Tillys Inc (TLYS) 2013 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Tilly's Incorporated third-quarter fiscal 2013 results conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Anne Rakunas of ICR Inc. You may begin.

Thank you. Good afternoon, everyone. Thank you for joining us today to discuss Tilly's third quarter fiscal 2013 earnings results. On today's call are Daniel Griesemer, President and CEO; and Jennifer Ehrhardt, CFO. A copy of today's press release is available in the investor relations section of Tilly's website at Tillys.com.

Shortly after we end this call, a recording of the call will be available as a replay for 30 days in the investor relations section of Company's website. I would like to remind you that certain statements that we will make in this presentation are forward-looking statements. These forward-looking statements reflect Tilly's judgment and analysis only as of today and actual results may differ materially from current expectations based on a number of factors affecting Tilly's business. Accordingly, you should not place undue reliance on these forward-looking statements.

For a more thorough discussion of the risks and uncertainties associated with the forward-looking statements we made in this conference call and webcast, we refer you to the disclaimer regarding forward-looking statements that is included in our third-quarter 2013 earnings release, which was furnished to the SEC today on Form 8- K as well as our filings with the SEC referenced in that disclaimer. We also note that this call contains non-GAAP financial information. We're providing that information as a supplement to information prepared in accordance with accounting principles generally accepted in the United States, or GAAP. And you can find a reconciliation of these metrics to our reported GAAP results in the reconciliation table provided in today's earnings release.

As for today's call, we have a limit of one hour, so when we get to the Q&A portion please limit yourself to one question at a time to give others the opportunity to also have their questions addressed.

And with that, I will turn the call over to Daniel Griesemer, Tilly's President and Chief Executive Officer. Dan?

Thank you, Anne. And good afternoon, everyone. Thank you for joining us today. On our call, I'll be providing you with an overview of the third-quarter performance and the key factors that drove our results. Jennifer will then review our financial results in more detail and provide our outlook for the fourth quarter and full year 2013. I'll provide a few closing comments, and then we'll open up the call for your questions.

During the third quarter, we achieved quality earnings that were at the high end of our expectations, and I'm pleased with how her team continues to execute in a challenging retail environment. We maintained healthy gross margins, controlled our costs, and exited the quarter with inventory as planned and well positioned for the holiday season.

As a reminder and discussed on our second-quarter call, the retail calendar resulted in sales shifting into the second quarter from the third quarter this year when compared to the 2012 fiscal calendar. Taking this into account, on a like-for-like basis, we delivered higher gross profit dollars than the third quarter last year in a very challenging teen retail environment.

During the quarter, we experienced a continuation of the weak traffic trends that have affected many retailers, leading to lower-than-expected comparable-store sales. Consistent with the past several quarters, consumers continued to focus their shopping into compressed peak periods and pulled back during non-peak periods. This trend was consistent across all product categories, real estate formats, and store vintages as well as in our e-commerce channel, affirming our view that our sales results were primarily driven by external factors.

While acknowledging that teen unemployment remains high, and that other categories such as electronics and entertainment compete for teen dollars, we know that Tilly's remains a top destination for the most relevant merchandise and brands important to our action-sports inspired customers.

Despite the challenging external environment, we continue to adhere to the proven business strategies that have guided Tilly's success for over 30 years, including our differentiated business model and our sharp focus on evolving preferences and needs of our customers.

Our dynamic merchandise model allows us to be nimble in responding to changes in demand and preference. Selective in our promotional activity, we believe it is critical to respect and protect not only the Tilly's brand but the integrity of the brand partners to ensure our long-term health. This strategy has served to maintain our healthy product margins while reducing inventory as planned by just under 16% on a per-square foot basis compared to the same date last year.

Our inventory is clean and current, which we believe positions us well to effectively navigate through the fourth quarter if the challenging retail environment persists.

Significant to Tilly's success has been our presence where our customers want shop in the right markets, in the right venues, as well as other channels of e-commerce and catalog. We continue to strategically build out our store base in high-caliber markets and to refine our channels of distribution, which we believe will position us to benefit from more consistent traffic trends.

During the quarter, we opened seven new Tilly's stores on time and in budget, bringing our total store count to 189. We introduced the Tilly's brand in three new markets and four new states. We continue to see a strong pipeline of new real estate opportunities, and we are on track to open 27 net new stores in fiscal 2013.

During the quarter, we continued to advance initiatives that allow our target customer to shop how and when they like in order to drive traffic to our stores and our website not only in the coming quarters but in years to come.

And now I'd like to turn the call over to Jennifer Ehrhardt for more detail on our financial performance in the quarter and an update on our outlook. Jennifer?

Thank you, Dan. And good afternoon, everyone. For the third-quarter, net sales decreased 0.9% to $123.8 million, a $1.1 million decrease compared to the third quarter of 2012. This reflects approximately $8 million in back-to-school period sales that shifted into the second quarter from the third quarter this year when compared to the 2012 fiscal calendar. Comparable-store sales decreased by 2.4%, with a similar level of comps in all departments aside from accessories that performed slightly better. Our e-commerce sales, which are included in our comparable-store sales, grew 3%. Our third-quarter comps reflect lower traffic, largely offset by an increase in both conversions and average transaction value. Gross profit was $38.2 million, or 30.9% of net sales, compared to 33.5% of net sales in the third quarter of 2012. Even before factoring in the sales shift into the second quarter this year, we achieved slightly higher product margins compared to the third quarter of last year.

The increase in product margins was offset by deleverage and buying distribution in occupancy costs as a result of the negative comparable-store sales and the sales shift into the second quarter this year. We continued to diligently manage our costs with selling, general, and administrative expenses of $28 million, or 22.7% of net sales, which is just slightly above an SG&A rate of 22.4% in the third quarter of 2012.

Our operating margin was 8.2%, compared to 11.1% in the third quarter of 2012, reflecting deleverage of buying, distribution, and occupancy costs offset by slightly higher product margins as previously discussed.

When adjusting for the week of back-to-school sales that fell into the second quarter of this year, operating margins were higher than the 8.2% we reported but still below the third quarter 2012. Net income was $6.1 million, or $0.22 per diluted share, based on a weighted average diluted share count of 28.2 million shares. This compared to an adjusted net income in the third quarter of 2012 of $8.3 million, or $0.30 per share after applying a pro forma 40% C Corporation tax rate.

Turning to the balance sheet. We ended the quarter with cash and marketable securities of about $50.6 million, with no borrowings and no debt outstanding under our revolving credit facility. Cash used for capital expenditures during the quarter totaled $12 point million dollars compared to $9.1 million in the third quarter of 2012 and were primarily related to new stores opened during the quarter, new stores under construction during the quarter that are scheduled to open in the fourth quarter of 2013, and our new e-commerce distribution center.

Inventory totaled $56.4 million at the end of the quarter. And, as Dan mentioned, compared to the same week 52 weeks ago, inventory declined 15.7% on a per-square-foot basis as planned.

Looking ahead to the fourth quarter, our inventory plans continue to reflect our strategy of delivering healthy product margins and keeping inventory fresh and current through the remainder of the year.

Therefore, we have planned inventory per square foot at the end of the fourth quarter to be down in the low double digits. We believe this best positions us to start the new fiscal year with the right level and composition of inventory in order to deliver healthy margins. The fourth-quarter guidance that I will now outline reflects achieving this level of inventory.

Turning to our outlook for the fourth quarter and full year 2013. We continue to experience weak traffic trends in a highly promotional environment in teen retail. If these trends continue, we would expect fourth-quarter comparable-store sales to decline in the mid-to-high single digits and net income to be in the range of $4.2 million to $6 million, or $0.15 to $0.21 per diluted share.

This assumes an anticipated effective tax rate of 40% and a weighted average diluted share count of 28.3 million shares, compared to 28 million weighted average diluted shares in the fourth quarter of last year. This compares to adjusted net income of $8.9 million, or $0.32 per diluted share in the fourth quarter of 2012, which includes a 40% effective tax rate to make that quarter comparable.

Factoring in our fourth-quarter assumptions, we now expect a comparable-store sales decline in the low single digits for fiscal 2013 on a 52-week versus 52-week basis. Using these assumptions and an anticipated annual effective tax rate of 40%, net income for fiscal 2013 is expected to be in the range of $16.9 million to $18.7 million, or $0.60 to $0.66 per diluted share. Based on an average diluted share count of 28.1 million shares, compared to 26.1 million weighted average diluted shares for the full year 2012.

This projection for fiscal 2013 compares to net income for fiscal 2012 of $23.9 million, or $0.92 per diluted share, and adjusted net income for fiscal 2012 of $22.9 million, or $0.88 per diluted share.

Adjusted 2012 net income included adjustments to have four quarters of ongoing stock-based compensation expense totaling $2.7 million and a 40% effective tax rate for the entire year. Adjusted 2012 net income excluded the one-time charge of $7.6 million to recognize life-to-date stock-based compensation and the one-time tax benefit of $3 million, both of those recorded in the second quarter of 2012.

We continue to expect capital expenditures for fiscal year 2013 to be in the range of $40 million to $45 million with the majority, approximately $22 million, related to the opening of our new stores as well as for remodels and refreshes of our existing stores. Our projection also includes approximately $12 million to $14 million for our new e-commerce distribution center.

The balance of our expected capital spending in 2013 is related to expenditures on IT and other infrastructure improvements. Our financial position remains strong, and we remain focused on diligently controlling our expenses and prudently investing in the long-term growth of our business.

Now I'd like to turn the call back over to Dan for some closing remarks. Dan?

Thanks, Jennifer. While consumer shopping patterns remain inconsistent and current trends dictate a cautious approach in the near term, we are confident in the strength of our Tilly's brand and remained focused on initiatives that we believe will advance our long-term growth. We continue to strategically expand our presence in high-caliber markets to take advantage of the significant whitespace opportunities we see before us, increase our brand awareness through targeted marketing and grassroots efforts, and grow and refine our e-commerce platform. I am pleased with how our entire organization continues to not only navigate and execute in a challenging retail environment, but to plan for the future in parallel. Everyone at Tilly's is focused on growing our business and driving quality, sustainable earnings.

I'd now like to open up the call for your questions. Operator?

(Operator Instructions) Sharon Zackfia, William Blair.

I guess a question on the fourth-quarter guidance. Obviously you're looking at kind of a mucky November with the shift in Thanksgiving. So if you'd give us more insight on how the guidance kind of stacks up relative to your current trends particularly as last year trends weakened as the quarter when on. I guess I'm just curious, are you assuming there is an uptick from the current trends? Have you adjusted for the shift in Thanksgiving? Any insight would be helpful.

Yes, sure, Sharon. So we recognize the range indicates a view of some volatility that we believe exists in the quarter and in estimating here at the beginning of the holiday season, pre-Black Friday, and well in advance of the majority of the season.

The guidance reflects the trends that we have seen recently and for the last few months, so coming out of the post back-to-school time period, and we have set several factors that are influencing that. Clearly, there is significant pressure on the teen sector and the teen customer competing dollars -- for limited dollars in a variety of things. Our own current trends, we have seen and believe this will be an extremely promotional season and expect it to be pretty brutal out there. We've got a calendar shift that's shortening the number of holiday days, and we have a lack of clearance going into this season that we had last year and know contributed to our revenue. It's kind of the combination of those factors is leading us to think that it's prudent to have a bit of a wider range than normal. We really want to see how this unfolds. It can -- low end of the range is one thing, high end of the range is another.

We're going to see how this unfolds. We're very confident about our content, our marketing strategies, the investments we've made in our merchandise, the way the stores look and feel, the preparedness of the teams. But we're going to stay focused on the things we can control; we're going to control those things. We're going to continue to work diligently at making the right decisions for the long-term and getting better at everything we do. But we recognize this is a very volatile season, and it's reflected in this kind of wide range that we have in here.

Okay. Thank you.

Lorraine Hutchinson, Bank of America.

Did you mention that merchandise margins were up in the third quarter? And if so, could you quantify that?

Yes, we did mention that merchandise margins after you account for the shift -- even before the shift, merchandise margins were slightly up, and after accounting for the shift, they were up over that compared to last year.

And does the fourth-quarter guidance contemplate higher merchandise margin year over year?

It does.

And as you watch some of your competitors compete with deeper and deeper promotions and discounts, how can you drive traffic into the store without succumbing to some of the same types of strategies?

Yes, so there's only so much that we're -- we can and are willing to do, right? It's very hard to compete when there's kind of reckless activity going on and anticipation of some pretty significant discounting. We stay focused on making sure that the content is fresh and relevant, that the teams are creating a great experience out there, that the stores look amazing, and communicate the value that exists in our offering. It's there, it's prominent, and I'm very pleased with kind of the content and where we're positioned going into that. But there's only so much we're willing to do because we're not willing to compromise the integrity of this brand for the short term.

So we've got mail strategies, things we're doing with our catalog mailings to drive traffic. Things on social media; very vibrant activity online. Things that we're doing in the store. All kinds of things that are happening, but there's only so much we can do so that kind of is feeding a bit of our caution in the view of the fourth quarter.

Steph Wissink, Piper Jaffray.

Hi, good afternoon everyone. Thank you. Just a quick question, Dan, on the new store performance, or Jennifer as well. As you look at the quarter, and then maybe stepping back to the general trend line around those new stores, is anything changing about how you think about your unit or site selection based on what you've experienced here in the back-to-school and kind of holiday-to-date period? Thanks.

So the new store performance remains in the same relationship as the kind of established or heritage stores, as has always been the case. So it's kind of a river or tide issue that's influencing -- and, again, another indicator that we recognize we're not perfect and there's a lot of things we need to work on. But this is an externally influenced -- largely externally influenced thing with the teen consumer.

We are being very judicious on the site selection process. We have, I don't know, between a quarter and a third of the leases signed for next year, if -- whatever that would be. That's normal at this time of year. We still remain very flexible and are being very critical about where we put our stores. There's no rush here. There's no race to get to what we believe is the long-term opportunity. We still are committed to the strength and opportunity that we see out there for the long-term with no change in that. But we'll only bring to the business the highest-caliber opportunities that we see in both malls and in off-mall venues.

^ Thanks, Dan. If I could, could I just ask one follow-up? If you look at your back-to-school and holidays trend line, it seems like the sequence Q3 to Q4 is a bit contrary to the group in terms of what we've seen. Do you think there's been a delayed pullback by your customer? Or maybe help shape what you're seeing third quarter to fourth quarter relative to the broader market, where we've seen kind of significant pressure Q3 and a slight improvement into Q4.

Yes, so I think what we're -- the way we're looking at it, Steph, is that we recognize we have a unique business, a unique business model. We have certain peaks and valleys in our business that may or may not sync up with other retailers exactly. We're reading the trend that we saw coming in the peak back-to-school time period being consistent with where we had projected and then softness that really began in Labor Day. And then that softness really continued if not slightly intensified. And the guidance that we have here is a caution and concern, given the multiple factors that seem to be kind of perfect storm here for the fourth quarter, with all of the various contributing factors around the teen sector, our own recent trends, the promotional activity we see and believe is going to be there. The limited dollars and strength in maybe the gaming industry and some distractions instead of purchasing apparel, that the shortened calendar. And then our own intentional push to cleaner business with cleaner inventories and less clearance, that combination is really what's leading us to this more conservative view of the fourth quarter.

Thank you. Best of luck, guys.

Lindsay Drucker Mann, Goldman Sachs.

Hi. Thanks, everyone. On the merch margin question, are you able to quantify how your merch margin -- the magnitude of improvement you saw this quarter versus what you saw in Q2 on an apples to apples basis? In other words, was the improvement reasonably consistent with what you saw last quarter or did it change some?

Thanks, Lindsay. Yes, last quarter when we talked about the impact of the shift of that back-to-school week coming into Q2 out of Q3, we had mentioned that, net 70 basis points of product margins to us, we saw a similar decrease in Q3 related to that shift. As well as, I mentioned earlier, even not considering the shift, we did have slight improvement in our product margin. So when you look at that 70 basis points plus slight improvement, it gets you to what we saw the improvement in overall product margin for the quarter.

Got it. So it sounds like on an apples to apples basis, it was pretty -- the rate of change was -- rate of improvement was pretty consistent versus Q2? Is that fair?

Yes it was. Right. That's fair.

Okay. And then can you -- I was hoping you'd just to clarify the inventory, your inventory positioning, and the adjusted inventory versus the reported inventory, where we saw the relationship between inventory and sales get a bit worse this quarter.

Oh, well, you know, we talked about this at the end of the second quarter. We recognized coming out of the third quarter last year, the composition of our inventory had more fall/winter carryover product in it then we needed, given the sales trend that we experienced in the latter part of the third quarter and in the fourth quarter. We had identified that coming out of that season.

We weren't pleased with the amount of clearance markdowns we needed to take in order to ensure -- that is so critical to our business ensuring that our inventory remains fresh and current. So we identified that we did not need that overhang of inventory and planned for it and managed the inventory down to that. And we talked about mid-teens down on a per-square foot basis. It really is cleaner and more current, and less clearance inventory was the makeup. It was intentional, and we're going to exit the fourth quarter down in the low double-digits.

And so we are committed. We remain committed. It's critical to this business that we remain committed to keeping our inventory fresh and current. That's what our kids want; they want to come in and see newness. So we won't carry over past seasons' problems into future seasons. So that's kind of where we have and what we're thinking about and the relationship of the inventory. It really is less related to the sales plan and more related to the composition.

Got it. And then just last one for me. Dan, if I -- if we sort of go back to earlier in the year where you talked about the softer backdrop and its lower -- the river was a lower level in terms of your customer spending. You know, you talked about a competitive environment, but -- and while you were reticent to really dial up aggressively on the promotions, you said you had some other plans to try and drive the business even in the face of the softer kind of backdrop.

I was hoping maybe you could talk to us about what was successful, what you feel is working, and any incremental plans you have in store for Q4, Q1. I mean, to the extent that the macro dynamic doesn't get better, should we just be looking for ongoing sluggish comps or do you have other areas you're looking to play off in? Thanks.

Yes, okay, sure. Yes, we clearly believe that it is particularly in this fourth-quarter going to be a very competitive and promotional environment. We recognize that, we knew and know that our business is not built on a high-low strategy. We have a strong branded presence, and the integrity of our brand and of our brand partners is critical to the long-term health of the business. So we don't build our plans and strategies around discounting desirable and current and fresh and relevant products. So it starts with making sure that we're relentless in the pursuit of having the brands and the styles and products from those brands that our customers want.

But then more to your question is saying, how are we communicating the value that exists in our offering? And it's there. And if you go into our store right now, you will see us being more obvious with that value; and it's in our windows, it's on our tables. You can see it. And while we have some strategies in place for this coming weekend and throughout the holiday season, I'm not going to give a whole lot of detail on that. We'll be able to share that once it's over, or you can see it as it unfolds. But we're going to remain committed to keeping the business clean, keeping the inventory clean, communicating value in the offering, and being very innovative on the product side and on the marketing and messaging side.

Jeff Van Sinderen, B. Riley.

Good afternoon. Dan, maybe you could just talk a little bit more about -- I mean, I understand you're -- kind of where you are in promotions generally. But just wondering if your plan -- were you more or less promotional in Q3 -- I just wanted to clarify that -- and are you planning to be more or less promotional or take fewer discounts? It sounds like -- I mean, if you back -- let's say we back out the extra clearance inventory that you had last year. Are you planning to be more or less promotional, take more or less discounts this year in Q4 versus last year?

Yes, it's probably about the same. It's hard to back out the clearance because that has such a heavy influence on kind of the promotional cadence and what you're messaging and what you're doing. Suffice it to say, both the third quarter and the fourth quarter, we will be taking less overall markdowns. So think about that. But there may be some shift in something that would've gone to clearance that now might be promoted in a slightly different way. But other than that, no. It remains -- this business remains very, very clean. Markdowns as a total are not a big part of it, and the big lever that moves is what you have to do to clear your residual inventory. That's really what influences the whole markdown pool. So keeping our inventory clean and current and lean is critical to the long-term health of the business.

Okay, and then just a follow-up on comps. If your inventory is much cleaner, you've got much less clearance inventory in the mix for Q4 this year versus last year. I'm just wondering how you -- I know it's hard to break this out, but how do you think about your comp the last year if you were to say, okay apples to apples. We have the same amount of clearance last year as we do this year. Is there a way to look at it like that and say, gee if we didn't have as much clearance inventory, or let's say we had flat clearance inventory, we would be guiding to a comp that's low to mid-single-digit instead of mid-to-high single-digit? Or is there way to sort of break that out?

Yes, without giving a whole lot of detail, you're on the right track there. We recognize that we did begin the season last year with more inventory that needed to be cleared coming out of the third quarter that was competing for fourth-quarter product. Right? So we intentionally pulled that out. We recognized that with team, sales and very little profit. So we're thinking this is the right way to run this business for the long the long-term. We would -- the lack of clearance is a contributing factor to our acknowledged wide range here for the fourth quarter. It is a contributing factor. So, you are on the right track.

Okay. Thanks very much, and good luck for the holiday.

Dave King, Roth Capital Partners.

Good afternoon. This is actually (inaudible) on for Dave King. Can you just talk about the outlook on the SG&A front and how we should think about the opportunity for future savings? And then should we expect deleverage both in gross margin and SG&A in the fourth quarter, given your guidance for a negative comp?

Sure. I'll go ahead and answer that -- address that with you. If you look at SG&A for Q3, you'll see, from a pure dollar perspective, we came in just slightly above last year, so we really are diligently controlling costs and always looking for ways to optimize efficiencies, processes, things along those lines. So when you look at SG&A and as a rate as a percent of sales, that was deleveraged that you saw going from the 22.4% to 22.7% this year. It was deleverage on the negative comps. And when you look into Q4, you'd already set it up perfectly, the SG&A and the rate that you see there is all driven by the deleverage on our guided negative comps we put out there.

Okay. Thank you.

Pam Quintiliano, SunTrust.

Great. Thanks so much. So just to be clear with the guidance, not to beat a dead horse, but it sounds like the environment in traffic, that's the issue, not as much -- and obviously not [having] as much carryover product. But the new fashion content, the customer is responding to the product that you have in the stores currently?

Yes, yes. We see a good response from the lower level. Right? So the tide is lowered; the river lowered, I guess is a better way to say it, and what we see the customer doing in the store we are pleased with.

And then I understand that it's critical for you guys to keep the inventory fresh and current and not to compete with the excessive promotions that are out there just to remain -- just have the integrity. But how do you balance that just with remaining relevant, given what's going on out there? And is there -- have you been working with vendors to try to create other types of compelling offers or anything differentiated for holiday that we could think about that you think your customer would get excited about, that not necessarily 50% off the entire store or something like that?

I like where you're going with that. Yes, the answer is spot-on because we cannot compete on price. You don't achieve greatness and relevance by just battling it out on the cheapest ticket. Using the long-term relationships and partnerships that we have with our brands, mapping out a course with them that works for them and works for us to make sure there's unique product, well priced value across the entire offering, and that's in all product categories and branded in our own proprietary product. It's critical. If you go into our store, you'll see some of those things. Now you'll see them as the part of the holiday offering and you'll see them ongoing.

And then is there any change to the timing of the flows? Just once again, you keep on talking about the inventory being fresh and current, so when we think about year-over-year?

Yes, so flow for us is different than it is for vertically integrated retailer in that we don't flow entire collections. So newness is flowing into our stores on a daily basis multiple times a week. Newness is across all product categories. So when we -- achieving these more rationalized inventory levels, we're done across the board, all levels, not just by pushing a collection out or pulling one forward. Does that make sense?

It does. And I guess what I was thinking more is -- are there more statements that you're making? Sorry if I misphrased it with the flows, but more statements that you're making when you're flowing in product that creates excitement in between Thanksgiving and Christmas to try to capture that traffic when it's not Black Friday and those excessive promotions going on out there.

Yes, I would actually ask you to go into a store and you tell me because I'm a little bit biased because I think our stores look amazing right now. I'm so bullish on the strength of the offering, the focus in fashion-relevant product in the junior side, the key items, the well-priced both branded and proprietary product on the guys' side, the newness that we have in accessories and footwear.

So I'm not a good one to ask because I think we're doing a lot of great things. And I hope that we're being overly cautious here, but there's a lot of headwind. The things that I've talked about -- there's a lot of headwind that gives us reason to be cautious.

Fair enough. Well, best of luck with all of it.

Betty Chen, Mizuho Securities.

Just to kind of follow up on some earlier questions, Jen. I was wondering if we should -- how we should think about specifically in terms of SG&A in the fourth quarter. I know you mentioned that we should be looking for deleverage given the negative comps. Should we look for the deleverage to be similar in magnitude to the third quarter, or is it going to be a little bit more obscure because of the sales shift going on from the calendar?

Yes, if you look at the deleverage in SG&A, it is going to be a little bit more severe than what you're seeing especially when you think about the comps that we've guided for Q4 versus where we just came in in Q3 at the down 2.4. So as I mentioned, you only saw about 30 basis points of deleverage in SG&A for Q3. So you should be factoring in a bit more severe for Q4 based upon the deleverage on negative comps.

Okay, that's helpful. And then in terms of the Q4 inventory position being down double digits, is the reduction just coming across the board from all categories or are there specific categories where you're sort of reducing investment given some of the learnings you've seen last year or earlier this year?

No, Betty, it's pretty much across the board because the inventory overhang that we believe we began the quarter with -- the fourth quarter with last year was created by a -- the beginning of some traffic softness. So it was across the board, and that's really one of the things that I hope comes through as people learn more about this business is the stability, the diversity, the balance that exists in this business across apparel, footwear and accessories, guys, juniors and kids, branded and private-label, fashion and more relevant basics. So it's across the board and it's being prudently managed. I'm very proud of the job that the merchants and inventory teams have done. They've positioned us very well for what we believe is going to be a challenging quarter.

Okay, great. And it sounds like maybe the e-commerce channel saw similar challenge with traffic. Are there -- I know you talked about various marketing initiatives whether it's social media or maybe (inaudible) milling. What do we think may be happening with the e-commerce customer, and are there some maybe online-only offers that you can continue to drive that you did in the third quarter to try to stimulate that interest?

Yes, so we do believe that this is a teen kind of macro-external influence because we've seen -- as we've talked about, what we experienced in the third quarter was across all channels and all product categories. It was a relative thing going on. It's important to note that the magnitude of that one week that shifted out of the third quarter into the second quarter was one of the largest e-commerce weeks of the year. And that move -- remember we reported in second quarter a 30% increase in e-commerce. We are reporting in the third quarter a 3% increase. When you combine the two, it's 15% increase. So it's still a very healthy, very vibrant business. And any other softness that you might see there I would attribute to the clearance as well because we talked many times about how efficient e-commerce is in clearing residual inventory. And not owning it has put a little bit of pressure on there. But that said, we're achieving those results and feel very bullish about e-commerce as a channel and the things that we have in place both from segmentation of our communications to social media to unique product to broader and more dominant assortment, more compelling categories, and more breadth from those categories to make sure that we keep that channel growing and vibrant.

That's great. A follow-up, Dan. In terms of the shift in impacting third-quarter e-commerce business, is a shift in the fourth quarter going to have a similar impact or not as dramatic?

No, it kind of all washes out in the fourth quarter. That last week of the quarter is relative to the first week of the quarter, not a whole lot different. So minor. Nothing like the shift in the second quarter to third.

That's great. It'll be nice when we survive through all these shifts.

Yes, you're telling us. Yes, right, right. (laughter)

(laughter) Could you just remind us again where we stand in terms of the e-commerce DC capital program? And I think originally we were possibly looking at a maybe spring completion date? And if you could remind us on that and when we may perhaps see some benefits from the efficiency of that DC. Thanks.

Spring is still a good window to look at. We still believe that's the case. The real variable continues to be approvals that we need in order to operate the facility but it is moving along very nicely. Jennifer, in her script, commented about the capital associated. It's coming in at or slightly below where we thought it would be. We're very pleased with how this is going to support the business, and we would look for kind of any benefit in the unit throughput to be probably more meaningfully expressed in the back half of the year. I wouldn't want you to model too much early on.

Okay wonderful, best of luck for the holiday. Thanks.

Okay, thank you very much.

Thank you.

(Operator Instructions) It appears we have no further questions in the queue. At this time, I would like to turn the conference back to management for any additional or closing remarks.

Okay, thanks operator. Thanks again for joining us. We look forward to speaking with many of you at the ICR Xchange in January. Have a good evening.

Ladies and gentlemen, this does conclude today's conference. We appreciate your participation.