Vera Bradley Inc (VRA) 2016 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Vera Bradley Q2 2015 earnings conference call. (Operator Instructions) As a reminder, today's conference call is being recorded.

I would now like to turn the conference over to Stacy Knapper, Vera Bradley's Senior Vice President and General Council. Please go ahead.

Good morning and welcome, everyone. We would like to thank you for joining us for Vera Bradley's second-quarter earnings call.

Some of the statements made on today's call during our prepared remarks and in response to your questions may constitute forward-looking statements made pursuant to and within the meaning of the Safe Harbor provision 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 those that we expect. Please refer to today's press release and the Company's Form 10-K for the fiscal year ended January 31, 2015, filed with the SEC for a discussion of known risks and uncertainties.

Investors should not assume that the statements made during the call will remain operative at a later time. The Company undertakes no obligation to update any information discussed on the call.

I will now turn the call over to Vera Bradley's Chief Executive Officer, Rob Wallstrom.

Thank you, Stacy. Good morning, everyone, and thank you for joining us on today's call. With me today are Kevin Sierks, EVP, Chief Financial Officer, and Sue Fuller, EVP, Chief Merchandising Officer.

We are pleased that better-than-expected revenue, gross margin rate performance, and diligent expense management drove second-quarter EPS of $0.15, above our guidance of $0.10 to $0.13. Our comparable sales trend began to improve towards the end of the quarter, which we believe is reflective of our new product offerings, improved in-store execution, and our initial marketing efforts. Our better-than-planned revenues were generated in spite of reduced promotional activity.

As you know, we remain committed to our long-term strategic plan, which is designed to drive traffic and bring new customers to Vera Bradley. We will continue to innovate and modernize our products, increase exposure to our brand and offerings by prudently growing our distribution points, and drive brand and product awareness through our elevated marketing efforts. Sue and I will update you on our progress against these elements of our strategic plan later in the call.

We still have a lot of work to do and know it will take more time to return the business to solid growth, but I believe we are starting to gain traction on our key initiatives. Specifically, customers are beginning to respond to our new offerings. In the aggregate, SKU productivity is higher on these products and UPT and conversion are improving.

For the first time in a long time our second-quarter direct comp sales trends were better than our traffic trends. We see indication that awareness of and affinity for our brands are increasing, and we are beginning to see new customers come into our brand and customer retention improve.

Made-for-outlet is working. Our expanded MFO assortment is improving sales trends and enhancing our gross margin rate.

We are seeing continued enthusiasm and growth from our department store partners. We have substantially improved our gross margin rate performance through reductions in raw material costs and sourcing efficiencies. In addition, we reduced promotional activity, eliminating our hyper promotions of 60% to 70% off and paring back our promotional days by nearly 20% during the first half of the year.

We have exercised diligent expense management, while continuing to make strategic investments in such areas as marketing and e-commerce. We have made website enhancements that are driving conversion, although reduced promotions are negatively impacting the sales and masking the benefits at this point in time. And we have begun to intensify and integrate our marketing efforts, combining creative national advertising with amplified social media and PR.

Let me also note that we recently made an important organizational change. The design and product development functions were reporting directly to me, but are now reporting to Sue. This change brings the design, product development, merchandising global sourcing, and planning and allocation teams all under the same umbrella.

We believe this new structure will allow for more integration, faster decision making, and quicker production times, all of which are becoming increasingly critical as we evolve our business and strive to make our brand more relevant through product innovation.

I'll now ask Kevin to give us a brief update on our second-quarter results and outlook for the third quarter and full year. Kevin?

Thanks, Rob, and good morning. Let me go over a few highlights for the quarter.

Net revenues totaled $120.7 million for the current year second quarter, a 1.5% increase over $119 million last year and above our guidance of $116 million to $120 million. Net income from continuing operations totaled $5.7 million, or $0.15 per diluted share, compared to $7.9 million, or $0.19 per diluted share last year. And as Rob noted, above our $0.10 to $0.13 guidance.

In our Direct segment, total revenues of $83.8 million increased by 7.7% from last year. This revenue number reflects a 15% comp sales decline, more than offset by sales from new store growth. Indirect segment revenues fell 10.3% to $36.9 million, primarily due to lower average order size from our specialty retail account and a modest reduction in the number of accounts, partially offset by the timing of our summer product launch which shifted approximately $3.7 million of revenues into the second quarter.

Gross profit for the quarter totaled $66.6 million, or 55.1% of net revenues, compared to $63.4 million, or 53.3% of net revenues, in the prior-year second quarter. The year-over-year gross margin rate improvement primarily related to increased sales of higher-margin MFO product in the Company's factory outlet stores, leverage of overhead costs due to fall 2014 cost reduction at the Company's since-closed domestic manufacturing facility, lower levels of liquidation sales, and reduced promotional activity. The gross margin rate exceeded guidance of 54.5% to 55%, primarily due to reduced promotional activity.

SG&A expense totaled $57.4 million, or 47.5% of net revenues, in the current-year second quarter compared to $50.7 million, or 42.6% of net revenues, in the prior-year second quarter. As expected, SG&A dollars increased over the prior year, primarily due to strategic investment in new stores, incremental marketing, and e-commerce. The SG&A expense rate was better than the Company's guidance of 48.3% to 49.3%, primarily due to better-than-expected revenues and disciplined expense management.

Operating income totaled $9.5 million, or 7.9% of net revenues, in the current-year second quarter compared to $13.2 million, or 11.1% of net revenues, in the prior-year second quarter. By segment, direct operating income was $16.6 million, or 19.8% of sales, compared to $17.1 million, or 22% of sales, in the prior year. In Indirect, operating income was $14.8 million, or 40% of sales, compared to $15.9 million, or 38.7% of sales, in the prior year.

Quarter-end cash totaled $76 million compared to $79.1 million at the end of last year's second quarter. We had no debt outstanding at quarter end. Quarter-end inventory was $103.9 million, below guidance of $108 million to $112 million and compared to $112 million at the end of last year second quarter, primarily due to timing of fall receipts.

Net capital spending for the second quarter and six months totaled $7.8 million and $15.4 million, respectively. During the quarter, we purchased $13.3 million under our $40 million share repurchase program. Subsequent to quarter end, we completed the balance of the program, equating to approximately 2.8 million shares at an average repurchase price of $14.19 since we began the repurchase program last fall.

Now let's talk about the outlook for the third quarter and fiscal year 2016. Guidance for the year excludes the first-quarter charges related to closing our domestic manufacturing facility, severance, restructuring, and the income tax adjustment outlined in today's release.

For the third quarter, we expect net revenues of $120 million to $123 million compared to the prior-year third-quarter revenues of $125.2 million. We expect Direct segment net revenues to increase in the low to mid single-digit percentage range with the comparable sales, including e-commerce, decrease in the low double-digit percentage range. We believe our Indirect net revenues will decline in the low to mid-teen percentage range during the quarter.

The gross margin rate for the third quarter is expected to range from 56.8% to 57.2%, compared to 52.5% at prior-year third quarter. SG&A as a percentage of sales is expected to range from 46.5% to 47% for the third quarter, compared to 42.5% in the prior-year third-quarter. The expected deleverage is primarily due to incremental investment in key areas like new stores, marketing, e-commerce, and incentive comp.

We expect third-quarter diluted EPS to be in the range of $0.19 to $0.21. Diluted EPS totaled $0.21 in the prior-year third quarter. We expect inventory to be $112 million to $118 million at the end of the third quarter, compared to $106.3 million at the end of last year's third quarter.

This projected inventory level reflects a better balance of current and retired inventory than a year ago and investments in key growth classifications including new fabrication. We expect additional inventory growth in the fourth quarter as we continue to invest in our key opportunities in new products. Keep in mind that inventory was down nearly 30% last fiscal year-end.

For the full year, we expect to net revenues of $487 million to $495 million compared to $509 million last year. Our revenue guidance includes Direct segment net revenue growth of a low single-digit percentage increase with a decline in comparable sales, including e-commerce, in the low double-digit percentage range. This guidance reflects a continued reduction in hyper promotional activity.

Indirect net revenues are expected to decline in the mid-teen percentage range.

The gross margin rate for fiscal 2016, excluding the charges outlined related to the first quarter, is expected to range from 56.2% to 56.4% compared to 52.9% last year. This planned improvement reflects the leveraging of overhead costs due to a planned increase in units manufactured. In addition, the planned gross margin improvement reflects reductions in sourcing and product costs, primarily related to our MFO product and including the closure of our domestic manufacturing facility, a greater sales penetration of higher margin MFO product, and reduced promotional activity.

SG&A as a percentage of sales, excluding the charges outlined in the first quarter, is expected to range from 46.7% to 47% for the fiscal 2016 compared to 41% last year. The expected rate increase is primarily a result of the previously discussed strategic investments in the business in fiscal 2016, including incremental marketing expense of approximately $8 million as well as incremental e-commerce, incentive compensation, and new stores. The deleverage reflects our soft sales guidance.

We continue to take an active posture on expense control and have a program in place. We have implemented or are implementing several cost reductions, including the recent closing of our domestic manufacturing facility; negotiating lower prices with our fabric mills; rightsizing the support staff for our Indirect channel; lowering supplies distribution, and fulfillment costs; and gaining staffing efficiencies in our stores.

We have adjusted our full-year diluted EPS expectations upward to $0.72 to $0.78, reflecting our second-quarter performance. This estimate range excludes the previously mentioned first-quarter charges. On a comparable basis, diluted EPS totaled $1 last year.

We expect our net capital expenditures will total approximately $31 million for the full year, primarily related to new store openings, continued investment in our systems, and the recent completion of our corporate campus consolidation.

Let me turn the call over to Sue, who will give us an update on product. Sue?

Thank you, Kevin. In the product area, we have made progress in our three main goals of delivering innovation, newness, and diversification; product segmentation by channel; and enhancing our gross margin rate.

We know we have to continually evolve to stay relevant. In July, we launched two new fabrications, our Wildwood leather and Preppy Poly collection. In addition, we introduced new microfiber colors and new styles and colors in our Sycamore leather collection including several items featuring calf hair.

Existing customers are responding to the newness and our data shows we are beginning to attract new customers to the brand. We know that our continued product evolution is critical to attract customers that have left or have never shopped with us. In the aggregate, SKU productivity of our new products is higher than our traditional quilted cotton products.

At the end of August we introduced our final new fabrication for the year, our printed Streeterville Poly Twill collection. We conducted a limited test with Streeterville online and in select stores in July and we are very pleased with the customer response.

Having said that, our cotton performance is continuing to decline faster than our overall business trend and, unfortunately, the introduction of newness and innovation is not yet enough to offset the decline of our core cotton business at this point in time. Although, as Rob noted, our quarter-over-quarter sales trends did improve in the second quarter.

We now offer seven fabrications: quilted cotton, solid microfiber, leather in Sycamore and Wildwood, faux leather, Lighten Up, Preppy Poly, and Streeterville. At the end of the second quarter, approximately 65% of the applicable SKUs in our full-line business are cotton, which includes our small print, and approximately 35% are in the new fabrications, compared to just 20% at the end of the first quarter.

As we end this fiscal year we expect our dependence on cotton to be further reduced as we continue to expand our non-cotton product selection. At year-end we expect nearly 50% of our applicable SKUs to be in the non-cotton fabrications. The interesting thing is that consumers are not walking away from pattern and color, just cotton. Our patterns and prints are still represented in Lighten Up and Streeterville, and solids remain a big opportunity with microfiber, leather, faux leather and our Preppy Poly offering.

We are continuing to focus on our collections, not just how the patterns, solids, and various fabrications work together, but which collection pieces make sense. For example, what accessories go with what bags and ensuring that the size and hardware are appropriate for each item. This attention to detail is part of our heritage.

Our second-quarter backpack and lunchbox business exceeded expectations. Customers responded to our expanded backpack assortment which features new styles and fabrications. In August, we began a test of our new collegiate program. This is a great example of an idea we fast tracked and delivered in time for this year's back-to-campus.

We are partnering with an outside company who is handling production and distribution. At this time, we've launched a focused collection for 16 universities with just five SKUs. We are selling collegiate in 16 full-line stores and in 16 specialty retailer locations, but the vast majority of collegiate has been sold online so far.

We are getting a lot of positive press on our collegiate products and social media is really busy, with many people clamoring for their schools to be added to the list. Based on the early success, we expect to add more items and schools in the future. While collegiate is very small at this point, we believe there is certainly growth opportunity as these products target both students and alumni.

We are getting more strategic about product segmentation. Both Sycamore and Wildwood leather are primarily being distributed in our full-line stores, on verabradley.com, and in department stores. Faux leather is now segmented to the specialty channel. In addition, we are continuing to create other specific products for the various channels, like special patterns or styles for QVC and Dillard's. And of course, our MFO products are a critical piece of this segmentation.

We have seen our gross margin rate expand this year and expect continued improvement in the back half of the year. This improvement is being driven by the penetration and success of MFO programs; of a reduction in our hyper-promotional activity; and lower sourcing, raw material, and manufacturing costs; and expected leverage of our overhead expenses with our planned inventory buildup this fall.

We will continue to build a more flexible, efficient, and cost effective supply chain through vendor and country diversification. We've expanded beyond China and are now manufacturing product in Vietnam, the Philippines, Indonesia, and Cambodia. By year-end, we expect about 15% of our manufacturing will be outside of China. Rob?

Thanks, Sue. Our distribution strategy is the second component of our long-term strategic plan. We opened six full-line stores during the quarter and are opening another four in the third quarter, which will bring the total full-line openings for the year to 15.

We opened three factory stores in the second quarter and will open three more in the third quarter, bringing the year-to-date total to 11. At the end of the second quarter, we had 107 full-line stores and 37 factory outlet stores, which is in line with the 3-to-1 ratio we have talked about in the past. And customers continue to offer positive feedback about our new full-line store design.

In our factory stores, our MFO product transition is well ahead of plan. Currently, over 60% of our product is factory exclusive and we expect that number to exceed 70% in the fourth quarter. We have added several new solid microfiber styles to our MFO collection and we will continue to maximize depth in colors and patterns in the best-selling factory styles like beach and travel. We are also focused on refining pricing, the promotional calendar, and the in-store visual presentation to better convey our value message to the consumer.

E-commerce remains a vital part of our distribution strategy as we build our digital flagship. Verabradley.com will convey our brand and product story and, ultimately, generate more full-priced selling. And to that end, we have four main focus areas: strategically pairing back our hyper-promotional activity, which began in January of this year; improving our website features, such as dramatically enhancing our search capabilities, which we completed in the second quarter; the redesign of our website, which is underway and will be complete early next year; and converting our website to a new platform, which will also be complete next year.

We have also added additional storytelling features, including allowing our customer to see recent blog posts and view how to wear it video guides. These additional engagement features, combined with the vastly improved search functionality, are increasing conversion and average time spent on the site. Of course, our reduced promotional activity is affecting overall site traffic and sales, but improving gross margin rate performance.

Department stores are also a key component of our distribution strategy. They expose our brand to new customers and are a great venue to showcase our new product assortments. Our department store partners are very supportive of our product and brand direction. We have expanded to 250 Macy's stores and are in the process of increasing the footprint in many of the stores to about 200 square feet from the current 100 to 150 square feet.

Our 400-square-foot shop in Macy's Herald Square will be unveiled at the end of September with the official grand opening in October. This is an amazing opportunity for increased brand exposure since an average of over 50,000 people visit that location daily.

We are now in seven Belk doors, including hard shops and Belk Charlotte and Dallas flagship stores. We will also open holiday pop-up shops in 33 Belk locations in October. In July, we introduced our products to 12 Bon-Ton stores with an average shop -- soft shop size of about 250 square feet, and we will also open holiday pop-up shops in 10 of their locations in October. We expect to convert to the Belk and Bon-Ton pop-up shops into regular floorspace next year.

Including the holiday shops, we will be represented in over 620 department stores this fall, double what we had just a year and a half ago.

Our door count in the Indirect specialty gift channel is still about 2,700. We are beginning to look for other appropriate specialty store relationships outside of the gift channel, such as local high-end apparel and accessories stores, and added 30 of those doors to our distribution in the second quarter.

Now let me shift to marketing. Marketing and brand-building are critical investments as we work to bring new customers into our brand and strengthen our bond with our existing customers. As you know, we are investing approximately $8 million in additional marketing this year.

We are very happy that Theresa Palermo joined us at the end of June as our new Chief Marketing Officer, and she has hit the ground running. Our primary marketing objectives are to generate brand awareness, evolve our brand perception, drive store and site visits, and inspire brand engagement.

We are excited about the initial launch of the "I am" campaign, which delivered over 500 million impressions through a combination of print and digital media. "I am," which focuses on storytelling and relatable moments, will continue into the fall season.

We know that there is not a magic bullet when it comes to the right media mix. However, we are working to deepen our consumer engagement with a continued focus on print combined with richer content on social media, increased emphasis on public relations, and more targeted digital media spend. We believe this combination will ensure we have both a broad reach as well as a well-targeted, nimble, cohesive, and integrated campaign.

We are working to further leverage our consumer data to ensure our communication with her is relevant and gives her additional value in being part of the Vera Bradley brand. We are really encouraged by the movement in our social media metrics from the first quarter to the second. We are casting a much wider blogger net and our blogger impressions increased from 9 million to 11 million. Not only due to increase blogger events, but because our new products are attracting more influencers and giving them a lot more to blog about.

Total PR impressions tripled from 2 billion to 6 billion due to increased media, Facebook, Instagram, and blogger placement. From the first quarter to the second, Instagram likes increased to 1.3 million, new Facebook fans increased 84%, and Facebook impressions grew 78% to 13.8 million.

Our marketing efforts will build throughout the balance of the year, increasing awareness and engagement. We know it will take time, but we are excited about our momentum in this important area.

Operator, we will now open up the call to questions.

(Operator Instructions) Ed Yruma, KeyBanc.

This is Jessica Schmidt on for Ed. Thanks for taking my questions.

First, can you talk a bit about the mix of off-price at retail? And I guess just a little more color on the composition of your comp this quarter.

As it relates to the comp, we saw a little more improvement in the factory stores than we did in the full-price stores. We would love for that to be kind of the opposite and to be leading with full price, but right now what we've seen is a pickup in factory stores.

We think the reason for that is because the assortment is really where we want it to be. If you think about the MFO percentage being almost at 70% now, we feel like we've really got a really nice assortment in the outlet stores for the customer. And it took us about a year, year and a half to get to that point. So we've seen an improvement there.

As you saw probably in the press release, the web was down a little over 14%. We attribute that mostly to traffic and mostly due to the reduced promotions. Obviously, people are migrating to the web, but given the reduction in promotions, which were significant for us, about 20 less days during the quarter, it was pretty significant -- 20% less during the quarter. It was pretty significant for us. So that is really the makeup of the comp.

And I guess just as a follow-up, if you could provide more color on some of the softness that you saw at the specialty retail partners, specifically the ones who just placed smaller orders. Was that focused on the core product or was that on some of the new merchandise?

What we've seen is they've been really attracted to the new product and so everything we are hearing from them has been very positive as it relates to the new product, and that's really where they have been investing their dollars.

Also, there's a little disparity in the specialty channel right now. There's a lot of our big retailers that are seeing some really good success, but there are some small retailers that aren't seeing that success as of yet. But I can say they are all very positive about the new product and that's where they are investing their dollars.

Great, thank you.

Oliver Chen, Cowen and Company.

Thanks, guys. Regarding the product mix, the 60/35, where did you say cotton would trend over time in terms of your long-term ideas there? And did you have a way for us to dimensionalize how the new product -- how much it outperformed versus the 60% being cotton? Just curious on those topics.

Thanks, Oliver. So in terms of the product mix, what we have said over time is that cotton would represent 30% to 40% of the business over time. Again, that was according to the long-range plan that we had given.

We do expect to exit this year in terms of SKUs at 50% being cotton and 50% being made up of the other materials that we have been introducing. And then again, just to talk about the new product, in the aggregate, again, we are seeing our SKU productivity outperform cotton. We are proud of it.

And I would say in terms of microfiber, which we had mentioned before, as well as we are continuing to get traction on our leather. And then I think what's really encouraging to us is some of the newer printed fabrications are also continuing to gain traction as well.

Okay. And the design and product changes in the organization sound interesting. When will that impact your ability to really transform what's in store and test read and react, and get the timing even closer to consumer demand?

I think a couple things. One, we are very excited about the change. We do have a lot of talent on the team.

What we thought this -- what this will really allow us to do is to continue to move forward on the new design and the innovation. As you've seen from us in this last year, we've been moving very quickly and we felt that really integrating the two departments, putting it all underneath Sue really just allowed for that decision making to happen quicker.

And so, in terms of the impact, I think that you would begin to see the impact of that change beginning mid part of next year. So a lot of that interaction, though, between the two teams has been occurring, but we will begin to see more and more of that happening over the next year.

Okay. And Rob and Sue, just a final question. When we do think about the new products and what -- all the positive momentum you are making there, how do we overlay that with how you feel about the new products within each channel?

Does -- specifically the outlet, the specialty retailers you are dealing with. Are they all sort of seeing the 60/35 split as well? I'm just curious about how to interpret the overall comments into the channels.

With our distribution channel, obviously as we look at our indirect side, there's so many different types of accounts: from our department store accounts through our key accounts, like QVC and Disney, down to our gift channel. And even within the gift channel, there is a wide variety in terms of accounts. Some of them are more high end and have a vendor matrix that would have other brands in there, like in men's Tommy Bahama or Eileen Fisher or some of the other large national brands.

Where we're seeing an elevated product assortment, where they have other brands that are elevated, yes, they are responding to the newness very well. So whether that's in -- Macy's has been moving forward with the newness with us well. Some of our larger specialty gift channels have been moving quicker in the newness and they are seeing the biggest results.

In terms of our smaller gift channels, they still are more focused on the core cotton and microfiber business and not evolving quite as quickly. And with time we continue to look at ways of refining their assortments.

But we do expect that over time the new, more elevated product that we have in store between leather and Streeterville and some of these new fabrications are really targeted towards our better points of distribution. And we really do want to work on how to have a separate assortment for our smaller specialty gift channel. That's why we've been doing things like the faux leather rollout, which is a more moderate price point than our full leather roll out.

So we're going to continue to refine that gift assortment as we go forward.

Thank you. Best regards.

Mark Altschwager, Robert W. Baird.

Good morning and congrats on the progress. Was hoping you could just talk about the intra-quarter trends a bit more. I know marketing really started to ramp in July and you said you saw an improving trend towards the end of the quarter.

Any more detail there? Did you see traffic improve later in the quarter or was that improvement mostly UPT and conversion?

We actually saw, which was encouraging; we saw improvements in traffic across the channels. We saw improvement in conversion overall across the channels, average dollar sales. So kind of we saw all of the metrics improving over the prior trend, which was really encouraging.

And it definitely was backloaded towards July as opposed to the first half of the quarter, which again is encouraging because that's when marketing started coming out, that's when the product innovation started to change more. And so it has been encouraging to watch.

Okay, great. And just following up on that and one of the earlier questions, it sounds like a lot of the improvement was concentrated in factory, whereas I think much of the new assortment and the new marketing is geared towards the full-line stores and the new customer acquisition. So just trying to reconcile that a bit and understand kind of where you're getting the confidence that the marketing efforts are gaining traction.

That's a great question. The way I would put color around it, yes, factory was outpacing our full-line business, but factory generally has been outpacing our business. And so we did see improvement across all of the channels, it's just that the factory performance was the strongest. But we did see significant improvement from prior trend also in our full-line business.

Great, and one more quick one. I know it's early, but just any learnings from the new initiatives with Amazon?

With the Amazon relationship, we're still learning together. We have a lot of work as we've opened up that new relationship of really focusing the business on full price, and so we do believe it's an opportunity to put our product in front of a new customer, which we're excited about. But we are very focused with them on how we continue to improve the brand positioning and the full-price positioning of the brand.

That's great. Thank you and best of luck.

(Operator Instructions) Steve Marotta, C.L. King & Associates.

Good morning, everybody. You mentioned, I believe, from a guidance standpoint that comps are expected to decline in the low double-digit range for the third quarter. Can you talk about an expectation of either acceleration or deceleration and comp trends over the balance of the quarter?

Obviously for Q2, Steve, we had down mid to high teens, and so you can see we got a little more confidence in Q3 and that's because of what we saw really as we exited Q2 and then even into August. So July was a pretty good month for us, trended anyway, and August continued that, and you can see that -- us going from down mid to high teens in Q2 to down mid to high single digits to low teens in Q3.

And we also expect that trend to continue into Q4. Remember, Q4 was our worst comp quarter last year, so we feel like: one, the comp is a little bit easier, but also we think it gives us a little more time to get the new product into new customers hands, as well as let the marketing take hold. So we do expect improvement in Q3 and then a little more improvement in Q4.

Okay. That's helpful. And the new store format, can you remind us how many are currently in place; how those are trending versus the older store format? And if you can give any sort of indication on your thoughts for the next fiscal year and how many units may be opened and if they are going to all be in the new format.

Currently we have 11 stores in the new format. They are all new stores, so we have not taken the new design and renovated any of our existing base yet. What we are finding from consumers, in terms of customers coming in and the feedback that we are getting from consumers, is they are excited about the new store design. Whether that's a new customer, an existing customer, they feel it allows them to see the product in a fresh way, so that's been all encouraging.

In terms of, though, when we looked at the productivity of those stores versus the old design, we have not seen a hugely significant lift in the sales per square foot., so we're continuing to refine. We're excited about where we've started, but at this point we don't have a renovation plan for our existing stores.

And then what about number of stores expected to open next year?

Next year we expect to open less than 10 stores, and that includes both factory and full price. Obviously, those full-price stores, we still expect those to be under the new concept.

We announced the slowing of our store opening based upon our slow comps that we had this year, and so we want to make sure that the comps are positive before we return to a more aggressive real estate expansion.

That's great. Just wanted to make sure that was still in place.

And, lastly, how many promotional days did you have or how many -- let me back up. How many fewer promotional days do you expect in the back half of this year compared to the back half of last year?

You know, I would expect relatively similar, so we're down about 15% to 20% in the first half of this year. The only difference we'd probably see in the back half of this year, which is a very small month for us, is January. We started to pull down our promotions pretty significantly in January, but given January is such a small month, not a huge impact; so I would still expect something around that 15% plus in the back half.

That's helpful. Thank you.

Dana Telsey, Telsey Advisory Group.

Good morning, everyone. As you think about the new product versus the cotton product, given the more favorable reception to the new product, how are you thinking about the cadence of adjusting the assortment and the impact on pricing and margin? Thank you.

As we are thinking about the new product, we do see it continuing to evolve over time. Like we had said, we plan to exit this year with about 50% of our SKUs in cotton and 50% of our SKUs in the new fabrications. I can tell you that we're continuing to read those new fabrications weekly and we're quickly adjusting the supply chain to make sure that, according to each channel segmentation, that we are fulfilling those customer needs.

The good news is that we are seeing traction across the different fabrications. So we're seeing it in leather, in microfiber, in the new fabrics such as Lighten Up, as well as in the Poly Twill fabrications, and we are seeing a different read by channel. And so we'll be -- we will continue to adjust accordingly.

As we think about margin over time and continuing to make sure that we are fulfilling the consumer's needs tied to the product needs, we do expect a pickup of margin over time.

Thank you.

Oliver Chen, Cowen and Company.

Thanks, guys, for getting me in again. Rob, I just wanted to ask you, with -- it sounds like the "I am" campaign is on track and this is a nice consistency compared to some prior campaigns you've had. I just wanted to talk to you about that and where you see that going next and your happiness with the consumer response and new customers coming onboard.

Then also, on the online channel, what inning do you feel like you are in? Because I know it has been a longer-term story in terms of being comfortable with the assortment and the pricing architecture versus the other channels.

Okay, Oliver, a couple things. One, in terms of the "I am" campaign; I think we are excited about what we are seeing. And what the "I am" campaign really did was begin to change how we advertise and how we present the brand, going from what I will call a really nostalgic look to something that's more current, forward, modern; and this whole idea of beginning to introduce more storytelling into how we market.

Those are really kind of the key elements and we do believe, as we go forward, that that will continue to evolve and blossom. We're trying to find ways of really building up this whole idea of relatable moments in storytelling through all of our different media, whether that's through our blogging -- through blogs, through PR, through video and really developing that. So we're excited that we believe that "I am" has put us on this new path that we believe will continue to evolve and really engage the consumer more as we are getting learnings.

Your second question regarding online is I would say we are probably in about the third inning. What we've been able to do is really pull back on a lot of the hyper-promotional activity. I think that we feel that we've made significant progress there. We're very excited about how the consumer has responded to our new search navigation. That's really been above even the expectations that we had, so that is very encouraging.

But we still have a lot of work. We're still working on the site redesign. We're working on the platform. Both of those will come out next year.

And we believe that as we are really moving our e-commerce site to this digital flagship, really enhancing the branding experience is something that we're putting a lot more focus on, and particularly since Theresa has joined us. She's really getting her hands involved as we're re-platforming and figuring out how we really move from just what I'll call an e-commerce focus to really a digital flagship focus, which is really building up that consumer engagement and a lot more storytelling.

So we're very excited about what the future holds, but I would say that we are in the very early innings.

Okay. And just lastly, we've been in the stores and you've done a great job showing us some of the product and how you are thinking about the presentation side. Just can you update us on -- within full price and outlet how you feel about the store experience and what's ahead, especially as you assort into a newer type of product and look to newer customers?

We definitely are going to continue, first in our full-line stores. As you've seen with the new store openings that we've had, us continuing to kind of modernize our environment; so we continue to go down that path. And even as we are bringing in new fixturing and new visuals and window displays, we're continuing to roll a little bit more modern aesthetic through all of our stores, so we continue to see that expanding.

We want to build upon our very strong customer relationships, but as we look at all of our customer service scores from our outside providers and what they are benchmarking, we traditionally have stayed way up in the very top of the engagement scores with our customers. The one area we're continuing to work on, as you can imagine with all of the new product introductions we have, is continuing to build up the product knowledge and selling of our associates.

What has been so exciting for us is we really were working on that selling environment in our Dallas stores. With some of the projects we've put in down there, we saw significant improvements in the customer metrics in Dallas. And we've begun to roll that out across the country and we're beginning to see that lift replicated.

So we definitely see more focus on selling and more focus on product knowledge as we are going forward in our full-line stores. Our factory stores right now, we feel good about where we are in terms of really focusing, first and foremost, on the merchandise assortments and the pricing, and we will continue to evolve that. But the store environment will not go under as dramatic of an update as you've seen in our full-line stores.

Okay, great. Congrats and good luck.

Thank you.

Steve Marotta, C.L. King & Associates.

Good morning again. Thank you for taking the follow-up.

Kevin, one quick question regarding the share repurchase. I just want to make sure that I heard correctly. There was roughly $13 million of the $40 million that was completed in the second quarter, but that the balance of it -- of the entire share repurchase program was exhausted since the second-quarter close and that 2.8 million shares were repurchased. Is that all accurate?

Yes, that's all accurate. So there's about $6.5 million here in Q3 to complete the program.

6.5 million is the balance today?

In dollars. That's right, in dollars there is $6.5 million spent in Q3 to repurchase shares, so that's the total of the $40 million.

Okay, thank you.

At this time it appears there are no further questions. I would like to turn the conference back over to our speakers for any additional or closing remarks.

Thank you. As I reflect back on the first six months of the year, I am very proud of what our team has accomplished. It will take time for these efforts to fully pay off, but I believe we are seeing some green shoots from all of our efforts.

I am very appreciative of our team; they are nimble, collaborative, and executing well. And I continue to believe we are taking the right steps to attract new customers to our brand and for the long-term growth of the business.

Thank you for joining us today and for your interest, time, and questions. We look forward to speaking to you on our third-quarter call in December.

Thank you. That will conclude today's conference. We thank everyone for their participation.