Christopher & Banks Corporation (NYSE:CBK) Q3 2014 Results Earnings Conference Call December 4, 2014 8:30 AM ET
Jean Fontana - ICR
LuAnn Via - President and CEO
Pete Michielutti - SVP, CFO and COO
Neely Tamminga - Piper Jaffray
Jennifer Davis - Buckingham Research
Jeremy Hamblin - Dougherty & Company
Liz Pierce - Bran Capital
Good morning, ladies and gentlemen. Thank you for standing by. Welcome to today’s Christopher & Banks Corporation Fiscal Third 2014 Earnings Results Conference Call.
At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions. Today’s conference is being recorded.
And now, I would like to turn the conference over to Jean Fontana of ICR. Please go ahead.
Thank you. Good morning, everyone. Thank you for joining us for Christopher & Banks’ third quarter fiscal 2014 conference call. Hosting today’s call are LuAnn Via, President and Chief Executive Officer and Pete Michielutti, Executive Vice President and Chief Operating Officer and Chief Financial Officer.
Before we begin, we would like to remind participants that remarks made by management during the course of this call may contain forward-looking statements about the company’s plans and future results. These forward-looking statements are subject to risks and uncertainties that could cause the actual results and implementation of the company’s plans to vary materially. These risks and uncertainties are referenced in today’s press release as well as in the company’s most recent filing with Form 10-K.
With that, I would like to turn the call over to LuAnn Via.
Thank you, Jean. Good morning, everyone and thank you for joining us today to review our third quarter fiscal 2014 earnings results.
I'll begin with some highlights on the quarter and provide an update on our go-forward strategic priorities. Pete will then review in more detail our third quarter financial results and provide our outlook for the fourth quarter and full fiscal year.
As we announced in early October and as other retailers have since commented, there was continued softness and mild traffic trends during the quarter. These traffic declines, coupled with a highly promotional retail environment and delayed receipts associated with the port disruption negatively impacted our overall performance.
For the third quarter net sales declined 6.4% to $110.6 million as compared to $118.1 last year and we operated on average 7.8% fewer stores this quarter as compared to last year.
Same-store sales decreased 7.6%, following a 4.9% increase in the prior year's third quarter. Sales per store for the quarter increased slightly driven by our MPW and outlet format.
Despite the topline pressure, we delivered gross margin expansion of 140 basis points to 39.5% and diluted EPS of $0.24 as compared to $0.23 in the third quarter of last year.
Inconsistencies in both traffic and spending patterns persist as does a highly promotional environment. While we continue to monitor and respond to current business trends, we remain focused on building upon our longer term growth strategies.
We have considerable opportunity to drive increased sales and profitability as we further evolve our merchandize mix of core versus fashion, bring newness into the stores more frequently and more closely align our assortment with customer preferences on an individual store level to capitalize on our special size businesses across all store formats.
To continue to execute on our real estate strategy of converting all of our stores to the MPW format and expanding our outlet business, to grow market share through increased share of wallet and new customer acquisition and to increase our emphasis on an omni-channel strategy.
During the quarter, we saw customers adopt updated styling more quickly than anticipated as well as continued strength in our core businesses. Bottoms was our strongest category with growth in our expanded denim offering as well as strength in solution-based pants as we focused on improved fit and enhanced comfort.
Our expanded offering of wear-to-work and casual pant options also performed well. Ponti styles were met with positive response when introduced in September and newer categories such as our casual relaxed restyled knit collection continues to fuel growth.
Tops in general were soft specifically in sweaters and novelty knits. Based on sales data as well as customer feedback gathered in our research, we've been able to adjust future lines including the expansion of fashion style choices in our top doors. This merchandize queuing approach is a key part of our go-forward strategy.
Lastly, we are very pleased with the consistent strong performance of our accessories business particularly jewelry and scarves, which provide finishing touches to her wardrobe and offer healthy gross margin rate.
Looking ahead, we continue to move forward with our key growth strategies. I will begin with what we view is our most significant opportunity to drive sales productivity and operating income growth namely optimizing our real estate strategy by converting stores into the MPW format.
We ended the quarter with 187 MPW stores and we expect our entire fleet will be transitioned to our MPW format over the next few years. Through these conversions, we achieved increased productivity per square foot and higher gross margin rates, in addition to increased operating margins as our MPW stores enable us to better leverage our square footage.
While the financial impact varies by type of MPW conversion, we're pleased with the overall performance of our MPW stores to date. We will continue to access the performance of each store and make adjustments on an individual store basis to maximize productivity.
In addition to our full price MPW strategy, we are also focused on building our outlet business. We see meaningful growth potential in outlets and we believe that we can successfully operate approximately a 100 outlet locations. These stores provide the second highest operating margin of our formats and we see opportunity for further margin expansion as we continue to increase the penetration of made-for product.
Currently about a quarter of our product is made-for with the remainder consisted of seasonal basics and clearance merchandize. Longer term this assortment will be evenly split among made-for in season fashion and basics and clearance.
Secondly, we recognized that gaining market share is key to our growth. During the current year we focused much of our direct marketing on our active customer base with the goal of driving return visits and compelling them to spend more. We increased targeting to our new brand in current customer segments, special events and offers.
The retention of our active customers continues to increase. We are lapsing fewer customers and retaining more of our new customers. The improvements in product selection, visual and merchandizing and customer care have also been tablets for this increased customer engagement.
As we look to acquire new customers, we established a baseline brand study earlier this year in order to measure these efforts. Through this study, we began to better understand what perspective customers are seeking and we started with small scale PR investments geared toward increasing brand visibility.
During September and October, we expanded that reach with a fashion media tour targeted social media efforts and in-store events for select stores geared toward reaching new customers. We are in the early stages with a focus on testing and learning so that we are able to expand these events in 2015.
We will continue these types of efforts while executing more robust grand opening events for both our new and conversion stores and also refining our paid digital investments with an emphasis on introducing the brand to new customers.
Additionally, we believe that refining our fashion offering across all stores, expanding our special size and selection through our MPW format and outlet stores as well as having combined our eCommerce sites into an MPW site, affords us a greater opportunity of attracting new customers to the brand and increasing the spend of cross-side shoppers.
While we have a solid foundation in our plus and petite size businesses, we see significant opportunity for expansion by enhancing our offering for these underserved customers as we strive to become the retailer of choice for our demographic with increased selection and marketing to these target groups.
Lastly another significant priority is centered on an elevated omni-channel strategy. Over the past several years, we've continued to see growth in our eCommerce business. We still have considerable opportunity to further leverage the website to support our strategic initiatives and company-wide growth.
Engagement metrics on our new combined site continue to show the customer's acceptance by increased time on the site and more pages viewed. Additionally, the number of orders that contain missy and women sizes continue to increase. Easier check-out and enhanced mobile tablet experiences have led to reduced card abandonment.
In the near term, we will focus on enhancing the brand image and product messaging as well as improving our selling by a strengthened visual merchandizing and product stories.
We recognize that our customer has an affinity for shopping in stores. She loves the personalized service and finding a perfect fit is key to her satisfaction. With improved site capabilities and integrated marketing, we can begin to execute a more consistent experience that meets her needs. This consistency should allow us to continue growth in our crossover store, web shopper and ultimately lift sales as we gain more new customers.
By putting the customer first, our goal is to move from selling via channels to providing a seamless and consistent experience integrated across all customer touch points, including in-store, on the website and every place we reach her.
We plan to invest approximately $8 million to $10 million over the next two years in enhancements that include our CRM database, POS system, eCommerce site and order management system. We have completed vendor reviews and we will be finalizing selection over the next few months.
The multiyear project ramps up in early 2015 and we will provide periodic updates as we move through this critical long-term initiative. While in the near term, we believe sales trends will remain inconsistent and the retail environment will be highly promotional, we are confident that our strategic initiatives will drive long-term topline and bottom line growth as well as enhance shareholder value.
I will now turn it over to Pete for a review of our financial results.
Thank you, LuAnn, and good afternoon everyone. My financial review will cover the third quarter ended November 1, 2014, compared to the third quarter ended November 2, 2013. I will also provide some general comments regarding our outlook for the fourth quarter and full year.
Let me start with the third quarter results. Total sales were $110.6 million in the third quarter of fiscal 2014, compared to $118.1 million for the same period last year. During the quarter, the company operated on average 7.8% of fewer stores during the comparable period last year.
Same-store sales decreased 7.6% in the third quarter. This follows a 4.9% increase for the same period last year. Same-store sales include a total of 396 stores in which 42 stores are in the MPW format. Sales per square foot decreased by 3% during the quarter compared to the third quarter of the prior year.
As LuAnn mentioned, our lower same-store sales were largely the result of the decline in traffic. We also saw a slight downtick in conversion. All this follows a significant increase last year. We saw an uptick in both average unit retails and UPTs.
During the quarter, we saw a slight increase in eCommerce sales with gross margin expanding by 190 basis points. Sales were negatively impacted by lower store initiated sales in part due to reduced store count and traffic levels. Online sales excluding store initiated sales were up 3.4%. As LuAnn mentioned, we're seeing a favorable response to our combined and enhanced platform.
We plan to invest between approximately $8 million and $10 million over the next two years in executing our omni-channel strategy. This is intended to elevate our customer's experience across all touch points. We will be affecting all customer facing systems, including an upgrade of our CRM and POS platforms as well as our eCommerce platform. The full extent of these changes will not be complete until 2016.
Gross profit decreased 2.7% to $43.7 million in the third quarter as compared to $45 million in the comparable period last year. Gross margin was up 140 basis points to 39.5% as compared to 38.1% for the third quarter of last year.
Approximately one third of the increase in gross margin was related to the reversal of a bonus accrual in this year's third quarter. Factoring that out, our gross margin came in toward the high end of our guidance. Significant improvement in our IMU and slightly lower markdowns drove a 170 basis point increase in merchandize margin.
Selling, general and administrative expenses decreased 5.3% to $31.5 million or 28.5% of net sales compared to $33.2 million or 28.1% of net sales in the same period last year.
The decrease in SG&A dollars was due to reversal of a bonus accrual in the third quarter of the current year totaling $1.1 million versus an accrual of $1.2 million in the third quarter of the prior year. In addition, favorability, in-store apparel expense was offset by additional corporate salaries and higher marketing cost.
In the third quarter marketing as a percent of sales was approximately 3% as compared to 2.7% last year due to increased digital and mass marketing efforts including research, PR and social. Depreciation and amortization was $2.9 million in the third quarter compared to $3.1 million in the comparable period last year. Income from operations was $9.3 million or 8.4% of net sales in the third quarter compared to $8.6 million or 7.3% of net sales in the third quarter of 2013.
We recorded an income tax provision of $315,000, which was primarily due to minimum fees and taxes. At the end of the third quarter, we maintained a full evaluation allowance in our net deferred tax assets. In the third quarter of the prior fiscal year, we recorded an income tax benefit of $45,000.
Net income for the quarter totaled $9 million or $0.24 per diluted share. Net income for the third quarter of last year totaled $8.6 million or $0.23 per diluted share. For the 39 weeks ended November 1, 2014, total sales were $320.6 million compared to $330.8 million for the same period last year.
Same-store sales for the 39 weeks increased 1.8%. Net income for the first three quarters of 2014 was $15 million or $0.40 per diluted share, compared to net income of $9 million or $0.24 per diluted share last year.
Now, turning to our balance sheet, we ended the third quarter with approximately $43.7 million of cash, cash equivalents and investments. This compares to $57.2 million at the end of fiscal 2013 and $47.1 million at the end of the third quarter a year ago. Total inventory was $58.8 million as of November 1, 2014, compared to $49.3 million at November 2, 2013, an increase of 19.4%.
Inventory per square foot, excluding in transit and eCommerce inventory at the end of the quarter, was up approximately $4.97 per square foot or 26.2% as compared to last year. Total inventory per square foot at the end of the quarter was $23.92 compared $18.95 at the end of the third quarter last year.
Core inventory increased by $6.70 per square foot, while fashion and seasonal inventory decreased by $1.73 per square foot as compared to the same period last year. The increase in inventory is attributable to our investments in the core basic programs that we've discussed previously.
After analyzing our inventory position last year, we determined the need to increase the level of core basic inventory to ensure we maintain a sufficient in-stock position. Inventory levels will be moderated by adjusting future orders. We remain comfortable with our inventory position as it does not represent a likely markdown risk.
The overall composition of the inventory at the end of the third quarter was very current. Approximately 82% of the inventory was represented by October and forward life cycle product or core inventory and this compares to approximately 76% at the end of the third quarter last year.
We had no outstanding borrowings in our revolving credit facility during the 13-week period ended November 1, 2014, and have not drawn on the facility other than to open letters of credit in the normal course of business. Capital expenditures for the third quarter totaled approximately $5 million.
During the third quarter, we closed seven stores. Six of the stores that were closed were converted into five MPW stores and we also opened four new outlet stores and seven new MPW stores. As of November 1, 2014, we operated 554 stores consisting of 209 Christopher & Banks stores, 115 CJ Bank stores, 187 MPW stores and 43 outlet stores.
Now, I would like to update you on our outlook for the fourth quarter of fiscal 2014. Based on our expectations, our sales trends will be similar to our third quarter results. We expect net sales for the fourth quarter to be between $94 million and $98 million and to operate on average 40 fewer stores than last year. This compares to $104.9 million in net sales in last year’s fourth quarter when we operated on average 584 stores.
We saw sales trends improve during Black Friday weekend; however as LuAnn mentioned earlier, we have seen an inconsistency in traffic and borrowing patterns which we have factored into our guidance. There is some opportunity to exceed our sales expectations depending on weather trends through the remainder of the quarter.
Last year, weather had negatively impacted approximately 15% of the store days in December and nearly two thirds of the store days in January. We expect gross margins to be roughly flat to the last year in the fourth quarter, largely driven by the improved merchandise margins offset by deleveraging of occupancy. This incorporates a highly promotional environment and our plan to remain competitive.
We expect SG&A dollars to be between $32 million and $32.5 million compared to $31.4 million of SG&A expense reported in the fourth quarter of last year. The majority of the increase is coming from additional corporate salaries representing staffing new business aimed at strengthening our team as well as an increase in medical claims. In addition during the fourth quarter to the prior year we had a nominal bonus reversal.
We expect to recognize a nominal tax expense for the fourth quarter and this expense represents minimum fees and taxes. As we have indicated throughout the year that a potential exist that the deferred tax valuation allowance will reverse in fiscal 2014 and we continue to assess the need for evaluation allowance and expect to make a determination in the fourth quarter. I refer you to the discussion in our third quarter 10-Q.
We expect our inventory levels to remain higher than the prior year on a dollars per square foot basis but at reduced level compared to the end of the third quarter. This is due to a number of factors.
First, by the end of the fourth quarter, we added CJ product to approximately 88 CB stores and CB product to two CJ stores. This will elevate the inventory in these stores while driving incremental sales.
Second, now that we will have anniversaried the core initiative, we will begin moderating core inventory levels in the first quarter. Lastly, we will collapsing buying a number of CB and CJ stores into MPW stores in January leading to a temporary increase in inventory per square foot.
Remember the collapsing combined at square footage is generally cut in half but we only anticipate about a 25% sales loss. The reduction in inventory is commensurate with the sales loss over time.
During the fourth quarter, we anticipate opening one new outlet. We also plan to convert 50 existing stores to 25 MPW stores and close two CB stores and replace them with two new MPW stores. This is an acceleration of our original plan as we push our MPW strategy forward. In addition during the quarter, we expect to close four CB stores, one CJ store and one MPW store upon lease expiration.
Now I would like to provide you with some of our expectations for the full fiscal year. We expect the average store count to be down approximately 7.4% for the full fiscal year and average square footage for the full fiscal year to decline by approximately 6%.
Overall stores square footage is expected to be down by 3.2% at the end of the year as compared to the last year, reflecting our acceleration of the MPW strategy.
Capital expenditures are expected to be between $22 million and $23 million reflecting new store openings, MPW relocations and the addition of new fixturing in all of our stores.
Now, I would like to turn the call back to LuAnn.
Thanks Pete. We will now open it up for questions.
Thank you, Miss Via. The first question will come from Neely Tamminga at Piper Jaffray.
Great, Good morning. I've a couple if I may. First LuAnn could you give us a little bit more color on inventory side. I know that on one hand inventory depth has been really good I think for you guys in denim, may be talk through some of those initiatives as to the successor scene.
But then is there a broader inventory exposure to aged goods sort of metrics that we can -- that you can share with us that gives us confidence that the inventory overage is just not excessive. Thanks.
Sure Neely. Yes, so as you know last year we started to invest in our core programs specifically in Denim and in Bottoms where we had other stock positions and we wanted to rebuild that foundation that was so strong for us years ago.
So we are beginning to anniversary that and we're seeing now obviously our Pants business and our Bottoms business overall has been the strength and it's been consistently strong over the last three quarters.
Our Denim business continues to be up double digits. We have now found what we believe and again as we are analyzing this more deeply by store, we think that we found the right model socks and what we're doing with denim for the go forward as we have denim, raw materials and fabrics rage on overseas that we can move on and we are also going to start replenishing now from the warehouse here.
We have the space and over the next year, we will continue to fine-tune by store Neely. So that inventory has been obviously very profitable. I think you can see by our margins that it is really driving margins up. It's consistent and it certainly is not a marked down liability.
Where we did see that we had excess inventory, the teams were able to push out goods as its sitting overseas, so that we can be more inline as we move forward, but again no liability from a marked down perspective either in denim or in our woven bottom business which is another piece.
The other piece of core is our layer your look business and I would tell you that our knit in basis overall have slowed down some. So again we are able to push that back because most of them are basic colors. We are also going to replenish that by store out of our warehouse as well. So again no marked down liability.
I think what really bodes well for us as Pete said that 82% of our inventory is current and that’s again 76% last year. So the good news for us is that while obviously it’s a very promotional environment and we believe we need to be competitive, we do not see a major impact as it relates to markdowns to the inventory that we currently have.
That’s really helpful. Thank you for that LuAnn and then on the bigger picture here is the longer range financial targets, is there anything that you're seeing that happened either in Q3 or is underway here in Q4 that’s taking your eyes off the price for your high single-digit operating margin goals by the end of fiscal 2016.
And then may be asked another way and sort of thinking about it may be in comp growth in terms of the build, could you remind us what the productivity per foot or store should be to achieve those levels. Thank you.
Yes, so I'll pick first part and then I will let Pete chime in as well. So we're confident that our long-term strategies are on target. As we look at our operating margins that we have put into our three year plan, we are confident and based on our results that we will achieve those high operating margin by the end of '17.
So we are feeling really good about that and as we continue to build on our core businesses, one of the things that are seeing Neely, which I think is interesting is that as we are really getting into the buy-store inventory levels and product assortment and what's selling, we're starting to see some of the newness that we have that has come in is selling at a higher rate than we really expect it.
One of the things that I think our customer is now looking for is she is a little bit more comfortable now with fashions like leggings or Ponti or long cardigans, which may be we didn’t give her enough credit for being as I hate to say forward because I don’t think she is forward but to really accept these trends now. So we're seeing higher sell-throughs in some of that product which is great for us obviously that’s what we want to see in fashion.
But now we are tweeting and we've actually revised our Q1 lined by teams on the phone to probably seven or eight times really trying to get that in line because she want newness. So we are buying shorter runs as it relates to fashion. Bringing newness and then slowing it as every two weeks and then maintaining it's in stock position in our core basics.
So now I'll let Pete pick it up on the sales per square foot.
Yes, hi Neely. As it relates to sales per square foot, to hit those high single digit operating margins, it's going to be between 220 and 230 per square foot. Now one of the ways that we get there is we continue to expand our outlet stores, which today we have 43, and we may have opened in the other quarters. So we'll probably have 44 and those carry a sales per square foot north of $250 per square foot today and continue to be the -- performing well in spite of the overall retail environment.
That is part of -- and as we continue to go down, your MPW strategy and collapse and combining another aspect of increasing the sales per square foot. I think overall as LuAnn said, I think by the end of '17 versus the end of '16 and I think that's more of a factor of just slow down just in general this year, but as we analyze the results of all of these strategies, we actually remain more confident that the other right strategies and we just have to weather through some softness and overall sales for a while.
And you know, Neely too, as we said on the last call that we were really focusing on net sales because a couple of things obviously with these conversions and the acceleration of MPWs as well as adding CJ product etcetera and these stores coming out of our comp, Our comps are a little Wonky, okay.
So normally I don't give this so Luke won't listen, but yesterday we were up 6% overall sales to last year with 7% less stores and yet we were down 3.5% comp or something. So it's really -- it's a really interesting phenomenon now as we're really moving and accelerating these MPWs.
So we will obviously be reporting comp store sales, but we do want to give more color as it relates to the total sales and then more information as we move forward with number one, the sales per square foot productivity as well as four wall between outlets and MPWs, which are really our most successful units.
We do see right now two and we're looking at continuing to accelerate the MPWs as well as accelerate our outlets as they come available based on the productivity and operating income that we're seeing there.
Okay. Great. I'll let a few other people ask some questions. Thanks.
For our next question, we move to Jennifer Davis of Buckingham Research.
Hey guys, good morning.
Good morning, Jen.
How are you?
First, sorry just a follow-up on your response LuAnn, you said yesterday was it through yesterday itself or…
No just yesterday, so what we're looking at it on a daily basis, we had one of these lastly too. So it's interesting that we can have 7.5% fewer stores have an overall increase in sales and yet have a negative comp. So a lot of that has to do with the mix of our stores Jen and that's why we feel much more confident that we can give a more accurate picture when we're talking about net sales versus comp.
Now once these stores anniversary, obviously we'll go back to guiding to comp, but that's going to take us a couple of years. So we believe providing guidance on net sales and where our current trends are running and then also reporting comp would provide you with the information that I think is really more significant.
Right, right. Okay. And I know you said that sales trends improved over the Black Friday weekend. How about November? Did you see an improvement in November versus overall…
The first half of November actually leading into Black Friday week, whatever we're calling it these days, was down, but the trends over the weekend improved quite a bit. We're still negative but it was a different trend line and we're very -- given the environment we're happy with the results over the weekend.
Right. Okay. All right. Great, and then could you -- and I am sorry, if I missed this, did you give the metrics around the MPW stores, versus a single branded stores in terms of sales per square foot?
The sales per square foot on the MPW stores runs about something about 12% higher in the quarter versus the CB and CJ standalone stores.
Okay. And year-to-date is it a similar number.
Year-to-date it's a similar number.
And for overall profitability.
The overall profitability for the quarter was up approximately 400 basis points versus the -- which is really an acceleration because year-to-date, we were up 350 basis points.
Okay. And then, sorry one last question and then I'll let someone jump on. Guidance, I think you said is based on similar sales trends as you saw in the third quarter is that correct?
So, I think it sounds like fourth quarter is off to a little bit of a better start but you're not -- you're not really considering that yet?
No, I think there is a big swing factor in the fourth quarter is going to be more the weather right and we had -- January last year was severely impacted by weather and now January is also the smallest month of the quarter and predicting weather is obviously is something you don't want to hang your head on as it relates to improvement in sales.
But we're positioned we believe to recapture those sales if we have more normal weather patterns.
Okay. All right, but that is not in your guidance.
Okay. All right. Okay. Great, thanks and best of luck.
We now move to Jeremy Hamblin of Dougherty & Company
Good morning and thanks for taking my questions.
So just wanted to ask another question honestly on the trends, so based on what happened or what the final result was for Q3 versus your updated guidance at the beginning of October, it seems though that there is maybe this kind of period between let's call end of September and the middle of November, would you characterize that as maybe the worst period that you’ve seen or are we continuing to see -- it sounds like the trends have improved a little bit.
But am I right in thinking that that period really was just a significant deceleration from what you had been seeing before and that it's maybe not quite as bad as it was during that period of time?
I think that's a pretty fair characterization of the -- of what's going on. In looking at things like we obviously monitor our own traffic, but looking at things like shopper track, they were reporting in November and I think with each successive week, the traffic related to apparel continued to decline in the worst week of traffic in October, happened to also coincide with our friends and family week, which obviously takes a bite out of sales.
And so over that period of time, was kind of what we feel just is now it was the low point with some improvement over the past holiday weekend.
And just overall, what do you think is causing this because quite frankly I think every week however thus far in the missy space has missed and it just seems like there was just a massive fall-off in trends in this space and it's obviously highly promotional as well, but LuAnn do you have a sense of what is causing this and how can we just get some comfort that this isn’t a maybe a longer term trend?
I wish I could give you that Jeremy. I would tell you after 40 years in the business, although I don't print that, is that it's interesting because and we dialogue this when we were on the road together is we started to see this happen, we thought at Labor Day, we were going to have the best quarter in the entire world right.
And that we were very excited about what the business was and then third week of September, and I think you said it when the iPhone 6 came out all of a sudden it looked like everything dropped off. Now I would tell you that I think first of all the missy business overall for the last two years hasn’t been strong as we all know although the junior business has been worse.
Really what was driving the apparel business from the last couple of years has been men's and kids and so this business has been challenged, but nothing like what we saw and I think you're seeing across the Board and not only just in specialty missy and junior apparel, but I think even in department stores, that it definitely had a major shift in the traffic declines and not just on mall, but people in lifestyles and strips are also saying the same things that traffic has just been down unless you're at the Apple store or you're at Home Depot, you know, or you're doing it yourself; but overall, it’s been a very strange last nine weeks, I'd say.
And then, we go into October. And as you said, it was the warmest of what two to three weeks in October in what 10 years of 50 years or whatever; but again, I don't see it weather related. I think it's just so many things as we discussed. The customers been pulling back, and I think it’s a same thing that all of our peers have said. I don't think there's any one answer. You know, obviously, we can always make improvements in our assortment, and we do have things that are selling.
So they're buying denim, they're buying some fashion. But overall, I have not seen this type of an impact, so widespread across the retail sector, outside of electronics actually in a very long time. And there's nothing that's one single factor that you can attribute it to, which is, it is a little concerning. However, obviously, if you listen to people that are much smarter than me from an economic perspective, I don't think there's any reason to think that this is a long-term shut down of missy apparel.
Right. Let me just ask then a follow-up to that which is, so it sounds like, based on your commentary and some of the other things that we've heard from peers, you know, things like the sweater category has not been very good.
But did you swing the pendulum maybe a little too much in the drive towards more basics? Is any of the performance do you think is self-inflicted, because it sounds like your customer is responding on the fashion side. Did you maybe, kind of, overcorrect in terms of going a little too much in basics?
I don't think so, Jeremy. Now, first of all, there's always things that are self-inflicted. But really what's working out there is that piece of the business. The sweater business has been challenged for the last three years overall.
There were couple of people last year that had increases, but they were up against really bad years the year before and actually pulled it out. So, sweater business overall has been shifting. But I wish I could pinpoint it to say that if I just had more fashion that it would be the case. But its -- that's really not the case.
So, we have 40% of our inventory is in core and 60% of its in fashion. So while there's always a miss, and believe me, every single day I call out what I've missed and what we could have done better, nothing is going to make that big of a change in what I would consider the overall environment and traffic.
And I think that's indicative of what you're seeing across the Board. And so, if it was just our company or if it was just one of our peers, you could say, okay, well we missed this. We are always going to miss something, but not when you have 60% of it in fashion.
So, I firmly believe and I would tell you the only reason I can sleep at night right now is the fact that I have this core and it's protecting the margins and driving people back into the stores. So, I am just thankful that my inventory is current, clean. Going into Q1, I'm going to be in a much better position than I was last year and the business is really challenged. So, I'm very thankful that I have that penetration of core at this point.
I think the other thing is that I think we are seeing opportunities and it's really at certain store levels we had what we call icing in the beginning of November. And we're seeing some very strong response to really little bit more fashion forward goods than we presented in the past.
And you know, Jeremy, I think there's a couple of things that we've identified. I firmly believe that we have much more opportunity in the special size piece of our business. I think that as America continues to be I think underserved in the special size business, we think that we have more opportunity there and we're making some shifts.
As we look at our overall stores, we're spending a lot more time. We're investing in our systems, our team is spending a lot more time really focusing on individual store performance because it certainly is different, and so how do we now make sure that we have the right fashion in certain stores and maybe a little bit more fashion in those stores and then -- and that could even be your most rural areas. We might be the only fashion game in town there.
So, it really -- you really have to analyze each one of those 550 stores to say; okay, now what's the right level and what product do each one of these stores need. And that's what we're really focusing on at this particular point. But I think that and I feel really strongly about the fact that we're well positioned from our inventory.
We're focused on -- our MPW strategy continues to work, which is our number one priority. And our outlet business is really strong, and it's producing great result. So that's where I believe that along with, of course, any time you could improvements to your assortment, but fortunately, I don't believe that that's the issue at this point.
Great. Pete, one more quick follow-up just on the guidance. Your -- the absolute level of dollars on SG&A have actually been down year-over-year and every quarter this year. The guidance implies that it's going to be up roughly $1 million in Q4. Is there any particular reason for that? Is that more embedded on the kind of corporate administrative cost or?
Yeah. As I said, it's more the corporate salaries -- when you're going through a turnaround you're very lien. We have a number of initiatives going on and we wanted to make sure that we have the ability to pull all these things off in a relatively short period of time, so we have staffed accordingly for it. And we think today we're at the staffing levels that we really need to be, so we don't see that as an ongoing increase.
Again, there's some medical claims that will -- that have been creeping up this year. We just had some special circumstances around that. So that -- and really in the third quarter we were up a little bit just by virtue of the fact that the bonus accrual thing optically makes it look lower, but we are up slightly. And we can't just look at store count as it relates to the change in SG&A because our square footage isn't changing at the same pace as our store count. And eventually as the square footage grows, you need the staffing in the stores to deal with that.
And for our next question we move to Liz Pierce at Bran Capital.
Just to -- I want to go back to Neely's question on inventory. That was really my main concern, and I just wanted to make sure I understood. So, the anniversary is happening as we speak in terms of when you made the investments in core.
Right. December, January is when we really rolled out, specifically in denim and bottoms, the sizing initiative that we were undertaking to make sure that we were in stock by size and that really started mid-December.
So, is it really apples-to-apples from where you ended November versus it seems like there's still somewhat of a gap here?
Last year in the fourth quarter we had a significant increase in core inventory. So, as it relate to the end of the third quarter, we had not really started increasing our core inventory with any great extent.
So then the increase that we're looking at right now, I just want to make sure I understand that, and you're still very comfortable with that. You say 82% is current.
And that's just assortment changes?
Well, that's -- I mean that's just recency -- Neely's question was around aging of inventory. And that's really just the recency. So part of it is the core, but if then you just take fashion, the fashion as it relates to the recency of fashion, the fashion that's in same place year-over-year as a percent of the fashion inventory.
Maybe let me ask it a different way. How about, if we look at it between units versus dollars?
The units are up a little bit more than dollars only because of the prices on core versus fashion because core is a little bit lower.
It's a little lower.
Really the thing to takeaway is relates to the core inventory is that the core inventory that we have today is the same core inventory that we're planning at selling six months from now, and nine months from now as it relates to the core basic program. It's no different.
So it's very easy to manage this by just reducing the amount of flow that we're bringing in later in the year, which we've already cut that flow. So that's why we feel very comfortable. It's now things that are seasonal in the nature from either a -- it's not Capris and Shorts, it's not fashion colors, its core basics that we're planning on selling year-in and year-out.
Okay. And then, LuAnn, in terms of the special sizes, because it seems to me, I agree with you, I think these customers are vastly underserved, you would think because of that she's got pent-up kind of demand open to buy, if you will. Maybe is it the matter of if she doesn't know that you're available to her in terms of driving that top line?
Yeah. Some of that is true, Liz. So, one of the things as we said we're analyzing are our MPW strategy as it relates to, and I'll just use this as an example. So as we added plus size product into our missy stores what we're seeing is we're seeing an almost an immediate ramp up of business in a location where we previously had a CJ plus size store.
What we're seeing is a little differently is a center where we never had a plus size store, and even though we marketed around it and we have it in the windows that says it has, has plus size product now that's a slower ramp up. They're just getting used to us being able to tell them that we do have plus size product.
So we can send marketing. We have call list to where we previously had a CJ store, so we can call those customers to come back in. If we didn't have a CJ store, we don't have a call list. And they don't really know, which is why I've said, we're actually focusing on doing more grassroots and more robust store opening as it relates to a store that never had plus size.
I'll tell you the other thing, and now here's Jeremy where it is self-inflicted, we do not have, in my opinion, the amount of plus size we need in the right stores. And that's an opportunity as well as petit, so we have a wide range. And this is no different than when I ran into other retailers.
When you're in different parts of the country, whether it's within the geographic location of the Southeast or the Southeast of the Midwest, customers are different sizes. And there's a higher penetration of size 14 and above in the Midwest than there is in Atlanta, I'm making it up.
But there's a whole difference is to what we want to focus on is to really make sure that we're getting this inventory by store right. So I do believe that we have an opportunity in inventory levels in both petit and in plus sizes on store-by-store basis.
Okay. So that kind of leads me back to the question. When you mentioned your CRM POS and couple other things what's the -- which one is happening first and I mean…
The best one. I think the best one, which is exactly what you're asking, Liz, CRM.
Because that's where we're going to get this information and we also have some other tools. We launched Quantisense last year and there's reporting that we can get on an individual basis. So, we're really looking into that store-by-store.
And I've got to tell you, I don't know if I said this in the script or not, but I know I've said it. I don't think that all of a sudden we're going to see traffic resurge to the 80s in retail, in apparel specifically. So it's a market share gain. So we need to make sure that we have it right by store, by market.
And that's our focus and that's also where we're investing not only in systems, but in team. We have to do a more finite job of analyzing our store business and reacting to it very quickly. And that's where I think the win-win comes as well.
But that, as you said, there's no question that the special size business is an opportunity; and while a lot of people do it, not everybody does it great. And right now I think that we have a big opportunity sitting out there, but we have to do it right also.
So I think there is much more opportunity than I initially saw, specially as we're seeing some of the results in these MPW stores and where we're actually adding CJ product into.
All right. That's helpful. And then my final question, curiosity, what you think given your tenure in the business, where do you think those sweater dollars are going?
I wish they were going to jackets because that's what we believed. But that's not working either. I would tell you that I think it's interesting. I think that some of it is in -- it's just a change.
And you see this. It's in longer tops, it's in those -- I think and there is some self-inflicted I would say that also. I think we could have done a better job in really increasing the penetration of our longer knit tops as well as our cardigan. So I think there is an opportunity there.
But I have to tell you we really thought it was going to go to jackets, and while we have elements of our jacket business that are good like our PU jackets have been very strong, our silky core jackets have been very strong.
Where it has more versatile, multiple use, it's working really well. But I can't say that there is a major shift of all those sweater dollars that have gone to another top category.
But don't you think it's what you said a second ago or earlier is that she is a little more comfortable on the fashion side and some of those sweaters and tops she has in her closet so she can shop for closet for that.
No question. I agree with you, Liz. And I think the other thing is, and I think this is why accessory business is also strong. Not taking away from my accessories team, because they've done an awesome job, but I would tell you that when we're in a cycle like this, she is trying to update her current wardrobe, she is spending her dollars elsewhere or she is saving more, and now she is accessorizing her wardrobe, what's in her closet picking up.
And just like you say, there is a sweater in her closet, but the warmer temperatures early on didn't help the sweater business industry-wide for sure. But she also is now picking up jewelry and excess scarves to really accessorize that existing wardrobe. And then when she sees something else, so here this is the one thing I didn't call out. And here look I can pick up is self-inflicted things all day long. So our legging's business is really good.
Now who thought the Christopher & Banks' customers going to wear leggings to the degree? But all of a sudden now she sees that it's relevant and everybody else is wearing it and I don't have enough leggings.
And it's kind of interesting and little anecdotal information, but I was in the stores -- and I've got to tell you, I have customers that you don't think that they would buy leggings or maybe they should buy leggings.
But I'll tell you what they are because they see them wearing them and now it's very irrelevant. So I think some of that where we characterized a little bit about the CBK customer, I think she is becoming more relevant and that's where we're tweaking some of the go forward.
Great. Thanks. That's all very helpful. Best of luck guys for Q4.
For our final question, we'll take a follow-up from Jennifer Davis at Buckingham Research.
Just a quick question on the West Coast port issues, any -- I guess what's the update going on there? I'm surprise it hasn't been asked yet.
Yeah. It's tough.
Yeah. Bumpy is a good word.
Yeah. We managed to just based on the time of your receipts it's -- we're having some impacts here or there, but the goods that are more seasonal in nature we're getting here and getting into the store, which is good. But it's hard work. Really -- it's something you got to manage every day. And then we've got a good team and a good partner in getting this stuff off the ship and on a truck or on a rail.
You know, Jen, we had that major hiccup in October which we said cost us what $3 million to $4 million, $5 million, whatever it was. And so that was a big concern to us. And then as I'm reading, obviously other people's scripts, I think there were other people and we are too impacted by it. But we've been very lucky to Pete's point. Well, we do have some receipts. We're not impacted like we were in October.
Now, I would just say based on everything we read, it could get worse. And we don't have the answers to that, but we're very lucky that we are in a really good position now as we move into the balance of fourth quarter and into Q1. So we have to monitor it every day because the word coming out is not -- it's not positive.
Right. Okay. But you are in a better position now?
We are. And so -- yes, we definitely are. And thankful based on what I read from some of our peers. It's very difficult.
Yeah, yeah. All right. Thank you.
And best of luck for holiday.
That concludes our question-and-answer session. Ms. Via, I'd like to turn the conference back over to you for any additional or closing remarks.
Thank you for joining us and for your continued interest in Christopher & Banks. We look forward to updating you on our progress on our next earnings call. Best wishes to all of you for very happy, healthy holiday season. Thanks so much. Have a great day.
Ladies and gentlemen, that concludes today's conference. Once again, thank you everyone for joining us.
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