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Edited Transcript of NWY earnings conference call or presentation 18-May-17 8:30pm GMT

Thomson Reuters StreetEvents

Q1 2017 New York & Company Inc Earnings Call

New York May 25, 2017 (Thomson StreetEvents) -- Edited Transcript of New York & Company Inc earnings conference call or presentation Thursday, May 18, 2017 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Eunice Han

* Gregory J. Scott

New York & Company, Inc. - CEO and Director

* John M. Worthington

New York & Company, Inc. - President and COO

* Sheamus G. Toal

New York & Company, Inc. - CFO and EVP

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Conference Call Participants

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* David Kanen

* Eric Landry

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Presentation

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Operator [1]

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Good day, everyone. Welcome to the New York & Company, Inc. First Quarter 2017 Results Conference Call. Today's conference is being recorded.

At this time, I'll turn the conference over to Eunice Han with ICR. Please go ahead.

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Eunice Han, [2]

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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 provisions 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 uncertainties as described in the company's documents filed with the SEC, including the company's fiscal year 2016 Form 10-K.

And now I'd like to turn the call over to Greg Scott, CEO.

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Gregory J. Scott, New York & Company, Inc. - CEO and Director [3]

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Thank you. Good afternoon. And thank you for joining us today to review our first quarter fiscal 2017 results. With me today are John Worthington, our President and COO; and Sheamus Toal, our Executive Vice President and Chief Financial Officer.

I'll begin the call by reviewing our performance for the quarter as well as providing further insight into our strategic initiatives. Following this, John will review our accomplishments in credit and loyalty, eCommerce, real estate expansion and Project Excellence. Sheamus will then wrap up our prepared remarks by providing more detail on our financial results and outlook before opening the call up for questions.

Our first quarter performance was in line with our expectations. Comparable store sales were down 0.7%, reflecting an improved performance during the March and April time period, offset by a soft start to the quarter. We were also very pleased that gross margins grew to the highest levels we've seen in the first quarter since 2008, and this led to a $3.1 million improvement in adjusted operating loss versus the first quarter of 2016. Throughout the quarter, we maintained disciplined inventory management and ended Q1 with total inventory down 6.4%, reflecting an 8% decline on -- in on-hand inventory per average store, partially offset by an increase in eCommerce inventory.

As it relates to sales, our momentum continued throughout -- through the quarter with the March and April combined period posting positive comparable sales. eCommerce continued to perform very well, delivering a strong double-digit increase in sales for the quarter. We also saw significant improvement in our Outlet business, offset by weakness in the core NYCO division driven by soft traffic. In total, consolidated net sales declined about 3%, reflecting the impact of a lower store count compared to last year and slightly negative comp sales.

With regards to the Mother's Day period, we continue to see stronger performance across the company, including a positive comp driven by improved traffic and improvement in the dress and 7th Avenue business. Across sub-brands and categories, our celebrity collaborations continue to perform strongly with Eva Mendes delivering another double-digit gain. At the same time, our active collection, Soho Street, had a very strong quarter. We also continue to do well with our eCommerce exclusives assortment, including extended sizes. While Soho Jeans, our casual denim base offering, saw slight declines in the quarter, we saw strong performance in our Soho woven top collection. Despite 7th Avenue, our largest sub-brand, struggling during the quarter, we are starting to see improvements. In fact, 7th Avenue exceeded our expectations for April. The improvements on that front were highlighted by the launch of our multi-year collaboration with Gabrielle Union.

The introduction of Gabrielle Union as our brand ambassador of the 7th Avenue business drove strong performance in April, and this performance has continued into the beginning of May.

Now let me turn to a few of the exciting growth opportunities we're pursuing and the strategies that are in place to help position us to enhance value for our shareholders and achieve our longer-term goal and transform New York & Company to a digitally led, dynamic omnichannel retailer with strong proprietary sub-brands and amazing celebrity partnerships.

First is our continued work on leveraging and enhancing our brand assets. This includes the development of our celebrity collaborations as well as our sub-brands. I already mentioned our excitement around our new partnership with Gabrielle Union. The initial response to Gabrielle Union for 7th Avenue has been very positive, and we are extremely excited about the eponymous collection that launches in August online and in all of our New York & Company stores. We attribute the strong early success of this collaboration to the support of our board and in particular, to our new independent directors. Together, we developed a strategy to identify celebrity collaboration partners who are aligned with the esthetics of our brand and whom our customers admire and connect with. The board's strategic efforts were instrumental in our collaborating with Gabrielle Union.

Turning to Eva Mendes. As we announced last quarter, we began to expand Eva's footprint by opening 25 more shop-in-shop stores for a total of 51 shop-in-shop locations. This enabled us to deliver another double-digit increase in the Eva Mendes business in Q1, along with a strong performance on our online business. We also held an event in our Miami store with Eva Mendes, which received over 900 million impressions from the media coverage to -- during this event. We continue to be excited about the growth of this business, and we are planning to launch an Eva Mendes microsite in Q2 that will enable us to showcase content that will drive engagement and will continue to grow the Eva business online.

We also see our celebrity collaborations driving greater traffic and customers to New York & Company given that these assortments are exclusive to us. At the same time, our partnerships drive engagement to our brand and drive a higher AUR in our total business. We believe New York & Company will increasingly become known as a key destination as we continue to expand our celebrity partnerships.

Second, we are focused on increasing our brand awareness and enhancing the effectiveness of our communications to both existing and new customers. In addition to celebrity and increased social presence, we are excited about the launch of our new loyalty program called RUNWAYREWARDS that John will discuss later.

Our third initiative focuses on better connecting with our most loyal customers through our credit loyalty program. In the first quarter, our credit loyalty business increased to 41.7% of our sales, up from 39.8% of total sales in Q1 '16. We continue to expect our credit card file to grow as we believe we can ultimately increase the penetration to 50% or more.

Our fourth initiative is to continue to grow and build upon the success of our -- we have seen in our eCommerce channel. The strength of eCommerce in Q1 was amazing and was driven by improved conversion, increased traffic and strong product acceptance, along with our continued focus as an omnichannel business. We saw strong reaction to our growing eCommerce exclusive business, which includes extended sizes and dresses and tops. We continue to see a strong response through our marketed collection and styles in both our digital and print marketing assets.

Now let me touch on real estate initiatives. As I've mentioned last quarter, we plan to open 6 to 10 stores in premier locations at attractive rents that require low capital investment, enabling us to drive top line sales and increase profitability, generate significant returns on our investments and more importantly, expand our brand's celebrity presence. We opened 5 of these stores in Q1. It is incredibly important to note; we continue to be very flexible in our real estate portfolio with more than 60% of our leases on a renewal basis of less than 2 years.

Regarding traffic. While reduced mall traffic led to a softness in our New York & Company stores, our traffic online continues to grow. And in fact, Outlet saw significantly improved traffic during the quarter.

Fifth, we will continue to execute on our ongoing business reengineering program, Project Excellence. I am very pleased with how all of our teams have joined together to improve our supply chain efficiencies and deliver on our product to customers quickly and efficiently.

As I've discussed before, our lead time is approximately 7 weeks shorter, and we continue to increase our receipts, which should -- which are [chase] receipts, which should have a positive impact on our Q2 results as we head into June and July. We will continue to push forward to improve and to generate additional benefits from this program across our business.

So in summary, while the quarter started softer than we had anticipated, we were pleased to see improved performance as the quarter progressed. More importantly, we continue to see significant opportunities ahead. Our board, our team and our entire management are dedicated to achieving our strategic goals for both the near term and long term and accelerating our even greater success to enhance value for our shareholders as we navigate through this fast-changing retail environment.

With that, I'll turn it over to John.

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John M. Worthington, New York & Company, Inc. - President and COO [4]

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Thanks, Greg. We were pleased to deliver first quarter results in line with guidance. While sales began the quarter soft, we delivered positive comp sales in the combined March and April period. Overall, the quarter saw continuing strength in our celebrity collaboration with Eva Mendes, up double digit, as well as strong contribution from Gabrielle Union when we began our new partnership in April.

Across channels, eCommerce sales rose double digit, and we had positive comps in our outlet conversion stores. The quarter also saw expansion in gross margin driven by higher IMU, the positive impact from credit royalty revenue related to our new credit card agreement and lower occupancy expense driven by rent reduction. Combined, we drove a $3.1 million improvement in non-GAAP operating loss for the quarter. These achievements continue to demonstrate solid traction against our key initiatives to differentiate New York & Company by scaling our celebrity and sub-brands, optimize our real estate portfolio, grow eCommerce and digital sales, benefit from our new credit loyalty agreement and deliver operational efficiencies included in Project Excellence.

We expect the continuation of our strategies in 2017 to increase customer loyalty and better position our stores to mitigate negative mall traffic trends. As I have noted previously, credit loyalty customers shop more frequently and spend 2 to 3x more annually. As we continue to increase our credit loyalty penetration, we have the opportunity to more effectively target these loyal customers. This week, we began the relaunch of our credit loyalty called RUNWAYREWARDS to our full 12-month active cardholder file, a circulation of approximately 1 million customers. We increased marketing for the relaunch through targeted mailing and e-mail campaigns and expect this effort to further engage those customers who have not recently shopped with us. We accomplished this with impactful in-store signage to spur activation into the program from current and new cardholders. We are very, very excited about our introduction of RUNWAYREWARDS as this program makes it easier for our customers to earn and use their rewards and increase long-term loyalty.

As it relates to our credit loyalty, in the first quarter, sales rose to 41.7% of sales versus 39.8% in the first quarter of 2016, representing 190 basis points of expansion. We expect to continue to expand our customer file as we leverage our SMS and e-mail acquisition campaign in store and online, made possible by new technology enhancements at point of sale. We also expect our new credit loyalty agreement to continue to assist us to expand gross margin. This drove gross margin expansion in Q1, and it is expected to add $11 million of incremental royalty to sales and gross profit this year.

Now let me turn to our omnichannel business. We continue to experience double-digit growth in eCommerce, benefiting from a combination of enhancements we've made and continue to make to our web platform. We believe we continue to lead in technology within the specialty store channel and expect our enhanced capabilities with Ask Us, Ship From Store and Buy Online Pick Up In Store to further differentiate New York & Company from others as we give consumers the flexibility to have the product, size and color they want and enable them to shop when, where and how they want. We expect our positive performance from eCommerce to continue as we benefit from the expansion of our core business driven by growth in dresses, exclusive shops for petite and tall, our online exclusive styles and the expansion of non-apparel categories such as jewelry. We'll also build on the strong momentum of Eva Mendes with the introduction of Eva boutiques online that engage consumers in the full collection and, beginning in April, through the addition of Gabrielle Union in our online marketing.

We have several initiatives in place to drive traffic conversion and ADS online. To drive online traffic, we'll leverage the social reach of our celebrities, invest in digital marketing and increase the credit loyalty engagement on site. Conversion improvements are expected as we redesign our website to drive a better brand experience as we expect to increase average dollar sales as we focus on promotion and events that enable us to achieve the objective while increasing higher AUR categories such as Eva, dresses and outerwear. We'll also focus on increasing units per transaction as we enhance the recommendation feature on our site as part of our web redesign to drive more outfit dressing.

Now let me briefly provide an update on outlet conversion, real estate and Project Excellence. As we have previously disclosed, we are committed to our ongoing and comprehensive review of our entire real estate portfolio to continue to improve profitability. Our converted outlet stores continue to perform well, and these stores achieved positive comp sales for the year and increased profitability driven by lower rents as well as higher conversion, UPT and improved traffic trends.

During the first quarter, the company opened 5 New York & Company stores and 1 outlet store, refreshed 3 stores and closed 8 New York & Company stores and 1 outlet. At quarter end, we operated 463 stores, including 123 outlets and 2.3 million selling square feet in operation. The 5 stores we opened during the quarter in Pentagon City, fashion -- [Chicago Fashion Center], Miami International, Dadeland Mall and Tysons Corner, are all in high-performing locations previously occupied by a close competitor. These stores were move-in ready and are on flexible lease terms. We are pleased with their sales volume thus far.

We continue to expect to open a total of 6 to 10 of these high-performing locations with flexible lease terms and strong store contribution. We'll continue to assess our store base so that we are positioned to drive optimal sales productivity and profitability. We have increased our flexibility to achieve this goal by having over 60% of our real estate lease renewals on 2-year basis.

As it relates to outlets, we are pleased with the performance of our outlet stores and expect positive comp sales in the second quarter and for the full year as we strengthen our product assortment and grow online beyond wear-to-work by building denim, the reintroduction of Lounge and increasing seasonal selections, especially in dresses and sweaters. In addition, we will also strengthen our non-apparel categories with the expansion of jewelry. We also expect to enhance the credit loyalty program to assist us to drive traffic to our outlets with a focus on increasing new accounts.

Now let me turn to Project Excellence. As you may recall, we began our journey with Project Excellence 2.5 years ago when we engaged a leading global business advisory firm, AlixPartners, to perform a comprehensive review of our entire business process and organizational structure to identify cost saving and business improvement strategies. During this initial phase, the company established certain goals, and our outside independent advisers provided recommendations based upon their detailed benchmarking of all expenses and headcount as compared to industry best practices. We successfully implemented these strategies, exceeding the reduction targets established by our outside advisers and exceeding our internal goal of $30 million in cost savings and expense reductions. As we discussed at the time, these savings were expected to assist us in improving gross margin and provide funding for investments in marketing and growth areas of our business such as eCommerce.

Based upon the initial success of Phase 1 of Project Excellence, we have continued these efforts, which, over the last year, have resulted in significant additional savings and benefits from several areas, including our new credit loyalty agreement, reductions in our store payroll expenses and reductions in store occupancy costs. At the same time, we have invested some of these savings as planned in growth areas of the business. As noted in the first quarter results, our gross margin has increased by over 300 basis points to the highest level since 2008, led in part [to] benefits from Project Excellence.

On an annualized basis, the ongoing efforts with Project Excellence have resulted in more than $50 million of savings, which is contributing to significant gross margin improvement but has also helped to fund investments in marketing to drive sales and fund incremental expenses in growth areas of the business such as eCommerce. As compared to pre-Project Excellence levels, our marketing expenses have increased from approximately 3.3% of sales in 2013 to 3.9% of sales in 2016 and is expected to be in the low 4% of sales in the future with continued investment in digital marketing and the expansion of our successful celebrity collaborations.

During the same period, our eCommerce business has grown dramatically from $88 million in 2013 to approximately $226 million in 2016, which has resulted in $30 million increase in eCommerce variable expenses over the same period. This increase reflects an $18.4 million increase in shipping costs, which is a component of cost of goods sold, and an $11.7 million increase in eCommerce fulfillment costs, which is a component of SG&A. Absent the Project Excellence savings, the significant increase in expenses would have resulted in lower operating results.

While Project Excellence has clearly been successful in improving gross margin and funding investments in marketing and eCommerce, it has also enabled us to improve our operational efficiencies. In this regard, we have seen an improvement in our speed to market by 7 weeks, which has enabled us to make decisions later in the process, thereby reducing risk. As we look to the future, we recently launched the next phase of Project Excellence work, which includes a comprehensive review of our pricing and promotional strategy and separately, a review of our logistics strategies, both of which are currently in process with the assistance of outside consulting resources with world-class expertise in these areas. We continue to target areas of opportunity and additional savings and are piloting a multi-store leader integration program that will improve SG&A savings and increase productivity across our field organization and improve our operating results.

In closing, despite an extremely challenging retail environment, we are very pleased to deliver sales and operating performance in line with our previously issued guidance. We remain encouraged by our strategic efforts across credit loyalty, omnichannel, real estate and Project Excellence and expect the actions we are taking to enable the second quarter and full year to represent growth toward our sales productivity and profitability goals.

With that, I'd like to turn the call over to Sheamus to review our first quarter results and outlook in greater detail.

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Sheamus G. Toal, New York & Company, Inc. - CFO and EVP [5]

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Thank you, John. Good afternoon, everyone. Net sales for the first quarter were $209.9 million as compared to $216 million for the first quarter of last year. Comparable store sales decreased 0.7%, reflecting double-digit comp growth in our eCommerce business, offset by deterioration in brick-and-mortar sales due to lower store count and decreases in comparable store sales. In the comparable store sales base, average dollar sales per transaction increased by 2.6%, while the number of transactions per average store decreased 3% largely driven by traffic declines.

Gross profit as a percentage of net sales increased by 300 basis points to 30.7%, representing the highest margin rate achieved in Q1 since 2008. This increase reflects the ongoing success of our business reengineering process or Project Excellence, which led to $5.7 million in benefits from the new private-label credit card agreement, improvements in our initial mark-up, or IMU, and reductions in various vendor expenses. The combined effect of these benefits from Project Excellence were partially offset with a slight increase in promotional activity, thereby resulting in a 200 basis point increase in product margins, which were partially offset by a 30 basis point increase in other cost of goods sold, largely related to increased shipping costs associated with our growing eCommerce business.

In addition to these improvements in product margin, we also continue to drive benefits in margin with our expense control efforts. As a reminder, the company's cost of sales include buying expenses as well as all store-related occupancy costs. As we have disclosed in the past, these buying and occupancy costs typically represent approximately 1/3 of our total cost of sales on an annualized basis. During the quarter, we improved the leverage of these buying and occupancy costs by 130 basis points despite our top line sales declines. This improvement was due to the continued success of our rent negotiation efforts.

Selling, general and administrative expenses were $68.3 million as compared to $65.3 million in the prior year. Excluding nonoperating charges of $1 million resulting from consulting expenses related to the continuation of our business process evaluation and to a lesser extent, legal costs associated with our trademark case, non-GAAP selling, general and administrative expenses in the first quarter were $67.2 million. As we have previously disclosed, the increase in selling, general and administrative expenses is partially due to the shift of certain credits and our planned investments in marketing and eCommerce to help drive sales. The main drivers of the $1.9 million increase in Q1 were as follows: first, the shift of $1 million in benefits from our new private-label credit card agreement to revenue as compared to the prior year period during which we reflected these marketing credits received as a reduction of marketing expense: second, investments of $1.2 million in marketing to drive double-digit increases in eCommerce sales, the expansion of our successful celebrity collaborations and investments in private-label credit card -- in the private-label credit card program to drive continued growth in this important segment of our customer base; third, an increase of $0.8 million in eCommerce expenses largely due to increases in fulfillment costs to support the double-digit percentage increase in eCommerce sales.

Finally, these increases were offset -- partially offset by a $1.3 million decrease in compensation expense resulting from reductions in store payroll and a significant decrease in stock compensation. GAAP operating loss was $3.9 million as compared to the prior year's first quarter GAAP operating loss of $5.4 million. On a non-GAAP basis, excluding $1.6 million of nonoperating charges in the current quarter, adjusted operating loss was $2.3 million, representing a $3.1 million improvement versus the prior year. There were no nonoperating charges during the prior year first quarter.

GAAP net loss for the first quarter of fiscal year 2017 was $4.2 million or a loss of $0.07 per diluted share. This compares to the prior year's GAAP net loss of $5.7 million or a loss of $0.09 per share. Excluding $1.6 million of nonoperating charges in the current year, the company's non-GAAP adjusted net loss was $2.7 million or a loss of $0.04 per diluted share.

Total quarter-end inventory decreased 6.4%, which is in line with our previous guidance and reflected lower levels of inventory on hand, partially offset by higher levels of inventory in transit and increased levels of eCommerce inventory.

Capital spending for the first quarter was $2.1 million as compared to $1.9 million in last year's first quarter, primarily reflecting continued investments in real estate and IT infrastructure. We ended the quarter with $75.3 million of cash on hand, representing approximately $1.19 per -- in cash per outstanding share and approximately $1 in cash per share net of debt. The company has no outstanding borrowings under its revolving credit facility.

During the first quarter, the company repurchased approximately 219,000 shares of its common stock and has repurchased a total of approximately 695,000 shares under its existing share repurchase program. As of the end of the first quarter, the company had approximately $3.5 million of total availability remaining under the company's share repurchase program. We expect to fund any future share repurchases using the company's available cash.

Now turning to our outlook for the second quarter of fiscal year 2017. Net sales and comparable store sales are expected to be flat to down in the low single-digit percentage range. Gross margin is expected to increase 250 to 300 basis points from the prior year's gross margin rate, reflecting continued benefits from Project Excellence through increased royalties, reductions in product costs and agent expenses as well as reductions in occupancy costs, partially offset by increased shipping costs associated with significant growth in the omnichannel business.

Selling, general and administrative expenses are expected to increase $3 million to $4 million as compared to the prior year's second quarter, reflecting the change in classification of royalties to revenue; investments in marketing, including digital marketing, celebrity collaborations and private-label credit card marketing, all of which are in an effort to drive sales; and due to increased eCommerce variable costs resulting from the expected increases in sales.

Operating results on a GAAP basis for the second quarter are expected to be approximately $1 million to $3 million in operating income as compared to operating income of $1.3 million in the prior year, reflecting anticipated diluted earnings per share in the range of $0.01 to $0.04.

The company continues to remain focused on improving EBITDA and for the second quarter, is expected to generate $7 million to $9 million of positive EBITDA.

Total inventory at the end of the second quarter is expected to decrease slightly as compared to the prior year second quarter.

The company continues to be very aggressive in the rationalization of its real estate portfolio, reducing occupancy costs while maintaining flexibility. In this regard, we currently have a high number of stores on short-term leases. Approximately 50% of our stores have lease expirations of less than 1 year, and more than 60% of our stores have lease expirations of less than 2 years. We believe this gives us tremendous flexibility as we move forward.

Capital expenditures for the second quarter are projected to be between $6 million and $8 million as compared to $7.4 million of capital expenditures in the first quarter of last year.

Depreciation expense for the second quarter is estimated at $6 million.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll go first to [Jack Donald], private investor.

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Unidentified Participant, [2]

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Thank you for the informative presentation and the optimistic guidance, and I do hope that does enhance our shareholder value. I've got a 4-part question. I'll direct to Sheamus, and then I'll listen to what you have to say. Your year ended balance sheet as of 01/31/17 showed an increase in other liabilities of some $35 million to almost $42 point million (sic) [$42.518 million]. My question is, what drove up the either reclassification or the accrual of that amount of money? Second, how much of your credit card agreement bonus in royalty payments are in revenue, both for the year ended statement of 01/31/17 and as of the first quarter ended April 30? That way I can do some comparative review of both the revenue and SG&A. Finally, for the fiscal period ending January 31, 2017, and the quarter ending April 30, were there any consulting or management fees paid to any of the significant shareholders? And finally, with the flexible real estate portfolio, which I'm very impressed with, do you anticipate more store closings than you had initially projected over the next 12 months?

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Sheamus G. Toal, New York & Company, Inc. - CFO and EVP [3]

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Okay. So first, in regards to the royalties, as we commented in our prepared remarks, the royalties this year were approximately $5.7 million and included within our sales. Last year, during the quarter, we did not have any royalties during the quarter. And we did have, under our old agreement, certain credits that were marketing credits that were recorded as reductions of marketing expense, and that totaled to approximately $1 million last year. So that's the royalty-related question. The question relating to any fees paid to our shareholders, I can tell you that no, there are no fees. We do have 1 significant shareholder. Irving Place Capital has been a significant holder for almost 15 years. During our entire relationship with them as a public company, we have never paid them any management fees at all. So there have been no fees paid to our shareholders. I think the third...

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John M. Worthington, New York & Company, Inc. - President and COO [4]

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The last question I think was on real estate.

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Sheamus G. Toal, New York & Company, Inc. - CFO and EVP [5]

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The last question on real estate. Certainly, our real estate portfolio and the flexibility that we've been able to negotiate into our portfolio gives us tremendous flexibility as we go forward. We believe it has enabled us to provide not only reductions of our store operating expenses through reductions of rent, but it also, by our strategy of moving to a short-term focused negotiation, it gives us a seat at the table as we continue to evolve as an omnichannel realtor -- retail company, and we continue to look at other avenues to grow our business. eCommerce, obviously, has been a successful one. We do believe that the flexibility in the real estate portfolio gives us a seat at the table with landlords as we have seen in the past continual traffic declines. As we've said in the past, we are fully committed to a thorough analysis of our real estate portfolio and committed to only operating stores that we can project are going to be profitable for us in the future. We've announced that this year, we expect to close some 30 to 35 stores. Over the last 5 years, we've closed over 150 stores. So we have taken aggressive action in terms of store closures. We do believe that the flexible base that we have today provides us the opportunity to either negotiate further reductions to some of these stores to ensure that they're profitable on a go-forward basis in the event that we do experience continual traffic declines. But we also are committed that if we're unsuccessful in those endeavors that we could close a more significant number of stores as we go forward.

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John M. Worthington, New York & Company, Inc. - President and COO [6]

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[Jack], this is John. I think Sheamus hit on it. I know we touched on it in the prepared remarks. But I think we have a very unique situation with 50% to 60% based on a year or 2 years, and it really has allowed us to move back and forth on our real estate and make decisions that are beneficial for the company and the bottom line. At the same time, I think we did something that a lot of other retailers did not do, which was open a few retail stores because they were in terrific centers, and we were able to move in with almost no capital, very little capital and also produce some pretty strong results if they play out that way, which the initial response is -- and the customer is really liking those locations. So we're feeling pretty good about those things. Again, we just want to be really flexible. We also did the outlet conversion a couple of years ago. We added more outlet conversions last year, so we just want to be flexible and make sure that we use our real estate the very best we possibly can to increase our contribution on the bottom line.

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Sheamus G. Toal, New York & Company, Inc. - CFO and EVP [7]

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And then I think, just to go back, I think you had one other question on the balance sheet in terms of the increases in accrued expenses or in other liabilities, I think it might have been. There are 2 big events that we had last year that contributed to increases in both long-term liabilities as well as accrued expenses. And that is the 2 significant events that were favorable in relation to our Project Excellence work. So first was the bonus that we received from our new private-label credit card agreement. That was a $40 million bonus that we set up -- that we received in cash. We set that up as, in essence, a deferred income item. We are recognizing that income over the 10-year life of the agreement. So we're recognizing approximately $4 million of revenue or benefit from that $40 million sign-on bonus as income each year. The second change that I think relates to also some changes that we had in relation to our Project Excellence work is, last year, we went through some shifts of our vendor base and shifted between some of our agents, and that resulted in a combination of things. One was a shift in terms between the vendors, so that might be driving some of the increase as well as rebates amongst those vendors. So those are the 2 major events driving a lot of that change.

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Unidentified Participant, [8]

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Excellent. I now understand where the $40 million went. You [tossed] it to deferred over the next 10 years.

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Sheamus G. Toal, New York & Company, Inc. - CFO and EVP [9]

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Correct.

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Unidentified Participant, [10]

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And Project Excellence, my compliments, looks like you're meeting your goals.

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Operator [11]

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We'll have our next question from Eric Landry, BML Capital.

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Eric Landry, [12]

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What was the -- I missed the comment you made about EBITDA. Could you repeat that, please?

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Sheamus G. Toal, New York & Company, Inc. - CFO and EVP [13]

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So we guided that EBITDA for the second quarter is expected to be $7 million to $9 million positive.

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Eric Landry, [14]

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And then on the 50% of your boxes that are under a 1 year -- with less than 1 year remaining on their leases, is there anything you could say as to the percentage of those boxes that are performing under the store average?

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Sheamus G. Toal, New York & Company, Inc. - CFO and EVP [15]

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I think largely, the 50% that are on short-term leases are stores where we've been successful in negotiating rent concessions and renegotiating deals in stores that came up for renewal. So I think, inherently in our process, as we go through, as I described earlier, when we have a store that comes up for renewal, if the store is losing money or even marginally profitable and we project that it could shift to a loss, given the sequential traffic declines that we've had over the last couple of years, we would look to renegotiate rent concessions or more favorable terms under those leases. And I think a lot of the stores that we have on the short-term deals are stores that would fall into that category. There are obviously some stores that are also coming off of natural expirations that, in some of those cases, could be loss stores. And in fact, there are a population of loss stores in there that we would expect, this year, to either negotiate rent concessions on those stores or were committed to closing them. So for example, as we commented, we expect 30 to 35 closures. Those are all coming obviously from that population of stores that are short term in nature, but we do not believe that the economics make sense for us to stay in those stores.

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Eric Landry, [16]

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Okay. So -- but basically overall, if I'm hearing this correctly, it sounds like it's a small portion of that cohort that is underperforming.

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Sheamus G. Toal, New York & Company, Inc. - CFO and EVP [17]

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It's certainly a small part. The stores that we renegotiate on a short-term basis, there are very few stores that lose money, if any, because the whole intent of our renegotiation is to make them profitable. Some of the stores that are coming off leases, so if you go back 6 or 8 years ago, we traditionally would negotiate 10-year leases, so we typically have, on a normal 10-year cycle, for us, 40 to 50 stores coming due in any given year on a normal approach. Within that 40 to 50 stores, that's where we would have some opportunity to renegotiate or we would close those stores.

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Eric Landry, [18]

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Okay. And lastly, and I think this is a very small percentage, but I'm wondering if any -- if there's any overlap with the type of shopper that would normally go to a Bebe or a BCBG, if there's any benefit from both of those closing.

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Gregory J. Scott, New York & Company, Inc. - CEO and Director [19]

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No. It's Greg. I would say from Bebe, BCBG, no. I think more importantly would be from limited stores closing where we would have more of an overlap with that customer for sure.

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Operator [20]

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(Operator Instructions) We'll go next to Dave Kanen with Kanen Wealth Management.

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David Kanen, [21]

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Can you take me through what the royalty was from the private-label credit card for the quarter? What I'm trying to figure out is how much of the gross margin benefit was from the royalty as opposed to true reductions in COGS and then also the benefit in rent expense allocation. Can you help me to understand that, please, Sheamus?

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Sheamus G. Toal, New York & Company, Inc. - CFO and EVP [22]

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Sure. So as we disclosed in our release and in our prepared remarks, we experienced approximately a 300 basis point increase in our gross margins, and I think, as we said, the highest levels that we've had since 2008. As we split that and we look at that, as we've talked in the past, we look at that in 2 components: the product margin and then the buying and occupancy components. As we look to the product margin, we've experienced a 200 basis point increase in the pure product margin. That was partially offset by about a 30 basis point deleveraging due to an increase in shipping costs due to the growth of the eCommerce business. So pure product-related margin, not affected by the occupancy cost of the store, we have a net increase of approximately 170 basis points and then the improvement in leverage of the buying and occupancy expenses through the renegotiations of rent, even on the lower sales provided us about 130 basis points improvement. So you have about 170 in what we categorize as product, about 130 in occupancy-related, totaling to the 300 basis point improvement. I think as we also commented on the call, and I think you asked about specifically, the royalty component for us falls within the product margin side, and that was a $5.7 million benefit for the quarter.

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David Kanen, [23]

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Okay. So what -- here's what I'm driving at. It was -- the royalty was $5.7 million, so if I take that away, there is very little if 0 -- and possibly 0 gain in gross profit that came from true product reductions or -- in COGS. So that being said -- and then also there's the benefit from the reduction in rent expense as it's allocated to COGS. So in reality, at this point, I would like to give you an A on Project Excellence, but I'm not going to be able to because the credit card deal was not part of Project Excellence, if I go back a few years ago. Can I move on to another issue, which is over -- the opportunity that you seemingly have with 50% of your leases maturing in the next year, okay? Can you give me an idea and quantify based on what the current market is versus the rate that you're paying right now, what the opportunity is as those leases mature and we renegotiate them, where we're going to be staying? Quantify for me what the approximate savings will be going forward.

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Sheamus G. Toal, New York & Company, Inc. - CFO and EVP [24]

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So as I mentioned earlier to the last question that was asked, as we look at the 50% that are short term in nature, they largely represent stores that we've negotiated rent concessions on and, as I described earlier, with the exception of the natural expirations. So the stores that we have already negotiated short-term renewals and rent concessions on, unless those stores dramatically change, we believe that we are already at fair market rents in those locations. So there's not a tremendous benefit in terms of ongoing. The opportunity, obviously, as I described to the last question, was in the stores that are coming off of natural expiration. That's the bigger opportunity.

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David Kanen, [25]

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What percent of the 50% of stores are "naturally" rolling off?

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Sheamus G. Toal, New York & Company, Inc. - CFO and EVP [26]

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So as I said during the last call, it would typically be about 45 to 50 stores would come off of expiration off of natural 10-year leases. So of our -- as we look at our entire real estate portfolio, roughly 10% of our leases would typically be due in a year, and the other 40% that we've referenced as the short-term renewals are largely represented by the renegotiated stores.

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Operator [27]

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And that does include our question-and-answer session. We'll turn the conference back over to Mr. Greg Scott for any additional or closing remarks.

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Gregory J. Scott, New York & Company, Inc. - CEO and Director [28]

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Thank you again for joining us. We look forward to speaking with you when we report our second quarter results in August. Thank you.

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Operator [29]

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That does conclude today's conference. Thank you for your participation. You may now disconnect.