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Tailored Brands, Inc. (TLRD) CEO Dinesh Lathi on Q3 2019 Results - Earnings Call Transcript

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About: Tailored Brands, Inc. (TLRD)
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Tailored Brands, Inc. (NYSE:TLRD) Q3 2019 Earnings Conference Call December 11, 2019 5:00 PM ET

Company Participants

Julie MacMedan - VP, IR

Dinesh Lathi - President, CEO & Director

Jack Calandra - CFO, EVP & Treasurer

Conference Call Participants

Susan Anderson - B. Riley FBR

Damon Polistina - Deutsche Bank

William Reuter - Bank of America Merrill Lynch

Sarah Clark - JPMorgan Chase & Co.

Hale Holden - Barclays Bank

Operator

Greetings, and welcome to the Tailored Brands Third Quarter 2019 Results Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Julie MacMedan, Vice President of Investor Relations. Thank you. You may begin.

Julie MacMedan

Thank you, and good afternoon, everyone. Welcome to Taylored Brands Third Quarter 2019 Results Conference Call. This call is being webcast, and a replay will be available on the company's Investor Relations website, ir.tailoredbrands.com.

Please note that comments made during the conference call contain forward-looking statements within the meaning of the United States federal securities laws. These statements are subject to significant business, economic and competitive risks, uncertainties and contingencies, many of which are beyond our control.

Any forward-looking statements are not guarantees of future performance, and actual results may differ materially from those in such forward-looking statements. Please refer to today's earnings release, our annual report on Form 10-K and quarterly reports on Forms 10-Q to understand these risks and uncertainties. You can access all of these reports on the Tailored Brands IR website.

In addition, the information on this call speaks only as of today, December 11, 2019, and we assume no obligation to publicly update or revise our forward-looking statements.

Throughout this conference call, management will be discussing results on an adjusted basis. A reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures and our explanation of why the non-GAAP financial measures may be useful are discussed in today's earnings release.

With me today are our President and CEO, Dinesh Lathi; and our CFO, Jack Calandra. I would now like to turn the call over to Dinesh.

Dinesh Lathi

Thank you, Julie, and good afternoon, everyone. Earlier today, we released our results for third quarter of 2019 that underscore the progress we are making on our transformation, and the impact that it's having on the top line, bottom line, and the balance sheet. On the bottom line, our earnings per share of $0.53 exceeded the high end of the guidance range we provided in September of $0.40 to $0.45.

On the top line, we exceeded the high end of the comp guidance range we provided at three of four brands, and were within guidance on the fourth. Specifically, Men's Wearhouse comped minus 2.8%; Joseph A. Bank comped at positive 0.5%; K&G comped minus 1.5%; and finally, Moores comped minus 5.5%. The results at Men's Wearhouse represent a sequential acceleration in comp of 150 basis points, while the results at Joseph A. Bank represent a sequential acceleration in comp of 380 basis points and the first positive comp since Q3 2018. Finally, on the balance sheet, we ended the quarter with total inventory up 1% versus last year, with finished goods down 3%. Our inventories have never been cleaner from an age perspective.

In addition, we decreased our debt by $56 million versus Q3 2018. These results are not a fluke. They reflect the customer obsession and execution focus of our nearly 20,000 colleagues. And importantly, they reflect the customer response to those efforts. While we are pleased with the progress we are making, we know our work is not done.

On our last call, I shared that we are in the midst of a transformation, that transformations take time and that we are executing our transformation in a challenging retail environment. None of that has changed, which means we'll continue to approach our customer-facing and cost-saving execution with the same rigor and urgency that we have over the last 12 months. Before turning it over to Jack, who will cover the financials in more detail, I'm going to quickly highlight a few areas where our strategic initiatives are starting to bend the comp trajectory.

As a reminder, we have been, and continue to be, focused on three customer-facing strategic pillars that we believe are critical to transforming the customer experience. The first is personalized products and services under which we have been focused on our Custom business and our polished casual assortment. Our Custom business continues to perform well. In Q3, we averaged roughly $5.5 million per week in custom clothing sales, representing double-digit growth year-over-year. While we are still seeing healthy growth in the Custom business, at this scale, we expected to see and are starting to see the growth in our custom suiting business moderate and track in line with overall business seasonality as we approach a healthy equilibrium in the eyes of our customers between custom and off-the-rack clothing. The Custom business now represents roughly 30% of all sleeves sold at Men's Wearhouse and over 35% of all sleeves sold at Joseph A. Bank.

On the polished casual side, we saw encouraging strength across multiple merchandise categories at both Joseph A. Bank and Men's Wearhouse. At Joseph A. Bank, we saw positive comps in slacks, shoes, dress shirts, and sportswear. The breadth of comp growth reflected strength in performance fabric across the dress shirts, pants, and shoes categories, as well as Merino and cotton sweaters featuring 2 new silhouettes, Mark and Turtleneck and our eco-friendly made-to-measure dress shirts. The comps were also helped by improved visual merchandising that built on the completer-piece approach that we started in Q2, and that is particularly well suited to polished casual looks.

At Men's Wearhouse, we saw positive comps in sport coats, shoes, dress shirts, and sportswear. Prior to Q3, sportswear had not comped positive since Q2 of 2016. The strong comp performance in sportswear was driven by earlier receipts and store floor set dates for our long sleeve wovens, improved sides curve allocations, and strong consumer response for mix and match promotions across divisions.

From a product perspective, we saw strong results from French rib long sleeve knits, cotton cashmere wovens, and new woven fabrications, such as our construct branded program. At both of these brands, the customer is responding favorably to continued editing of the polish casual assortment, better in-stock availability, and competitive pricing and promotion depth. Our second strategic initiative is to create an inspiring and seamless omnichannel experiences. E-comm is a critical piece of the omnichannel experience, and Q3 marked another quarter of solid growth in e-commerce sales at both Men's Wearhouse and Joseph A. Bank. E-comm growth has been driven by a combination of traffic gains, feature enhancements, and elevated merchandising. We've seen a clear and distinct positive inflection in our e-commerce sales starting in Q2 and gaining momentum in Q3, where we posted double-digit increases at both brands. This exciting growth reflects the investments we are making and accelerating our e-commerce capabilities and agile development model we've created that continues to generate new revenue opportunities.

During Q3, our agile development teams executed over 60 feature tests. Examples of some of the more successful tests that we pushed into production include the following: Providing customers with information on what products were trending in their specific geography proved to actually be more compelling than traditional product recommendation algorithms. Also, customers responded favorably to seeing badges that highlighted fabric performance features on the product detail page. And finally, we are mindful of the fact that a majority of our site traffic is occurring on mobile devices, and that mobile has its own unique navigation needs. Accordingly, we've been leaning in on mobile-specific features and are seeing meaningful revenue gains from simple enhancements like better exposure of filters and the mobile web experience.

In addition to website features, we also started experimenting more aggressively with site merchandising to drive stronger traffic conversion, while supporting our assortment evolution. Our Q3 Men's Wearhouse polished casual event, which drove a significant increase in homepage traffic conversion, was a great example of how we are achieving both objectives.

We believe elevated site merchandising represents a ripe opportunity for both Men's Wearhouse and Joseph A. Bank. Our excitement around an investment in e-commerce is now supported by the momentum and results we are seeing in this part of the business. E-comm will continue to remain an important investment area and growth driver in the coming quarters.

Our third strategic initiative is evolving our marketing so that our brand stands for something more than just price. To do this, we said we both engage our customer in the media channels they are frequent and tell the stories of our brands so that our customers better understand what they are getting for their dollar. On the channel shift, we continue to move spending from offline to online. At Men's Wearhouse, the working media spend mix increased 10 percentage points in favor of online versus Q3 2018.

At Joseph A. Bank, the mix increased 8 percentage points in favor of online versus Q3 of 2018. While we are rapidly shifting marketing investments to more efficient programs to increase conversion, loyalty and advocacy among existing customers, we will continue to invest in building awareness and consideration among potential customers and test our way into the optimal marketing mix that will maximize profitable growth in both sales and new customer acquisition. On the creative shift, our creative across all brands continues to improve quarter-over-quarter. It's increasingly more relevant to our existing consumer and more effective in attracting a new customer. We're more consistently showcasing age and ethnic diversity in moments that customers can relate to with our polished casual assortment, playing an increasingly prominent role. The channel and creative evolution is driving performance on 3 different fronts. First, we are seeing growth in new customer acquisition at the aggregate level. And specifically, within the important younger generations.

In Q3 2019, we saw both Joseph A. Bank and Men's Wearhouse shift their new customer mix younger. We were also encouraged by the contribution to sales growth for both brands from Gen V, particularly exciting was the Gen V growth we saw at Joseph a. Bank, showing the broad demographic potential of the brand. Second, as I just discussed, we are also seeing significant year-over-year increases in e-commerce traffic. And third, utilizing some of the more sophisticated digital media platforms, we are seeing increasingly compelling data that our investments in online spend are driving improvements in store traffic.

Given these results, we'll continue to aggressively test and learn how to efficiently shift increasing amounts of our working spend into performance-oriented digital channels. Finally, before turning the call over to Jack, I wanted to speak to a few important organizational changes.

Earlier today, we announced that Mary Beth Blake, President of Joseph A. Bank, is resigning from Tailored Brands. Under her leadership, Joseph A. Bank delivered positive comps in 9 of the last 12 quarters, including this most recent quarter. She has been an impactful leader, and she will be missed. We wish her the best of luck in her next endeavor. Mary Beth's resignation comes as we are developing a deeper understanding of our core customers across all our brands. That improved understanding is revealing what, we believe, could be financially significant opportunities to execute on behalf of our customers and more effective and efficient ways.

To ensure that we are tightly coordinated as we go after these opportunities, I'm pleased to announce that we've created the new role of Chief Customer Officer, and we've appointed Carrie Ask, who is currently the President of Men's Wearhouse and Moores, to that position. Part of this change, we are eliminating the Joseph A. Bank, Men's Wearhouse and Moores Brand President roles.

In her new role, Carrie will oversee all marketing, merchandising, planning and allocation, and e-commerce activities for Joseph A. Bank, Men's Wearhouse and Moores. Carrie's customer obsession, intellectual curiosity, analytical rigor and execution prowess or just a few of the reasons that the pace of learning and innovation at Men's Wearhouse has accelerated, that the trajectory of our comps is starting to bend and that she is the right person for this new and critically important role.

With that strategy and people context, I'll now turn the call over to Jack, who, in addition to discussing the financials for the quarter in more detail, will also cover our guidance for Q4 2019.

Jack Calandra

Thanks, Dinesh, and good afternoon, everyone. Today, I'll review third quarter financial results and guidance for the Fourth Quarter. Before I begin, I'd like to make sure everyone knows that I will be discussing adjusted numbers today, which eliminates certain items that are not indicative of core business results.

Also, as a reminder, on August 16, we completed the sale of the corporate apparel business and have reported the disposal as discontinued operations. Therefore, my remarks today will be related to continuing retail operations. Please refer to our press release for more details.

Turning now to results for the quarter. Total sales for the Third Quarter were $729 million, down 3%, with comp sales down 2.2%. Notably, we saw improved performance each month of the quarter and delivered a positive comp in October.

The noncomp spread of negative 0.8% was largely explained by closed stores and lower alterations revenue. Gross margin was $308 million, a decrease of $37 million. As a percent of sales, gross margin decreased 380 basis points to 42.2%. About 280 basis points of the decline was primarily due to higher promotional activity, increased penetration of e-commerce sales and lower alterations revenue.

The balance came from occupancy deleverage of 100 basis points. Turning to expenses. Advertising expense decreased $3 million and was down 20 basis points as a percent of sales to 4.7%, reflecting a shift from off-line to more effective online spend as we continue to optimize advertising mix across channels as well as some marketing spend at moving to Q4.

SG&A decreased $4 million largely due to lower employee-related benefit costs. As a percent of sales, SG&A increased 40 basis points to 30.5%. Operating income was $52 million compared to $82 million last year. As a percent of sales, operating income decreased 380 basis points to 7.1%. And net interest expense was $17 million, down $1 million to last year, reflecting the year-over-year reduction in total debt. The effective tax rate was 23.1% compared to 24.4% last year, and diluted earnings per share were $0.53 versus $0.95 last year.

Turning now to the balance sheet and cash flow. We ended the quarter with total liquidity of $477 million, which includes $456 million available on the revolving credit facility and $21 million of cash. At quarter end, inventories were up $6 million or just under 1% versus last year, a significant improvement from the 9% increase we reported for Q2 and ahead of our expectations. We expect continued improvement in inventory levels in Q4.

As Dinesh mentioned, we also continue to improve the quality of finished goods inventory, as measured by inventory age at Men's Wearhouse, Joseph A. Bank and Moores. Debt at quarter end was approximately $1.1 billion, down $56 million versus a year ago. During the third quarter, we repurchased and retired $55 million in face value of senior notes at a discount to par.

On a trailing 12-month basis, debt-to-EBITDA was 4.4x. Paying down debt continues to be a high priority. Over the past 3 years, we have made significant progress on debt reduction, reducing total debt by approximately $475 million, with a focus on the 7% senior notes that mature in July 2022. We also extended the maturity on the term loan, our largest tranche of debt, to 2025. Although our debt-to-EBITDA ratio has increased this year due to business performance, we remain committed to reducing debt-to-EBITDA to 3x over the medium term.

Year-to-date, cash flow from operations was $66 million compared to $278 million last year. The decrease primarily reflects lower net earnings and changes in accounts payable and accrued expenses, primarily due to timing. We also received a $15 million income tax refund in the Third Quarter of last year.

Capital expenditures, through the first 9 months, were $63 million, up $16 million versus last year. We now expect capital expenditures for fiscal 2019 of $90 million to $95 million. During the Third Quarter, we repurchased 2.3 million shares, nearly 5% of shares outstanding, through open market repurchases for a total of $10 million at an average price of $4.28 per share. We have $38 million remaining under our Board's share repurchase authorization. With respect to real estate, during the quarter, we closed a net 4 stores, opening 1 K&G store and closing 4 Men's Wearhouse and 1 Joseph A. Bank store. The total number of stores at quarter end was 1,451.

Turning now to guidance for the Fourth Quarter. We expect Fourth Quarter loss per share of $0.50 to $0.55, which implies full year 2019 earnings per share of $0.97 to $1.02. Our Fourth Quarter guidance assumes the following: For comp sales, we expect Men's Wearhouse, down 1% to up 1%; Joseph A. Bank, down 1% to up 1%; K&G, flat to up 2%; and Moores, down 6% to 8%.

We expect an effective tax rate of 22% to 23%. With respect to real estate, we expect net closures of 5 stores. With regard to the List 4 a tariff that went into effect on September 1, we expect no material impact to Q4.

As a reminder, most of our imports from China were subject to tariff with the implementation of List 4A. And finally, this outlook excludes expected cost for third-party domain experts and other actions associated with our cost savings and operational excellence programs.

Thank you, and now I'll turn the call back to Dinesh to wrap up.

Dinesh Lathi

Thanks, Jack. On our last call, I indicated that we were seeing early signs of customer response to our strategic initiatives. Our Q3 results are yet another sign that we are focused on the right things, things that are starting to trend in comp sales because they are addressing the evolving needs of today's consumer. The results are also an indication that the Taylored Brand's team is working in a way that recognizes that our transformation is not business as usual, and that we will not be satisfied with the status quo.

We are changing the way the company executes for the better; by being anchored-in and obsessed with the customer; by investing for long-term and sustainable value creation; by focused execution that allows us to continue to generate cash and meet our financial commitments; by using data and analysis to guide decisions; and by moving with an urgency that reflects our conviction and confidence and our ability to own the customer's loyalty and advocacy.

I'm incredibly proud of the progress the team has made in the face of a challenging retail environment. And while we still have plenty of work ahead of us, the continued positive customer response we are seeing is fueling our excitement for the journey ahead.

With that, let's open the line for questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions]. Our first question comes from Susan Anderson with B. Riley FBR. Please state your question.

Susan Anderson

Jack, I was wondering if you could talk a little bit about the gross margin puts and takes for fourth quarter versus third quarter? And then also what you're seeing so far from the promotional environment? Do you expect it to be similar year-over-year versus last year?

Jack Calandra

Yes, Susan. Thanks for the question. So as I mentioned, in Q3, the decline in our gross margin was due to a higher promotional activity, and that was particularly at Men's Wearhouse, higher shipping costs associated with the increased penetration of e-commerce sales, the lower alterations revenue associated with the continued growth of custom, and then some deleverage of occupancy.

We don't guide to gross margin in Q4, but that’ll be helpful, I would expect gross margin rate to be down versus last year, but certainly, I would expect to see sequential improvement versus what we saw in Q3.

In terms of occupancy, that should be relatively neutral to gross margin in Q4, and I would also expect to see some improvement in selling margin given where we ended the third quarter with pretty clean inventories and the continued progress on the strategic initiatives that Dinesh discussed.

Dinesh Lathi

And Susan, it's Dinesh, and I'll speak to your question on promotions. From where we sit, the retail environment was, and remains, heavily promotional. As far as our frequency of promotions, it was similar to last year. Let’s say, the difference is we are a lot better about reading and responding to the competitive environment than we were last year, which means in some cases, even though the frequency was similar, the promotion depth may have been deeper than it was last year. So we'll continue to experiment with handles and depth, making sure we're optimizing for relevance with the customer, and of course margin dollars.

Susan Anderson

Great. That's helpful. And then maybe if you could talk a little bit about your capital allocation priorities, I guess with the repurchase of debt this quarter, but then also some share repurchases, how should we think about the balance between those 2 as we look forward?

Jack Calandra

Sure, Susan. This is Jack again. So capital allocation priorities are to: First, invest in our strategic initiatives where we can get an attractive return on our investments; secondly, to pay down debt; and then third to repurchase stock on an opportunistic basis. And you can see the alignment of our actions with those priorities in the third quarter, where we invested $24 million in Capex, $34 million towards debt paydown, and we bought back the 2.3 million shares of stock for $10 million.

For free cash flow, we will continue our primary focus on paying down debt and utilize share repurchases on an opportunistic basis, and so that's going to be the plan -- the continued planning going forward.

Susan Anderson

Great. That's helpful. And then if I could just add one more. Dinesh, it sounds like some of the initiatives are starting to bear some fruit. I guess, maybe, if you could talk about kind of where you're at with mixing in the casual wear in the stores, in the penetration, sequentially in kind of where you're at or versus where you look to go in the future?

Dinesh Lathi

Yes. I'd say, similar to the way we've talked about Custom, we don't necessarily have a target penetration rate with polished casual. And specifically, we just -- as we did with Custom, we'll continue to let the customer guide us as to what the right mix is between polished and tailored clothing. That being said, I want to emphasize just the strong growth that we saw across multiple polished casual categories at both the Joseph A. Bank brand and the Men's Wearhouse brand.

And we think those are being driven by specific actions that we're taking, whether it's the earlier receipts in the store set dates, improvements in size curve allocations, continuing edited of the assortment, and then again the strong consumer response we're seeing from mix and match promotions. So we're making good progress on continuing to weave that in and meet the customers' needs when it comes to a polished casual assortment.

Operator

Our next question comes from Paul Trussell with Deutsche Bank.

Damon Polistina

This is Damon Polistina on for Paul. First, can you talk about the improvement at Men's Wearhouse and Joseph A. Bank on the comp and traffic, just delve into the drivers of that? And specifically at Joseph A. Bank, what's kind of driving the outperformance versus Men's Wearhouse on a sequential improvement basis?

Jack Calandra

Yes. Thanks, Damon, for the question. The drivers of that sequential improvement in comp is really 3 big ones that we think about here. The first is what we just talked about with Susan, which is the strength across these polished casual categories, and we've just talked about the things that were driving that. The second is our e-commerce growth. E-commerce growth was really strong, and that was being driven by the improvements in traffic and the feature enhancements and the site merchandising that we referenced. And then, obviously, the marketing shifts that we've made are helping to drive growth in transactions and new customer acquisition as we continue to shift spend into digital. So, those three things, all of which, are directly aligned to the strategic initiatives that we've been talking about for nearly 9 months now were the main drivers of the comp improvement Q2 versus Q3. On the second part of your question as far as Bank relative to the Men's Wearhouse, just emphasizing both brands saw strong performance and multiple nonsuiting categories and in e-commerce. And really, the major difference between Joseph A. Bank and The Men's Wearhouse was that Joseph A. Bank had a stronger performance in suiting, and specifically, benefiting from stronger growth in custom suits, which more than offset decreased sales of off-the-rack.

Damon Polistina

And just a follow-up on online. Where do you see kind of what in AUR as far as the enhancements to that business? And then do you have the percentage kind of penetration for both Men's Wearhouse and Joseph A. Bank with online?

Jack Calandra

Yes. We don't give out the penetration rate. But what I can tell you is that we are seeing solid growth. And that given the relatively low penetration at both of those brands, we do think it can continue to be, for some period of time, a meaningful driver of comp growth. And, Damon, I didn't get the first part of your question. So if you could repeat that?

Damon Polistina

Yes. Just on kind of the inning of the enhancements do you think you have at your disposal in that business? As far as how many -- how much more ability you have to improve that business with more features and things like that?

Jack Calandra

Sorry, I was -- inning. I got you. What inning are we in? Baseball analogy. Got it. We are in the early innings, Damon. And you can see that in some of the features that we're releasing right now, I'd characterize as some pretty basic e-commerce functionality, which is exciting on 2 fronts. One, it's exciting because we're harvesting some of that low-hanging fruit. And number two, it's exciting because it just points to the fact that we've still got a lot of runway left in terms of the feature sophistication we can bring to the site to drive sustained conversion and traffic improvements. So early innings.

Damon Polistina

Got you. And then last one for me. You mentioned Gen Z growth. Do you have any kind of details as to what's -- what might be driving that?

Jack Calandra

Yes. I mean a big factor in that is going to relate to the marketing shift that we've talked about. And as you remember, one of the big efforts there was around shifting from offline to online. And the strategy is bearing fruit. We did that because that's where we felt the customer was [indiscernible] their time. And so we've ramped up the amount of investment and the percentage of media on the digital and online item. And that's attracting a new kind of customer for us, all of which is good.

Operator

Our next question comes from William Reuter with Bank of America Merrill Lynch.

William Reuter

The first is, I just want to make sure I heard this correctly. Was it $55 million of bonds that were repurchased? Or was that -- did that include some term loan reduction?

Jack Calandra

Bill, it's Jack. So that was all on the bonds. So $55 million face value of the bonds that we purchased -- repurchased at a slight discount to par.

William Reuter

Okay. And then you had laid out your capital priorities second, continuing to be debt reduction. I guess will you continue to be opportunistic with regard to bond repurchases in the open market over the next handful of quarters as you generate cash?

Dinesh Lathi

Yes, I would say, as we look at the opportunities to reduce debt, both via the term loan and the bonds, we'll continue to look at both of those options. And we'll consider, Bill, among other things, the relative maturity dates of those debt instruments, the current pricing and effective yield on each of those. Any specific covenants in our term loan agreement regarding sources of cash that we unlock in the business. And then certainly, the required mechanics and costs associated with paying down each type of that debt. So definitely continued focus on debt reduction. As you know, we've been primarily -- or I'm just entirely focused on the senior notes, but we'll continue to look at opportunities in both of those instruments and make the best decision accordingly.

William Reuter

Okay. And then I appreciate your commentary on tariffs in terms of fiscal year '19 impact. In the event that List 4 tariffs are implemented the List 4B this Sunday, do you have a sense for what the aggregate impact on fiscal year '20 would be at this point?

Jack Calandra

Yes. So we're not guiding yet on 2020, but List 4B really doesn't have a material impact on the business. Most of our goods imported from China were part of the List 4A. Our sourcing team has been doing a lot of good work in terms of continuing to reduce our reliance on China for those imports as well as negotiating with the vendors in China, where we plan to stay. What I would say, just to just a little bit of an update, is I think you know in 2017, 30% of our imported goods came from China. And in 2018, that was 23%. And I had previously guided that we would be between 18% and 20%, and for 2019. And that number will now be on the low end of that. It will be closer to 18%. And I would expect continued reduction in that percentage in 2020, but more to come on our next earnings call.

William Reuter

Okay. And then just lastly for me. I noted down, you mentioned the cost savings program, which you brought up on the second quarter call. I don't think I heard a target on that. Did you miss -- did I miss that? Or I guess will you lay out some sort of a target at some point?

Jack Calandra

We will, I'd say. Let me just give you an update on where our cost rationalization efforts are to date. This year, we focused on advertising efficiencies, sourcing and supply chain and non-merchandise procurements, and we've seen some good progress in each of those. In advertising, that Dinesh talked about, we've continued to shift the mix to more efficient online spend. In sourcing, as I mentioned, we continue to lower our exposure to China pretty dramatically. In the supply chain this year, we consolidated our distribution centers in Canada from 2 to 1. Now that's not a big OpEx savings because the facility we closed is an owned facility, but the facility is currently for sale.

And the proceeds from that sale will be applied to our capital allocation framework. And then in non-merch procurement, we've had some wins in international air freight as well as print production expense. I would say, the big opportunity for profit improvement and cost reduction is the store fleet review that is currently underway. And the results for that, we expect to share on our fourth quarter earnings call in March, and there's a potential there for both primary and derivative benefits associated with that work. And then finally, I would just say, as Dinesh mentioned in his prepared remarks, as we're developing a deeper understanding of our customers across all our brands, as Dinesh said, we believe there could be financially significant opportunities to execute more effective and efficient way. So more to come on that in future earnings calls.

Operator

Our next question comes from Carla Casella with JPmorgan.

Sarah Clark

This is Sarah Clark on for Carla Casella. Will you talk a little bit more about the use of proceeds from your corporate apparel sale? And to that end, after buying back some debt, how much debt reduction is needed to achieve your 3x target leverage?

Jack Calandra

Yes. So the proceeds from the corporate apparel sale were used for the agreement of the term loan. We will be able to reinvest those proceeds into the business. And that freed up cash for reduction that we applied towards our senior notes. And so that's what basically help fund the $55 million face value reduction in our bonds that we saw in Q3. Obviously, the -- to get to the 3x target, that will be a combination of both continuing to work down the quantum of debt that we have on the books, but also continuing from the initiatives that Dennis just talked about to improve the EBITDA contribution of the business. So I see us getting to that 3x multiple through a combination of those two levers.

Sarah Clark

Got it. And then one more from me. Can you talk a little bit more about any promotional disruption that you saw that might have confused customers in 3Q that you're also seeing in 2Q or any tons of promotions going into holiday?

Dinesh Lathi

It's Dinesh, and I wouldn't characterize anything as a disruption. I think the retail environment was, and remains, heavily promotional based on what we see. But particularly around Q3, we were similar in the frequency of our promotion depth or similar in our frequency promotion, sorry, and we were opportunistic in our depth, and that's essentially what we're seeing as we continue into Q4 here.

Operator

Our next question comes from Hale Holden with Barclays.

Hale Holden

I just had two clarifications. The younger demographics or the younger aging of the customer vile, that you called out, that was primarily online and not in-store? Is that the way to think about how that age down?

Jack Calandra

We look at the business on an omnichannel basis. And the reason we do that is we recognize, as I referenced in my prepared remarks that even as we're shifting the mix of digital or advertising to online and digital spend. We also recognized that even store-based transactions very often result as a -- or they start with an online journey. And so those investments in digital marketing are driving younger generations to both the website and to our stores.

Hale Holden

Great. And then the second question I had was on the tariff. I heard everything that you answered to Bill's question. But for 2020, you'll have a full year of impact from 4B in terms of inventory turns, sourcing, the rest of it, which wasn't the case in '19. And I was wondering if we should think about any potential impact there or if you thought you had the pricing capability to kind of offset, assuming nothing changes?

Dinesh Lathi

Yes. So getting back to the tariffs. We are continuing to look for opportunities to reduce the exposure to China further. So as I mentioned, this year, about 18% of our imports will come from China. I would expect that, that number will continue to fall as we talk about 2020. That, in combination with the negotiations with the specific vendors that we will continue within China. At this point, we think those are 2 big mitigating items in terms of any gross margin rate exposure for tariffs in 2020, but more to come on that in our next earnings call.

Hale Holden

Great. Best of luck in the last 15 days of the holiday here.

Dinesh Lathi

Thank you.

Operator

Thank you. Ladies and gentlemen, there are no further questions at this time. I'll turn it back to Danish Lathi for closing remarks.

Dinesh Lathi

All right. Thanks. Just to wrap up, I'm incredibly proud of the progress the team made and as you saw, what showed up in our Q3 results. We have a lot more work to do, obviously, but we're excited about the progress we're seeing. We appreciate your support through our transformation, and we look forward to keeping you posted on our ongoing progress.

Operator

Thank you. This concludes today's conference. All parties may disconnect. Have a great day.