Burlington Stores Inc (BURL) 2014 Q3 法說會逐字稿

Greetings. Welcome to the Burlington Stores, Inc. third-quarter 2014 earnings conference call.

(Operator Instructions)

As a reminder, today's conference is being recorded. I would now like to turn the conference over to your host, Mr. Bob LaPenta, Treasure. Thank you, Mr. LaPenta. You may now begin.

Thank you, operator. Good morning, everyone. We appreciate everyone's participation in today's conference call to discuss Burlington's third-quarter FY14 operating results. Our presenters today are Tom Kingsbury, our Chairman and Chief Executive Officer, and Todd Weyhrich, our Chief Financial Officer. Tom will begin with a brief overview of the quarter's financial results and update you on the progress we've made towards the goals we outlined in our IPO. Todd will then review our financial results and future outlook in more detail before we open the call for questions.

Before I turn the call over to Tom, I would like to inform listeners that this call may not be transcribed, recorded, or broadcast without our express permission. A replay of the call will be available for seven days.

Remarks made on this call concerning future expectations, events, strategies, objectives, trends, or protected financial results are forward-looking statements and are subject to certain risks and uncertainties. Actual results or events may differ materially from those that are projected in such forward-looking statements. Such risks and uncertainties include those that are described in the Company's S-1 and in our other filings with the SEC, all of which are expressly incorporated herein by reference. Now, let me turn it over to Tom.

Thank you, Bob, and morning everyone. I am thrilled to share with you another quarter of great results as we continue to make significant progress toward our long-term goals. Yet again, we performed at a very high level.

Our top and bottom lines exceeded our guidance and compared very favorably in a difficult retail environment. Our consistent strength demonstrates the continuing improvement in execution of our off-price model and the successful implantation of our growth strategies by our Team. We continue to believe we are in the early stages of realizing the full benefits of our model with considerable run rate ahead of us.

Let me share with you some specific highlights of the third quarter. We reported strong sales of total sales rising 8.7%. Comparable store sales rose 5.2%, on top of a 3.9% increase in the third quarter last year. Our comp growth was driven by higher transactions, based on increased traffic and a higher average basket based on more units per transaction.

We saw positive traffic, demonstrating our success in attracting more customers to our stores. We believe this is partly due to our new testimonial marketing campaign, which features our customers in our stores explaining why they love and shop at Burlington. In addition, we continue to satisfy our customers once in store, as evidenced by our slightly higher conversion rates.

With the third-quarter, we recorded our seventh consecutive quarter of positive comp sales, and we have delivered comp sales increases in 16 of the last 19 quarters. With a great sales performance, we leverage our SG&A, and adjusted EBITDA grew 16% versus last year. And adjusted net income per share was $0.16, a dramatic increase from a loss per share of $0.05 last year.

In addition, I'd like to point out the following accomplishments during the quarter. Comparable store inventories decreased by 14%, contributing to a 24% faster comparable store inventory turnover. We entered the fourth quarter with a much more current inventory position and significant open-to-buy liquidity to take advantage of the great buying opportunities we see in the marketplace.

We continued our store expansion with the opening of 17 new stores. And we increased our financial flexibility and reduced interest expense going forward through the refinancing of our debt that was completed on August 13. Later, Todd will take you through the details of our financial performance and our fourth-quarter and 2014 full-year guidance.

Fueling our comp store sales increase again were especially strong performances in key businesses that cater to our core female customer, such as missy sportswear, ladies shoes, and accessories. In addition, our men's apparel and our home businesses outperformed the Company average. We were able to achieve these results with improved execution of our off-price model. This includes having substantial liquidity to take advantage of the great in-season buying opportunities, continuing to expand our vendor and brand base, and improving our merchandise localization.

We saw good performance across all of our territories in the quarter, with the northeast being the strongest and the west the weakest on a relative basis. The continued growth in the quality and quantity of our vendor base has helped fuel this strong performance. We continue to increase our better and best receipt unit penetration as well as our branded receipt units.

As has been the case in previous quarters, we believe the increase in comp sales was not only driven by better assortments, but also by continued improvement in the store experience. We remain focused on simplified merchandising, clear brand signage, size fixtures, well-organized selling floors, and a better alignment of selling hours to customer traffic, which all translate into a better customer experience.

I'd like to provide an update on a few other initiatives that positively impacted all of our regions and categories. We continue to make progress in terms of tailoring our assortments across brands, lifestyles, sizes, and climate. We continue to improve the timing of our seasonal product deliveries by region, allowing us to get the right products to the right locations at the right time. We believe our localization strategies, combined with our markdown optimization system, will continue to result in much less seasonal product at the end of the season. We are looking forward to the continued benefits localization will have on our results.

Inventory management continues to be an important initiative in driving comp performance, and we continued to make great strides on this front during the quarter. We are very pleased with the level and currency of our inventories at the end of the third quarter, as our comparable store inventory level decreased 14% versus last year, with a comparable store inventory turnover improving by 24%. In addition, the level of aged inventory again decreased significantly versus last year. All these metrics have helped us in improving the freshness on our selling floors, which we are focused on providing to our customers every day.

At the end of the quarter, pack-and-hold inventory represented 18% of our total inventory, versus 12% last year. As we've stated before, we do not set targets for inventory levels for pack-and-hold product as our buys are opportunistic and dependent on the availability of highly desirable branded product or key seasonal merchandise at strong values. We continue to have plenty of open-to-buy to take advantage of both in-season and pack-and-hold opportunities.

We remain pleased with the performance of our new stores, and our expanded retail store base contributed to our growth in the quarter, delivering a $41.5-million increase in sales from new and non-comparable stores. We remain excited about our business prospects and expect the continued implementation of the three key priorities we outlined during our IPO to enable us to maintain our positive performance in the remainder of FY14 and longer term.

First, we expect to drive comparable store sales as we continue to benefit from our enhanced off-price model to deliver the most sought-after brands, the right trends, and compelling value every day. As it relates to the fourth quarter, we are in a great position with substantial liquidity, less aged goods, and a plan to deliver more fresh product each month of the quarter. In addition, the higher penetration of pack-and-hold as a percent of total inventory will help us deliver more great values on the floor throughout the remainder of the year.

We continue to see improving results from the investments we've made in our home business. Once again, the home business significantly outperformed the Company average, with our initiatives gaining traction. We achieved double-digit increases across home decor, textiles, housewares, and luggage. Specific to the fourth quarter, we are looking to expand our gift giving. This includes categories across the Company, but we will be highlighting compelling brands at unbelievable values.

In addition, we are looking to aggressively grow three businesses. One of these is our home business, which we are focusing on holiday entertaining, cookware sets, and expanding cutlery and gadget assortments. Accessories is the second area, where we are looking to build our jewelry, bath and body, and fragrance areas. The third business is men's, where we are looking to grow our highly-productive furnishings and gifts with more brands and tech product. From a store execution standpoint, we have made substantial progress, and we continue to identify ways to improve the customer experience.

Second, expansion of our store footprint continues to be a critical growth driver for us. We are excited about our new 2014 stores, which span from coast to coast. We have 24 new stores in 2014, and we'll have closed 2 locations. We remain on track to open 28 new stores in 2015 and continue to believe that we have significant white space for growth to reach 1,000 stores over the long term.

Third, we expect to enhance our operating margins as we continue to optimize our initial pricing and markdowns, tailor our assortments by store, and remain vigilant with inventory management disciplines. Operating margins are also expected to benefit as we grow our top line and leverage fixed cost. We remain positive about our business for the fourth quarter with our holiday plans well underway. As our guidance suggests, we expect to drive traffic and sales with our powerful gifting items, compelling assortment, and our great store experience. This is supported by a holiday marketing campaign that features our customers in our stores explaining why they love and shop at Burlington. And now, I'd like to turn the call over to Todd to review our financials and outlook in more detail.

Thanks, Tom. Good morning, everyone. Thank you for joining us today. We are extremely pleased with our third-quarter performance. We meaningfully surpassed our top and bottom line expectations and saw progress across our key operating metrics. We are obviously very happy with the performance so far this year.

I will begin with a review of our operating results. For the third quarter, as Tom indicated, total sales rose 8.7% and included a comparable store sales increase of 5.2%. Our gross margin rate was 39.6%, a 60-basis point increase versus last year, which was offset by a 70-basis point increase in product sourcing costs, which include costs to process goods through our supply chain, and buying costs, both of which are reported in SG&A. The deleverage on product sourcing cost in the quarter and was driven by DC cost of processing receipts in Q3 for inventory that will be sold in the fourth quarter.

Consistent with previous quarters, the continued improvements in the freshness of our inventory and localization efforts has helped drive our strong sales results and deliver good margin expansion year to date, very much in line with our plans. As a percentage of net sales, SG&A expenses, exclusive of advisory fees and product sourcing costs, increased 40 basis points to 29.4%. Leveraging was achieved primarily in store payroll and advertising, due somewhat to a planned shift of some fall investments to the fourth quarter. This was offset somewhat by higher incentive compensation accruals.

Adjusted EBITDA increased by 16.1%, or $10.1 million, to $72.5 million representing a 40-basis point increase in rate for the quarter. Depreciation and amortization expense, exclusive of net favorable lease amortization, increased by $1.9 million to $36.1 million. As we previously disclosed, on August 13, we refinanced and replaced our existing term loan facility with a $1.2-billion term loan. The proceeds from this loan, along with a $217-million draw on our ABL, were used to redeem all of our higher-cost debt. Together, these resulted in lower interest costs going forward.

Accordingly, net interest expense decreased $16.1 million, to $16.6 million, driven by interest savings related to the refinancing and principal payments made over the past 12 months. Our adjusted income tax expense was$ 7.9 million, compared to a benefit of $1.2 million last year. The adjusted effective tax rate was 39.9%, versus 25.7% last year. The increase in the tax rate is the result of certain tax credits not yet approved in the current year and other one-time discrete items recorded in the prior year. Combined, this resulted in an adjusted net income of $11.9 million, versus a loss of $3.3 million last year. Adjusted net income for fully diluted share was $0.16, versus an adjusted net loss of $0.05 per basic share last year.

For the first three quarters of FY14, total sales rose 7.6% and included a comparable store sales increase of 4.2%, following a 5% comp store sales gain last year. Gross margin rate was 38.7%, a 70-basis point increase versus last year. This improvement was partially offset by a 40-basis point increase in product sourcing costs.

As a percentage of net sales, SG&A expenses, exclusive of advisory fees and product sourcing costs, decreased 40 basis points, to 28.4%. Expense leverage was achieved primarily in store payroll and advertising. Adjusted EBITDA increased by 18%, or $34 million, to $223 million, a 60-basis point increase in rate versus last year.

Depreciation and amortization expense, exclusive of net favorable lease amortization, increased by $0.9 million, to $104.7 million. Net interest expense decreased $31.5 million, to $68.7 million, driven by our debt refinancing and principal payments over the past 12 months. The adjusted effective tax rate was 40.1%, versus 28.4% last year. The increase in the tax rate is the result of the same items I mentioned earlier regarding the quarter. Combined, this resulted in an adjusted net income of $29.6 million, versus an adjusted net loss of $10.8 million last year. Diluted adjusted net earnings per share was $0.39, versus and adjusted net loss of $0.15 per basic share last year.

Now, turning to our balance sheet. Merchandise inventories were $900 million, versus $902 million at November 2 last year. The decrease was primarily driven by a comparable store inventory decline of 14%. This decrease was partially offset by a $50-million increase in pack-and-hold purchases and inventory related to the opening of 18 net new stores since the end of the third quarter last year.

Accounts payable increased $58 million, to $766 million, versus the end of the third quarter last year, representing 74 days of accounts payable outstanding, reflective of our normal payment terms for inventory. Our year-to-date cash flow provided from operations was $89 million, which was offset by $165 million in cash spent for capital expenditures and $28 million in cash used in financing activities primarily related to our debt refinancings and repayments. There have been no changes in our CapEx expectations since the end of the second quarter.

We will continue to utilize free cash flow to pay down debt when available. Our debt totalled $1.424 billion at quarter end. Our current outstanding balance on the ABL is $75 million, and we expect to be out of the line at the end of this week.

As Tom mentioned earlier, we opened 24 stores this year, and we closed 2 existing locations. We expect to end the year with 543 stores. We now expect 28 new store openings in FY15.

Turning to our guidance, we are excited to be raising our fourth-quarter and full-year fiscal year outlook based on our better-than-expected sales and net income performance during the first nine months of the year and our expectations for the fourth quarter. For the fourth quarter, we expect comparable store sales to increase in the range of 3% to 4%, net sales to increase in the range of 7.2% to 8.2%, interest expense to approximate $15.1 million, reflecting the debt refinancing completed earlier this year, and adjusted net income per diluted share in the range of $1.25 to $1.28 on 76.2 million diluted shares outstanding. This compares to an adjusted income per pro forma share of $1.07 in the fourth quarter of FY13.

For the full fiscal year, we expect total sales to increase in the range of 7. 5% to 7.8% and comparable store sales to be approximately 4%. Our expectations for gross margin net of product sourcing costs remains unchanged. We expect adjusted EBITDA margin expansion of approximately 45 basis points, interest expense of approximately $84 million, a tax rate of approximately 40%, and fully diluted adjusted net income in the range of $1.65 to $1.67 per share, utilizing a fully diluted share count of 75.8 million shares.

As our guidance suggests, FY14 is expected to solidly exceed the long-term targets we set for our business. We continue to believe the long-term targets we set at the time of our IPO are representative of the growth we expect to achieve annually longer term. I will now turn the call back over to Tom.

In summary, we are very proud of our year-to-date results, and as our raised guidance suggests, we continue to expect FY14 to represent a strong year and another period of significant accomplishments toward our long-term goals. We remain confident in our ability to continue our positive momentum in future years given our dynamic operating model, our disciplined execution, and the significant runway ahead. Operator, we are ready for questions.

Thank you.

(Operator Instructions)

The first question comes the line of John Morris of BMO Capital Markets. Please go ahead with your question.

Good morning, everybody. Congratulations on a good performance in a tough environment.

Thanks, John. Good morning.

Question on the gross margin and the product sourcing costs. Gross margin up really nicely. As you fairly point out, the product sourcing costs up a touch more. And then generally, Todd, you said you wanted -- the goal is for gross margin gains to exceed increases in the sourcing costs. Were there any timing issues in those cost increases? And more importantly, how should we expect them to trend, go forward, still committed to that goal? And then also, a little more color on maybe what's driving those increases and the return that they expect to get for you?

Okay. Thanks for the question. It actually is very much timing.

As we look at the full-year, as we've talked, we have a very flexible buying model, and our supply chain is built to be able to handle the goods the way our merchants buy them. And basically, what we have happening is costs in the third quarter are a little bit higher. If we go back and look at the same thing last year, the costs in the third quarter last year were a little higher also, and it really just has to do with the flow of freight as it comes in for the third quarter to support the fourth-quarter sales, and a combination of just how we happen to buy goods during the quarter.

So the way to think about it is it's really timing between the quarters. Our full-year projection is literally dead on with our original expectations, so you should be thinking about it that way, that it's -- the timing shifts a bit during the quarter depending upon how we buy goods, but overall, the merchants managed to make sure the overall margin comes out to our expectations, and we've done a great job with that over a lot quarters now.

Thanks.

Our next question comes the line of Lorraine Hutchinson with Bank of America. Please proceed with your question

Thank you. Good morning. Was just hoping for an update on cold-weather categories, specifically how you're inventoried for the season, and any update on performance to date?

Hi, Lorraine. This is Tom. I will address that. Obviously, as the weather cools, our cold-weather performance obviously improves. I really can't give you a lot of information so far on the fourth quarter overall. But let me just go back to the third quarter and address it in that manner.

Our cold-weather businesses in the third quarter of were not big contributors to our overall performance. We've done a really nice job -- or the merchants have done a very nice job of expanding other categories. Our growth in our missy sportswear business, that has helped de-weather our business. The home business, with the significant growth that we've had there, that also helps in that pursuit. The accessory businesses, the bath and body business, the fragrance businesses, all of these businesses really have helped us when there's deviations in the weather overall. But collectively, the third-quarter performance was more related to the growth in the categories that we spelled out in the prepared remarks.

Thank you very much.

Thank you

Our next question is from the line of Kimberly Greenberger with Morgan Stanley. Please go ahead with your question

Great thanks. A really terrific third quarter. Tom, I think you talked about positive traffic when you were going through your comp metrics. I'd don't remember over the last seven or eight quarters, has traffic been consistently positive, or is this a new level of acceleration? And within the third quarter, do you think it's the advertising that's the primary traffic driver? What do you think is the key turn on, given that the rest of the industry seems to be struggling with traffic?

Well overall, prior to this quarter, our traffic has been flattish to slightly up. This quarter, we've experienced one of our best increases in traffic overall. It's really a combination of a lot of things that are really improving our traffic. I think our in-store experience is really helping us in that pursuit. The customers really enjoy shopping at Burlington, so they're coming back more frequently.

The other aspect is the fact that we've really worked hard on the treasure hunt aspect of our business. And by expanding our assortments, adding more brands, putting more better and best in our assortments overall. And then, of course, the marketing. The marketing approach we took in the third-quarter versus last year is really resonating with the customers, so we're getting a lot of benefit on that because our marketing spend was fairly comparable to last year, but obviously, we had a 5.2% comp, so it leveraged very nicely overall.

So it's a combination of everything that we've been doing. The increase in pack and hold. It's multiple things that have contributed to the increase in traffic, but it was one of our biggest -- if not the biggest -- traffic increase we've had.

Great thanks

Thank you.

Our next question comes the line of Dana Telsey of Telsey Advisory Group. Please go ahead with your question

Good morning, everyone, and congratulations. As you think about the changes in marketing that you've done, what helped the third quarter? What's changing for the fourth quarter? And how do you see it next year, in addition to any changes in medium in terms of how you're dealing with the marketing and the spend? Thank you

I think what's really helping us is content of our marketing approach. That is one of the key things. Our messaging is just really terrific. It's our customers in our stores talking about the great values that they're getting, so as I mentioned before, it's just really resonating. It's really resonating. It's really exciting to see the results of that, and it's contributing, obviously, to our comp store increase. And our Marketing Team has worked really hard to make sure that we're getting the most out of the money we spent through more efficiencies overall in terms of trying to get as many GRPs is possible.

As far as medias go, we are shifting more into online and digital overall. It's not material at this point in time, but we're doing a lot of testing and experimenting with this, and candidly, what we've seen so far, we are pleased with the kind of returns we're getting.

Congratulations. Thank you.

Thanks.

Our next question is from the line of Paul Lejuez of Wells Fargo. Please go ahead with your question

Thanks, guys. I think you mentioned an SG&A shift maybe into fourth quarter. Can you just frame that, quantify that for us? And then was also curious about comp performance of urban versus suburban locations. And also curious if you've seen any impact from gas prices and if you normally consider that a tailwind for your business. Thanks.

Okay, this is Todd. I'll take the leverage point. As we called out in the prepared remarks, we've been getting good leverage from both payroll and advertising all through the year so far. It's slightly more pronounced in the third quarter. As we go into the fourth quarter, we have, on a comparative basis to last year, shifted a little bit more of the investment -- it's not a huge dollar amount -- of both store payroll and marketing spend to Q4.

As we gave in the initial guidance, with our increase in comp store sales, we are still guiding to a number that is in the 3% to 4% range, and given the comp performance we've had so far this year, just by that comp being guided slightly lower than we have on a year-to-date basis, that affects the leverage partly in the flow-through for the fourth quarter. But I think the thing to really focus on is, as we think about the gross margin delivery and how the expense structure is working in the fourth quarter, we raised our guidance for adjusted EBITDA expansion to 45 basis points. When we talk about the shift between the quarters, it's a relatively negligible impact on the fourth quarter.

I'll address the suburban versus urban. Kimberly, we are doing well in most markets, obviously, based on a 5.2% comp. And as we've stated many times before, the results by location are really based on what happens within the four walls of the particular building. If the customer service scores are really good, if the store has very good operational efficiencies and have put together a really good team, that's where the performance really improves overall. But suburban versus urban, we're pretty much good across the board.

Gas prices, of course. They help. Obviously, our customer has not a lot of disposable income, and obviously, gas could eat into that, and hopefully, what they're saving, they're spending in our stores.

Thanks, guys. Good luck.

Thank you

The next question is from the line of Ike Boruchow with Sterne Agee. Please go ahead with your question.

Hi. Good morning, everyone. Thanks for taking my question, and congrats on a great quarter. This one's for either Todd or Bob. The debt you guys currently have on the balance sheet, I don't believe there's any prepay penalties. Is it safe to assume that you'll continue to use your free cash flow in the coming years to pay down the balance? And how should we think about it? Is it a minimum cash cushion? Is the leverage ratio on terms of where you balance being down debt and/or potentially starting to give cash to shareholders through dividends or repurchases?

High Ike. This is Bob. I'll address that question. So, yes, as we have said for a while now, our priority is going to be to use free cash flow to pay down debt. We have haven't set any targets or specific leverage targets, and I would expect for the near term, we would use free cash flow, and to the extent possible, some additional borrowings on the ABL to pay down debt. And I don't see that changing. And as we true up specific plans to do so, we share that with you.

Great thanks

Our next question is from the line of David Glick of Buckingham Research. Please go ahead with your question

Thank you. Good morning, and my congratulations to the Team

Thanks, David.

Tom, I was wondering if you could talk about your fleet of new stores and how they differ in terms of four-wall economics, the types of locations versus your more mature store base. I'm just wondering what the profile looks like, what the productivity is shaping up in your newer stores, because obviously, if you look out potentially in the long term to 1,000 stores, you've got a base of existing stores where you're making good productivity improvement, and then obviously, you're opening new stores, and it would be helpful to understand how those new stores are performing, how the economics differ from a productivity-rent perspective and types of locations

I'll start answering the question, and then I'll let Todd finished. First of all, we're pleased with our new store performance overall. We really feel that we can operate -- a lot of the stores are around 60,000 square feet. We really feel comfortable operating a 50,000- to 60,000-square-foot store. The smaller square footage stores, the productivity is better overall.

But what we're really excited about is what the stores look like, what the environment is in the new stores, and actually, it's not just the new stores this year, it's the new stores that we've opened since 2012. And we've touched a lot of our stores, actually, over the last five years. A high percentage of our stores now have either been remodeled or refreshed. So we really feel good about overall in terms of long-term improvement in productivity, but the smaller stores are more productive. So I'll let Todd continue to answer the question.

Yes, so as we've talked about numerous times in the past, we've made a lot of improvements to our underwriting model over the last several years, and really, the thing that's important I think for us, like it is for any retailers, to be able to predict what the revenue base of the store is going to be, and as we've been able to do a better job of that and have less variation around the underwriting model in a year's portfolio stores than we had historically, that just increases our confidence in opening new stores.

From an economic standpoint, as Tom indicated, we were really pleased with the performance of new stores overall. The economic model for a smaller footprint store is really no different than it is for any other store. We look at the revenue base that we believe we can produce in a location, and ultimately, what the flow-through, the payback, the net present value is. So regardless of the store footprint, the underwriting model is the same. So the economics are not meaningfully different for the new stores. It's just we are doing similar volume in a slightly smaller footprint.

And is the nature of who you compete with in your newer locations, is it different than in your more mature stores?

I think if we look at the stores that we've underwritten most recently, we are more often with a number of other folks that help drive traffic. As Tom indicated before, what's indicative of how our stores -- or what is predictive of how our stores perform is really how well we do within the four walls of the store. We buy for the whole chain. We allocate according to the parameters of the customers that come into an individual store. And so how they perform has an awful lot to do with things that we can control, what we buy, how we allocate, how we execute in the four walls.

But as we are underwriting new stores, we are undoubtedly going into a lot of locations where we have other people who drive traffic, and actually, we look at those as a positive in our underwriting model because maybe different than may have been the case many years ago, we believe what we offer our customer and how it presents itself is very favorable to the competition, and when we're with our competition, we believe we're going to get our fair share of the business.

So it's fair to say in these newer locations, higher revenue, little higher rent, but comparable four-wall economics?

It's really location by location, but conceptually, yes. The point is, if the rent is higher, it takes a higher revenue base to make it work.

Great. Thank you very much for your clarification. Good luck in the holiday quarter.

Thanks, David.

Our next question is from the line of John Kernan with Cowen and Company. Please go ahead with your question.

Good morning, everyone. Congrats on a nice quarter.

Good morning.

Just a follow up on the productivity of the newer stores. How early are we in the cycle of lower inventory per store? And increasing your open to buy, how much faster you can actually -- or how much farther you can lower your inventory per foot and boost inventory turns. It still seems you are well above inventory per foot relative to some of your other larger peers. Thanks.

Over time, we've done a really nice job of reducing our comp store inventory. Over the time that I've been at Burlington, it's well over 50% reduction in the amount of inventory that we have in our stores, in our comp stores.

But with that said, we really feel for the foreseeable future we can continue to have the kind of decreases that are in line with some of the decreases we've had recently, just because we need to turn faster. I think that's a very good point that you made. Even though we've done a really nice job of improving our turns, we still have a lot of opportunity to continue to do that.

So we're staying very liquid in terms of how we approach the business. We wait until we have to in order to place good so that we don't have a lot of inventory tied up or receipts that we really don't want to have. So to answer your question, we really feel we have a lot more opportunity in terms of reducing our inventory levels.

Okay, thank you.

Our next question is from the line of Stephen Grambling with Goldman Sachs. Please go ahead with your question.

Thanks. And maybe if I can sneak a quick follow-up to that last question on inventory improvement, as you look at gross margin, how much more opportunity do you see there relative to some of your peers, and better markdown in that inventory management?

This is Todd. I'll take that one. I think we've made a lot of progress over, as Tom indicated, a number of years in terms of the level of inventory we have, the quality of the inventory we have, the freshness of the inventory we have, the level of clearance that's on the floor, and we've constantly made improvements quarter after quarter, and we're going into the fourth quarter this year very clean and very well-positioned on inventory. And I think the way we think about it and the way we'd like for you to think about it is we are always looking at what does the customer need first.

So as we are thinking about margin expansion and we're talking about how we price our goods, the key is, first and foremost, to make sure that we're competitively priced on the floor on product that our customers cares about. And I think we've demonstrated now over a number of quarters in a row that our Merchant Team has done a great job of continually improving the brands and the quality of the goods that we have on the floor, what that initial pricing is. We've been able to sell more goods at the initial cost. Our markdown optimization and our allocation improvements have gotten the goods to the right store and changed the pricing more quickly to make sure that we sell on the first markdown. And as we've gone through all that, we're making sure we're giving value to the customer, and that is our priority.

We've indicated that we do expect margin expansion after product sourcing cost to continue to grow as we go forward, but we're looking at that very carefully with the customer in mind first, and I think we've shown a very good ability to strike the right balance. So as the cut-through on all that, what it's done is we do believe there's additional opportunity for margin expansion, but we're going to err on the side of making sure we have great value. And there isn't anything about how our business has progressed over the timeframe since the IPO to change our long-term thinking other than we've just delivered one more great quarter and we feel really good about the fourth quarter.

Thanks. And if I can sneak one other one in there, as you look at that longer-term framework, can you provide us with a little bit more color on how you're thinking about 2015 and if there are in unique items we should be thinking about? Thanks again.

This is Todd. I'll take that, and Tom may want to comment as well. We haven't really given any guidance for 2015 yet. We're very happy with the performance so far this year, and we're well in to our planning process as it relates to 2015 from a merchandising standpoint and financial standpoint but it's appropriate for us to talk about that we get to our year-end call.

Okay, great. Best of luck.

Thank you

Our next question is from the line of Pam Quintiliano with SunTrust. Go ahead with your question

Good morning. This is David Kwon for Pam Quintiliano. Thanks for taking my question. Can you provide an update on e-commerce, and also if you're seeing any benefits from the [port] disruption in terms of goods in the marketplace?

Okay, this is Tom. E-commerce is a really good business for us. We've seen some really nice growth over time. But candidly, as a percent of our business, it's still really small overall and really -- not really material.

But we feel good about it. We can continue to grow, and we're going to grow over time there. We've added more product to our site over time. We've improved the navigation of our site. We've built our Management Team there. But we feel good about it, and we expect some nice growth in the future overall.

Whenever there's a disruption in the marketplace, it always benefits us. Goods are late; we can take advantage of it. Big weather differentials; we take advantage of it. So when there is a disruption, it's very favorable to us overall.

Thank you

Thank you. At this time, I will turn the call back to Management for closing comments.

Thank you for joining us today. We wish all of you a happy and healthy holiday season and look forward to speaking with you when we report our full-year results in March. Thanks again.

This concludes today's teleconference. You may disconnect your lines at this time. We thank you for your participation.