JJill Inc (JILL) 2018 Q2 法說會逐字稿

Good morning. My name is Carol, and I will be your conference operator today. At this time, I would like to welcome everyone to the J.Jill Second Quarter 2018 Conference Call. On today's call are Linda Heasley, CEO of J.Jill Inc.; and Dave Biese, Executive Vice President and Chief Financial and Operating Officer. (Operator Instructions)

Before we begin, I need to remind you that certain comments made during this call may constitute forward-looking statements and are made pursuant to and within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 as amended. Such forward-looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from such statements. Those risks and uncertainties are described in the press release and J.Jill's SEC filings. The forward-looking statements made today are as of the date of this call, and we do not undertake any obligation to update our forward-looking statements. Finally, we may refer to certain adjusted or non-GAAP financial measures on this call. A reconciliation schedule showing the GAAP versus non-GAAP financial measures is available on our press release issued today. If you do not have a copy of today's press release, you may obtain one by visiting the Investor Relations page of our website at jjill.com.

I will now turn the call over to Linda.

Thank you, and good morning, everyone. While our Q2 performance was in line with our guidance for top and bottom lines, we acknowledge we have work to do to deliver growth and ensure consistent performance. That work is underway. There are some distinct positives in the quarter, which I wish to call out. We grew our active customer file and our store channel remained strong, delivering positive comparable store sales growth for the 17th consecutive quarter. We continue to maintain our focus on providing a positive customer experience, leveraging our strong fleet of stores and remarkable field associates.

At the same time, we recognized that there is opportunity to better engage our customer through our e-commerce channel. We aim for both channels to operate synergistically. We are on track to deliver this fall, the planned enhancements to improve our e-commerce shopping experience. And while we are seeing improvement in conversion and other site metrics, we are refocusing resources to accelerate our development and rollout of actions to better and more quickly address the evolving expectations of our customer in frictionless retail.

Last quarter, I have spoken in my initial period of entry into J.Jill as being pointed toward assessing every aspect of our business. I am still formulating actions based on those findings, and we will provide more detail in the future. What I will share with you today are some of my learnings and initial areas that the management team and I have determined are high priorities for our time and attention. I categorize our priorities into 4 main areas. One, knowing our customer, validating who she is and what we are to her as well as who we want to be and what we should be to her. Two, defining the brands by which, I mean, product on the one hand and how we message to her on the other. Three, developing more efficient and effective support functions of the business so we can be even more focused on the customer. And four, identifying the best prospects for growth.

These focus areas will require an investment of time and other resources and are part of a developing and comprehensive list of initiatives that we will be executing throughout this year and next.

To start knowing our customer. Who is she and what are we to her? I have tasked our entire team to refocus on our customer. Our customer exhibits a real love for our brand. Something, which is truly special in a retail environment rife with fickle consumer behavior. J.Jill has an admirable base and consequently the opportunity to be more to the women we serve. We have the experience and expertise to be special to women new to the brand, women currently unaware of who and what we are. We need to think less about age and age cohorts and more about life stage, mindset and style sensibility. Age is an imprecise indicator of customer behavior. We are asking and listening more to what she is telling us, not just about specific garment and wardrobe requests, but also about how the fabric in construction feels and moves with her through her very busy day as well as how easy it is to clean, pack and style. And she clearly appreciates the smallest of details in the product that are unique to J.Jill and that make her feel unique as well.

Second, brand definition first with product. All of our channels will benefit from a new focus on product. We need to be even more relevant and current. I believe that for a period, we have relied too heavily on variants of tried and true offerings and some customers became fatigued with the absence of newness. This is a testable hypothesis. We will offer fresh takes while continuing to offer a core selection of the staple she expects of us. As I have mentioned, I am working closely with our merchandising and design teams, and we are adjusting our plans where we can. I have been pleasantly surprised with the flexibility that we have in our supply chain. We are continuing to improve lead times and cultivate a test and learn strategy to enable us to more quickly prototype and scale opportunities. That said, the impact will come in stages and will begin to be realized in the middle of next year.

Related to this, we are putting a greater focus on our extended size women's business and testing various merchandising options in our stores as well as improving messaging and search on our digital platforms. You will see more inclusive imagery and messaging across multiple touch points in the upcoming quarter.

Helping us in this regard will be our new Senior Vice President and Chief Merchandising Officer, Shelley Liebsch, who I welcome to J.Jill. Shelley has a great background having worked in a range of vertically-integrated specialty retailers like Victoria's Secret, Urban Outfitters and Anthropologie. And most recently at Destination Maternity where she has led design and merchandising functions for the past 2 years. In our role at J.Jill, Shelley will be a key partner to Joann Fielder, our Executive Vice President and Chief Creative Officer in-charge of design and creative expression. Both roles will report to me. I'm excited to have Shelley join us at this juncture and bring a new perspective to our offering.

A second major component of brand definition is how we reach and message potential and existing customers and continuing to grow our base. As we evolve the product line to be even more relevant and current, we are also evolving how we speak to our customer by communicating a more effective and cohesive message across the full spectrum of touch points.

Our use of a catalog continues to be a key marketing vehicle, yet we are developing ways to contemporize our approach and integrate it more completely with her shopping experience across all channels. For starters, we have shifted to more lifestyle imagery that fosters a sense of time, place and community as part of our creative expression. We have included a range of styling cues to show her the versatility of the garments to address more relaxed moments to times when she wants to feel a little more tailored and put together. We have updated our online shop-the-look feature to match the catalog imagery. And in September, we will test an enhanced version that will enable minimal click shopping off the image itself.

Our website is, of course, a very important touch point. We can do much with engaging her in the brand experience through this capability and leveraging this part of the business to further connect the components of the omni-channel model. She tells us that if she can see how it fits on her, she will purchase. We will soon be launching enhanced fit and size tools to assist her in her selection process.

Also beginning this fall, you will see exclusive capsule collections for the e-commerce channel called online editions. These of-the-moment statements will heartened to what J.Jill has meant and will always mean to our customers, always appropriate of-the-moment unique offerings that complement all of her wardrobe options. We start with our white shirt shop, which will be launched in concert with the store and catalog with additional unique styles online.

Mobile is, as you probably expect, the fastest-growing touch point, and we are working to continue to find new ways to provide ease of shopping and transacting on mobile and smart devices for our customers. This is important to capitalizing on traffic but is also often our best foretaste of emerging ways customers, especially new to brand customers, would like to interact with the brand.

You will also see enhanced focus on community, digital and social with fresh content across all channels beginning with our fall campaign. Our compassion fund was founded in 2002. And since its inception has donated more than $14 million to a network of women shelters targeted at addressing issues of homelessness and domestic violence. Through ongoing work with our compassion fund partners and new efforts to maximize our social footprint, you will hear us leverage our voice more on these very important programs appropriately addressing women's issues. Our September and October catalogs, store presentation and digital platforms showcase members of this partnership of organizations. I hope you are as touched and humbled as I am with their stories for why they do and what they do.

Overseeing J.Jill's go-to-market resources and the work I have just described, requires more than my attention, and we are delighted to announce that Brian Beitler will be joining us as our Executive Vice President and Chief Marketing and Brand Development Officer. I have worked with Brian before. He brings a wealth of experience in customer-facing strategies and brand management. Recently, he was Chief Marketing Officer for the Plus Segment at Ascena. Prior to that, he was Chief Marketing Officer at David's Bridal and held marketing roles at Kohl's and Bath & Body Works. Third, we are looking to develop more efficient and effective sales support processes and practices. Benchmarking suggests we have opportunity. I am always keen to free any asset from nonvalue-added work to be able to focus more on our customer, where we can be more efficient and we will. Fourth and last, we are identifying the best prospects for growth as we stabilize and enhance our existing business. We have started with optimizing the things we are doing today, including store growth and e-commerce, and we'll have more to discuss with you in future quarters on new opportunities.

In summary, I recently completed my fourth month with J.Jill, and continue to spend my time with the team assessing the business and looking across our platforms to find the areas in which we can hasten realization of our potential, then creating and implementing action plans to realize that potential. It is truly a wonderful brand, and we are poised to do much.

There is much more right than wrong with J.Jill. The company's strength and opportunities are defined by a distinct well-recognized brand, valuable loyal customers. The elements of a strong omni-channel model with catalog at its core but with very successful store and e-commerce businesses. And we have a strong data orientation that reflects our direct-to-consumer heritage. I look forward to further exploring these learnings and cultivating the focal points to further develop the J.Jill brand and better serve our customers and sharing a longer-term view with you as we progress.

Now I will turn it over to Dave to elaborate on the second quarter results and guidance for the third quarter. Dave?

Thank you, Linda. As Linda mentioned, our second quarter sales and earnings results were in line with our expectations. However, our gross margin was more pressured than our guidance contemplated, as we took greater clearance action than originally anticipated to meet our goal of reducing our inventory to start the fall season.

Before going into the detail, I'll remind you once again that 2018 is a 52-week fiscal year versus 53 weeks in 2017, and we experienced an impact from the related calendar shift. Our annual comparisons are largely unaffected, but had shifted sales from the second quarter to the first quarter and will further shift sales from our fourth quarter to our third quarter. And as it relates to reporting comparable sales, we are using the NRF's restated 2017 calendar to calculate our comparable sales.

Moving now to our second quarter results. Our total company comparable sales increased 2.2%. Similar to the first quarter, this performance was driven by our stores. Total net sales was $179.7 million, a decrease of 0.9% versus last year's $181.4 million.

Total net sales reflect the calendar shift, I noted earlier. Gross profit was $116.7 million versus $122.6 million last year, and gross margin was 64.9% compared to last year's 67.6%. We started the quarter fully expecting to increase promotions year-over-year, yet promoted more than anticipated. We also removed certain inventory from being available for sale and liquidated it.

SG&A expense was $97.4 million versus $97 million last year. Last year's second quarter included $700,000 of nonrecurring expenses related to the IPO in March 2017. As a percentage of total net sales and excluding last year's nonrecurring expenses, SG&A was 54.2% versus 53.1% for the second quarter of 2017. Our original guidance anticipated the loss of leverage driven by the calendar shift. And you may recall that the shift helped us realize positive leverage in the first quarter. When combining the 2 quarters or on a year-to-date basis and excluding nonrecurring expenses, SG&A was 54.3% versus 54.6% in 2017.

Operating income was $19.3 million or 10.7% of sales. This compares to last year's adjusted operating income of $26.4 million or 14.5% of sales when excluding nonrecurring expenses. Adjusted EBITDA for the quarter was $29.3 million as compared to $35.3 million last year. As a percentage of sales, adjusted EBITDA was 16.3% versus 19.4% last year. A reconciliation of EBITDA to net income is included in our press release.

Interest expense for the quarter was $4.9 million versus $5.1 million last year, reflecting voluntary prepayments on our term loan made in 2017. This benefit was partially offset by higher interest rates this year.

Tax expense for the quarter was $4 million versus $8.6 million in the second quarter of 2017 and the effective tax rate was 27.4% compared to 41.6%. This reduction reflects the benefit of the U.S. Tax Cuts and Jobs Act. GAAP net income for the period was $10.5 million or $0.23 per diluted share versus $12 million or $0.28 per diluted share of last year, which included a $0.01 negative impact from nonrecurring expenses related to the company's IPO. When comparing to last year, second quarter EPS was negatively impacted by approximately $0.03 due to the calendar shift, yet benefited by approximately $0.04 from the lower tax rate.

For our year-to-date performance highlights, please refer to this morning's press release.

Turning to the balance sheet. We ended the quarter with $62 million in cash and $38.4 million in availability under our revolving credit facility. Our inventory at the end of the quarter was $61.6 million compared to $62.8 million at the end of the second quarter in 2017. During the quarter, we opened 3 stores and closed 3. We ended the quarter with 273 stores. Finally, gross capital expenditures in the quarter were $3.5 million.

Turning now to our outlook. And as noted previously, we are providing guidance at this time, for 1 quarter out. We feel positive about our actions to improve our inventory and our e-commerce site performance. Yet, we are cautious regarding the fall, given the uncertainty of changing our promotional posture and the softness in e-commerce.

For the third quarter, we expect total comparable sales to decrease between 2% and 4%. We continue to expect comparable sales in our stores to be positive, albeit at a somewhat slower rate than in the first half. We do not expect e-commerce sales to be positive versus last year.

Total net sales are expected to increase between 2% and 4%, driven by the benefit of the calendar shift and again, this shift will become a headwind in the fourth quarter. At the midpoint of our comparable sales guidance and versus last year, we expect gross margin to decline approximately 125 basis points and SG&A to deleverage approximately 100 basis points after excluding the $700,000 of nonrecurring expenses in the third quarter of 2017. Interest expense for the quarter will increase approximately $500,000 compared to last year, due to higher interest rates in our term loan.

Diluted earnings per share are expected to be in the range of $0.09 and $0.11, including a $0.03 benefit from the calendar shift and a $0.02 benefit from a lower tax rate. This compares to $0.14 in the third quarter of fiscal 2017. Adjusted diluted earnings per share for the third quarter of 2017 were $0.13, which excludes $0.01 of nonrecurring expenses related to last year's transition to operating as a public company.

During the quarter, we expect to open 5 stores and to close 1, ending the quarter with 277 stores. For the full year, we expect to open 13 new stores and close 7, ending the year with 282 stores. We expect capital expenditures for the year to be in the range of $27 million to $29 million versus $30 million to $32 million in our prior guidance, which reflects the movement of select projects to 2019.

I'll reiterate that we see this year, in general, as a transition period to shore up our foundation, and it will take some time for the actions we've taken and the initiatives we are further planning to take hold. Having said that, we are doing all we can to deliver the optimum result in the back half of 2018. I'll end by reiterating Linda's point that we are evaluating all aspects of our business to best position ourselves for profitable growth over the long term. This work is well underway, and we look forward to sharing more later this year.

And with that, I'll turn the call back to the operator for questions.

(Operator Instructions) Your first question comes from the line of Lorraine Hutchinson from Bank of America.

I was hoping to get a little bit more -- more details around your strategy for the fall season, you talked about changing your promotional posture. So I guess, that's the first facet of the question would be what are the plans in terms of that promotional posture? And then secondly, can you give us an update on the website? And why e-commerce sales would continue to be negative in the third quarter?

Okay. This is Dave. Good morning, Lorraine. I'll talk first to the promotional posture for the fall. I mean, there's a number of strategies we are looking to in the fall that give us some optimism about the fall, and Linda touched on a good deal of those in the script. As far as the promotional cadence goes, again it's kind of in line with what we've been talking about previously, which is getting our inventories rightsized for the fall, that's level and mix. I think we will reach our objective in terms of level. That sets us in a place where we can be more mindful, more planful about promotions, which isn't necessarily that we're going to discontinue promoting. I think you'll continue to see us use those promotional vehicles that have worked for us in the past, but I would tell you the overall number of days and the level at which we use that, those will be different. So we're not going from 60 to 0 so to speak and pulling promotions out. It will be less days and perhaps a little less sharper in terms of the level of discount. One of the things that I'll acknowledge as part of our guidance though is being conservative, particularly around margin in terms of what the response to that could be. So we are mindful of the fact that change is change and particularly around the e-commerce business where we have been clearing a great deal of product through there and using promotions significantly. So with that, I think Linda had some comments on the website. It's the things we're doing to try to get the customer something else to think about other than promotion.

Yes. I also wanted to add on to the promotional comments. What you saw in August building into September is announcing a wonderful new pants. And for me, that's a type of promotion that isn't discounted but highlights a product and you're going to see more of that in the fall as well, starting with the September catalog. With respect to the e-commerce platform, it's been about a year where we've seen the deceleration in our business. A lot of that was tied to the replatforming. We are fixing all technical as well as nontechnical considerations on the site. We are seeing improvement in the site performance as we speak. At the same time, it's correcting our use of that channel, not to be exclusively or primarily a clearance channel, as Dave mentioned in his comments. It is to showcase the lifestyle that we embrace and what we want to talk to our customer about. It is about highlighting ways to style effortlessly and easily. It is about ensuring that she can envision the product fit and size on her. So you're going to see enhancements to the overall site as well as exclusive product to be introduced to move us away from it being primarily a clearance channel and a sales channel to being something that's about what the brand stands for.

Your next question comes from the line of Oliver Chen from Cowen and Company.

Regarding the innovation and changes you're making to the assortment, what would you say is the magnitude of changes that need to happen, as you both update essentials and look at the trend rate novelty? And how would you contextualize those changes in the context of both managing for traffic trends and also making sure that you're appealing to your existing as well as new customers?

Oliver, thank you for the questions. Some of it is -- it's art and science. It's ensuring that we don't walk away from the tried and true things she loves about J.Jill and comes to us for. But at the same time, it's inserting certain level of newness and an evolution of that product to ensure that we're in front of relevant and current trends. So this August, we relaunched the Bi-Stretch Pant. She loved it. It's-- it is a go-to pant for her. It augments the cotton essential pant as well as pre -- is a precursor to the ponte pant which is more for the winter time wear. And relative to traffic, we drove significant amount of traffic beyond what we had anticipated, which shows that we're going to have to learn how to balance her getting in front of these demands. So I think it's a -- these are all testable hypotheses. We are implementing a test-and-learn approach to the business, particularly around product. So we do not alienate our most loyal customers. At the same time, I believe strongly, we will delight her more as we bring new customers to the brand.

Okay. And just a follow-up. The IT and the website seems like you're making some really great customer-centric innovations. As you think about the road map for IT and what you're prioritizing in terms of the seamless experience, what are the key priorities? And what do you think will impact the numbers at the most like near versus longer term? And how you're thinking about sequencing changes because it's not an easy task necessarily either?

So I'll start, and then I'll turn it over to Dave. We're relooking the road map, or rethinking the road map. And we're trying to accelerate a lot of the things that we had slated for 2019 and pulling it forward. So you'll start seeing PayPal. You'll start seeing a new focus on my J.Jill, et cetera, to enhance her shopping experience. At the same time, we are giving her styling tips. You're going to see embedded video. Some of this will be on the website itself, some of it will be carried into some of our social platforms like Instagram. So again, it's to give her a comprehensive taste of what it is to be part of the J.Jill brand, and we're going to invite her to share content with us. So again, we're looking at everything to help her identify and select products more easily as well as complement her whole experience with the J.Jill brand. We are also tying the experience online more tightly with mobile as well as with the catalog and with the store experience. So she should have a full 360 view of J.Jill. Dave?

Yes, I would add to that the fact that to see that we made good progress against that. We will invest more resources on the technology side of our business to see that we are developing those things. I'll say expeditiously, but also with intent and see that we do it the right way. But we are going to make and in addition -- and I'm talking about something that's relatively modest in the grand scheme, but seeing that we have the resource to deliver that on time and in a good way. There are -- in terms of what that could mean, there are a number of examples where we can use something like mobile that simply starts her store experience at home as an example, and we think through our styling programs and some other things, we can simply make it easier for her to shop us the way she likes regardless where she is, in particular, in a digital or mobile fashion. There's other opportunities. There's additional payment options we can offer. We'll have PayPal this fall, but there are certainly other options that people are probably well aware that we can develop into. One thing we've heard loud and clear from our customer, she needs more fit information in that channel. And that is something we can do, and we can do well and that is on the road map. So there's a number of examples in -- we're just getting behind it now to see that we can deliver it well starting this fall and into and through next year.

Your next question comes from Janine Stichter from Jefferies.

Want to stick a little bit more into the inventory, given the actions you took in the second quarter, it sounds like you're in pretty good shape, should be in better shape by fall. How are you feeling about the composition of that inventory? And then any changes you're making to the timing of flows going forward, just to ensure more balanced flow of inventory in the future?

Well, in terms of the absolute numbers, you have that in our press release. One nuance thing that I would say is when you peel away the timing of some of the in transits, our overall inventory levels year-over-year are down about 8% going into the quarter. So in terms of that number, we feel like that's a good number that addresses the absolute level. We also feel better about the assortment. There is not -- there will not be as many off-price choices through our direct channel for -- which was always part of our objective to make it more shoppable for our customer. Having said all that, and we talked about where we can evolve in product, we still think, we still see opportunity there. But in terms of I'll say cleaning down and cleaning up inventory, we do feel like we will meet our objective, we’re there frankly right now. It was already September in terms of being well positioned in order to start to execute something different from a promotional standpoint. In terms of flow, I would describe that as being very mindful about how we're buying the next several quarters and into the future. We need to make sure that we truly understand the demand patterns. That's in absolute levels, but it's also in terms of how we can flow and introduce the newness, some of which Linda talked about and are working, I'll say, vigorously to see that we can improve wherever we can and that's another place to do that. So how much we allocate initially, how much we replenish? All of those things come into play in terms of being more mindful about how we're going to manage our gross margin going forward.

Anything changing in terms of lead time?

Lead times?

We're working on that now. I'm starting to meet with many of our sourcing partners and factory base, and we'll have more to talk about that in future quarters.

Your next question comes from Paul Trussell from Deutsche Bank.

Wanted to circle back on the third quarter top line guidance. To what extent is the negative comp forecast due to a meaningful slowdown that took place towards the end of second quarter? Or what you're seeing quarter-to-date versus your expectation of customer reaction to the changes in strategy and promotional cadence? Just want to better understand how we should think about third quarter expectations? And then second, you did talk about customer file growth, obviously, that has slowed last year, it's picking back up. Help us better understand what drove that gain?

Sure. So in terms of top line guidance, I mean, frankly, you touched on it. Our second quarter, it was, I'll say, somewhat stronger to start the quarter. It didn't meaningfully decelerate as we went through the quarter, but it was taking more promotion in order to move those goods. So the difference was again having to promote, especially as we moved through July to put ourselves in that position to meet our inventory objective. So having said all that, July and August business, our August business has been relatively slow by comparison and together, finishing the quarter in August has informed a good deal of what we're talking about in terms of our top line. And there might be some -- there are reasons for optimism in terms of our product and the like that we'll come back to you, but couple of other things I'll offer to is, we are simply not going to have that level of clearance activity in the third quarter that we've had now for the last couple of quarters, where a significant amount of top line sales are generated by off-price product that we had to move through the system. So just the sheer volume of that drove some top line in the first half. You touched on the promotional offer. It is being cautious about doing something different there, particularly in e-commerce and being mindful that we may see lesser traffic and conversion could be more challenge. So all of that was in mind, as we set our level -- or set our thoughts around the third quarter. But again there is optimism around some of the product in the third quarter.

Yes. I think there are couple of things that I think are interesting about the file growth because during this activity of heavy clearance, we were very cautious on prospecting. And at the same time, we were able to build in a nice build to the file, which is great. In addition to that, I think, a lot of it was the glimmers of great product that we saw throughout the summer, but it's really building from August into September and September into October. Fields associates that were in-house, our district managers and regional were really excited about what we saw for fall. So I think that bodes well. We're getting even more new to brand customers in, and again, when the field is excited about the product, that's great. You will see the pant program is build more and as I said the Bi-Stretch is something we're stepping out in a big way. We have new interpretations of the ponte product that will be coming in this fall. So I would think we feel very good about what we're seeing.

So file growth to your point, it was positive in the second quarter. So current trajectory on file growth was slower in the back half of '17. It picked up a little bit in the first quarter of '18. It was somewhat slower in the second quarter than it was in the first quarter. That's a lot to hold on too. To Linda's point though, we did admittedly prospect a little bit less, given our promotional posture and I'll say our pace to the market. In that regard, we did not go strong into prospecting, particularly in June and July. The existing file was very engaged across that period in terms of what we were trying to do. As we look to make these improvements, we believe there's an opportunity to as we see that traction to begin marketing a little bit more as well as bringing more prospects into the chain as we put a -- I'll say, a better foot forward in terms of product and the like. So that drove some of it. A couple of other points on that. There was strength in the retail file direct largely reflect the clearance activity. We continue to see growth in our multichannel, consumer as well. So overall, the file was good, in that it demonstrates a lot of engagement. So we feel good about that, but again, the caution is a little bit around the promotional cadence for the third quarter.

(Operator Instructions) Your next question comes from the line of Kimberly Greenberger from Morgan Stanley.

Dave, I just wanted to reconcile a little bit the answer to Paul's question on the mix between sales and gross margin here for the third quarter. So the comp is expected to be negative, particularly in e-commerce because I think you said you're not planning to lap as many promotions as last year, but the gross margin is still expected to decline. So I just wanted to sort of understand what's driving both the negative comps if promotions will be less and then a subsequent decline in margin? And then Linda, I wanted to just make sure I understood your view of third quarter product as you're sitting here today. It sounds like you said the field management team when they were visiting had positive things to say about it, but there's still not -- I'm just not getting an overly constructive sense from you. I know there were pieces of it that you feel good about. Is it the issue you identified earlier, too much sameness in the fall product, not enough newness and it will just take simply a while to get the newness in, maybe you could just sort of give us a well-rounded picture on that? And then my last question, Dave, is on the gross margin for the second quarter. I think you said something about removing products for sale in the second quarter. I wasn't sure if you took it down from the website and went through with disposition process. If you could just explain that a little bit further that would be great.

So the last question first is, yes. It meant that we simply took that product out of the system so that the customer didn't see it frankly and that was largely in e-commerce, and we liquidated that through some other channels. In terms of the margin impact in the second quarter though, I would emphasize that the impact was more around discounting and less around some of that activity, but that activity was at a level that we've not used in the past in terms of marking out of stock. So we thought we would make a note of it. So and in terms of kind of looking to the third quarterin that interplay between sales and margin, I would say, it is the absolute level of clearance product that we've had in the first and second quarters drove a lot of top line. That simply will be absent in the third quarter, which impacts our volumes and our comps. And then as you further get into the comp and the margin, it is taking a cautious view that we are planning less promotions, but at the same time, we are allowing in our guidance the fact that the customer may not respond the way we would like her too. So from that standpoint, the guidance allows for us to react to whatever response we get from our customer. Hopefully, that helps. And then Linda as far as...

Sure. With respect to the Q3 product, August represented -- I think August is a challenge for many retailers relative to a heavy sale or clearance components. It's largely key item-driven, and I think we had some key item programs like our Bi-Stretch Pant which are very, very strong. And at the same time, Pure Jill had a rethink and a beautiful cohesive collection, but very small part of our business at that time of the year. And Wearever had a rethink as well, and I -- again, a great story, but small emphasis in the store. We are building on August going into September to really transition her into fall. And there you'll see much -- you'll see the menswear meets feminine detailing. You'll see an interpretation of tweed and plaid and definitely push into the fall season. And that's where our field associates got very excited about is they can see September as a nice transition and it builds very nicely into October as well. Again, as lot of those are anchored in some great bottoms, but there's a great dress story. And there's pieces that pull together in an effortless wardrobing. And the challenge to the field is 3 to 5 items in the back, you can outfit her perfectly on the floor in mix-and-match items. So it's a nice transition for how the brand has presented itself previously, and I think speaks well or bodes well for the fall season. Does that help?

Yes.

Your next question comes from the line of Ike Boruchow from Wells Fargo.

I think I'm just trying to understand maybe, Dave, the planning around the business in the near term, well, I kind of acknowledge the larger changes are going to be set for next fiscal year. I guess, the trajectory into Q3 based on your guidance is negative. And when we look to holiday, the business has some very tough compares coming up in Q4. And I think that you also mentioned the calendar is going to work against you from sales and timing. I know you're not giving annual guidance, but is there any way you could give us some type of framework, just on the thinking on how you guys are thinking about the business through the end of the year, it would be really helpful.

Well, I guess, we -- I do think about the third and fourth quarters similarly in terms of our thoughts about what we're doing as well as what the customer is going to experience, I would say, it's going to be a transition, and we see the fourth quarter similar. I mean, from a customer standpoint and again, it's going to be less -- we're going to be in the game promotionally in the fourth quarter, you have to be. But again, in terms of looking to have a more cohesive product offer, not over assorted, a little tighter, you may be a little less sharper on promotional like, all of those things together are what we will be going into the fourth quarter with. So acknowledging again some of the same caution on the third quarter, I don't see there being anything meaningfully different about the top line in the fourth quarter as we see in the third quarter. There is reason for optimism. The work on the product continues. The work on e-commerce continues. There are things that we can point to that point to the fact we're not giving up by any means, and we are going to make most out of the fall. But again, as we transition, and we work to do things, to your point, over a longer term that will be even more meaningful. There is some caution in terms of going through the fall and I would say I think about the fourth quarter similarly, in terms of -- or similar to the third quarter.

Your next question comes from the line of Brian Tunick from Royal Bank of Canada.

Two questions. Wanted to talk a little bit about the Delta at the store comps versus the DTC business. Just any color you can share there regarding traffic, ticket, what kind of maybe product differentiation there is? Just trying to understand why the store comps continue to trend well? And then, secondarily, on the timing, Linda, when do you think it will be reasonable to expect growth to come back to the DTC channel? And have you thought about what you think is the right size of the -- or the mix of the business, DTC versus stores longer term for the company?

So I'll grab that first one, which is a discussion of the channels. Our stores business remains strong in a relative basis, you heard that. As we move to the second quarter, we continue to see positives in both traffic and conversion, both channels saw a lower AUR. As we projected the third quarter in that sense, we continue to see and plan for or expect rather that positive traffic and conversion, albeit at a more tempered level, given again the promotional posture. We did not -- we planned for our AUR to increase, but I can't say that I put a lot of reliance on that as you now see from the guidance. As you think about direct, what we saw there was as we make these improvements, we are seeing conversion firm up nicely. We expect to continue to see that. Traffic has been slower at, I would say, particularly as of late and that's an opportunity for us. And from my point of view, as we -- as some of the things we're doing take hold, and we see some traction there, we can start to market a little bit more. We haven't marketed that business as aggressively, recently because it's not our best foot forward. So we are working through some of this. We do know that there's a point or feel, there's a point, where we get that traction, and we can start to turn this spigot back on a little bit more in terms of stimulating traffic into that channel.

But -- and as to the relationship of the direct-to-consumer channel relative to the entirety of the brand, I think it's a great question, and it's something that we're exploring right now. Ideally, we would be fostering even more of omni-behavior in our customer base and that's one of the other things that we're working towards. The online exclusive, the online edition card that I talked about in my comments is intended to help drive that interaction between the store channel and the e-commerce channel. And to Dave's point, we are already testing areas in which we can ramp up our digital marketing spend smartly. And particularly, as we have a better foot to place forward and what we want her to see in the brand. We're going to be balancing our e-mail traffic to her relative to promotional messages, but as importantly, branded messages on some of these wonderful products that we're bringing to her. So you're going to see a rethink on all of these components in how we talk to her, and I think as a result of that we're going to fuel even greater traffic to the site, and we're going to rightsize it to -- its importance to the brand in total. As a brand, we need to be thinking of how she starts her day and -- or most likely, I mean, Dave said it in the comment on mobile, most likely that's her first touch point with the brand. So how do we rethink all components that how we interact with her around digital first potentially. Catalog and stores remain critical, and I love the fact that we have positive traffic into our stores. And then, when you go into our stores, she sees it as her J.Jill. It's her place to be. That's very special, and we don't want to take away from that, but we definitely want to augment it with all these other touch points in digital to her. So more to come on all of that, and as you said, well, you'll hear more from us about that in the future quarters.

There are no further questions at this time. I will now turn the call back over to Linda for some closing remarks.

Well, I want to thank everyone for joining us today, and we look forward to speaking to you again on our third quarter call. Thank you.

Thank you.

This concludes today's conference, you may now disconnect.