Vince Holding Corp (VNCE) 2015 Q1 法說會逐字稿

Good afternoon, my name is Mike, and I will be your conference operator today. At this time, I would like to welcome everyone to the Vince Holding Corp. Q1 2015 earnings results conference call.

(Operator Instructions)

I will now turn the call over to Ms. [Jennifer Poland], Vice President of Finance. You may begin your conference.

Thank you, and good morning, everyone. Welcome to our first-quarter 2015 earnings conference call. I'm Jennifer Poland, Vice President of Finance. Joining me today is Jill Granoff, our Chief Executive Officer, and Lisa Klinger, our Chief Financial Officer, who will be your speakers for today's call.

Before we begin, let me remind you that certain statements made on this call may constitute forward-looking statements, which are subject to risks and uncertainties that could cause actual results to differ from those that we expect. Those risks and uncertainties are described in today's press release and in the Company's SEC filings, which are available on the Company's website. Investors should not assume that statements made during the call will remain operative at a later time, and the Company undertakes no obligation to update any information discussed on the call.

After our prepared comments, we will be available to take your questions for as long as time permits. Now I'll turn the call over to Jill.

Thank you, Jennifer, and thank you, everyone, for joining us today to discuss our first-quarter 2015 results. I'll start by giving you an update on the quarter, as well as our growth initiatives for the balance of 2015. Then I'll turn it over to Lisa for a more detailed review of the financials and outlook, before I end with some brief closing remarks.

Vince is a leading contemporary fashion brand. We offer our customers everyday luxury essentials and modern, effortless style, and as a result, our brand has broad consumer appeal. We are successfully evolving into a global, dual-gender, multi-channel lifestyle brand, and have multiple levers for long-term sustainable growth. We remain focused on our strategic initiatives, which include enhancing our women's product assortment, further developing our men's business, selectively opening new retail stores, leveraging eCommerce to drive awareness and sales, and broadening our international reach.

As we look at the first quarter, our results came in generally as we expected, and we saw many positives in our Business. Sales grew 12%, with growth in virtually every channel. Our increase was driven by our direct-to-consumer segment, which grew by 34%. Prom sales increased 9.7%, including eCommerce, which saw significant traffic increases.

Our wholesale segment was up slightly, driven by our domestic wholesale business and licensing royalties. Gross margin expanded 200 basis points to 51.4% in the quarter, while SG&A costs increased due to strategic investments in our Business. In addition, EPS grew 50% to $0.06 in the first quarter.

Turning to some operational highlights from the quarter, as you know, product is paramount at Vince, and we continue to make strides in our evolution into a lifestyle brand. We were pleased with our performance in a number of women's categories, including dresses, bottoms and outerwear, with significant double-digit growth in each. These businesses are becoming a meaningful part of our assortment, as we respond to our customers' request for head-to-toe looks that address multiple-wear occasions.

Sweaters remain our largest category; and while sales were essentially flat in the quarter, they were below our expectations. In addition, our knits business was down to last year, and below our plan.

Our men's business continued to demonstrate strong double-digit growth, led by knit tops, pants and outerwear. Customers are responding favorably to our growing athleisure assortment, and we see room to broaden our men's line to address additional wardrobing needs.

In terms of accessories, we recently introduced our handbag collection in limited distribution. Customers reacted positively to the clean, modern designs. At the same time, they wanted increased functionality and an improved price/value relationship. We quickly addressed customer feedback, and used learnings that we gained from the initial deliveries to influence and impact the expanded global launch this fall. We continue to see handbags as another promising category for the Vince brand.

In addition, momentum in our licensed footwear business remained strong. Vince has become a leading women's contemporary footwear brand, and we believe we have similar opportunities in men's footwear. For our fall 2015 collection, our women's footwear is expected to be in over 500 doors, and our men's footwear will be in nearly 150 doors.

Looking at our distribution channels, as we expected, we saw our US wholesale partners reduce their initial orders. In addition, reorder activity, which is typically 10% to 15% of their sales, was below our expectations. As a result, our wholesale business increased low-single digits for the quarter.

In contrast to our wholesale business, our direct-to-consumer business grew over 30%, with comps of nearly 10%, driven predominantly by our eCommerce business. Total sales growth was also driven by our new stores. We opened five stores year to date, several in new markets, and each of these stores performed at or above our expectations.

I would like to note that our new stores in Washington, DC, and Scottsdale, Arizona, demonstrated particularly strong performance, and we believe both are great markets for the Vince brand. We now have a total of 42 stores, and still believe there is potential for 100 stores in the US alone.

International expansion also remains a significant part of our growth strategy, and we continue to make strides to develop the business, and set ourselves up for long-term success. We held our first market in our new Paris showroom, and were able to present Vince to our international accounts as a full lifestyle collection for the first time. We are pleased to say that the opening was met with great enthusiasm by existing accounts, and we also received orders from several new accounts. Our international business still represents just under 10% of total sales, and we will continue to stay focused on increasing penetration in key markets.

Overall, we have an exceptional brand, a highly loyal customer base, and strong relationships with our wholesale partners. We are confident that we are taking the right steps and have the right business model in place to drive healthy double-digit sales and profit growth over the long term. However, taking into consideration our current business trends, some of which are within our control and others related to macro factors, we are resetting our expectations for 2015. Lisa will provide more details on our revised guidance shortly.

Looking ahead, we are focused on several key initiatives to drive improved and sustainable top- and bottom-line growth. First, our primary focus remains on product. Our customers have come to know us for our exceptional women's ready-to-wear offerings.

However, when we saw the softer performance in our sweater and knit categories, we took a step back to re-evaluate these businesses, and have been diligently focused on returning to our heritage of offering luxurious cashmere sweaters and tops with great style, high quality, and strong value. We have begun to present our new collections to our wholesale partners; and based on initial feedback, they are pleased to see that we are re-emphasizing our core sweater and top business, which is what the Vince brand has become known for.

Turning to other product categories, we expect our men's business to continue to grow at a healthy double-digit rate, as both awareness and acceptance further expands among male consumers. We believe men's can be a major contributor to our long-term growth, and look forward to driving continued momentum in this business with an expanded assortment and increased distribution.

Handbags, our newest category, shows promise. Our initial launch provided great insight into what consumers are looking for, in terms of design, features, pricing and quality. The fall collection, which is just starting to hit doors now, offers improved features and functionality.

In addition, after evaluating our price positioning, we made the strategic decision to adjust prices to more closely align with our footwear and women's ready-to-wear positioning. We believe this step will help us to maximize our opportunity in this exciting new business. Our fall 2015 handbag collection will be presented in 130 doors, as compared to 45 doors for the initial launch.

We believe that our licensed footwear business will also be a key growth driver. Based on the success we have seen in wholesale distribution, we see meaningful growth opportunity in our retail stores and on Vince.com. As a result of the strong consumer demand, we are dedicating more space in our new stores to showcase the expanded footwear assortment. We are also highlighting this expanded assortment digitally on our website to drive further growth.

Second, we remain focused on continuing to grow our direct-to-consumer business. As I said, we were pleased with the five stores opened year to date. Our new store format, which is reflected in our recently opened Brookfield store in lower Manhattan, better merchandises our expanded lifestyle assortment with compelling visual displays, and dedicated areas for handbags and footwear. We are also testing a side-by-side format for men's in select locations, based on the success we have seen in our freestanding men's store in New York.

Moving to eCommerce, we continue to make enhancements to ensure our customers get the best experience possible wherever they shop. The launch of our new digital operating platform is on track for this fall, and we believe that the new platform will provide us with enhanced capabilities to drive accelerated eCommerce growth, as well as support our international expansion.

Third, we are focused on managing through the headwinds that we face in the wholesale channel. We are now forecasting a low double-digit decline in our domestic wholesale channel versus last year, due to reduced off-price shipments and lower-than-projected reorders. This was the result of lower-than-anticipated sell-through in certain categories, as well as softer department store business overall.

Importantly, we remain the number-one or -two brand in our US department stores, and continue to work closely with our partners to optimize business in this channel. We believe that the product initiatives I discussed earlier, as well as improved visual merchandising, increased product exclusives, and targeted selling techniques will help us drive improved performance in our wholesale business.

Fourth, we are continuing to grow our international business. We are on track to enter Selfridges in the UK and Printemps in France this year. We also recently renewed our Japan distribution agreement. Closer to home, we expect to see increased penetration in Canada, especially as Nordstrom and Saks expand their presence in that market.

Fifth, we recognize the need to build brand awareness, and will continue to use a multi-pronged, 360-degree marketing strategy designed to increase awareness, drive traffic and create loyalty. We are pleased to see the significant increases in our web traffic as a result of our digital marketing initiative, which signifies to us that interest in our brand is gaining momentum.

Finally, we continue to invest in the Business to build out an infrastructure that will support the Company as we grow. We remain on track to fully migrate our IT systems, processes, and support structure during the back half of the year. We also continue to add talent and capabilities in our key growth areas.

In summary, we are intently focused on our strategic objectives, and making great inroads to evolve into a global, multi-channel, lifestyle brand. Now let me turn it over to Lisa for a review of our financial performance for the first quarter, as well as an update on our guidance for 2015. Lisa?

Thank you, Jill.

For the first quarter, net sales grew 12% to $59.8 million versus $53.5 million in the prior-year period. Our wholesale channel sales increased 2.6% to $38.3 million due to slight growth in our US wholesale segment, and an increase in our licensing royalty revenue. Our direct-to-consumer segment sales increased 33.6% in the first quarter, as we added 13 new stores since the first quarter of last year, and grew our comparable-store sales, including eCommerce, by 9.7%. Our comparable-store sales growth was driven primarily by strength in our eCommerce business.

Moving on to profitability, gross profit in the first quarter increased 16.4% to $30.7 million versus the first quarter of FY14, as a result of both an increase in sales and an increase in gross margin rate. Gross profit as a percentage of net sales increased 200 basis points to 51.4% from 49.4% last year. The gross margin rate increase was driven primarily by increased product margins and higher sales penetration of our direct-to-consumer and licensed businesses, partially offset by higher inventory reserves and a shift to lower-margin businesses, such as men's and handbags.

Selling, general and administrative expenses in the quarter were $25.6 million, or 42.9% of sales, compared to $21.2 million, or 39.7% of sales, for the first quarter of last year. As we have discussed previously, as we continue to invest in our direct-to-consumer channel, our SG&A rate is up, due primarily to increased store labor, occupancy costs, and depreciation expenses related to our retail growth strategy.

SG&A costs were also impacted by the increase in equity compensation expense, as well as increased new office costs. This resulted in operating income for the first quarter of $5.1 million, or 8.5% of sales, compared to $5.2 million, or 9.7% of sales, for the first quarter of last year.

Net income for the first quarter increased to $2.5 million compared to $1.4 million in the first quarter of last year. Diluted earnings per share was $0.06 compared to diluted earnings per share for the prior year's first quarter of $0.04.

Now moving on to the balance sheet, we voluntarily reduced our debt by $4.9 million during the first quarter, resulting in total debt outstanding of $83.1 million. Our debt leverage ratio was 1.1 times at the end of the quarter, compared to 2.3 times at the end of the first quarter of FY14.

At the end of the first quarter, the Company had $22.2 million of availability remaining under its $50-million asset-backed lending facility, providing significant liquidity to the Business. As of June 3, the Company amended its asset-backed lending facility, and increased its size from $50 million to $80 million, and extended the maturity date from November 2018 to June 2020.

Inventory at the end of the quarter was $41.2 million, compared to $31.9 million at last year's first quarter. The year-over-year increase was primarily driven by the increased in-transit inventory as a result of our operational improvement initiative, the addition of 13 new retail stores since the first quarter of last year, and incremental handbag inventory.

As this is the last quarter of in-transit inventory impact, starting in the second quarter we expect to see the gap between sales growth and inventory growth narrow to a more normalized level. Overall, we are generally pleased with the quality of our inventory, and the levels on hand to support the brand's growth.

Capital expenditures for the quarter totaled $6.3 million, of which $3.4 million was attributable to new stores and shop-in-shop buildouts. And $2.9 million was related to cost related to our new design studio in Los Angeles, and infrastructure costs related to our IT migration project.

The Company has signed six leases for stores that are expected to open in the remainder of FY15 and early 2016, with several other leases in various stages of negotiation. As of today, June 4, the Company has 42 stores in the US, including 32 full-priced stores and 10 outlet stores.

Now turning to our updated outlook for FY15: We are now forecasting total sales for the year of $340 million to $350 million, including 10 to 11 new retail stores, and comparable sales growth including eCommerce in the high single-digit range. With the exception of domestic wholesale, all distribution channels are expected to achieve double-digit growth rates. Additionally, we now expect the gross margin rate to expand between 50 and 75 basis points, driven primarily by channel mix benefits, partially offset by increased sales penetration in men's, handbags and footwear sold in our direct-to-consumer segment.

Selling, general and administrative expense growth will be driven by costs associated with our retail expansion strategy, increased infrastructure investment, including our IT migration costs, and higher equity-based compensation expense. Given the lowered sales outlook, as a percentage of net sales, SG&A is now expected to expand between 350 and 400 basis points over the adjusted FY14 rate of 28.2%. As a result of these revised expectations, we now expect diluted earnings per share for the year to be between $0.85 and $0.90.

Finally, we continue to expect our capital expenditures to be in the $17 million to $20 million range for FY15. Capital expenditure investments will be driven by new store openings and incremental shop-in-shops, as well as our new Paris showroom, LA design studio, and IT investment.

That concludes my comments regarding our first-quarter financial performance and outlook for the remainder of FY15. I will now turn the call back over to Jill for her closing remarks.

Thanks, Lisa.

While we are not happy about our revised guidance, we firmly believe in the long-term potential of the Vince brand, and are taking steps to solidify our leadership position and achieve continued success. We know our customers are passionate about Vince products, and we are committed to realizing our full potential as a global lifestyle brand. We have a lot of opportunity ahead of us from a product, channel and geographic perspective, and we look forward to driving significant growth in our Company and increasing shareholder value over the long term.

Before turning the call over for questions, I would like to thank our amazing Vince team in New York, LA, and the field for their tireless efforts. I'd also like to thank our wholesale, licensing and international distribution partners who showcase and support the brand globally.

Now let's open it up for questions. Operator?

(Operator Instructions)

The first question is from Ed Yruma with KeyBanc Capital Markets.

A couple quick ones, first can you talk a little bit about the reduction in shipments to off-price? I know that was one of the reasons you called out for softer annual guidance when you reported last. Where is the change in off-price considering that you were already trying to ratchet that back?

And then as a follow up, how should we dimensionalize the handbag business from a dollar perspective? And then finally Jill, I noticed that Marc Leder was elected Chairman, how should we view that change? Is it just a Corporate governance change, or is there more changes in the Senior Leadership team? Thank you.

Sure, so in terms of the off-price shipments, as you know, we increased our off-price sales penetration last year above our targeted 20% range. We wanted to penetrate a 20%, we actually penetrated slightly higher. And what we've learned is that many of our partners have actually packed and held the inventory as seasonally appropriate and now they feel that they have sufficient supply to meet the demand. So as a result, we're seeing that shipments are down, but the good news is retail sales are still planned positively.

In terms of handbags, it's really too soon, we feel, to dimensionalize this business. We've obviously just taken a major change in our pricing strategy. The good news there is that the initial results seem very, very promising. So we will get back to you on that. But we think that handbags obviously can be a meaningful portion of the business when we look at some of our competitors and what handbags represents as a percent to total.

Also, just go back on off-price for minute. I'm sure you'll see that we have lowered our guidance by about $20 million, roughly $10 million of that is the off-price shipment reduction. So we wanted to clearly dimensionalize for you that the bulk of the decline in our guidance is the wholesale and that is split roughly equally between the reduction in off-price to the tune of roughly $10 million and then also a reduction in our planned reorder rate. So we can talk about that in a minute.

In terms of Marc Leder being named Chairman, to your point, that is exactly a Corporate governance issue. The Board felt that it would be really appropriate to separate the Chairman and CEO roles, and Marc said that he would step in and fulfill the role as Chairman. So we made that announcement the other day.

Great, thanks so much.

Your next question is from Matthew Boss with JPMorgan.

Christina Brathwaite on for Matt, thanks for taking our question. So now that the EPS growth bar has been [esthetic], can you just walk through your ability to rebound in FY16 and return to that 20% EPS growth rate algorithm that we talked about previously? Are there any potential headwinds in FY16 that we should be thinking about? And then in addition, can you just describe any of the learnings from the miss in the sweater and knits category during the quarter, what was the key driver there?

Sure. So at this point in the time, we're not giving guidance for 2016. Obviously with the change in our guidance being driven by the reset of our wholesale business as we again mentioned on our call three months ago, and that's continuing to find its footing over the next few quarters. But we're very confident there's a path to double-digit sales growth in mid to high double teens earnings growth in the foreseeable future. But 2016 is really a little bit too early to tell.

Okay, and then on the sweater and knits category, any color there?

Yes, so what I would say here is this is probably, to a certain extent, a self-inflicted wound, and the good news with that is that it's something that we can correct. We've really been listening to our customers. Our customers have said to us they really wanted head to toe looks, they wanted more bottoms, more dresses, easy casual wear to work clothes, year-round outerwear. And we responded to that and obviously we've had very good results in that. Each of those categories has been up in the double-digit range and we're really seeing those categories become a meaningful percent to total.

When we were planning our assortments, what we also did was we reduced our style counts in knits and sweaters. Our knit style count was down 27%. Our sweater style count was down 7%. And in addition to that, what we did was we actually eliminated styles in the good and better price buckets. So what that in effect did was raise our AUR.

So now that we have gone back to look to the business to say wow, we're really known for sweaters and knits, these didn't perform to the degree we thought, what happened here? And I think part of it is that we really pulled back the styles, our average prices went up, and as a result, the performance of those categories went down.

And this is what we're known for, so we're really refocusing on our core heritage categories. And also especially in sweaters, there's a big cry for 100% cashmere, the luxurious hand feel that Vince is known for. So we've been able to address that and impact our fall and pre-spring deliveries at the back half of this year.

Okay, great. Thanks.

The next question is from Jeff Van Sinderen with B. Riley.

I know you mentioned that most of the comp was driven by e-commerce, but I was wondering if you could break out what the -- if you wouldn't mind breaking out what the brick-and-mortar comp was? And then any other underlying metrics you could share there maybe AUR, UPT, ATV transactions, what you were seeing in traffic? And then also discounting and promotional levels in your own retail stores versus last year.

Okay, well in terms of comps overall, as you know, we've made the decision to combine e-commerce in stores because that's just the way that customers are shopping now. It's incredible how many people look online, buy in store, look in store, buy online. So we're not breaking that out, but we are providing directional input as we've mentioned to say that our e-commerce business was the predominant driver.

What I would say to you is that we did see our store performance was slightly better in the West Coast region and in mall locations than what we saw in the East Coast and in street locations. So our retail stores did come in below where we thought and again, we were really impacted in the East Coast and on the street.

From a traffic perspective, overall we saw very nice traffic increases overall, but again, a lot of that was driven in e-commerce. The good news is we feel that our digital marketing initiatives are really working, as well as the fact that we're seeing increased momentum in brands interest. The traffic was up quite significantly online. So hopefully that provides you with good color in terms of our comp range overall coming in nearly 10%.

Got it, no, that's helpful. And I don't know if you want to get into this or not, but is there anything you can help us with as we think about the quarterly progression? I know you're only giving annual guidance, but anything we should think about in terms of how the quarters fall, maybe how we should think about Q2?

Yes, so I think on the last call I had indicated that we were looking for comp growth that was pretty steady throughout the quarter. Obviously, with a slight decline versus our expectation in the first quarter, we're probably a little more backend loaded in the fourth quarter than what we originally planning. So, there could be a gradual step up from each quarter throughout the rest of the year.

Okay. And then is there anything else to add in terms of or to frame things in terms of your discounting levels in wholesale, what you're hearing from your partners there? How their merchandise margins have been running? I know you said that the bookings were -- they were cutting down a little bit on bookings, was that just because they had -- the sell-through rates weren't where they expected or the margins weren't or the -- maybe any color to frame that would be helpful.

Yes, our markdowns are up a little bit year over year. We are cycling on Nordstrom's price matching activity that they didn't really start doing that until early summer last year. So from a year-over-year perspective we still are feeling that from a promotional standpoint in wholesale. I would say that on the margin they are promoting a little bit more heavily than they were last year, but it's not dramatically. I would say the only key differential year over year is the Nordstrom price matching cycling that we have.

Okay, that's helpful. Thanks very much and best of luck.

Thanks, Jeff.

Next question is from Joan Payson with Barclays.

I think you mentioned in addition to the off-price reduction that maybe there were some macro factors having an impact upon the revenue outlook for the rest of the year, maybe you could talk a little bit about what those are, if tourism is having an impact at all on your business. And then I think you also mentioned that both men's and handbags are lower gross margin businesses currently, do you expect that to continue longer term, or is there a point at which those should begin to turn to lower unit cost businesses?

Okay, so I'll take the macro factors and then Lisa can address the margin situation. So the macro factors that we were referring to is something that we discussed on our last call as well and obviously we're seeing that our department store partners are looking for their inventory to turn faster. So they're buying less inventory up front. So that's one of the factors that we're seeing.

In addition to that, the other macro factor when you look at the department store business is that they're really getting their growth in the off-price sector and a little bit on the digital sector, but not in the full priced sector. And as you know, we have a stated strategy that we don't want to increase our off-price penetration. As a matter of fact, we want to reduce our off-price penetration.

And then the other is within the full-priced stores themselves, we see our department store partners becoming more promotional. So the fact they're buying a little bit less inventory up front, that they're distorting their efforts to off-price and that in addition to that they were a bit more promotional, these are all things that are impacting our business.

Tourism has also impacted our business in selected locations, but not across the board. Some of the other macro factors that other people talk about like foreign exchange currency has not really impacted us. We had minor impacts due to port delay, I wouldn't say that was major. I would say it's really about the dynamics within the department store sector and certainly a little in terms of tourism in selected markets.

Yes, and then from a gross margin perspective, we would certainly look for handbags to be accretive over time once we brought that to scale. And I think on a men's perspective it would be difficult to have those margins be higher than our women's category, but we would certainly, again, as we scale and build that business, would look for that differential to narrow.

Great, thank you.

The next question is from Mark Altschwager with Robert W. Baird.

So it sounds like you're looking to reverse some of the AUR increases in women's tops. And then handbags are no smaller today, but initial prices are lower with the fall assortment. So with those changes, how are you thinking about the gross margin profile of the business longer term? And then separately with the change in the revenue growth trajectory, any opportunity on the cost side to offset that looking forward? Thanks.

So from an AUR perspective, we still do get some nice mix benefits from some of the other categories. Again, knits is one of our lowest AUR categories anyway, so the fact that it's going down a little bit, it's not skewing it dramatically. We still are getting some nice mix benefits from outerwear and leather and a few other categories that we have. And again, we weren't anticipating for handbags to be a large portion of the mix, so that price shift there doesn't really move the consolidated AUR needle per se. And then I'm sorry, what was the second question?

Any opportunity on the cost side, given the change in revenue trajectory versus the plan 12, 18 months ago?

Yes, so from an SG&A perspective, we have certainly taken a very sharp pencil to each one of our variable and discretionary costs. We're doing that prudently though, because as a growing Company, you want to make sure that you're supporting the initiatives that you have for the long term. So to the extent that we can again prudently cut costs or defer costs, we are doing that, but we are absolutely still investing in the business and investing in the long-term future.

Okay, thank you. And then Lisa, maybe one more if I could, any help on the cadence of that wholesale growth rate over the remainder of the year? Should we expect a more severe slowdown in Q2 offset by later in the year with the improvement in the assortment?

Yes, it's actually -- it's going to be pretty much high single, low double-digit declines for Q2, Q3 and Q4 for our wholesale segment.

Great, thank you.

It does take a little while to get some of those changes through to the product mix.

The other thing I would add to that, as you know, our wholesale segment is really three sectors in total. So this really is a domestic wholesale issue. We are continuing to forecast double-digit growth, not only in DTC, both retail and e-commerce, but also in international and licensing. So the one channel sector of the business that we are projecting, down to Lisa's point, is really in our domestic wholesale. We do realize this is a large part of our business, so obviously that's impacting the total, but we are very pleased to see that all of our other channels, all of our other categories are growing at double-digit rates.

Great, thanks for the additional color and best of luck.

Thank you.

Next question is from Lindsay Drucker Mann with Goldman Sachs.

My first question was, are some of the issues that you're facing within women's wholesale in the US, is there a broader issue on the contemporary floor? In other words, do you hear other brands or your wholesale partners talking about similar challenges for some of your competitors?

Actually, we are hearing that to a certain degree. I think years ago contemporary was a new category. You had a lot of designer customers trading down, you had a lot of new entrants, it was very high growth. We were a key driver of that growth.

I think now that business has developed more. There are more people there, so the growth rates have definitely slowed. We certainly don't see this as a Vince issue, we definitely see it more of a channel issue and within this segment.

That said, if you have great product and innovative product, the customer will buy it, and that's why we are really refocusing on our core heritage products to drive continued growth. But to your point, we are seeing it as a broader issue beyond Vince's performance.

So do you get the sense that you're losing share of contemporary or your businesses is weak alongside the broader category?

We don't get the feeling that we're losing share. We are still the number one brand at Neimans, at Saks and at Nordstrom. Still number two at Bloomingdale's. Our space allocation is remaining the same. We are meeting with all of our department store partners. They are telling us how important we are to them. So I don't see it as a situation where we are overall losing share from a retail perspective, I just see it as a broader issue.

Got it. And then I just wanted to get some clarification, I think Jill, you mentioned before, I don't know if I heard it right, but that part of the issue for wholesale shipments this year is that some of your wholesale partners had carryover inventory or pack away inventory that they're going to be selling again, which I don't know if I've heard you say before. I just wanted -- maybe I have it wrong, but could you explain a little bit more in depth what's going on there?

Yes, well, you have it exactly right. So what we said was that the off-price shipments would be down. We shipped a lot last year, and what we have learned is that several of our partners have decided to pack and hold that inventory for seasonally appropriate goods. Obviously at the end of the year you have a lot of fall product and they're holding that. So as we look out to the back half of the year, they basically feel that they have the supply to meet the demand. Obviously that can change in time, but that's the current view that we have.

Got it, so it's not your full price department stores who are holding on to product?

No, no, no, it's only in the [off-price products].

Okay, thanks a lot.

The next question is from Erinn Murphy with Piper Jaffray.

I had a question on the inventory being up 30% at the end of the quarter. Seems a little bit high, given the adjustment in guidance be flat to up low singles for the year from a sales perspective. So can you help us understand how you see that moving throughout the year? And then where does that actually go when you have wholesale down low double-digits and you're really working hard to pull back on the off-price channel?

Yes, so this is the last quarter where we do have the in-transit impact year over year. So the $9 million year over year increase, roughly half of that is due to this in-transit impact. So between the in-transit are 13 new retail stores year over year and the incremental handbag inventory, that really accounts for about 90% of that $9 million year-over-year increase.

So these are current goods that are causing the increase. It's not any older goods per se. Now since this is our last quarter of the in-transit, for the second quarter we would look for inventory levels to be up mid- to high teens. And then we're looking for the full year, year over year to really be up in the low teens range. And that's obviously off of up low single-digit sales.

We've articulated in the past that given our growth trajectory and new stores that we have in the pipeline, shop-in-shops, those sorts of things, that we will have inventory growth faster than prior quarter sales growth again to fuel the growth. And so that's typically about a 10-point differential, and that's about how we try to measure the year-over-year inventory growth on a normalized basis, if that makes sense.

Okay, no that's helpful. And then paint a different way, what percent of the goods that you guys cut heading into the season folds through, and then how did that compare to your plan thus far?

So what we're able to do which is actually great is we have a fairly rigorous procurement approval process. So we have the ability to flex up the buy based upon our projection for sales and this really allows us the opportunity to scale both up and down as we see changes in the marketplace. So again, we have that flexibility so that you don't necessarily get painted in a corner.

Second point is we do have many options to liquidate the inventory across very profitable third-party off-price venues, including our own Vince outlets. So we have a good path in order to take care of any true excess that we have. But more importantly, we have the ability to flex up and down before we actually place a lot of those upfront buys.

Okay, I can follow up on that offline as well. And then on the growth margin side, how do we think about the cadence throughout the year guiding to 50 to 75 bps versus the 200 basis point improvement in Q1? And then what you are reserving from a markdown allowance period? I know last year you had a pretty significant reserve in Q3, so help us think about the cadence as some of the puts and takes.

Yes, from a quarterly basis, we likely will not see the sorts of expansion that we saw here in the first quarter. This is really the last quarter where we had some significant contributions from the operational initiative and improvements that we put in place. So we start to cycle on those starting in the second quarter. So again, you will see the expansion on a quarterly basis certainly compress over the next three quarters to a more normalized level.

From a markdown perspective, we did put in place a higher markdown reserve in the second half of last year, so obviously we faced that pressure in the first half of this year on a year-over-year basis. But again, it should be a little bit more even over the next three quarters, with a little bit more pressure, like I said, in the second quarter as we continue to cycle on some of the markdown issues that we started facing in the third quarter of last year.

Got it, thank you guys for taking my questions.

(Operator Instructions)

The next question is from Richard Jaffe with Stifel.

If you could add some color to the men's business, it sounded like that was on the up and up and wondering if you could provide some detail about the business? And how high is up, how big do you think that could or should be as a percent to total?

Well I have to say, Richard, we're very, very excited about our men's business as is our department store partners, as is the customer. It's probably where women's was five years ago in terms of being very, very focused with sweaters and knits, and we've begun to add outerwear and bottoms, and we've seen really, really nice growth in those categories. So I think I mentioned in my remarks, the greatest growth really did come from the knit tops, from pants and from outerwear.

We're opening more shops in men's, which is great. On the retail side, we opened our first men's only store, and we're also going to testing some side-by-side retail formats. We actually opened one like that in DC with a separate entrance to the store for men's. It's doing quite well. Separate dressing rooms, separate cash wrap. We'll be doing that also in our store opening in Abbot Kinney in Venice.

So we think there's a lot of upside in terms of the product assortment expansion, in terms of expanding our footprint within our department store partners. Obviously giving some additional space and location within retail stores as well and across the board, we're seeing really nice double-digit increases. So it's very exciting and it's like we haven't even touched the opportunity internationally. Right now we're really focused domestically.

So men's today is about 13% of our business, and we believe that over time it could probably approach 20% of the business overall.

And that would include men's shoes, the 20%?

No, that does not really include men's shoes because footwear is a licensed business, so we get royalties on men's footwear from Brown Shoe, now Caleres, so that would impact our wholesale line, that's where the royalties are recorded. However, as we roll out men's footwear online and in DTC, we'll see some growth there as well. But those numbers are predominately what we're projecting for our men's sportswear business.

Got it, thank you.

There are no further questions at this time. I will now turn the call over to Jill Granoff.

Thank you all for listening and participating in our call today. We look forward to speaking with you again in September for our FY15 second-quarter earnings call.

This concludes today's conference call. You may now disconnect.