New York & Company, Inc. (NWY) CEO Greg Scott on Q1 2018 Results - Earnings Call Transcript

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New York & Company, Inc. (NYSE:NWY) Q1 2018 Results Earnings Conference Call May 24, 2018 4:30 PM ET

Executives

Allison Malkin - IR

Greg Scott - CEO

John Worthington - President and COO

Sheamus Toal - EVP and CFO

Analysts

David King - ROTH Capital Partners

Oliver Chen - Cowen and Company

Jason Smith - Kanen Wealth Management

Operator

Good day everyone and welcome to the New York & Company First Quarter 2018 Earnings Conference Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Ms. Allison Malkin of ICR. Please go ahead.

Allison Malkin

Thank you. Good afternoon everyone. Before we begin, I would like to remind you that some of the comments made on today's call, either as part of our prepared remarks or in response to your questions, may contain forward-looking statements that are made pursuant to the Safe Harbor provisions in the Private Securities Litigation Reform Act of 1995.

Actual results may differ from those projected in such forward-looking statements. Such forward-looking statements are subject to risks and uncertainties as described in the company's documents filed with the SEC, including the company's fiscal year 2017 Form 10-K.

As a supplement to today's presentation, we have made slides available, which you can view under the Investor Relations section at newyorkandcompany.com.

And now I would like to turn the call over to Greg Scott, CEO.

Greg Scott

Thank you. Good afternoon and thank you for joining us today to review our first quarter fiscal 2018 results. With me today are John Worthington, our President and COO; and Sheamus Toal, our Executive Vice President and Chief Financial Officer.

I'll begin the call by reviewing our performance for the first quarter and our key areas of focus we have in place to drive continued improvement throughout the year. Following my remarks, John will provide an update on our credit and loyalty, eCommerce, real estate optimization, omni and Project Excellence initiatives. Then Sheamus will wrap-up our prepared remarks by providing our financial results and outlook in more detail before opening the call up for questions.

Our results were well above our guidance with Q1 profits at the highest level in a decade. Our non-GAAP operating profit of $4.3 million for the quarter increased $6.6 million over the prior year's non-GAAP loss of $2.3 million and represented our fifth straight quarter of improved results.

Our topline comp at nearly 3% and bottom-line gross profit margin increase of 130 basis points, reflects the company's strongest Q1 performance since 2005. We improved EBITDA by -- to $9 million, a $7 million increase to last year and we ended the quarter with $78 million in cash on hand, $1.19 per share and no debt.

During the quarter, we are pleased to deliver not only positive comps for both the February combined March/April period, but also positive comps in both store and eCom channels. This was the first time we've delivered first quarter comp growth in bricks and clicks since Q1 2011.

Our store traffic continues to outperform industry benchmarks, and which, combined with a significant increase in average dollar sale, we were able to drive positive sales comps. Finally, we are seeing our eCommerce business continue to expand at 31% of sales, near the high end of the specialty women's apparel industry.

Our strong performance reflects our continued evolution to a lifestyle brand platform with a dominant digital channel combined with diligent expense and capital management. We are challenging ourselves every day to become a leaner, faster, more efficient and streamlined organization and are unlocking the potential of New York & Company's differentiated market position and disciplined operating approach.

Turning to our first quarter results, I'd like to spend a few moments discussing our progress against our 2018 key to success, which contributed to the positive comp performance in both our store and eCommerce channels.

First, we continue to leverage our celebrity collaborations and sub-brands at market differentiators that our customers can only find at New York & Company. Together, our Eva Mendes and Gabrielle Union collections grew at a double-digit pace, represented nearly 10% of the business.

The positive halo of celebrity has also elevated performance in our sub-brands, specifically 7th Avenue, which Gabrielle Union serves as a brand ambassador for this largest sub-brand in the company.

These collaborations reflect the positive impact our celebrities have for both their individual collections and for the core New York & Company assortment. I want to thank the continued support of Eva Mendes and Gabrielle Union as they are amazing partners and continue to be great ambassadors for New York & Company.

We are seeing our customer response to fashion, style, quality, and value offering across all of our sub-brands. Our 7th Avenue sub-brand continued its strong momentum in Q1. Driving this momentum was the emerging suiting trend where we continue to capitalize on the trends and positive customer response.

Our Soho Street sub-brand, which showcases a more casual and personal aesthetic, also delivered positive sales comps in Q1. We are pleased to see the strength in our 7th Avenue sub-brand, coupled with a positive response to our Soho Street sub-brand, as these reflects the progress we have made in expanding the versatility and lifestyle perception of New York & Company.

For Q1, we continue to evolve our lifestyle brand platform in several ways, including: in our wear-to-work sub-brand 7th Avenue, we delivered positive comp supported by strong double-digit comp growth in jackets and pants with pants as a critical component of the sub-brand's success.

Suiting is the new it, and we are happy that it's happening because this plays to our core competency. This sub-brand is an area of competitive strength for New York & Company and is a strong driver of customer loyalty given its strength in pants.

In Soho Street, we continue to deliver positive comp performance as we [distort] [ph] investments where we see the greatest potential to enhance [into areas] [ph] on trend, comfortable, and effortless lifestyle.

Our performance in Soho Jeans was softer than anticipated and we have a plan in place to relaunch this collection with new fabrics and the latest technologies that will drive growth.

Most importantly, I am pleased to announce that our newest celebrity will be joining as our Soho Jeans celebrity ambassador in fall 2018. This will allow us to further amplify our casual lifestyle projection and replicate the success we've delivered with our Eva Mendes and Gabrielle Union partnerships.

Number two, the positive halo of our celebrity partnerships and sub-brands also supports our second strategic priority to increase brand awareness and customer engagement. We continue to see our strong traffic outperform in -- our store traffic outperform industry benchmarks, which we attribute in large parts to the role celebrity plays in amplifying our brand voice.

For 2018, we are focused on gaining share and driving traffic, customer acquisition, retention, and increasing customer engagement with our celebrities and sub-brands.

To update you on a few initiatives supporting this strategic priority; A, regarding traffic, we continue to leverage our celebrity partnerships in order to build awareness and drive traffic.

In February, we launched our AllTogetherNow campaign featuring Gabrielle Union and the four leading actresses of BET's hit show, Being Mary Jane. This campaign celebrates the diversity of body types, the inclusivity of women of all ages and encourages our customers to post photos of people who inspire and motivate them.

The engagement on this campaign has been further amplified by the strong social following of both of our celebrities. In addition, our PR impressions for Gabrielle Union increased nearly 25% over the prior year, reflecting the power of celebrity as it continues to be an important traffic driver and a strong partnership that we have with Gabrielle Union.

B, regarding acquisition and retention, we transitioned to a new CRM database vendor, which will enable our data analytics and personalization capabilities in driving higher frequency among current loyalty customers while reengaging lapsed customers.

In Q1, for example, we enhanced our direct mail targeting algorithms and delivered higher productivity per name mailed. Further, we now have visibility to develop customer segmentation based on spend, offer, and category affinities.

And C, regarding our credit loyalty business, our RUNWAYREWARDS program continues to be an important growth initiative. During the quarter, we delivered increased sales and penetration of these high-value customers.

And regarding digital marketing, to further amplify our brand reach, we continue to adjust our digital marketing investments across platforms. For example, in our social channels, we leveraged our propensity and predictive models to optimize our digital spend. This resulted in lower cost per visit to our digital platforms. In addition, the power of celebrity social presence provides an additional vehicle, driving interest and visits.

Number three, our third strategic priority is focused on driving digital and omni. For Q1 2018, we continued to grow our eCommerce channel as a leader within the specialty women's apparel industry to 31% of total sales. The increase in traffic to our digital flagship reflects the increased awareness and power of the New York & Company brand and celebrity collaborations.

In addition, our exclusive online merchandise delivered double-digit comps. These assortments allow us to expand our fashion projection through new styles and categories while also offering extended sizes as we offer size 00 through 20 in nearly all styles, including our celebrity collections. Finally, we continue to identify opportunities to enhance the customer experience whether it's through product extensions or site enhancements.

Regarding omni initiatives, we continue to effectively monetize visits by providing an easy and seamless customer experience. We were early adopters of this technology in 2014 with 100% of our store network omni-enabled. We have moved beyond implementation and are now focused on smarter, more profitable fulfillment.

Our fourth strategic priority focused on optimizing our real estate portfolio. We experienced continued leverage of our store expenses with store closures and an ongoing land or rent concessions contributing to the $3.4 million reduction in buying and occupancy costs. We also benefit from a highly flexible real estate portfolio with roughly 65% of our existing store base on a two-year or lease -- or less terms.

In an environment where most retailers are shutting locations, we have taken advantage of openings in select premier centers where we can introduce and expand the brand's new markets. John will elaborate further on the steps we are taking to rationalize and optimize our store fleet.

Next, Project Excellence, we continue to make progress against being a leaner, faster, more efficient and more responsive organization. Our SG&A expenses decreased $3.4 million compared to the prior year and contributed 250 basis points in leverage, reflecting our commitment to enhancing productivity and operational discipline.

While John will discuss this initiative in greater detail, I would like to walk you through a few highlights. First, organization. As we have discussed previously, we have streamlined our organization. Last fall, we consolidated our New York & Company outlet organization to improve sales and profit while driving efficiencies across channels. We believe this consolidation will increase channel profitability.

In February, we further streamlined our corporate office support functions. The combined impact of the outlet integration and corporate office rationalization reduced annualized payroll-related costs by approximately $7 million in 2018 and benefited our Q1 results by over $1 million.

Next, pricing and promotions. As I've shared previously, we are driving higher sales and margin through leveraging data analytics and insights across product, customer, and calendar elasticities while reducing underproductive promotions.

During the quarter, we reinvented one of our banner promotion, city cash, which drove a significantly improve customer response. In addition, we reduced several ineffective and margin-eroding promotional events. We expect continued benefits from this initiative throughout 2018.

John will also discuss other areas of business where we'll make progress on expense control, cost savings, and overall efficiency for the business. We remain committed to looking at every cost to improve efficiencies and deliver a more profitable operating model.

Our final strategic priority focused on growth initiatives. I've shared previously that we've launched our subscription box service, NY&C Closet available at nyandcloset -- nyandcompanycloset.com. I'm pleased to share that we built a profitable operating model and continue to grow the subscriber base. Going forward, we look to expand customer engagement with the New York & Company brand through this platform.

In addition, we expanded our portfolio of brands with the relaunch of Fashion to Figure in mid-February. As previously announced, this acquisition enabled us to enter the $21 billion-plus market and drive accretive growth to the New York & Company portfolio.

We're in the process of developing our long-term strategic plan for Fashion to Figure. We are excited by the potential of this brand, and we'll update you further regarding Fashion to Figure strategies for growth.

The strength of our balance sheet with $78 million in cash on hand or $1.19 per share and no debt is a competitive advantage, which will allow us to further evaluate opportunities for growth that are accretive to the company.

Looking forward to Q2, we are pleased to see continued momentum transitioned into early summer, which is reflected in our positive comp guidance in the low single-digit range. In addition, we are pleased to increase our expectations for spring season operating income compared to our previously issued guidance.

Before I turn the call over to John, I want to thank the entire organization for their continued hard work, dedication, and commitment to our customers.

With that, I'll turn the call over to John.

John Worthington

Thanks Greg. We're very pleased with our first quarter results, reflecting growth across all key operating metrics, including increased sales, positive comp store sales, expansion in growth margins, and leverage in SG&A. Combined, this drove a $7.3 million improvement in operating income versus the first quarter of last year.

EBITDA also improved in the quarter to $9 million, increasing $6.9 million from last year's Q1. We ended the quarter with $78 million in cash on hand, representing $1.19 in cash per share with no debt, as Greg mentioned.

Indeed, our strategy have focused on providing our customers with exclusive brands supported by a highly effective omni-channel experience are working to give us consistent top and bottom-line growth.

Our comp store sales rose 2.7% and reflect increases across both our store and eCommerce channels, further demonstrating that our celebrity, private-label credit card, omni and sub-brand strategies are enabling us to provide consumers with great product and value, driving her to shop more often at New York & Company, both in-store and online. We are very proud to have reached our highest gross margin rate since the first quarter of 2005.

In Q1, we expanded gross margin in the quarter by 130 basis points to 32% as we benefit from royalties associated with our private-label credit card as well as product cost efficiencies, agent rebates, and rent reductions.

We also continued to lower SG&A as part of our Project Excellence initiative and are very pleased with the consistent positive performance we've seen. Combined, this led to a GAAP operating income of $3.5 million, up $7.3 million over last year and our best Q1 opt income in the last 10 years.

I can't stress enough how pleased we are with the progress that we continue to make. And it is clear that we have the right strategies in place to drive the business forward. We remain well-positioned to leverage our strong momentum as we strive to further grow our business performance.

Now turning to update our key initiatives, I'll begin with our credit loyalty program, RUNWAYREWARDS, then turn to our real estate strategies, including rent improvement, lease terms, conversion stores, and opening new takeover stores in premier centers. In addition, I'll update you on our omni-channel, eCommerce, IT initiatives, and close with Project Excellence, which continues to be a strong contributor to our top and bottom line performance.

Starting with our RUNWAYREWARDS credit card. We continue to see a strong response to this program, which delivered long-term loyalty and comp sales. Our PLCC penetration rose to over 42%, up 30 basis points compared to last year. Our credit loyalty customers tend to shop more frequently and spend two to three times more annually than our non-loyalty customers.

We will continue to be laser-focused on leveraging this great program to drive sales. The results that we saw in the first quarter from our PLCC card customers continue to show that we are on the right path.

As we said before, our goal is to increase PLCC penetration to approximately 50%. We'll do this by continuing to acquire new customers, grow the customer -- current customer base and focus our efforts to send targeted e-mails to existing customers to drive response.

In terms of real estate, we open one New York & Company store, eight Fashion to Figure stores and converted one existing New York & Company store to an outlet, ending the quarter with 432 stores, including 119 outlet stores.

We'll continue to selectively open takeover locations in highly productive malls where we can quickly take over a current location that is move-in ready on favorable lease terms.

During the quarter, we opened our newest takeover location in Christiana Mall and remain on track to open three to four additional takeover stores this year. The newest store in Christiana, along with our takeover stores we opened last year in Miami International, Tysons, Sawgrass, Pentagon, Chicago Fashion, Sherman Oaks California and Manhattan Mall in New York City, continue to produce strong sales.

Now, let me turn to outlet conversion. Our outlet conversion stores also continued their strong performance with sales accelerating from Q4. As we mentioned last quarter, we started to include some New York & Company clearance merchandise into our outlet conversion stores at the start of the year. This has enabled us to continue driving strong traffic and profit at these locations. In fact, in the first quarter, we saw a double-digit comp increase in our outlet conversion stores.

Importantly, we continue to see a balanced basket among customers in these outlet conversion stores with both clearance and outlet-only products. We are focusing on continuing to optimize our entire retail fleet, ensuring that we have flexible lease terms that benefit -- that we benefit from our recent rent concessions.

During the quarter, we closed nine locations and plan to close an additional 30 to 40 throughout the remainder of the year. As I mentioned, we ended the first quarter with 432 stores, including 119 outlets and 2.2 million selling square feet in operations.

Importantly, our store portfolio remains very flexible with approximately 65% of our locations on two-year or less leases. Combined, our real estate strategies of outlet conversion, takeover stores and fleet optimization in New York & Company retail stores, position us well in 2018 and beyond.

Our next focus is on omni-channel and IT strategies. We continue to leverage the investments that we have made to elevate our capabilities and make our business more efficient. We are already seeing improved efficiencies in our stores as associates begin to use our mobile handheld scanners and tablets and customers also appreciate the additional flexibility that we've given through our omni-channel fulfillment option such as Ship From Store and Buy Online Pick Up In Store.

We expect to continue to leverage these new IT and omni features to drive further increases in our omni-channel business as well as efficiencies and productivity in our stores.

Now, let me turn to eCom. Our eCom business continues to see growth. In Q1, eCom represented over 31% penetration of our overall Q1 total sales, a new high. This important channel serves as a platform to grow both our customer file and our PLCC base quickly throughout the country.

We are pleased with the strong foundation that we have built with our eCommerce business, which has helped us to continue our multi-channel growth. We are focused on continuing to aggressively expand this important channel as we go forward.

Finally, turning to Project Excellence, which is now in the start of its fourth year. We continue to see improvements as we integrate our New York & Company and outlet stores organization and process.

With these teams operating as one organization, we can create efficiencies across product, visual, merchandising, allocation, and our field operations. We will be better positioned to enhance our outlet offering with proven assortments and relevant sub-brands that resonate with our customers.

In addition, we can leverage learnings from both channels to improve business in marketing and promotions to ensure that our stores have compelling offers to drive traffic. Importantly, this integration will enable us to lower cost across the business as we leverage our sourcing capabilities in both channels.

In terms of our sourcing strategy, we continue to build strong partnerships with our key agents and factories, which we expect will help us to further improve speed-to-market and reduce cost. We are now realizing approximately $10 million in benefits annually from these sourcing strategies.

Overall, we are pleased with the results that we are seeing from Project Excellence in real estate, private-label credit card, sourcing, omni, and our overall organizational structure. We are positioned to continue to drive our efforts to reduce expenses, improve efficiencies and productivity, and, of course, drive profit to the bottom-line.

In closing, we are very pleased with the strong results and momentum in Q1 that has carried us on -- that carried on from our solid results in 2017. We are excited about the progress that we have made in the business, which has again led to consistent comp performance, growth in our PLCC loyalty, and continued progress on Project Excellence. All of these strategies and efforts have led to a strong operating income in Q1 and position us well for Q2 and the remainder of 2018 and beyond.

With that, I'd like to turn the call over to Sheamus to review our first quarter results as well as our outlook in greater detail.

Sheamus Toal

Thank you, John. Good afternoon everyone. Net sales for the first quarter were $218.8 million as compared to $209.9 million in the prior year. The increase in net sales reflects the combined effects of the shift of the calendar due to the 53rd week in fiscal year 2017, increased sales from our new Fashion to Figure business, and growth in eCommerce sales, partially offset by reduced store count with 30 less stores in operation during the period, representing a 6.5% reduction in store count.

Comparable store sales increased 2.7% driven by increases in both brick-and-mortar stores and increases in sales from our -- from the company's eCommerce business. In the comparable store sales base, average dollar sales per transaction increased by 5.3%, while the number of transactions per average store decreased by 2.5%.

Gross profit as a percentage of net sales increased 130 basis points to 32% versus the 2017 first quarter gross profit percentage of 30.7%, reflecting the highest gross margin rate achieved in the first quarter since 2005. The increase during the quarter reflects a 260 basis point improvement in the leverage of buying and occupancy costs due to a $3.4 million reduction in expenses and higher sales, partially offset by 130 basis point decrease in merchandise margins, largely driven by increased shipping costs, severance expense related to our recent reorganization changes, and a slight increase in promotional activity to drive sales.

Moving to selling, general and administrative expenses. On a GAAP basis, selling, general and administrative expenses were well below our prior guidance at $66.5 million or 30.4% of net sales as compared to $68.3 million or 32.5% of net sales in the prior year period. The current year period also included $0.5 million of non-operating charges primarily related to the employee termination costs resulting from our recent reorganization changes.

On a non-GAAP basis, selling, general and administrative expenses were $66 million or 30.1% of net sales as compared to non-GAAP selling, general and administrative expenses of $67.2 million or 32% of net sales in the prior year.

We are also pleased to exceed the high end of our external guidance range with GAAP operating income of $3.5 million and non-GAAP operating income of $4.3 million as compared to our prior non-GAAP operating profit guidance of $2 million to $3 million. This represented an improvement of $7.3 million on a GAAP basis and $6.6 million on a non-GAAP basis as compared to the prior year period.

GAAP net income for the first quarter of fiscal year 2018 was $3.1 million or $0.05 per diluted share as compared to the prior year GAAP net loss of $4.2 million or a loss of $0.07 per diluted share.

On a non-GAAP basis, the company's first quarter adjusted net income was $3.9 million or earnings of $0.06 per diluted share. This compares to the prior year's first quarter non-GAAP adjusted net loss of $2.7 million or $0.04 per diluted share.

Total quarter end inventory decreased 5.4%, reflecting planned reductions in unit inventories. Capital spending for the first quarter of 2018 was $300,000 as compared to $2.1 million in the prior year period.

As previously disclosed, the company prepaid the remaining outstanding balance on its long-term debt in the amount of $11.5 million. The prepayment will save the company approximately $500,000 of interest expense for fiscal year 2018 and save $1 million of interest expense over the remaining term of the loan.

While there were no prepayment costs, the company did write-off approximately $200,000 of unamortized deferred financing costs, which are reflected as a loss on extinguishment of debt. The prepayment was funded with the company's existing cash on hand. The company ended the quarter with $78 million of cash on hand, no outstanding borrowings under its revolving credit facility, and no long-term debt.

Regarding expectations for fiscal year 2018. The company continues to focus on improving its operating results to drive increases in both annual operating income and EBITDA.

As we've previously disclosed in our March release, during the spring season, the combined effects of the calendar shifts from the 53rd week in 2017 and new revenue recognition accounting standards, will have an impact on the individual quarterly results. And as such, we originally provided commentary on the overall spring season, which combines the first and second quarters of fiscal year 2018, which we have updated in today's release, increasing those operating profit expectations.

For the spring season, we now expect non-GAAP operating income to be in the range of $5 million to $6 million, excluding the impact of non-operating charges of $0.8 million, primarily related to severance, resulting from our recently completed streamlining of our corporate office support functions as compared to the prior year non-GAAP operating income of $1.2 million.

As we disclosed in March, as a result of the calendar shift from the 53rd week in 2017, an important pre-Mother's Day week moved out of the second quarter and into the first quarter, benefiting sales and profits in the first quarter, but this shift will negatively impact the second quarter of fiscal year 2018 as compared to last year.

We disclosed detail spring season guidance in our release. But I will also provide some commentary on the second quarter. For the second quarter, we are currently expecting the following; net sales are expected to decrease in the low to mid-single-digit percentage range, reflecting the shift of the calendar and a reduction of 31 stores as compared to last year or approximately 6.7% of the total store count. This is partially offset by growth in the eCommerce sales and the addition of the Fashion to Figure business.

Comparable store sales for the second quarter, which are shifted to compare like stores and calendar weeks, are expected to increase in the low single-digit percentage range.

Gross margin for the second quarter is expected to be flat on a rate basis as compared to last year's historic high, reflecting reductions in home office payroll costs driven by the ongoing benefits of Project Excellence and reductions in occupancy costs through the company's real estate negotiations, offset by increased shipping costs associated with the growing omni-channel business and increases in variable compensation accruals.

As it relates to selling, general and administrative expenses, as disclosed in the prior year second quarter, the 2017 second quarter general -- selling, general and administrative expenses included an unusual benefit due to the reversal of $1.7 million legal reserve. Excluding this benefit from the prior year, selling, general and administrative expenses were $65.1 million.

For the second quarter of this year, selling, general and administrative expenses are expected to be flat on a dollar basis at approximately $65 million. This reflects the company's continued efforts to increase efficiency and reduce home office payroll costs through a recently completed rationalization of the company's corporate support functions, partially offset by increases in selling expenses driven by the growth in eCommerce variable costs and increases in performance-based compensation accruals, which are anticipated this year based upon improved operating results that are expected in the spring season and the full year. The prior year second quarter included no such performance-based accruals.

For the second quarter, we are currently expecting up to $1.7 million of operating income on both the GAAP and non-GAAP basis as compared to operating income of $5.2 million in the prior year. However, as previously disclosed, the prior year operating results included an unusual benefit of $1.7 million.

Excluding the $1.7 million non-operating benefit, non-GAAP operating income was $3.5 million in the prior year. The reduction in non-GAAP operating income reflected in the current year's second quarter guidance is largely attributed to the shift in calendar, which benefited the first quarter.

As previously noted, the spring season non-GAAP operating results are expected to improve to $5 million to $6 million as compared to the prior year non-GAAP operating income of $1.2 million.

Based upon the anticipated results in the second quarter, the company now expects EBITDA for the full spring season to be in the range of $17 million to $18 million as compared to $12.3 million of EBITDA in the prior year period.

We expect total inventory at the end of the second quarter to decrease by a low to mid-single-digit percentage as compared to the prior year second quarter.

Capital expenditures for the second quarter fiscal year 2018 are projected to be approximately $3 million to $5 million as compared to $2.6 million of capital expenditures in the second quarter of last year, reflecting continued investments in the company's information technology and omni-channel infrastructure and real estate remodel, refresh activity.

For the full fiscal year, capital expenditures are still expected to be in the range of $10 million to $12 million. Depreciation expense for the second quarter is estimated at $5 million.

With that, I would like to turn the call over to the operator to begin the question-and-answer portion of the call.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, the question-and-answer session will be conducted electronically. [Operator Instructions]

And your first question will come from Oliver Chen with Cowen and Company. Mr. Chen your line is open, you may want to check your mute button, we're unable to hear you. And once again, you may want to pick up your handset.

With no response, I'll move on to Dave King with ROTH Capital.

David King

Sure. Thanks. Hi guys.

Greg Scott

Hi.

David King

I guess, first on the gross margin guidance. Given the, I think, 130 basis points of improvement year-on-year with a lot of that coming from lower BDO [ph], I guess, I would have thought more of that would be flowing through into the second quarter. Is that just conservatism on your part? Or how significant is the higher shipping or the comp growth?

Sheamus Toal

Yes. So, I wouldn't say its conservatism. I think we are certainly anticipating additional savings in occupancy, so that's part of our continued strategy going forward. But part of what benefited us in leveraging that expense in Q1 was the increase in topline sales. So, part of the improvement and the basis point leverage is because we were increasing topline sales. That was, as I commented, partially attributable or significantly attributable to the shift in sales.

As we look to Q2, while we're expecting comparable store sales increases for the quarter alone and we're certainly expecting comparable store sales increases for the season, so we're in a strong sales position there, because of the shift, the gross topline sales number is going down in the quarter due to the shift as well as the lower store count.

So, that's really what's causing the lack of leverage in the second quarter is that shift of sales is creating a negative pressure on the sales and a headwind in terms of leveraging those somewhat fixed buying and occupancy costs. Although, as I started, we are experiencing some level of reduction in those costs.

David King

Okay. And then somewhat similarly, I guess, did I hear correctly that you took down your guidance for store closings for the year? And I guess, more importantly, what should we take that to mean in terms of progress on lease negotiations? And what do you see as the potential for further rent release going forward?

Sheamus Toal

So, in terms of store closures, we're probably still in the same ranges that we had originally established. So, I think John commented that we've closed some stores in Q1, and then we expect for the remainder of the year to close another 30 to 40. So, we're still probably in the ranges that we had established for the full year, but it was just split out into those two buckets.

I think we've always said that, that was the range based upon our expectations in looking at the rent in these stores and the performance of these stores. But as we commented in the past, we're very aggressive in terms of renegotiating stores upon renewal. And to the extent that we can achieve profitability or an acceptable level of profitability in these stores either through additional rent concessions or further improvements in sales throughout the year as we're successful with some of our celebrity efforts and some of these other initiatives that we're putting in place, we would certainly keep those stores open.

So, I think it is a flexible target for us and one that, honestly, depending upon the success of some of the renegotiations, it could go down further.

John Worthington

Dave, it's John. I think just to touch on what Sheamus said, I think because we're 65% to 70% on these one to two-year leases, it has really allowed us to have a very good fluent conversation with all of our big landlords. And -- so although we closed nine, we project another 30 to 40, that number could change.

I think the other number that could change is if we find that there are nice opportunities with takeovers, which we were able to capitalize on -- in 2017, we had a handful scheduled for 2018. But if there are other opportunities that open up, we'll certainly take advantage of those.

And again, I think, with what we're doing with outlet conversion and just generally, with our fleet having some flexibility, we're moving things back and forth. But because we have such a high percentage of short-term leases, it allows us to really do the best we can with negotiations. And we've been very successful -- and I think Greg quoted a number with our whole rent release over the last several years.

David King

Great. Fantastic. And then I guess lastly for me. Nice job on paying off the debt as planned. With that now done and call it $1.20 a share in cash, what do you see as the primary uses of that cash balance going forward? Obviously, you’ve the uptick in CapEx, but it's not that significant. Are there other acquisition opportunities out there like Fashion to Figure? How should we think about those priorities?

Sheamus Toal

Yes. So Dave, it’s Sheamus. I think we're constantly looking at our working capital needs and liquidity and what is the best use of the cash that we have. We think we're in a very strong position in terms of balance sheet and cash position, and it opens up a number of different opportunities for us.

I think first and foremost, as we look to the future, I think, Greg mentioned a whole series of initiatives that we believe in, that we believe will help us drive topline sales and improve profitability, and we're prepared to make investments in those whether it's celebrity collaborations, the addition of further new celebrities, looking at expanding the Fashion to Figure business that we've recently invested in that was a very modest investment, but we're monitoring that business and look to capitalize on opportunities to expand that. Further investments in our eCommerce business, which, as you know, has really paid off huge dividends for us in terms of topline sales growth as well as improvements in profitability.

And then always looking at whitespace opportunities, other areas that we could invest in, either in self-generated new opportunities or potential other external opportunities. So, we believe that those are still significant opportunities ahead of us and are constantly monitoring those as potential uses of cash for the future.

David King

Okay, that's good color. Thanks for taking my questions and nice quarter.

Sheamus Toal

Thank you.

Greg Scott

Thanks Dave.

Operator

And we'll go to Oliver Chen with Cowen and Company.

Oliver Chen

Hi, thank you. Solid quarter. Our question was about merchandise margins and what you can expect there. It's not been an easy environment in terms of promotions. So, what are your thoughts as the year progresses in terms of managing promotions? And the shipping cost piece has been an industry-wide challenge. Do you expect that to continue for the foreseeable future? Thank you.

Greg Scott

So, I'll pick it up on merch margin. It's Greg. A couple of things that I would say is we believe we're going to continue to experience improvement in our AUC, which is going to help our IMU. One of the big initiatives that we're seeing is that with the consolidation of New York & Company outlet buying shared assortments, we're seeing a very nice uptick in some of the items we're buying from outlet and in NYCO because of the larger quantities of shared items.

So, we're actually seeing some benefits in IMUs because of AUC that we were not probably early anticipating. So that, we think, it's going to continue, obviously, as a benefit as we move throughout the year.

Two, we reduced our testing where we've taken out some of the unprofitable testing, both online and in-stores. We're a large testing company. We think it's a super important core competency. But we believe, as we move to fall, we're going to reduce it by 30%, which is going to reduce both our markdowns but also improve our IMU, and it's going to help us as well.

Next, I will say, we continue to look at L.E.K., which was a consultant we looked at for pricing and promotion. And what we're seeing now is that as we looked at Q1, we're starting to pull promotions out of our system in terms of, for instance, not going to 50 off everything but going to up to 50 pulling, what we call, mystery cards out of the system where we find promotions that are not -- had not really given us their incremental sales and margin we needed. So, we believe we continue to do that, especially in Holiday as we move forward.

And in regards to shipping costs, as they go up, I think, I can't remember the numbers, 6% or 7%, annually in terms of shipping rate. But I will say there's a couple of things that are benefiting. While our eCommerce sales continue to increase, we have become much more diligent and much more, I guess, stringent on our Ship From Store.

And we've really taken down what we call hops, meaning the amount of times an order can go to stores, which has really benefit us actually in Q1 by reducing our shipping cost from plan due to the fact that we've really reduced the amount of different orders or different, I guess, shipments per customer.

So, I think if I look at all those things, and I think of merch margin, I think -- I believe there's continued improvement as we move forward.

Sheamus Toal

Yes, I would absolutely agree with everything Greg said. I think, as we look -- and I think Greg commented earlier, we really refine the algorithms that we use in terms of our Ship From Store capabilities, limiting the number of split shipments, really identifying the units per transaction and the values that we'll do on split shipments. And that's generated some benefits for us in terms of improvements in the efficiency of those Ship From Store orders, which we have seen in our shipping cost.

So, as Greg said, while rates are increasing at anywhere from 5% to 7% a year, we have not seen that level of increase in our spend. We're obviously seeing that dollars go up because we've seen such a dramatic increase in our topline sales, but we've definitely gotten more efficient in how we do this.

Also, as we look to the current year, we are looking at even further efficiencies in terms of shipping methods, testing, slight tweaks to the shipping methods that we utilize in a further effort to reduce costs.

The last thing I'd say about shipping is, well, it's not necessarily related to shipping itself, this is a phenomenon that we fully anticipated, and a lot of the changes that we've made in terms of our strategies are really to counteract some of the growth that we've been anticipating in shipping costs.

So, whether it's the aggressive real estate reductions, some of the efficiencies that we've implemented at our home office, we've been able to absorb relatively large shipping increases and still show significant gross margin improvements quarter-after-quarter. And it's really based upon the strategies that we've put in place to counteract some of those cost increases that we fully anticipated.

Greg Scott

The only thing I'll add Oliver is--

Oliver Chen

That's very helpful. Thank you and best of luck.

Greg Scott

Thank you.

Operator

[Operator Instructions]

And next, we'll hear from Jason Smith with Kanen Wealth Management.

Jason Smith

Hey guys. Thanks for the call. I just have two quick questions. One, in regards to your subscription business. I think it's NY Closet & Company. How big is the use base? Is it growing? I mean, is that business profitable?

And then second, related to the Fashion to Figure. Did it lose money and is it draining earnings in Q1?

Greg Scott

So, in terms of NY&C Closet, it is actually a very, very small piece of our business right now. I will say, obviously, the subscriber base grew by 80%, but it's a very small denominator. What I would just say to you about it is it was profitable in the quarter. We have a high retention rate. We are looking at ways to go deeper in our desk files to get customers who have kind of lapsed with the business to join back in it through New York & Company Closet.

So, what I will say to you is it is in incubation mode, for sure. We believe that there could be opportunity. We are definitely seeing some incrementality by customers who joined, and we did see strong growth in the quarter in terms of their subscriber base, though small. But we'll continue to watch it, and we continue to believe it could be an opportunity.

To Fashion to Figure, I think we're pleased to say while it was our first quarter, we opened the stores in February. We have eight stores plus they're on the New York & Company website, which we're looking to possibly have their own website in the future. I will say it was -- did not lose money in the quarter.

I wouldn't say it was accretive to earnings in the quarter, but it was not a drag on our earnings in the quarter. So, I guess, I would say it's pretty much breakeven, which we are pleased to see in the quarter. A lot of that had to do with strong merchandise margin in the quarter for Fashion to Figure.

I think what I would say is if you look at 2018, 2018 is a year for us to unlock the potential of -- meaning understand the potential of Fashion to Figure, $21 billion market. We think it has a great brand story. We've done a lot of surveys already about what's happening. It really has a great potential because we believe this market of women 25 to 35 in the plus market fashion relevant, there's a big opportunity.

So, look -- we look forward to talking to you probably in August about our plans for the growth of Fashion to Figure. But I will say, it was not a drag on earnings in Q1, which we were happy to see.

John Worthington

Jason, it's John. I think the other thing -- we mentioned when we picked up Fashion to Figure, I think, in December, we're able to get it opened in February, which was amazing. The teams did a great job, both online and in-stores. But we're really only in three cities today. So, we do think that this year, we were able to get these stores open quick in Q1. There's plenty of real estate out there and opportunities when -- and deciding on how we're going to expand.

Greg mentioned we'll give more color on it in August and obviously, give better color on 2019 and beyond. But huge opportunity for us, and we don't really see it as a drag, just a huge opportunity as we go forward in 2019 and beyond.

Jason Smith

All right. Great. Thanks guys. Good quarter.

John Worthington

Thank you.

Greg Scott

Thanks Jason.

Operator

And with no other questions at this time, I would like to turn the conference over to Mr. Greg Scott for any closing remarks.

Greg Scott

Thank you for joining us today. We look forward to speaking with you when we report our second quarter results in August. I would like to thank all of our shareholders for their continued support of New York & Company and all of our employees for their continued dedication to New York & Company. Have a great Memorial Day. Thanks.

Operator

Ladies and gentlemen, that does conclude today's presentation. We do thank everyone for your participation. And you may now disconnect.

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