Burlington Stores Inc (BURL) 2015 Q2 法說會逐字稿

Greetings, and welcome to the Burlington Stores second-quarter 2015 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded.

I would now like to turn the conference over to Bob LaPenta, Treasurer for Burlington Stores. Thank you, Bob. You may now begin.

Thank you, operator, and good morning, everyone. We appreciate everyone's participation in today's conference call to discuss Burlington's second-quarter FY15 operating results. Our presenters today are Tom Kingsbury, our Chairman and Chief Executive Officer; and Marc Katz, our Chief Financial Officer.

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. We take no responsibility for inaccuracies that may appear in transcripts of this call by third parties. Our remarks and the Q&A that follow are copyrighted today by Burlington Stores.

Remarks made on this call concerning future expectations, events, strategies, objectives, trends, or projected financial results are subject to certain risks and uncertainties. Actual results 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 10-K for FY14, and in other filings with the SEC, all of which are expressly incorporated herein by reference.

Please note that the financial results and expectations we discuss today are on a continuing operations basis. Reconciliations of the non-GAAP measures we discuss today to GAAP measures are included in today's press release.

Now, here's Tom.

Thank you, Bob, and good morning, everyone. We delivered a strong second quarter, highlighted by increased comparable-store sales and a significant rise in earnings per share, both of which exceeded our guidance. We are extremely pleased with our performance, which continues to validate the strength of our off-price operating model, and the successful execution of our growth and our strategic initiatives by our team.

Let me share with you some specific highlights of the second quarter. We reported strong sales momentum, with total sales rising 9.6%. Comparable-store sales rose 5.6%, on top of a 4.7% increase in the second quarter last year. This represents our 10th consecutive quarter of positive comp sales. In addition, we have reported comp sales increases in 19 of the last 22 quarters.

Gross margin, net of product sourcing costs, expanded by 50 basis points, and we leveraged our SG&A exclusive of product sourcing cost by 60 basis points. Adjusted EBITDA grew $17 million or 30% from the second quarter last year. This led to net income per share of $0.19, a significant improvement from a loss of $0.01 per share last year.

In addition, we are pleased to report the following accomplishments. Second quarter represented our fourth consecutive quarter with an increase in traffic. Comparable-store inventory decreased by 7%, contributing to a 13% faster comparable-store inventory turnover during the quarter.

We entered the third quarter with a more current inventory position and sufficient open-to-buy liquidity to take advantage of the great buy-in opportunities we see in the marketplace. And we utilized $25 million in cash to repurchase 450,000 shares of our common stock during the quarter. Fueling our comp-store sales increase were strong performances in bath, cosmetics, fragrances, home, men's, shoes and juniors.

In terms of the three businesses we highlighted in Q1, I am pleased to share that ladies' shoes performed above the Company average, and both ladies' dresses and suits and handbags showed nice improvement versus the first-quarter trend. From a geographic point of view, our comp growth was broad-based, as we experienced comp increases in 28 out of our 31 regions.

In terms of territories, the Midwest and the Northeast were the strongest, and the Southwest was the weakest, on a relative basis. In addition, we continue to improve the quality and quantity of our vendor base. We continue to increase our better and best and branded unit receipt penetration.

As in previous quarters, we believe the increase in comp sales was not only driven by better assortments, but also by continued improvement in our store experience. We remain focused on simplified merchandising, clear navigational signage, sized 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 position us well for the future. 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 location at the right time. We remain pleased with the performance of our new stores that continued to perform in line with their underwriting model. In total, new and non-comp stores contributed an incremental $47 million to our second-quarter net sales.

We remain excited about the business prospects as we begin the third quarter, and expect the continued implementation of our three key priorities that we outlined during our IPO to enable us to maintain our positive performance in the second half of the year and beyond. First, we expect to drive comparable-store sales as we continue to benefit from our enhanced off-price model, much improved store experience, our marketing testimonial campaign, and our merchandise localization strategies.

We began the third quarter in a strong inventory position with sufficient open-to-buy. We will continue our plan to deliver more fresh product each month of the quarter. In addition, a higher penetration of pack-and-hold as a percent of our total inventory will help us deliver more great values on the floor.

By category, we expect to see continued sales growth from the investments we've made in our ladies' apparel, home, bath and body, and accessories businesses. We continue to be underdeveloped in these areas, and are very excited about the opportunity for the remainder of 2015 and beyond.

From a store execution standpoint, we are consistently conducting various tests within our stores, ranging from faster movement of receipts to the selling floor, to different fixture types. When our testing platform indicates a positive return on investment, we look to roll out these initiatives Companywide as soon as possible. In addition, last year we converted from a customer phone survey to a Web-based survey that provides more detailed, actionable customer feedback. Store managers now have the ability to immediately review online feedback from his or her store, and react accordingly. As we have now anniversaried the start of this new survey, we were happy to see our overall customer satisfaction scores are improving versus last year.

Second, expansion of our store fleet continues to be a critical growth driver for us. We are excited about our new 2015 store program, which spans from coast to coast. We remain on track to open 25 net new stores in 2015, and our pipeline for 2016 is ahead of where we were last year at this time. We 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 markdowns, tailor our assortments by store, and remain disciplined managing our receipts. Operating margins are also expected to benefit as we grow our top line and leverage fixed costs.

And now I'd like to turn the call over to Marc to review our financials and outlook in more detail.

Thanks, Tom, and good morning, everyone. Thank you for joining us today. We are very pleased with our second-quarter performance. Our sales and net income handily exceeded our guidance, driven by balance increases across our financial metrics, including strong comp-store sales, expansion in gross margin, leverage in operating expenses, and lower interest expenses.

Moving to a review of the income statement and starting with sales, for the second quarter total sales rose 9.6% and comparable-store sales increased 5.6%, which follows two years of strong comp growth, including a 4.7% comp increase in the second quarter of 2014, and a 7.8% comp increase in the second quarter of 2013. Our growth in comparable-store sales was driven by increases in traffic, conversion, and units per transaction, while average unit retail was flat with the prior year. This represented our fourth consecutive quarter with an increase in traffic.

Our gross margin rate was 39.2%, an increase of 100 basis points versus last year. As we remain focused on inventory management, our gross margin continues to benefit from lower levels of aged inventory compared to the prior year. Accordingly, the primary driver of the reported margin increase was a lower markdown rate than last year. While the overall markdown dollars spent was in line with plan, the stronger-than-expected comp sales resulted in incremental rate improvement. Our margin rate also benefited from reduced freight costs, driven by product mix resulting in lower pounds per unit and by lower fuel costs.

Partially offsetting the gross margin improvement was an approximate 50-basis-point increase in product sourcing costs, which include cost to process goods through our supply chain and buying costs, both of which are reported in selling and administrative expenses. For the second half of the year, we expect reported margin improvements versus last year to slightly outpace product sourcing cost increases versus last year. As a percentage of net sales, selling and administrative expenses, exclusive of product sourcing costs and advisory fees, declined 60 basis points to 28.4%.

Expense leverage was achieved primarily in occupancy, store payroll, and marketing costs, slightly offset by increased stock-based compensation. Adjusted EBITDA increased 30%, or $17 million, to $75 million, representing a 100-basis-point increase in rate for the quarter. Depreciation and amortization expense, exclusive of net favorable lease amortization, increased by $2 million to $36 million. Interest expense decreased $11 million to $15 million, primarily driven by the savings realized as a result of the 2014 term loan refinancing and principal payment made during the previous 12-month period.

The adjusted effective tax rate was 40.8% versus 39.9% last year. The increase in tax rate is a result of a one-time discrete item recorded in the second quarter, offset partially by state credits available to us for our new corporate headquarters. Combined, this resulted in an increase in adjusted net income of $16 million to $15 million for the quarter compared to a loss of $1 million last year.

Diluted adjusted net income per share increased significantly to $0.19 versus a loss of $0.01 last year. And our fully diluted shares outstanding were 76.5 million shares versus 74 million basic shares last year.

For the first half of FY15, total sales rose 7.2%, and included comparable-store sales increase of 3.1%, following a 3.6% comparable-store sales gain in the first half of last year. Gross margin was 39.5%, representing an increase of 140 basis points versus the first half last year. This improvement more than offset a 60-basis-point increase in product sourcing costs. As a percentage of net sales, selling, general and administrative expenses, exclusive of advisory fees and product sourcing costs, decreased 10 basis points to 27.8%. Expense leverage was driven mainly by reductions in store payroll and occupancy, partially offset by increases in stock-based compensation.

Adjusted EBITDA increased by 18%, or $26 million, to $177 million, representing a 70-basis-point increase in rate for the first half of FY15. Depreciation and amortization expense, exclusive of net favorable lease amortization, increased by $3 million to $72 million. Interest expense decreased $23 million to $29 million, driven by the August 2014 refinancing and principal payments over the past 12 months.

The adjusted effective tax rate was 39% versus 40.3% last year. The decrease in the effective tax rate is primarily driven by state tax credits available to us for our new corporate headquarters. Combined, this resulted in an adjusted net income of $46 million versus an adjusted $18 million of net income last year.

Diluted adjusted net earnings per share was $0.60 versus $0.23 last year. And our fully diluted shares outstanding was 76.5 million shares versus 75.6 million last year.

Turning to our balance sheet, at the end of the quarter we had $27 million in cash, borrowings of $214 million on our ABL, and have availability of approximately $330 million. At the end of the quarter, total debt was $1.4 billion.

Merchandise inventories were $802 million versus $712 million in the prior year. The increase was primarily driven by increased pack-and-hold inventory levels, and new-store inventory, partially offset by a decline in comparable-store inventory of 7%. As Tom mentioned, our comparable-store inventory turnover improved by 13%.

Cash flow used in operations was $0.7 million, primarily related to a $55-million increase in pack-and-hold purchases and inventory related to the opening of 23 net new stores since August of 2014, partially offset by our improved operating results. The Company anticipates generating free cash flow during the remainder of 2015 and beyond to fund all of the Company's capital expenditures, business initiatives, and to support any potential opportunistic capital structure initiatives.

Capital expenditures, net of landlord incentives, were $65 million through the second quarter. This includes approximately $20 million net for store expenditures, and approximately $26 million to support continued distribution facility enhancements.

As you recall, our Board of Directors authorized the Company to repurchase up to $200 million of our common stock through June 2017. During the quarter, we repurchased 450,000 shares of stock for $25 million, leaving approximately $175 million available under our current stock repurchase program. We continue to expect our debt leverage to be at or below 2.5 times at the end of 2015, which we believe will continue to decline in future years based on EBITDA growth alone. We now have the ability to delever our balance sheet and return capital to shareholders at the same time, as we opportunistically utilize our recent repurchase authorization.

We ended the quarter with 546 stores. We continue to expect to open 25 net new stores in FY15, resulting in 567 stores at the end of the year.

Turning to our outlook, we are introducing third-quarter guidance and increasing our full-year outlook. For the third quarter of FY15, we expect net sales to increase in the range of 6% to 7% -- comparable-store sales to increase between 2% to 3%. Adjusted net income per share is expected to be in the range of $0.20 to $0.23 versus $0.16 per share last year, utilizing a fully diluted share count of 76.3 million shares.

Turning to our increased guidance for full-year 2015, we expect net sales growth in the range of 6.5% to 7%, comparable-store sales to increase 2.5% to 3%, adjusted EBITDA margin expansion of 30 to 40 basis points, interest expense to approximate $61 million, an adjusted tax rate of approximately 39%, and a share count of approximately 76.4 million shares. Net capital expenditures are expected to be in the range of $155 million to $160 million, and depreciation and amortization of approximately $150 million. This brings our adjusted net income per share guidance to a range of $2.27 to $2.32. As a reminder, our adjusted net income per share in 2014 was $1.83.

And now I would like to turn the call back over to Tom for concluding remarks.

Thanks, Marc.

Since our IPO, we have consistently executed our operating model, which has resulted in sustained profitable growth for our Company. And our second-quarter and first-half results certainly validate that this opportunity is ongoing. I continue to believe there is considerable white space for our Company to further improve upon our success to date, as we further optimize our tool set, and strengthen our ability to deliver the best trends, brands, and experience for our customers. I expect our efforts to lead to consistent growth in total sales, comp sales, and earnings in the near and long term.

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

Thank you.

(Operator Instructions)

Lorraine Hutchinson of Bank of America.

Thank you. Good morning.

I wanted to ask one short-term and one long-term question. First, in the near term, did you see any impact from the back-to-school tax-free shifts or the later Labor Day? And then longer-term, how big is home now, and how big do you think it could be as a percentage of your total sales over time?

Okay, this is Tom. I will take this one.

First of all, when you look at the back-to-school impacts in terms of tax-free, it did have a slight impact, but it was really two days. It was really just the last two days of the quarter.

So it really wasn't really material overall. I will say that we are pleased so far with our back-to-school business. Obviously, July was strong which helped, contributed to our strong second quarter performance, and August is good so far. We haven't really seen -- with a shift of Labor Day and a later Labor Day, and in fact, that really didn't have much impact.

As far as home goes, we are really pleased with our home business in the second quarter. We had significant growth overall.

As we articulated, our percent to total is really light relative to what our competitors are and department stores. So we see in the long term a continued strong growth in home.

Thank you.

Thanks, Lorraine.

Matthew Boss of JPMorgan.

Hey, good morning, and congrats on a great quarter, guys.

Hi, Matt.

As we think about expanding brand relationships over time, can you talk about any learnings so far from the West Coast buying office? I think the designer showroom up on the website is interesting. And just categories where you see the top branded opportunity over time as we kind of break down the store?

Well, we normally don't talk about the brands that, the relationships that we're building. But we do have an opportunity to continue to build brands. We had a nice growth in our brand penetration last quarter and so far for the spring overall.

The West Coast, just having a presence there gives us the ability to be in that market every single day looking for new brands overall. So learnings is just that, is being out there, having the team out there gives us the ability to continue to foster and build relationships with the West Coast manufacturers.

But in general, as we've stated many times before, we just have a lot of room to grow brands as a percent to total. We feel very good about what we have done so far, but there's a lot of upside.

Great. And then just a follow-up, on capital allocations, so free cash flow generation of $180 million to $200 million this year, what is the best way to think about debt pay down versus share buyback in the back half? And then just the best way to think about -- your thoughts on allocation beyond this year?

Matt, this is Bob. I will speak to that.

As we said in the past, we ended last year with leverage at 2.7 times which was lower than we had planned due to the out performance in earnings and EBITDA. We expect leverage to continue to decline this year.

We've stated that we think leverage will be at or below 2.5 times at the end of this year, and we're comfortable with that level of leverage. We think it will continue to decline going forward just based on EBITDA growth alone. We initiated an authorization, our Board authorized us to buy back 200 million shares over the next two years.

We purchased -- or spent $25 million to purchase about 450,000 shares this quarter. And just like this quarter, at the end of every quarter we will share with you any activity that we have, if any at all.

That's great. Best of luck, guys.

Thank you.

Stephen Grambling of Goldman Sachs.

Hey, good morning, thanks for taking my question. Just a quick question on the pack and hold. As it continues to increase year-over-year, is there any CapEx that might be needed just to support that growth, whether it's incremental DCs or warehouse facilities?

First of all, as you know, we spent a lot of our capital this year to support our increase in pack and hold. We really feel confident that we can build on our pack and hold significantly based on our actions we took this year overall.

But we will do what we've done in the past. If we feel pack and hold needs to be a bigger percent to total, we will go down and we will look for more space. We will look for more space to expand it overall. But right now we feel very good about the money we spent this year and we have room to continue to grow pack and hold.

Stephen, just put some numbers around that. We have talked about spending $155 million to $160 million in CapEx this year. $50 million of that is supply chain related. And a good portion of that is to support more storage for pack and hold. As we have said before, Stephen, they are our highest gross margin by types and more than pay for themselves.

Great. That's very helpful. And then, I guess, a related question on the competition.

There's been a lot of noise, just given the choppy numbers from some of your department store folks. And inventory seems a little bit elevated. Anything that you are doing as you look out at that environment differently or to prepare for any change in the promotional environment? Thanks.

No. Our goal really is to stay focused on what we're currently doing to date and continue to deliver great values overall. Obviously, our merchants are in the competition all the time to make sure that our values are very, very strong.

But we don't see any overt strategy changes. We just want to continue to stay focused on what we are doing and just deliver great value for our customers.

Sounds good. Thanks so much.

Thank you.

Kimberly Greenberger of Morgan Stanley.

Great, thank you. Really nice sales and earnings results today.

Thank you.

Bob, I wanted to just follow up on the capital allocation question. You started off with $25 million this quarter. Would it be prudent for us to model roughly $25 million a quarter in share buybacks going forward?

And then, Tom, as you think about this growing opportunity in pack and hold, you're sitting at 28% of inventory today in pack and hold. Is there a sort of target, upper limit, that you are working toward over the next one or two years? And if so, what might that limit be?

And do you have any sort of color or feel for where the goods are coming from? Are you getting goods that were delayed in the ports? Is there any sort of visibility, or is it just kind of generally available in the market? Thanks so much.

Hi, Kimberly. This is Bob. I'll take the first question.

I would use the share counts that Marc gave his comments around guidance and that we put in the press release. Just like this quarter, if there's any additional activity going forward we will share it with you at the end of the quarter on the conference calls.

As far as pack and hold goes, we really don't target pack and hold, as we've said before. We let the deals available really determine what level of pack and hold we have overall.

We originally went out, we felt that pack and hold wouldn't be more than 10% or 15%. And now we're at 28% because there really is an abundance of products out there and great deals out there.

And as Marc said, it turns faster than other product. It's higher gross margin. But we really don't want to target it. I know that some of our competitors, or one of our competitors is much higher than we are, one is a little bit lower than we are. But overall, we just let the deals speak for themselves, and that will determine what level of pack and hold we have overall.

Where are the goods are coming from? They are really coming from many different areas. There's a little bit, dribble in from the port disruption at this point, but it's not really that material relative to what it was maybe two months or three months ago.

But it's really generally coming from every avenue, from cancellations and other things that may be occurring. But it's just coming from many different sources.

Thanks so much, Tom, and good luck for the fall.

Thank you.

Dana Telsey of Telsey Advisory Group.

Good morning, everyone, and congratulations on the very good results.

Thank you.

I believe last quarter you had talked about taking a look and assessing wages on the store associate rankings -- on the store associates. What are you doing there? What are you seeing there, and how should we think about that going forward?

And the Web survey was very interesting. What are you learning, how many people is it surveying? And are you getting any different qualitative information than you got with the old method that you used, and how does it impact your planning for holiday?

And just one last thing, on the pack aways, is some of that the cancellation department stores, or is it more the issues with the port? Thank you.

Okay, Dana, thanks for keeping it one focused question on one topic.

Oh, yes. (laughter)

Appreciate that, thank you. So I will see if I can take a crack at these and Tom will weigh in if need be.

In terms of the wages for store associates, on July 5 of this year, we went to $9 an hour for all full timers and $9 an hour for all part-timers with at least six months of service. And that was an incremental $5 million in wages that started July 5 through the end of this year.

In terms of where do we go from there, that will all be part of our 2016 financial planning process, and we will take a look at that. We will take a look at whether or not $10 comes into play or not and any other potential headwind that come our way. We will talk to that more in our Q4 call. But at this point, that's all that we've done there.

In terms of the Web survey, right now and the bottom of every receipt that prints off at our registers we ask folks to go online and talk to us about their experience. We used to do 50 phone calls per store per month to get our information. Now with the Web coming off in every receipt we're getting a lot more information.

We're getting it a lot more timely and we're able to get a lot more detailed, actionable customer feedback. Stores are excited about it. It is new. But what I can tell you is we've anniversaried it and we're finally up against true LY numbers, and we're seeing nice increases in overall customer satisfaction as we saw for years with the phone survey. So really exciting stuff that the stores seem really happy about.

Your third question was on pack and hold. I think it was about where it's coming from?

As I mentioned, it's really coming from --

Everywhere.

Yes, everywhere, many different avenues overall.

The ports disruption, obviously, it was much more meaningful earlier, as I mentioned before. But it is coming from all different sources overall.

As far as the customer feedback, though, in terms of the survey, it just helps us manage our stores better. We are able to quickly react to things that our customers are telling us. And we feel that it should help us for the balance of this year and for the holiday season just because we have much more knowledge about our customers, and we can react to that as we go into the busiest part of our season.

Thank you.

Thanks, Dana.

John Morris of BMO Capital Markets.

Thank you. Good morning, everybody, I want to add my congratulations as well. Really nice quarter.

Thanks, John.

I guess, just a quick follow-up on the port disruption, potential positive, but then another more direct question. Given what you've said so far about the benefits there in terms of being able to capitalize on some of that disruption, do you feel like most of that is behind you in terms of what you've released into the stores? Or is some of it still to come in Q3 and Q4 as you release some of those goods that I assume are in pack away?

And then my second question is for Marc. The offset on the wages increase, you guys have talked before about using efficiency gains, and I'm wondering how those gains are progressing and in kind of what areas you have been able to squeeze out some of that efficiency? Thanks.

As far as pack and hold goes and the port disruption, a lot of the goods that we will be delivering in the third and fourth quarter were a result of the port disruption overall. But with that said, I just want to emphasize, it is coming from many different places. It's not just because of the port.

But a lot of those goods that were caught up were more fall related. So those would be brought in in the third and fourth quarter overall. Marc?

Yes, and in terms of what is offsetting the wages, John, we have a very active profit improvement program at our Company. So as you think about all our store support areas we all have what we refer to as PIG goals, profit improvement goals. We are actively, day in and day out, looking for ways to become more efficient.

As we came up with the $5 million number to go to $9 an hour, we allocated that literally to every store support area of the Company. And everybody contributed. And everybody continues to contribute, and there are absolutely no issues with us in terms of being able to offset that $5 million.

Great. Thanks.

You bet.

Pam Quintiliano of SunTrust.

Great, thanks so much for taking my questions, and let me also add my congratulations to really great execution. I had two for you.

Just regarding the size of your footprint, can you talk a little bit about the performance of some of your smaller stores? And then just, if you could remind us the average store size of the fleet now, the size of the stores you are opening, or have opened this year, and how we should think about it next year?

Okay, I'll talk about the footprint and then Marc can talk about the economics of it.

As we have been saying all along, we really feel that we need a smaller spot store. If you look at our average right now we're around 77,000 square feet, and the stores we are opening recently, in 2013 and 2014 the average is a little over 60,000 square feet in terms of new stores.

And then this year, the average is around 55,000 square feet, and we only have one store over 60,000 square feet and it is 62,000 square feet. We're really marching towards a smaller, smaller footprint overall.

Our customer, we talked about the customer survey, and one of the things our customers have told us is that they feel more comfortable having a more intimate experience in a smaller store. So we're listening to our customers. We're making the stores smaller.

But, as you know, our turns, our inventory turns, have gone up significantly. We've taken significant inventory out of our stores. Obviously, at the end of the second quarter, we also had a big reduction in comp store inventory, and we see that reduction happening for the foreseeable future.

We just feel, even though we've made tremendous progress on increasing our turns, we feel we still have opportunity to do even more of that which would necessitate even smaller stores. So in general, we're very comfortable with a 50,000 to 60,000-square-foot box. And we actually have our teams looking at a box that is even smaller than that because we feel we're headed in that direction.

So I'll let Marc talk about the economics.

Pam, as Tom mentioned in his prepared remarks, the new store performance continues to operate in line with our underwriting models. That's both from a sales and an EBIT performance point of view, so we're very happy with that. What we will say, and we have said and it still continues to be true, is that our stores that are less than 60,000 square feet in terms of sales per square foot they are about 22% higher than the chain average.

Okay. Thank you, that was very helpful.

And then, if I could switch gears and ask just one other question about -- Jennifer, and I know she's still relatively new, but just how do we think about how she's devoting most of her time right now? And just leave it very broad-based, what she is doing, the impact she has had on the organization thus far, how we think about the ramp there?

Okay. Jennifer is off to a great start. She is a very strong executive overall.

She does have a lot of off-price experience which -- she has 14 years of experience in off-price. And she is helping us fine tune what we are doing overall.

She is working with the merchants in the market, she's spending time on strategy with them. She's helping us understand the relationship between pack and hold and up front buys. So she just has a wealth of knowledge that is really helping our team get even better. And she's made great impact early on and we really feel that she's going to continue for a long time to really help us, just solidify how we operate our model.

Excellent. And just, last question, the advertising campaign. Just any thoughts on customer response to that?

Well, we really feel good about our marketing campaign, our testimonial campaign, we've been doing it now for well over a year. As our customers talking about the great values they're getting in our stores, it's real life messages. It resonates.

Our second quarter performance is just an indicator of that overall. But with that said, we're looking at spending in marketing dollars comparable to last year. We're not looking to ramp up a lot overall.

We're focused on, obviously, continuing to improve our testimonial ads, but we're really driven by the experience a customer has in our stores overall also. But we feel good about our testimonial campaign and you'll see that for awhile.

Great. Thanks so much. Best of luck.

Thank you.

(Operator Instructions)

John Kernan of Cowen and Company.

Good morning, this is Krista Zuber for John Kernan. Thanks for taking our questions.

Most of my questions have been answered, but I just wonder if you could just talk a little bit about how your planning outerwear for holiday and fall, and how the cold weather in outerwear affected Q4 last year?

Well, we really don't get into that kind of detail, planning, how we are planning the business. The coat business, as I said on the call last time, it under performed our Company in the fourth quarter. November was good, but we have an opportunity to do more in December.

So people are going to buy coats, it's just, sometimes it's early. If they have a cold November or it's in December or January. It just happens in terms of timing.

But overall, one of the things we have done and is -- we're really building categories that help the weather -- our Company. The home growth that we're going to experience. Our bath and body business, our fragrance business overall, our ladies accessory business. So we're rooted in the coat business historically, but we've expanded every other category to make sure that we can -- no pun intended -- we can weather any kind of change in the climate.

Thank you.

Jarrod Feinstein of Buckingham Research.

Hi, thank you, good morning. I'm on for David Glick today. Congrats, again, on the great quarter.

Thank you.

My question today is if the investments you're making now will help you reduce the pressure that you're seeing on higher product sourcing costs in the future and when you might be those benefits flow through?

And then a second one if I can. Can you give us a little bit more detail on what you meant by the potential opportunistic capital structure initiative, anything specific that you could speak to at this point?

I'll take the first one and then I'll kick it to you. The $50 million that we talked about that we're spending for our supply chain is enabling us -- a big part of that is enabling us to be able to take in more pack and hold product. So if we're able to take more in and work more, I don't necessarily think that means you'll see a reduction in product sourcing costs going forward.

What we have said though, Jarrod, is whatever increases we do have in product sourcing costs we will offset with reported margin increases. We've done that for a number of years now and continue to do that.

Yes. And just what we've said in the past about capital allocation is given the fact that we expect to generate free cash flow we will look at how we can return that to shareholders. And we'll evaluate what we think the right thing to do is over time and when we decide to do something we'll certainly share it with you.

Okay. Great. Thank you very much.

Thank you.

Thank you. And I would now turn the conference back over to Management for any closing comments.

Thanks, again, for joining us today. We look forward to speaking with you when we report third quarter results in December. Thank you.

Thank you, ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time, and thank you for your participation.