Good afternoon. I was wondering Emilia, can you talk a little bit more about the sub-brands, the size of the sub-brands expected for Q4 and where we think it might be for 2015 and how that group performed relative to private label. And then I think if I could follow-up, did I miss it -- did you quantify what was the comp that you are seeing in the test group where you were able to plan and allocate specifically for the store types? Thanks.
Emilia Fabricant
Well, as far as the sub-brands, on an annualized basis, the sub-brands continue to have a higher AUR and gross margins in the chain average. As we said during the prepared remarks, we believe in the opportunity in our sub-brands and have hired VP of Emerging Brands and Products Extensions to increase focus on them.
In addition to Live Love Dream, we are focused on tuning sub brands, Tokyo Darling and Brooklyn Calling. And we’ll also continue to collaborate with top influencers. We have said they would be about 15% to 20% of the total Aéropostale assortment. And we believe they will continue to be -- they might grow online in some other instances, other opportunities but right now we’re saying 15% to 20%. We have no further growth plan at this point.
Julian Geiger
And Betty, regarding our pathway store performance, we didn’t give a numerical quantification. But we did say that they significantly exceeded the performance of our overall chain. We believe we have learned from that group of pathways stores, with our opportunities to the store additional core merchandise and those that typically can absorb those types of styles and on the other end of the spectrum, distort fashion to stores that have an appetite for those types of looks.
So that is one of the biggest components of the incremental performance in pathway stores, in addition being never out leveled in certain key classifications. We’ve seen a positive return on that investment and the shoppability benefits as well. We’ve invested in some of the fix string in the stores as Emilia mentioned upfront. And those three components combined have led to the better comp performance as well as better gross margin dollar performance.
Operator
Thank you. Our next question is from Thomas Filandro of Susquehanna. Please go ahead.
Thomas Filandro
Hi. Thanks for the comprehensive call. I just want to say happy holidays. So Julian, you noted that the offering has clearly become over assorted. So I was hoping that maybe you guys could quantify the level in which you think it’s over assorted, maybe given us some SKU targets. If you are reducing skews as well as the timing and then add on comment, this is really for Julian.
I would be curious to hear your thoughts on what you think about the opening ticket prices that we’re seeing in the assortment. They have clearly moved higher. Just want to hear what your reaction is to those prices? Thank you.
Julian Geiger
Sure. In terms of SKU count, we are talking especially about fashion as part of the business. We think the SKU count can be reduced by 10%. And as a result, the depths with which we buy each SKU could probably go up by 20% which pay enormous dividends in terms of staying in stock on style, having more muscle in those styles to drive volume and being able to allocate them to the stores at a more effective basis.
In terms of our ticketed prices, our ticketed prices are pretty similar to what they traditionally been especially in the mid-classification. We do a systematic, survey throughout the market to see what prices -- what tickets are. We think our ticketed prices are fair, but we’ll continue to monitor them as time goes on.
Operator
Thank you. The next question is from Susan Anderson of FBR Capital. Please go ahead.
Susan Anderson
Hi. Thanks for taking my question. I was wondering if you could talk a little bit about how you are planning for the rest of the holiday season, if you expect it to be more promotional year-over-year, on kind of what you are expecting the competition to do out there and then also if you could maybe talk about just your comfort with liquidity levels going forward? Thank you.
Julian Geiger
Susan, on promotions for competitive reasons, we are not going to speak to our promotional posture. Clearly in the upfront remarks, we mentioned that our guidance was predicated on a negative high single digit to low double-digit comp trend and clearly to be at that trend rate, we do anticipate it to be competitive and promotional out in the malls.
As it relates to liquidity, we feel very good about our liquidity position. Inherent in our guidance for Q4, is the fact that we expect to be operating cash flow positive for the quarter and we expect to be operating cash flow positive, including the fact that we will have a number of cash outlays for the quarter related to store exits and severance and associated consulting fees. So, we feel very good about our liquidity position and clearly in addition to the cash we have on our balance sheet. We have access to the $230 million revolver.
Operator
Thank you. The next question is from Rick Patel of Stephens. Please go ahead.
Rick Patel
Good afternoon, everyone and thank you. Just a question on inventories, they appear to be in good shape but can you talk to us about the comp position? I’m curios how you are positioned with your better selling products versus everything else and to what extent that can help in the fourth quarter? Thank you.
Emilia Fabricant
So, as we mentioned on the call earlier, we feel we’ve taken a strong position in cleaning of our inventory in Q3 to better prepare for Q4. We had a couple of our core departments that actually had some trend shift. The merchandising team acted quickly to address the on-winter for holiday and we’ve seen improvement there. So, we feel very well positioned in the products that we have seen success in early on.
Operator
Thank you. The next question is from Janet Kloppenburg of JJK Research. Please go ahead.
Janet Kloppenburg
Hi everybody.
Julian Geiger
Hey Janet.
Janet Kloppenburg
I’m assuming if you could talk a little bit more, Julian, about this development of the core products, when we might see the return of it and the entire range may change? And I think you earlier said, some of the movements in basics spots. I’m asking world right now that makes us all a little bit nervous when I think about core, you returning to the core business. So if you could endorse a little bit on that for us that will help?
And then I was just curios about the trends in early November, I think you said it was positive -- negative really doubles or something like that even worse. So maybe, Julian, if you could share some analysis behind that? Was that all core leverages in the early positive month and then maybe your promotions when they’ve been impactful for Black Friday? I’d like to hear your thoughts there. Thank you.
Julian Geiger
Hey, Janet. If I miss answer your questions it’s because your questions were little bit problem. It was little hard for us to just understand. We think we understand what you wanted. If we go in the wrong direction just let us know. Yes, we believe that every business must have a foundation upon which it predicates profitability. For us, it’s always been our core product. As we have said, core had developed the pejorative connotation over the course of many years and people equate it with things that are either cheap, dumb or logo driven.
The uniform has clearly changed that the teenager wears but they still wear a uniform. They still wear t-shirts. They still wear shorts. They still wear jeans. They still wear knit shirts. Our challenge is to take those items, make them more relevant by adding minor details at them -- details to them, still maintaining outstanding pricing on them, buy them somewhat more aggressively so we stay in stock and believe in them and become known for them in all of our channels of distribution. I think that will pay particular dividends in our e-commerce business, in the international business, in our outlet business and in our fashion businesses. I’m trying to remember the next question, Janet.
Janet Kloppenburg
November.
Julian Geiger
It’s hard to pinpoint what the triggers were for the various elements of November. I think it goes down to the question of who shops when for what. I think that the more fashion oriented customer was shopping earlier in November clearly, a more need oriented customer shops during black Friday. I think that a lot of the fashion that we had on the floor was outstanding.
It was supported by the interaction with UNITED XXVI and with Bethany. I think they drove a lot of people in. I think people saw a new side of Aéropostale that may have been not apparent before. I think that's a very good sign for many times during this season. I think you get a different customer with the different mindset at when Black Friday comes.
So we would have like the trend to have continued unabated. But we are thankful that we had what we had in the beginning of November as there are many periods of time now, between now, between holiday and back-to-school, that really are the times that the fashion customer shops more often.
Operator
Thank you. The next question is from Dorothy Lakner of Topeka Capital. Please go ahead.
Dorothy Lakner
Thanks. Good afternoon, everyone. I'm just tagging onto that question. I wondered if you think that given how much promotional activity took place earlier in November, if you were impacted by a pull forward of shopping versus what happened over the Black Friday weekend? And then my second question would be in terms of the pathway program, how many more doors are going to be added to that? Thanks.
Julian Geiger
It’s possible that a small portion of the Black Friday business was in pull forward. It would not have been pull forward to the beginning of November. So I think that the change in trajectory was a function of who the customer was and what they found in our stores.
In terms of some of the findings of pathway, we’ve never disclosed or do we need to disclose what the number of stores were in the test. Certain elements that were successful from those initial group of stores was expanded to holiday to a group of stores that was 2.5 times that size. So we were aggressive in reading and reacting to the success as we have there.
Operator
Thank you. The next question is from Kimberly Greenberger of Morgan Stanley. Please go ahead.
Kimberly Greenberger
Great. Thank you. Julian, I’m not sure that I understand completely what you mean by the uniform. Maybe you can just tell us, describe what you mean by the uniform and how does that differ from the let say fast fashion retailers?
Julian Geiger
We think that people -- the teenager today wants to fit in. They want to fit in by wearing things that make them feel safe. If there’s a brand promise to Aéropostale, it’s that the teenager could wear our clothes, go to school and not be teased or made fun of the way they look. So that while fashion plays a role at certain times in people's wardrobes, there is still those fundamental basics that are the underpinnings literally of what they wear.
Kids will always wear jeans. They will always wear T-shirts. They will always wear knit shirt. They wear sweaters. They wear wovens. Our goal is to make sure that the one that we represent as -- once we believe in the most are consistent with what they want to wear. They at one point as you know, virtually every teenager wants to wear a T-shirt with somebody’s name on it. Those days are over.
We’re not saying that logo is part of the uniform. But in the old days, a hoodie with the name extra corrosive with the pair of jeans was what everybody wore. They’re just wearing different things now. But the classifications -- there were always four classification that represent 80% of the business. That's what represents the uniform and that’s where we have to excel.
Operator
Thank you. The next question is from Jennifer Davis of Buckingham Research. Please go ahead.
Jennifer Davis
Hey, guys. Good afternoon. I was hoping you could maybe delve a little more into Black Friday and comps up low single-digits at the beginning of the month? I think you guys kind of pushed fashion back a little bit on Black Friday and had some more of the core product. I know that’s a bad word but kind of more of the basic products up in the front of the store. And I’m just wondering if maybe that’s potentially part of what led you to decline, maybe your customer wants a little bit more fashion and she was out at that point in the time too. And then I was hoping you could maybe give a little more color around the pathway stores. I know you don’t want to disclose how many, but can you give us some sense of, is it 5 or 50, or give us some sort of sense on how many stores are in that group? Thanks.
Julian Geiger
I’ll answer the second question first. It’s much closer to 50 than 5, so it will give you some idea of the scale and scope of it. If we could answer the question about Black Friday, we would be geniuses. We think we did the right thing in the way we set up the floor. There is no question that the proportion of what people bought in our stores was validated what we put up in front. I think it was a challenging shopping time for most people, and we'll see what happens in December and how -- which of those two trends we saw in November predominates as we go through the month.
Marc Miller
And just to clarify Julian’s remark on pathway by 50 more than five, he was referring to the number of stores in the group. The underlying performances as I characterized early was consistently better than chain. And as we think about 2015 and what our opportunities are from a comp perspective, clearly the learnings that we apply from pathway will be embedded in our comp guidance as we enter into the New Year.
Operator
Thank you. The next question is from Paul Lejuez of Wells Fargo. Please go ahead.
Paul Lejuez
Hey. Thanks guys. CapEx was running a bit below depreciation this year, looks like again next year. So how long do you think that can continue? And I’m just wondering what sort of investments are on hold as we experience that dynamic? Thanks.
Julian Geiger
It’s the biggest pullback we’ve experienced in CapEx over the last two years is certainly in terms of new store openings and to a much lesser extent, store remodels. So as we think about the buckets of systems related expenses versus store-related expenses, the biggest pullback is on the store side. We do believe that’s sustainable over the next few years if necessary. That said, we don't want to start the stores and as we see formats and investments in stores that will pay off, we will free up CapEx dollars to go after those opportunities.
Operator
Thank you. The next question is from Matthew McClintock of Barclays. Please go ahead.
Matthew McClintock
Yeah. Hi. Good afternoon, everyone. I was for -- just for context purposes, I was wondering, if you could just remind us how the SKU count on that’s expanded over a last couple of years as you have added fashion, if it expanded at all? And then -- and in terms of the organizational changes breaking into the emerging brand division versus the Aero team? Could you just help us understand a little bit more the -- into the organizational changes like segmentation, what functions -- what core functions will be properly segmented between those two teams and what will be shared-services? Thanks.
Julian Geiger
The four groups that were affected by the reorganization represent the product development group, which are the merchants, the designers, the production people and planning organization. And they are all aligned and they are the only group that is affected really by this.
Emilia Fabricant
SKU count, we have been working on SKU counts over the last year and a half. So the opportunity that we’re speaking to next year is above and beyond that. We do feel there is additional opportunity to gain more depth in our fashion buys, as well as protecting our core buys and staying in stock in some core. So it’s just an additional reduction on top of what we have already started last year.
Operator
Thank you. The next question is from Lindsay Drucker Mann of Goldman Sachs. Please go ahead.
Lindsay Drucker Mann
Thanks. Good evening, everyone. I had two questions. The first, Julian, you talked about some of the areas where you want to change in the assortment, the color or category, but the other core elements for Aero is a very strong value message to consumers? You talked about sort of opening ticket as being appropriate, generally do you feel like the value message that Aero is sending is where it needs to be just particularly in light of all the AUR pressure we are seeing across some of your key competitors and key retail?
And my second question is, I was hoping you could go into a little bit more detail on the economic implications of the store closures, whether those were loss making stores and not just help improved operating profit, whether you have early lease termination payments or some of the rent concessions you were able to get from that? Thanks.
Julian Geiger
I think, in terms of our ticket prices, as I said before, I think our ticket prices in most cases are very realistic, especially at our opening price points and those classifications that drive most of the business, which are knits and sweaters.
We have certain elements, we are somewhat higher in our ticket prices on the collections influenced by the social media influences and we sell them in full ticket. That would lead somebody to believe that we can get ticket. I think we have been afraid to stand with our prices and go with them for a period of time. I think if the merchandise gets better and better as it will, the ticketed prices will truly represent a value and marketplace for the quality and for the look.
Marc Miller
As it relates to store closing program, we announced the approximately 120 stores that we will close for Aéropostale this year. Those stores carry on average roughly an $80,000 to $85,000 four wall loss. So in aggregate those stores represent almost $10 million worth of four wall operating losses.
We haven’t broken out the impact of rent release. That’s additional color we will provide on future calls as negotiations are still underway. And the final question on store closings, that’s all on store closings.
Operator
Thank you. We have time for one final question. And the final question comes from Simeon Siegel of Nomura. Please go ahead.
Gene Vladimirov
Good afternoon. This is actually Gene Vladimirov on for Simeon. Thanks for squeezing us in. Wondering if you could give us an update on your omni-channel initiatives, maybe learnings you have had from the testing there, any color, if you have seen a boost either online or in store or both? Thanks.
Marc Miller
On omni-channel we are just getting started with testing save-a-sale through these mini iPads that we placed in a few select stores. We are very much in a testing phase. I think there is a -- certainly there is an omni-channel opportunity across retail and the merchandising organization changes that Julian spoke to will allows us to capture those omni-channel opportunities. Depending on the results of the particular save-a-sale test we have may choose to expand it in the spring.
Operator
Thank you. That is all the time we have for questions. I would like to turn it back over to management for any additional or closing remarks.
Julian Geiger
Well, we thank you all for your time and your interest and your question today. We appreciate you are spending some time with us. We want to wish you all a very happy and healthy holiday season. And we look forward to speaking with you about three months to talk about our performance in fourth quarter. Thank you very much.
Operator
Thank you. Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time and thank you for your participation.
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