U.S. Markets closed

Edited Transcript of NWY earnings conference call or presentation 29-May-19 8:30pm GMT

Q1 2019 RTW Retailwinds Inc Earnings Call

New York Jun 6, 2019 (Thomson StreetEvents) -- Edited Transcript of Rtw Retailwinds Inc earnings conference call or presentation Wednesday, May 29, 2019 at 8:30:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Gregory J. Scott

RTW Retailwinds, Inc. - CEO & Director

* Robert Ferrario

RTW Retailwinds, Inc. - SVP of strategy and growth

* Sheamus G. Toal

RTW Retailwinds, Inc. - Executive VP, COO & CFO

================================================================================

Conference Call Participants

================================================================================

* Andrew Mali Vijaiyan

Roth Capital Partners, LLC, Research Division - Research Analyst

* David L. Kanen

Kanen Wealth Management Llc - President & Portfolio Manager

* Maksim Rakhlenko

Cowen and Company, LLC, Research Division - Associate

* Robert Stephen Anderson

Penbrook Management LLC - Co-Founder

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Greetings and welcome to the RTW Retailwinds, Inc. First Quarter 2019 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Bobby Ferrario, Senior Vice President, Strategy. Please go ahead.

--------------------------------------------------------------------------------

Robert Ferrario, RTW Retailwinds, Inc. - SVP of strategy and growth [2]

--------------------------------------------------------------------------------

Thank you. Good afternoon, everyone. Before we begin, I would like to remind you that some of the comments made on today's call, either as part of our prepared remarks or in response to your questions, may contain forward-looking statements that are made pursuant to the safe harbor provision in the Private Securities Litigation Reform Act of 1995. Actual results may differ from those projected in such forward-looking statements. Such forward-looking statements are subject to risks and uncertainty as described in the company's documents filed with the SEC, including the company's fiscal year '18 Form 10-K. The company undertakes no obligation to publicly update or revise any forward-looking statements to reflect subsequent events or circumstances.

As a supplement to today's presentation, we have made slides available, which you can view under the Investor Relations section at newyorkandcompany.com.

And now we would like to turn the call over to Greg Scott, CEO.

--------------------------------------------------------------------------------

Gregory J. Scott, RTW Retailwinds, Inc. - CEO & Director [3]

--------------------------------------------------------------------------------

Thank you, Bobby. Good afternoon and thank you for joining us today to discuss our first quarter 2019 results.

Following my remarks, Sheamus Toal, our Executive Vice President, COO and CFO, will review our financial results and outlook in greater detail before opening the call up for questions.

At our Investor Day last September, we outlined our strategic agenda that we believe will best position us to drive profitable and sustainable growth for the future. Our transition to RTW Retailwinds reflects our vision to maximize the power of our platform to create destination celebrity and lifestyle brand assortments across categories and channels.

For the first quarter, we executed against our strategic plan of growing our multibrand portfolio by continuing to build our Fashion to Figure business and by bringing to market digitally native brands that address customer opportunities.

Regarding Fashion to Figure, we are pleased to see the ongoing implementation of our strategic plan resonate with the customer as reflected in the brand's 30% comp for the quarter.

In addition, on April 4, we introduced Happy x Nature, Kate Hudson's first ready-to-wear collection supported by Kate's active and engaged social network.

On April 25, we introduced Uncommon Sense, a lingerie lifestyle brand, which solves the challenges many women face in their lingerie choices through smarter fits, technology and support that looks great and feels amazing.

Across the entire RTW portfolio, from New York & Company to Fashion to Figure and Happy x Nature to Uncommon Sense, we are investing for the future, and we will share our progress as we grow our new businesses.

That said, we were disappointed by our first quarter performance in our core New York & Company business with February performance being particularly challenging, though we did experience sequential improvement throughout the quarter during the combined March and April period.

Traffic, along with the new customer acquisition and weak results from our Soho Jeans sub-brand, contributed to the overall disappointing results in the first quarter. This is reflected in our Q1 comp sales decline of negative 5.3%. While we were disappointed in our sales performance, the team was agile and reacted appropriately by managing expense in the inventory, by also investing in our new businesses to drive future growth, which contributed to meeting our operating income expectations.

Finally, we ended the year with a strong balance sheet, nearly $83 million in cash on hand or $1.27 per share at no debt, which is a competitive advantage in today's highly dynamic retail environment.

We believe we are building a strong pipeline of innovation and newness, though we also acknowledge that the year has started off slower than we'd like, and we are making the appropriate adjustments to improve our results for the balance of the year.

Looking ahead to our long-term growth, as announced today, we are pleased to announce that Traci Inglis will be joining RTW in June as our President, Chief Marketing and Customer Officer. In this newly created position, Traci brings exactly what we are looking for with her track record in translating customer data, analytics and insights into innovative, customer-first strategies.

She joins us at an important time in our multibrand evolution, and her experience will be incredibly important to our portfolio of brands as we work to reinvent the way we market and deliver experiences to our customers across all channels.

Traci is the ideal leader to leverage the power of our information to engage customers and build digital brands through optimized customer experiences and new customer acquisition. I look forward to working with her on building for the future of RTW and transforming our customer journey across our portfolio of brands.

Turning to our first quarter results, I'd like to spend a few moments discussing our progress against our 2019 keys to success.

First, we continue to leverage our celebrity collaborations at sub-brands as market differentiators that our customer can only find at New York & Company. During the first quarter, we successfully launched Happy x Nature, Kate Hudson's collection, in New York & Company stores online and on its own site. At the same time, we leveraged the power of Gabrielle Union celebrity to drive sales across her collection at our 7th Avenue sub-brand while also introducing a small baby capsule, Kaavi James by Gabrielle Union, which launched in April.

We are seeing our customer's respond to the areas of the business that satisfy her need for fashion, style, quality and value. Driving continued momentum in our 7th Avenue sub-brand was our ongoing innovations in fit and fabric, which continue to accelerate our growth in pants, which is an area of competitive strength and a strong driver of customer loyalty, and is our #1 department in the company. In addition, our top assortment within 7th Avenue drove strong results, contributing to this sub-brand's performance.

We were also pleased with our performance in dresses as dresses become our second largest category in the summer season. This provides an important fashion halo and we were able to [distort] investment in trending categories, including jumpsuits and rompers. Unfortunately, the comp decreases we experienced in Soho Jeans significantly impacted our overall comp performance. The weakness in Soho Jeans was driven across all categories in the business, including sweaters, tops and denim.

Specifically in denim, we continue to see weakness in our spring deliveries, and overall results were below our expectations. In the near term, we are managing our inventory investments in these areas. Looking forward, we are urgently addressing our assortment challenges and are looking to reinvent the sub-brand sometime in the fall season.

Number two, regarding our second strategic priority to increase brand awareness and customer engagement, we experienced softness in our brick-and-mortar traffic, and our new customer acquisition decreased over the prior year. We recognize that our marketing investments must be deployed to acquire new customers and are actively rebalancing our marketing mix to invest more digital acquisition channels to ensure we are bringing new customers to the New York & Company brand.

In addition, we plan to continue to further deepen our relationship with existing customers to enhance levels of personalization and segmentation, tailoring our marketing voice to where she is in the customer journey.

From a customer file perspective, we see a high-level engagement among retained customers, and we are working to address our customer acquisition opportunities. During the quarter, we experienced positive traffic growth in e-commerce, sequentially improved traffic in brick-and-mortar and improvements to trend in new customer acquisition as we're recalibrating our marketing media mix.

In addition, we have engaged several outside consultant groups to identify opportunities and continue to help implement the necessary changes to improve our results across the customer journey. We are committed to ensuring our marketing spend is allocated across working media channels that touches the customer to reach our overall spend efficiency in optimizing our marketing initiatives. That said, our customer is highly engaged and loyal, and our Net Promoter Scores continue to improve. And our celebrity collaborations provide an important halo to the brand, which, combined, provide a powerful foundation from which to amplify our marketing efforts.

Regarding digital marketing, to further amplify our brand reach, we continue to adjust our digital marketing investments across platforms. As a result of our investment intensification in digital marketing, we were pleased to see traffic increases to our digital site, specifically from social channels and our mobile app, which continues to accelerate in the second quarter to date.

Our third strategic priority focuses on driving digital and omni. For Q1, while we were disappointed with the New York & Company e-commerce performance, we were able to improve our digital traffic from the incoming trend by also driving significant comp growth in our Fashion to Figure business.

In addition, sales through our omni programs, which include in-store pickup, order online, ship from store or online and order in -- order and ship from store or online, increased at a double-digit rate for the quarter. We were early adopters of these programs and see them as critical to drive customer engagement regardless of where, when or how a customer shops.

From a product perspective, our e-commerce exclusive merchandise delivered double-digit comp performance in the quarter and allowed us to expand our fashion projection through new styles and categories. These assortments also are size inclusive as we offer sizes 00 through 20 in nearly all styles, including our celebrity collaborations.

During the quarter, we were able to successfully introduce 2 digital-first businesses by leveraging our existing IT infrastructure. Both of these businesses utilize a combination of elevated content and responses by design to provide a customer experience that is specific and unique to these brands.

Finally, across all brands, we were able to increase our digital sales penetration to over 33% of volume as compared to 31% last year. Under Traci's leadership, we will continue to implement the changes necessary to reaccelerate our digital growth.

Our fourth strategic priority focuses on our real estate portfolio, while we experienced a decline in store occupancy expenses, with store closures and ongoing landlord rent concessions contributing to the decrease in buying and occupancy costs.

We also benefit from a highly flexible real estate portfolio with approximately 70% of our existing store base on 2 years or less terms. In addition, we have opportunistically taken advantage of much of the consolidation that has happened in the industry over the past several years. We have opened approximately 15 new stores at high price profile and premium centers to improve brand awareness and customer acquisition while delivering favorable four-wall economics.

Our final strategic priority focuses on growth initiatives. While we continue to maintain our focus within our core New York & Company business, we continue to look at additional white space opportunities without significant capital investments though leveraged -- through the leverage of our RTW operating platform. We have also built specific teams to lead the efforts of each of these businesses separate from the core New York & Company business.

Our Fashion to Figure brand continues to execute against the strategic plan we implemented beginning in the fall of 2018. We are pleased with the overall customer response to our assortments and marketing messages as we position this brand for growth in the plus size market. We are building awareness and engagement through a combination of relevant messaging across our social media channels, influencer and celebrity partnerships and expanded assortments in loyalty-driving categories.

Finally, our comp growth in excess of 30% in the first quarter continues into the second quarter, effectively positioning this business to breakeven operating results.

Building on our success with Fashion to Figure, combined with leveraging the efficiencies of our RTW platform, we introduced 2 new digitally first brands during the quarter, and we intend to grow and scale these brands from a digital-first, highly dynamic and iterative perspective. We're using data and insights collected across our customers' interactions, online and through social media, to inform our strategic marketing plans. We will provide future updates regarding our growth plans across Happy x Nature and Uncommon Sense throughout 2019.

Finally, our subscription box service, NY&C Closet, continues to grow and benefit from a strong and positive customer response. We look forward to introducing a subscription box service with our FTF brand later this quarter to ensure we are engaging our customers wherever, whenever and however they shop.

Looking forward to Q2, we are pleased to see comp improvement across our stores and digital business driven by traffic improvement. Within core New York & Company, we are seeing improved product acceptance across our celebrity collections well above Q1. We are seeing continued strength in our 7th Avenue sub-brand and dresses, and we are urgently focused on reinventing our Soho Jeans sub-brand.

Within Fashion to Figure, we are building on the growth we experienced in the first quarter throughout the second quarter with the brand digitally relevant and fashion-driven projection resonating with customers.

Finally, our new brands, Happy x Nature and Uncommon Sense, we'll continue to test and invest across digital marketing channels to increase brand awareness and drive customer acquisition.

We believe we are making the adjustments necessary to be more competitive in the short term while also balancing our long-term growth objective to position RTW as a premier multibrand platform for celebrity and lifestyle brands.

With that, I'll turn the call over to Sheamus.

--------------------------------------------------------------------------------

Sheamus G. Toal, RTW Retailwinds, Inc. - Executive VP, COO & CFO [4]

--------------------------------------------------------------------------------

Thank you, Greg. Good afternoon, everyone. Net sales for the first quarter were $201 million as compared to $218.8 million in the prior year, reflecting a 5.3% reduction in comparable store sales and a reduction in store count resulting from 22 closed stores, partially offset by the inclusion of sales from Fashion to Figure.

Gross profit as a percentage of net sales decreased 80 basis points to 31.2% versus fiscal year 2018 first quarter gross profit percentage of 32%. The decrease reflects increases in shipping rates and decreases in the leverage of buying and occupancy costs.

Selling, general and administrative expenses decreased by $1.4 million to $65.1 million or 32.4% of net sales as compared to $66.5 million or 30.4% of net sales in the prior year period. Included in selling, general and administrative expenses in the first quarter of fiscal year 2019 is $2.3 million of incremental spending incurred in connection with the incubation of 3 new businesses: Fashion to Figure, Happy x Nature and Uncommon Sense. These increases were offset by a reduction in variable compensation and store selling expenses.

Operating loss for the first quarter of 2019 was $2.5 million, inclusive of $1.5 million of losses from the 3 new businesses. This compares to operating income of $3.5 million for the first quarter of 2018. There was no impact on operating income for the first quarter of 2018 from the company's new businesses.

Net loss for the first quarter of 2019 was $2.2 million or a loss of $0.04 per diluted share as compared to net income of $3.1 million or $0.05 per diluted share in the prior year period.

Total quarter end inventory increased 4.3% as compared to the prior period to support growth in new businesses.

Capital spending for the first quarter of 2019 was $0.9 million as compared to $0.3 million in the prior year period, primarily reflecting continued spending to support new stores and investment in the IT infrastructure to support new businesses.

During the first quarter, the company opened 1 New York & Company store, closed 1 location and remodeled/refreshed 3 existing locations, ending the first quarter with 410 stores, including 119 outlet stores and 2 million selling square feet in operation. The company continues to maintain a highly flexible lease portfolio with approximately 70% of its leases expiring in 2 years or less.

We are pleased to end the quarter with a strong balance sheet with $83.2 million of cash on hand, representing $1.27 per diluted share, versus $78 million in the first quarter of 2018. And we have no outstanding borrowings under our revolving credit facility and no long-term debt.

Now turning to our outlook for the second quarter of fiscal year 2019. We continue to focus on investing in the future to drive improvements in long-term operating results and increases in both comparable store sales and annual operating income. We are pleased to see the early success with our Fashion to Figure business, and we are excited about the prospects of our newly launched Happy x Nature and Uncommon Sense businesses.

For the second quarter, we expect the following. Net sales are expected to decrease in the low single-digit range, reflecting the combination of reduced store count and comparable store sales, which are expected to be flat to down slightly, partially offset by sales increases from our new businesses.

Gross profit as a percentage of net sales is expected to be down slightly, primarily reflecting increased shipping costs, partially offset by increased leverage of buying and occupancy costs.

Selling, general and administrative expenses are expected to decrease by approximately $1 million versus the prior year second quarter. This reduction reflects decreases in variable compensation and reduced payroll, partially offset by increases in marketing expenses and an increase in selling expenses driven by higher e-commerce variable costs and costs to support the new businesses.

Operating income for the second quarter is expected to be approximately breakeven, inclusive of approximately $1.5 million of losses associated with the 3 new businesses.

On-hand inventory at the end of the second quarter of 2019 in the core New York & Company business is expected to be down in the low single-digit percentage range offset by increases in in-transit levels due to the timing of receipts and inventory to support the new businesses, with total inventory expected to be up in the low single-digit percentage range.

Capital expenditures for the second quarter of 2019 are expected to be approximately $5 million to support ongoing investments in IT infrastructure, investments in new businesses and new and remodeled store activity. Full year capital expenditures are expected to be between $12 million and $13 million as compared to $8.5 million in the prior year.

Depreciation and amortization expense for the first quarter is expected -- is estimated to be approximately $16 million, with approximately $11 million attributed to amortization of the company's right-of-use assets resulting from the adoption of Accounting Standards Codification 842, Leases, on the first day of fiscal year 2019.

During the second quarter of fiscal year 2019, we expect to open 5 New York & Company stores and 2 Fashion to Figure stores, remodel or refresh 2 existing stores and close 1 location.

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

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question comes from the line of Oliver Chen with Cowen and Company.

--------------------------------------------------------------------------------

Maksim Rakhlenko, Cowen and Company, LLC, Research Division - Associate [2]

--------------------------------------------------------------------------------

This is Max on for Oliver. So first, can you just discuss your outlook on merchandise margins? And how do you view the cleanliness of your inventory position? And then just stepping back, how do you view the competitive and promotional environment as well as the overall health of the shopper? And then we have one follow-up.

--------------------------------------------------------------------------------

Gregory J. Scott, RTW Retailwinds, Inc. - CEO & Director [3]

--------------------------------------------------------------------------------

So in terms of just straight merchandise margins, we were able to see a slight uptick in our rate in Q1. And we believe in Q2, we'll also see improved merchandise margins. What's really driving that is we continue to really focus on strong AUCs and really focus on great leveraging items in these strong AUCs, which is helping our IMU. We've always been a highly promotional business, so we play competitively in that space, and that's really built into our models.

I would say what we have done well is really react to the business. So in terms of inventory, we -- you haven't heard us say and -- or nor are we going to suggest that we're really building inventory up or that we have an inventory issue. I think what we've been really good at is reacting to the business, being as open and flexible as possible with our inventory, especially into Q2 where it's had our shortest lead times probably of the year, which leaves us -- we leave a lot of money open and really buy that quarter based on the trend of Q1, which is giving us that flexibility and that improvement, I think, that ability to show improvement in merchandise margin, both in Q1 rate and in Q2.

It's interesting, the health of the customer -- all, I think, macro numbers would say the health of the customer should be good. I think what is confounding probably is when you see mall traffic numbers, especially when you look at the external data, there's 2 sources we look at. You follow one, Cowen, and we actually use ShopperTrak. And we've definitely seen continued negative mall traffic numbers. We are starting -- we are pretty much in line with those numbers in Q2. It would say that there -- the macro would tell us there shouldn't be major issues with the consumer in terms of economic issues, but we are seeing it from a macro perspective on the traffic in malls. I'm pleased to see that traffic is starting to pick up again -- once again for us in our digital business, which also reflects -- really enhances our total business. As we talk about digital marketing, obviously, it really drives marketing traffic across our whole portfolio.

So I think for us, what we believe is the mall environment will stay competitive or the retail environment in our space will stay competitive. Our model is built for that. We buy for that. And we're continuing to see some real improvements really in some AUCs because we're getting better at really leveraging and doing a lot better planning at some of those buys, and that's where we're really seeing merchandise margin improvement.

--------------------------------------------------------------------------------

Maksim Rakhlenko, Cowen and Company, LLC, Research Division - Associate [4]

--------------------------------------------------------------------------------

Got it. That's very helpful. And on a different topic, can you provide an outlook on tariffs? And how much of your product is currently sourced from China? Any comments would be great.

--------------------------------------------------------------------------------

Sheamus G. Toal, RTW Retailwinds, Inc. - Executive VP, COO & CFO [5]

--------------------------------------------------------------------------------

Yes. So the tariff situation is something that we're obviously closely following with our partners and agents. To date, we've obviously been impacted by the tariffs put in place earlier this year and the latest increase in May, but that impact is relatively minimal for us in the categories that have been impacted so far.

And as we monitor that, we're planning to shift some of our categories into higher-margin goods to offset the minimal impact. So we're talking -- the goods that have been impacted so far are in a couple of hundred thousand dollar range in terms of the impact. Obviously, the more significant risk and exposure for us is the potential future impact of any escalation in terms of the categories that we would anticipate being covered by future tariffs.

To answer the second part of your question, we still are highly dependent in terms of China, specifically for apparel where about 60% of our production is done in China. We are working closely with our agents and partners to migrate to other countries as we see potential escalation in terms of tariffs into other categories. But it is a significant portion of our production at this point.

--------------------------------------------------------------------------------

Operator [6]

--------------------------------------------------------------------------------

Our next question comes from the line of Dave King with Roth Capital Partners.

--------------------------------------------------------------------------------

Andrew Mali Vijaiyan, Roth Capital Partners, LLC, Research Division - Research Analyst [7]

--------------------------------------------------------------------------------

This is Andrew stepping on for Dave. I just wanted to ask, first, on Happy x Nature launch, how has consumer response been there? And how does it compare to expectations?

And then how has your initial sell-through been? Has there been any learnings thus far?

And then lastly, on that topic, how's performance been at the New York & Company store and also online versus the brand's own website?

--------------------------------------------------------------------------------

Gregory J. Scott, RTW Retailwinds, Inc. - CEO & Director [8]

--------------------------------------------------------------------------------

So overall, we are very pleased with the initial launch of Happy x Nature. What I think is unique about this brand is obviously it's driven by Kate Hudson socially in a very large way. We're seeing strong, strong traffic, both to our site and to the initial Happy x Nature site driven by social traffic.

I think we've had a lot of great learnings early on the line. It's offering a point of differentiation in our overall mix, both at New York & Company, but also we believe that this brand has legs outside of New York & Company, specifically by how many new customers we are seeing and from our email list and our whole customer data mix.

The line has been highly successful in dresses and in tops. I think the line will only get better as we move forward, especially all the learnings we've had there early on. I think that what we plan to do is we'll continue to carry it in New York & Company stores. We'll continue to grow it online. I would say the mix is pretty much the way we thought it would be at about a 50% brick-and-mortar, 50% digital business right now. And we are seeing some disparities between the selling on the own site, the New York & Company site, in terms of style preference, which is based on how different the customer mix is. Overall, it met expectations in the quarter. We look forward for Q2. We have a new drop in about 2 weeks, which we're excited about.

What's really great is to see the power of what Kate Hudson can do as she drives this brand socially. She had an event at her home 2 weeks ago or last week, drove strong traffic both to the Happy x Nature site and to our own site. So we are encouraged about the future of this business.

I think what's really another piece that has been specific about this brand that I think is going to be great learnings for New York & Company or RTW as a whole is the sustainability nature of this brand. Kate and the designer are highly focused on sustainability. We've already brought in several garments that obviously are made of recycled plastics, a lot of organic cotton. We're looking at new ways to wash our denim, obviously through digitized washings. Her package is, I think, completely disintegratable in 12 months, something new we've not done.

So her customer, the Happy x Nature customer, is highly motivated by the sustainability nature of this brand. We're continuing to see new ways to do that. And I think that will carry through into New York & Company as well as we believe sustainability is going to be a huge part of the future of all fashion brands who've been really trying to find ways to improve this or grow this as a percentage of their mix.

--------------------------------------------------------------------------------

Andrew Mali Vijaiyan, Roth Capital Partners, LLC, Research Division - Research Analyst [9]

--------------------------------------------------------------------------------

Great. That's really great color. That's helpful. And then I guess just similarly on the Uncommon Sense launch, I guess similar questions. How has the consumer response been so far compared to your expectations? Any early learnings thus far there? And then same question in terms of the performance there on their own brand website versus the New York & Company website and stores.

--------------------------------------------------------------------------------

Gregory J. Scott, RTW Retailwinds, Inc. - CEO & Director [10]

--------------------------------------------------------------------------------

So Uncommon Sense obviously launched about 2 weeks ago. And so what's exciting there is that we've only put a small piece in New York & Company stores, which is really the panty business, and we're seeing really strong results there, kind of surpassing the expectations we thought we would. I think the difference here is we don't have a celebrity really backing the brand. So obviously, it's growing the consumer and growing the traffic more organically and through our utilizing our own site. So it doesn't have the power of a celebrity.

I think that what we're really seeing is that -- what has been strong is the panty business, the seamless business. And I think we already have some early learnings. I would just say on this business, I think it's just begun. I think we'll have a lot more to talk about in the Q2 period. The one thing I would say, though, is we definitely are encouraged by what we're seeing in the NYCO store performance, especially in the panty business.

--------------------------------------------------------------------------------

Andrew Mali Vijaiyan, Roth Capital Partners, LLC, Research Division - Research Analyst [11]

--------------------------------------------------------------------------------

Great. That's helpful. And then if I could just sneak in one more here, following up on the gross margin question earlier. Could you just maybe provide a bit more color on the pressures you're seeing in Q2 just beyond shipping and BDO leverage? And then just what are some of the puts and takes there for Q2?

And then also for the full year, how are you thinking about margins for the year and the mix between shipping costs, product margins, tariffs and rent relief?

--------------------------------------------------------------------------------

Sheamus G. Toal, RTW Retailwinds, Inc. - Executive VP, COO & CFO [12]

--------------------------------------------------------------------------------

Yes. So in terms of the overall pressures that we're seeing, obviously, as Greg commented earlier, we're in a highly promotional environment. So we're built for that, and we're very aggressive with that. So we don't anticipate a significant impact on our merchandise margins during the second quarter. I think as we commented, the biggest impact that we're seeing is in terms of shipping rate increases. And also shipping as a percentage of our cost of goods sold is increasing as we drive growth in our digital business, our Fashion to Figure business. So those are really the components that we're seeing in terms of rate increases.

As I commented earlier, the tariff impact to date has been negligible for us. And if the tariffs were held at this level for the fall season or the rest of the year, it would be a relatively minor impact and one that we plan on offsetting with the shift into certain higher-margin categories and pulling back on certain categories where tariffs have been imposed.

So as we said earlier, the biggest impact on margin right now that we see is primarily in terms of shipping and the leverage of the 6 occupancy components.

--------------------------------------------------------------------------------

Gregory J. Scott, RTW Retailwinds, Inc. - CEO & Director [13]

--------------------------------------------------------------------------------

And just to continue to say that I think the teams have done a very good job at managing inventory based on the early Q1 trend. I think it really shows the flexible nature of our -- really, our pipeline in terms of how we can chase goods, how we can leave ourselves open to really reflect what's happening in the business, which gives us the flexibility to really chase what's happening from an offensive perspective. At the same time, it allows us to not really have buildup of large inventory where we have to take a lot of markdowns to clear. And that's why we probably saw margin rate expansion in Q1. We're planning it also for Q2. And I think we as a company are always trying to be as close to the delivery as possible, and we're continuing to build up that muscle in our production pipeline.

--------------------------------------------------------------------------------

Operator [14]

--------------------------------------------------------------------------------

Our next question comes from the line of Robert Anderson with Penbrook.

--------------------------------------------------------------------------------

Robert Stephen Anderson, Penbrook Management LLC - Co-Founder [15]

--------------------------------------------------------------------------------

My first question relates to financial aspects of the business. Maybe, Sheamus, you could review the percent of business that is conducted with your own proprietary in-house credit card.

And then another related financial question, with the stock here at $2 and over $1 in cash per share, isn't it prudent to do some stock buybacks? So bring us up to date where you are in the stock buyback and any future plans?

--------------------------------------------------------------------------------

Sheamus G. Toal, RTW Retailwinds, Inc. - Executive VP, COO & CFO [16]

--------------------------------------------------------------------------------

Sure. So in regards to your first question, PLCC, our private label credit card, it continues to be a strong part of our business. We're currently at approximately 43% of our sales are on the private label credit card. It's an initiative that's important to us and one that we continue to push in terms of shifting customers to the private label credit card as we have an opportunity to communicate with them and drive incremental purchases with that customer.

So it continues to be a core focus of ours and one that is important. We've recently launched in the Fashion to Figure business a private label credit card that we think will help grow that business. So it's an important component of our business and one that we've been successful at in the past. And obviously, as you know, as we've chatted in the past, it drives significant benefits in terms of both the royalty that we receive on that as well as the reduction in certain transactional costs associated with an alternative credit card usage. So yes, we're pleased with that.

In terms of the buyback question, we obviously benefit from a very strong balance sheet and have significant cash balances and no debt. So we're very pleased with that. I think as Greg mentioned earlier, we view that as a competitive advantage. While we certainly launched 3 new businesses and we've been extremely pleased with the early success of the Fashion to Figure business, we continue to monitor very closely our working capital needs on an ongoing basis and believe that the strong balance sheet provides us and the cash balances provide us a unique ability to invest in these businesses as we see them reach a point where we can drive an accelerated growth model and drive significant improvement in terms of top line sales as well as return to shareholders.

I think as we've also discussed in the past, we do have -- we believe that, that's a better alternative in terms of driving shareholder value than necessarily a share repurchase program that would put in jeopardy certain of our deferred tax assets. Today, we currently have about $56 million of deferred tax assets that we plan to utilize in the future to offset taxable income. They have no value on our books today but do provide us a cash value in the future. And potentially utilizing cash to buy back shares could put certain restrictions on the ultimate recoverability that -- the recoverability of those deferred tax assets that we don't think is in the best interests of shareholders.

So we continue to believe that holding those cash balances to invest in growth initiatives and growth businesses as we're seeing with the Fashion to Figure business is the better alternative for us.

--------------------------------------------------------------------------------

Robert Stephen Anderson, Penbrook Management LLC - Co-Founder [17]

--------------------------------------------------------------------------------

Okay. And then just one follow-up. You haven't said, least I don't think you said anything about a personality to lead Fashion for Figure (sic) [Fashion to Figure], so maybe you could comment on that. And you didn't really say anything about Eva. Maybe you could update us on what she's up to.

--------------------------------------------------------------------------------

Gregory J. Scott, RTW Retailwinds, Inc. - CEO & Director [18]

--------------------------------------------------------------------------------

So in terms of Fashion to Figure, I think that team has been

(technical difficulty)

influencers that have really helped their business. They've had relationships with about 3 influencers that have driven really strong traffic. I think we're continuing to look for even bigger influencers for Fashion to Figure instead of having one major celebrity having a cadre of influencers that represent the total Fashion to Figure brand. I think the team is pretty connected with the -- that market space. We're looking to do a deal with a couple of new influencers in the next month or 2 as well.

I think we're also seeing from certain influencers, YouTube channels, on that space specifically, great traffic from some of the halls they're doing as well in there. So I think that team has a really good strategy of having multiple people from the community representing all different types of lifestyles in that market space. And they're highly connected with that community because of their long tenured relationship there.

So I would just say that I think they're doing a really good job in a different way of attracting authenticity and really speaking to the plus size community in general. So I think they're doing it slightly different than the New York & Company but still using influencers to drive traffic and awareness.

Eva Mendes is still our largest celebrity in terms of product and in terms of volume. Her contract ends in July 31 of this year. We're currently in negotiations with them on extending that contract. And I would say in the quarter, her sales were slightly off, but we did see continued success with Gabrielle Union and obviously the launch of Kate Hudson.

--------------------------------------------------------------------------------

Robert Stephen Anderson, Penbrook Management LLC - Co-Founder [19]

--------------------------------------------------------------------------------

You didn't mention the 3 individuals in Fashion to Figure. Who are those 3 individuals?

--------------------------------------------------------------------------------

Gregory J. Scott, RTW Retailwinds, Inc. - CEO & Director [20]

--------------------------------------------------------------------------------

It's a much smaller group, and I can get back to you on that.

--------------------------------------------------------------------------------

Operator [21]

--------------------------------------------------------------------------------

(Operator Instructions) Our next question comes from the line of Dave Kanen with Kanen Wealth Management.

--------------------------------------------------------------------------------

David L. Kanen, Kanen Wealth Management Llc - President & Portfolio Manager [22]

--------------------------------------------------------------------------------

First question is in regards to Dressbarn. I believe they're closing over 600 stores. Could you speak to, number one, how many of their locations overlap with yours, at brick in malls specifically? And what do you -- how do you think that plays out? For example, as they liquidate inventory, is that something that's going to potentially pressure your margins and force discounting but then later offer upside similar to -- I can't remember the last major women's retailer that was next to you in the malls that closed, but it seems like after a few quarters, there was some benefit. So could you just comment on that, how you see that playing out? And then I'll have a follow-up question.

--------------------------------------------------------------------------------

Gregory J. Scott, RTW Retailwinds, Inc. - CEO & Director [23]

--------------------------------------------------------------------------------

So thanks, Dave. So it's Greg. Obviously, we've looked at Dressbarn. We actually do not have a lot of centers where there's high crossover of stores. And Sheamus, we've already pulled that, so I don't know if you have the exact percentage here.

--------------------------------------------------------------------------------

Sheamus G. Toal, RTW Retailwinds, Inc. - Executive VP, COO & CFO [24]

--------------------------------------------------------------------------------

Yes. I don't have the exact percentage handy with me, but as Greg said, it is a relatively small percentage. They're largely in strip centers, street locations, that's the vast majority of their portfolio. So it is something that we do monitor and look at that crossover, but it is a relatively small percentage.

--------------------------------------------------------------------------------

Gregory J. Scott, RTW Retailwinds, Inc. - CEO & Director [25]

--------------------------------------------------------------------------------

I would say that what's interesting is that it has not typically come up in our competitive set. When we ask customers, either quarterly or annually, about other places they shop, Dressbarn typically has not appeared as a competitive set. That said, to your point, there's $800 million of volume going up and is up for grabs. And I think the question is for us, how much of that we will take.

I think the retailer that closed probably there was more close to us was limited stores back, what was that, 2 or 3 years ago, they were about $250 million. That probably provided us, specifically in our wear-to-work uptown business, upside, which I bet we've probably been seeing over the last 1.5 years.

--------------------------------------------------------------------------------

David L. Kanen, Kanen Wealth Management Llc - President & Portfolio Manager [26]

--------------------------------------------------------------------------------

Okay. And then can you give me some color on the percentage of sales for FTF that are e-comm versus brick? And then with the 30% comp that you saw, are you profitable at this -- are you EBITDA profitable before allocating corporate G&A?

--------------------------------------------------------------------------------

Sheamus G. Toal, RTW Retailwinds, Inc. - Executive VP, COO & CFO [27]

--------------------------------------------------------------------------------

Yes. So in the FTF business, they maintain a higher penetration of e-commerce sales than even we do in the core New York & Company business. That was one of the reasons we were attracted to the brand.

Today, they are approximately approaching 50-50 in terms of the sales penetration. We obviously believe that we can grow that business, both digitally as well as in store. But one of the primary reasons that we made the move with Fashion to Figure was the strong digital presence, the strong customer awareness that they have and our ability to grow that, and that's what we're seeing.

I think as Greg hinted in his comments, with the growth that we've seen in the combined Fashion to Figure business, we saw strong comp growth in the first quarter, over 30%. We're tracking to that level or better in terms of comp growth in the second quarter. And that business is quickly moving to basically breakeven at this point, a minor loss. But we believe as they continue to grow, we'll see that shift to profitability, which when you think about it in terms of us acquiring that brand about a year ago, launching it, seeing the growth that we're seeing, shifting from losses in that business and investments in that business in the early going, to driving to breakeven and profitability effectively in a year, is a strong result for us and one that we've been pleased with.

--------------------------------------------------------------------------------

David L. Kanen, Kanen Wealth Management Llc - President & Portfolio Manager [28]

--------------------------------------------------------------------------------

Okay. And where is most of the growth coming from in terms of the 30% comp? Is it mostly driven by e-comm? Or is it evenly dispersed?

--------------------------------------------------------------------------------

Sheamus G. Toal, RTW Retailwinds, Inc. - Executive VP, COO & CFO [29]

--------------------------------------------------------------------------------

It's more heavily weighted towards e-comm. So as I said, we believe that, that was the higher growth potential and our ability to leverage that and accelerate that growth with our infrastructure, our capabilities, and that's exactly what we're seeing. That being said, we did see -- we do see opportunities in the future for Fashion to Figure in certain markets in terms of store penetration and additional store growth there. But the bigger component of the growth for us has been digitally.

--------------------------------------------------------------------------------

Operator [30]

--------------------------------------------------------------------------------

Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to Greg Scott, CEO, for closing remarks.

--------------------------------------------------------------------------------

Gregory J. Scott, RTW Retailwinds, Inc. - CEO & Director [31]

--------------------------------------------------------------------------------

Thank you for joining us today. We look forward to speaking with you when we review our Q2 results in August. Thank you.

--------------------------------------------------------------------------------

Operator [32]

--------------------------------------------------------------------------------

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.