Signet Jewelers Limited
Q1 2019 Earnings Call Transcript

Published: 6 Jun 2018

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the Signet Jewelers Limited First Quarter 2019 Results Conference Call. During the call, all participants will be in a listen-only mode. After the prepared comments, we will conduct a question-and-answer session. Instructions will be provided at that time. [Operator Instructions] Please note that this call is being recorded today, June 6, 2018 at 8

[Randi Abada:]

Good morning and welcome to our first quarter earnings conference call. On the call today are Signet’s CEO, Gina Drosos and CFO, Michele Santana. During today’s presentation, we will in places make certain forward-looking statements. Any statements that are not historical facts are subject to a number of risks and uncertainties and actual results may differ materially. We urge you to read the risk factors, cautionary language and other disclosures in our Annual Report on Form 10-K and quarterly reports on Form10-Q. Except as required by law, we undertake no obligation to revise or publicly update forward-looking statements in light of new information or future events. During the call, we will discuss certain non-GAAP financial measures. For a discussion of the non-GAAP financial measures as well as reconciliations of the non-GAAP financial measures to the most directly comparable GAAP measures, investors should review the press release we posted on our website. I will now turn the call over to Gina.

[Gina Drosos:]

Good morning, everyone and thank you for joining today’s call. Today, Michelle and I will discuss Signet’s first quarter which has a number of complexities impacting our results as well as update you on our early actions under our path to brilliance plan. We will then open the line for your questions. As discussed last quarter, our path to brilliance plan is designed to increase our cost competitiveness by driving out costs customers do not see or care about while enabling growth investments in our e-commerce and omni-channel capabilities, product and digital innovation, customer value and optimizing our real estate footprint. This plan which is focused on three pillars

[Michele Santana:]

Thank you, Gina and good morning everyone. I will start with the review of our first quarter results. After that, I will provide an update on the sale of our non-prime accounts receivable, the financial impacts of our transformation strategy, and lastly, discuss our updated guidance for fiscal 2019 and our outlook for the second quarter. For the first quarter, total sales were $1.5 billion, up 5.5% year-over-year on a total basis and 4.3% on a constant currency basis. Same-store sales growth was essentially flat to prior year, including an 85 basis point benefit from James Allen. James Allen generated a total of $53 million in revenues in the first quarter. Additional items, which did not impact same-store sales, but had a favorable impact on total revenue dollars, included the following three items. First, the adoption of the new revenue recognition accounting standard, which contributed $24.5 million in sales; second, a calendar shift of weeks in the quarter, which resulted in a Mother’s Day event in Q1 that was held in the second quarter of the prior year. Note that this shift has no impact on same-store sales as same-store sales calculations were adjusted to comparable weeks. The net effect of realigning the weeks following our 53rd week fiscal year including the Mother’s Day shift was $16 million. Third, a foreign exchange benefit of $16 million. Offsetting these favorable impacts were negative impact of store closures of $39 million. Within the North America segment, same-store sales momentum in our Zales and Piercing Pagoda banners continued with growth of 8.9% and 7.2% respectively. Kay same-store sales improved sequentially at down 1.9%, which included 430 basis points of benefit from a planned promotional gift appreciation event out of Q4 into Q1 to a line closer to Valentine’s Day. Jared same store sales were down 7.8%, including a negative impact of 180 basis points due also to a planned promotional move out of Q1 into the second quarter to a line closer to Mother’s Day. The gross margin rate was 32.7% in the quarter, down 230 basis point year-over-year. The gross margin rate decline was anticipated in our guidance and reflects certain factors that are more pronounced in the first quarter and will have less of an impact as we move through the balance of the year. The overall rate decline was driven by the following five items. First, our gross margin rate results reflect our previously announced decision to cease offering credit insurance midyear in fiscal 2018. The impact of the credit insurance of 70 basis points in the first quarter will be less of a headwind as we moved through the balance of fiscal 2019 due to the timing under which we phased out this program. Second, the impact of the addition of James Allen, which carries a lower gross margin rate negatively impacted the rate by 60 basis points and also becomes less impactful once we left the acquisition in September. Third, bad debt expense had a negative impact of 50 basis points on rate. Although only 2 months for bad debt expense were recorded in the first quarter as compared to a full quarter in the prior year, we saw higher level of expense, primarily attributed to a lag effect of conversion disruption that occurred in last November and December resulting in higher losses. Fourth, to a much lesser extent, the gross margin rate was impacted by negative 20 basis points due to calendar shifts of promotions in the first quarter and then lastly, a smaller unfavorable impact of 10 basis points related to adoption of the new revenue recognition standard. As always, a critical driver of leverage in our gross margin rate as we move ahead will be same-store sales performance. SG&A expense was 32.6% of sales in the quarter compared to 32.3% in the prior year quarter. Total SG&A dollars were up by $30 million over the prior year quarter, which includes R2Net/James Allen SG&A. The primary drivers of increased SG&A were $12 million in higher advertising, $24 million of credit outsourcing costs, which was partially offset by $12 million in savings related to in-house credit operations and $9 million in higher incentive compensation, which included a one-time $6 million cash award to non-managerial hourly team members and to a lesser extent foreign exchange. These increases were partially offset by transformation cost savings. Other operating income declined by $55 million as expected compared to prior year due primarily to a loss of interest income as a result of the sale of our prime accounts receivable portfolio that occurred in the third quarter of fiscal 2018. Our GAAP operating loss of $574 million included the following three items. First, we recorded a non-cash goodwill and intangible asset impairment pre-tax charge of $449 million in the quarter, which will have no impact on the company’s day-to-day operations or liquidity. The charge is primarily related to the write-down of goodwill and intangibles recognized as part of the Zale Corporation acquisition. This includes goodwill and indefinite live intangible assets as well as goodwill associated with the acquisition of Ultra Stores Inc. The decline in our market capitalization during the first quarter created a triggering event for impairment assessment purposes. As part of the assessment, it was determined that an increase in the discount rate applied in the valuation was required. This higher discount rate in conjunction with revised long-term projections associated with finalizing certain initial aspects of our path to brilliance plan in the first quarter resulted in lower than previously projected long-term future cash flows for these businesses, which required an adjustment to the goodwill in intangible asset balances. Second, as expected we recognized a loss of $143 million on non-prime receivables, which were reclassified to held-for-sale during the quarter in advance of the closing of the non-prime credit outsourcing transaction. And third, we incurred restructuring charges of $6.5 million related to severance and professional fees associated with our transformation plan. On a non-GAAP basis, excluding these items, operating income was $24 million or 1.6% of sales, which was ahead of our plan as a result better than expected same-store sales performance partially offset by higher than expected credit outsourcing costs. The total impact in Q1 related to credit outsourcing was $69 million compared to our previously guided estimate of $60 million. The higher than expected credit costs in the quarter were primarily driven by higher bad debt expense and higher prime tender cost due to a higher mix of customers electing deferred interest plans over revolving plans. We anticipate that this trend in mix will continue in the current year and therefore have updated our expectations related to these costs that I will discuss as part of our fiscal year 2019 guidance momentarily. And looking year-over-year, the decline in operating margin rate of 660 basis points was primarily driven by a 600 basis point decline attributable to the net combination of credit outsourcing and discontinuation of credit insurance. Additional drivers included higher advertising and incentive compensation somewhat offset by greater sales leverage and cost savings. GAAP EPS was a loss of $8.48, including $6.44 charge related to goodwill and intangible impairment, $2.05 impact related to the loss on the reclassification of non-prime receivables and $0.09 of restructuring charges associated with the transformation plan. Excluding these charges, non-GAAP EPS was $0.10 for the quarter. So, let me briefly touch on our credit participation rate in the first quarter. We are now reporting credit participation on the North America segment basis, which includes the legacy Zale division in addition to our legacy Sterling division. As we will be including these purchasing into this ratio, our credit participation rate will be referred to as the payment plan participation rate going forward. North America payment plan participation, inclusive of leasing in the first quarter, was 49.7% versus the prior year quarter of 53.4%. In closing out my first quarter comments, free cash flow was flat year-over-year with lower operating cash flow offset by lower capital spending as we reduced our store base. We repurchased $60 million in Signet shares during the first quarter at an average price of $39.62 as part of our previously announced $475 million expected share repurchase in fiscal 2019. Now, turning to an update on the sale of our non-prime receivable portfolio and the overall financial impact on our operating profit related to the outsourcing of both the prime and non-prime portfolio. We continue to expect the sale of the receivables to close in the second quarter and this timing is embedded in our fiscal 2019 guidance. We now expect $420 million to $435 million in proceeds at closing compared to $401 million to $435 million previously guided. This is driven by a higher expected receivable balance and we continue to expect $7 million of transaction costs. Net proceeds from the transaction will be used for share repurchases in fiscal 2019 subject to market conditions. As I shared on the fourth quarter call, we expected both a total pre-tax loss associated with the sale of the non-prime receivables of approximately $165 million to $170 million, of which $143 million was recognized in the first quarter with the remainder to be recognized in the second quarter. In terms of the expected financial impact of our credit outsourcing in totality, we have previously provided an estimate of the negative year-over-year impact on operating profit of $118 million to $133 million for the full fiscal 2019 year. We now expect full year fiscal 2019 operating profit to be unfavorably impacted year-over-year by $145 million to $155 million. This increase is driven by our first quarter results and higher fees on our prime credit portfolio for the balance of fiscal 2019 related to a higher mix of deferred interest plans. The year-over-year impact is expected to be $32 million to $35 million in the second quarter, $40 million to $45 million in the third quarter, and $4 million to $6 million in the fourth quarter. For fiscal 2020, we continue to expect year-over-year impact on operating income ranging from zero to a benefit of $5 million. The fiscal 2020 estimate incorporates as scheduled significant increase and revenue share profit percentage related to our prime outsourcing arrangement as well as a comparison against one quarter of bad debt expense in fiscal 2019. Our projected fiscal 2020 expense also includes an assumed discount rate for the non-prime arrangement. The fiscal 2020 estimate could change if the discount rate were to reset higher or lower under certain review provisions in the nonprime receivables agreement. So, with that, let me move to review financial considerations associated with our transformation plan. We continue to expect the path to brilliance plan to result in net cost savings of $200 million to $225 million over 3 years. In fiscal 2019, the transformation plan is expected to deliver net cost savings of $85 million to $100 million with further incremental cost reductions of $115 million to $125 million by the end of the 3-year program. As we have previously guided, the majority of cost savings in fiscal year ‘19 are expected to be realized in the fourth quarter. Total charges are anticipated to be $170 million to $190 million over the 3 years with $125 million to $135 million of charges in fiscal 2019. Cash charges are anticipated to be $105 million to $120 million, of which $60 million to $65 million are expected to be paid in fiscal 2019. Last week before moving on to guidance and capital allocation, our fiscal 2019 total revenue guidance is unchanged at $5.9 billion to $6.1 billion and we continue to expect same-store sales to be down low to mid single-digits. As a reminder, we had an extra week in fiscal 2018, which provided $84 million in revenue. We also closed stores in fiscal 2018 that had revenue of approximately $150 million. Both of these amounts should be renewed from 2018 base when working through your models. As I discussed earlier, we adopted the new revenue recognition standard this year, which is expected to result in approximately $100 million of revenue included in total sales dollar guidance with no impact on profit as this is simply a geography change on the P&L. The offsetting expense is 70% cost of goods sold and 30% SG&A. Our same-store sales guidance negative low to mid single-digit assumes a positive momentum we saw in our sales banner in the first quarter to continue and to be offset by negative sales growth in our Kay and Jared banners. Please note that our same-store sales, excludes revenue recognition changes. As our transformation initiatives and product innovation plans begin to take hold, we do anticipate gradual signs of improvement in same-store sales trends in the fourth quarter. So moving on to operating profit, fiscal 2019 operating profit will be negatively impacted by the following four items

[Operator:]

[Operator Instructions] And your first question comes from the line of Brian Tunick with RBC. Your line is open.

[Brian Tunick:]

Great, thanks. Good morning and nice to see some stabilization there. I was curious about the Kay business, maybe you could give us some underlying metrics maybe you could look at from an internal perspective I guess when we look externally at the shift in the promotion from Q4 in the credit outsourcing obviously lot of noise there. Can you maybe give us sort of what you think are the key drivers whether it was transactions or average ticket on the Kay business? And then maybe the second question just how you are looking at the overall jewelry industry trends or any category growth you can comment on for Q1? Thank you very much.

[Gina Drosos:]

Hi, Brian. Thanks for your questions. So I will start with the macro overview on Kay, turn it over to Michele for some details on the specific to U.S. and then I will turn back on the jewelry industry question. I think in a macro sense what we have seen on Kay in the quarter is a couple of things. One is improved operational excellence on our credit transition issues. We worked very hard to get a number of important initiatives in place in stores, including retraining of our entire store staff around our different credit offerings and some important IT interventions and that’s really helped us see some stabilization in that. The second is focus on innovation and bringing newness and merchandise to some of our core sub-brands. We saw some really nice growth in bridal behind Neil Lane as an example. We have brought in significantly newer better merchandise we feel in bridal and in fashion in both of those groups for Kay in the quarter. So in a macro sense what we are seeing on Kay I think is the very beginning of path to brilliance initiatives starting to come to life.

[Michele Santana:]

And also to add one additional comment to that, Brian, I know you mentioned the promotional shift that we talked about on the call. When you look at Kay’s comp for the quarter at down 1.9% and factoring that promotional that we attributed 430 basis points too, it still showed strong sequential improvement over our Q4 period and the stabilization that Gina had talked to on the call was evident driven by the initiatives. I think on your question regarding macro jewelry trends, we see the category as healthy. Gina’s data is hard to come by in this category, but it appears that we are still continuing to see growth in that 3% to 5% range that we have seen over the last number of years. So that’s great. The biggest opportunity in my point of view is for a company like Signet to begin over our path to brilliance transformation to lead category growth as we access more events. I gave the keynote address at J.C. Kay, which is our big industry conference last week. And I talked about the fact that instead of just focusing on Valentine’s Day and Mother’s Day and holiday, we have an opportunity to win more birthdays, more graduations, things like that throughout the year. And I think the data analytics that I talked about on the call how we are now able to target parents before graduation events, we are able to target gift-givers around birthdays and things like that, those will continue to allow us to have more personalized and targeted messaging going forward and hopefully be able to grow the category further.

[Brian Tunick:]

That’s great. Thanks and good luck.

[Gina Drosos:]

Thank you.

[Michele Santana:]

Thank you.

[Operator:]

Your next question comes from the line of Ike Boruchow with Wells Fargo. Your line is open.

[Ike Boruchow:]

Hi, good morning everyone. Thanks for taking my question. I have two questions. One the piggyback of Brian’s, so the Kay improvement much, much better, that’s good to see, but Jared actually got worse despite the promo shift in Q1. Can you maybe just help us understand how you are feeling about Jared relative to all the things you kind of just said about Kay?

[Gina Drosos:]

I think just on a high level in Jared, it is lagging, because it’s the place where we have been frankly the slowest getting some of our path to brilliance initiatives in place. As I talked about on previous calls, we were able to get some of our new organization structure and our new merchandising in place first on Zales and we are seeing some good green shoots behind having done that. We have moved to the new org structure on both Kay and Jared beginning in January of this year. And so we are beginning to see some I think improvements on accountability and decision-making on Kay and we just haven’t seen that quite yet on Jared as we are continuing to get those right structural improvements in place.

[Michele Santana:]

And I would just add when you look at the promo shift we had mentioned, there was a negative effect of 180 basis point, because we shifted an event out of the first quarter to a line closer to Mother’s Day. So if you take that into consideration, Jared was basically flat in the fourth quarter.

[Ike Boruchow:]

Got it. And then just a quick follow-up Michele thanks very much for all the detail on credit. So, it sounds like you are taking the credit headwind for the year up a little bit and I think you cited higher fees on prime based on credit mix of deferred interest plans. Can you just help, I am sorry – can you help me understand a little better what exactly happened that kind of changed your view versus 3 months ago?

[Michele Santana:]

Yes, sure. So you are right, we have increased the outsourcing cost $145 million to $155 million over our prior guidance of $118 million to $133 million. And really the primary difference as I said on the call was driven by higher fees on our prime portfolio related to a higher mix of customers that are electing deferred interest plans as compared to interest-bearing plans and then of course there is an incremental factor related to the higher bad debt expense that we saw in the first quarter of which post Q1 will no longer be recognized as bad debt expense. So as it relates to the mix that we saw, we are continuing to analyze the drivers, but what we wanted to do is just assume that this higher mix continues throughout the year in our guidance. We have put in place a very robust tracking system and working on optimizing the balance of our credit performance on making process and technology changes. And then the other thing I would add I guess I mentioned on the call that when you think about FY ‘20 benefit that I gave that does include a contractual step up in the revenue share profit percentage associated with defined outsourcing.

[Ike Boruchow:]

Got it. Very helpful. Thank you.

[Gina Drosos:]

Thank you.

[Operator:]

Your next question comes from the line of Simeon Siegel with Nomura Instinet. Your line is open.

[Simeon Siegel:]

Thanks. Hey, good morning everyone. Gina, nice sequential improvement across most of banners as they all clearly standout, any thoughts just a brand segmentation or the customer crossover between Zales and Kay at this point, has that changed your view or do you have an updated view on the size of your store fleet across those two concepts? And then just Michele, I already think a big part of the Zales margin opportunity if I recall correctly originally was narrowing that productivity gap between Zales and Kay, how are we there now and maybe any thoughts towards the Zales EBIT margin opportunity? Thank you.

[Gina Drosos:]

So I will talk to your first two questions, Simeon, brand positioning and size of the store fleet. So as I mentioned in the call, we have been good progress on completing our brand positioning where an agency reviews right now. We have done good fundamental consumer work to really understand who has been shopping in our different banners and how we can better position us to differentiate and create broader appeal across our portfolio. And one of the things that we are seeing is the appeal that Zale has to a more fashion-oriented consumer that kind of mindset crosses both bridal and what we typically call fashion jewelry, so someone who is really looking for more of the latest trends. Our Vera Wang brand, for example, does quite well in Zales as a result of targeting that customer. So I see continuing to be able to move Zales in that direction from a product and an experience standpoint as well as the brand positioning. I think on Kay as the category market leader, we fundamentally really serve customers who are looking to commemorate a strong relationship for an important moment gifting moments in particular. And so I see us being able to really talk to that on Kay and the love that’s expressed through special jewelry gifts. And so those will come to life as we rollout our brand positioning in the fall to be ready for a very strong holiday. In terms of how we think about the store fleet in that context, we continue to take a very analytical approach to our store portfolio. You probably saw in the press release we were down net 28 stores in the first quarter. We are very much on track for the roughly 200 store closures we talked about. We are repositioning off-mall and being very opportunistic in renegotiating our lease levels. And just getting into the highest opportunity markets and now that we are getting our brand positioning right, we can actually get our real estate portfolio to better align up against those brands. So, on Zales, for example that means qualifying a new off-mall store footprint that would be especially appealing to our new target audience.

[Michele Santana:]

And I will just add in terms of Simeon, your question on Zale and the margin productivity metrics, clearly that is an opportunity and even if you go back in the 10-K and look at what we filed and you will get the average sales per store between a Zale and a Kay, there still is a gap there. So, that’s been the focus and that is part of our path to brilliance with all the initiatives that Gina has spoken about, including the real estate strategy that we do believe that we will be able to increase the productivity at the Zales as we drive that higher top line and as we continue to focus on the cost savings initiatives, particularly in the gross margin side that should be flowing down to the margin and we should be able to get expansion related to that. But as everything, it’s going to be gradual and incremental and it’s not going to come overnight, but clearly, the opportunity is there.

[Simeon Siegel:]

Great. Thanks a lot guys. Best of luck for the year.

[Michele Santana:]

Thank you.

[Operator:]

Your next question comes from the line of Rick Patel with Needham & Company. Your line is open.

[Rick Patel:]

Thank you. Good morning, everyone. Curious to get your big picture thoughts on the use of promotions for the rest of the year, so excluding timing shifts I believe you increased your promotional cadence in the second quarter of last year as you start to be more competitive and go after market share. So as you begin to lap that I am curious if you are looking to increase promotions further year-over-year to remain competitive or if you are looking for it to be even and how that will play into the impact to gross margins?

[Michele Santana:]

Yes. So let me start with that. As you probably guess for competitive reasons we are not going to get too specific in terms of what our promotional strategy and margin implications are for the year. On the call, we noted that in Q1 we had about a 20 basis point negative impact on our total gross margin due to shifts of promotions into the first quarter and we had also mentioned on the call that in the past we have relied too heavily on the promotional spending lever, which at times can be confusing to customers. So part of the transformation plan that Gina has been speaking about is really looking at the promotions, the testing, learning new approaches how we market and target our customers. We are also doing a broad sale value service equation for customers to really understand the unique benefits that we can deliver to them and that will really help us decide how best to provide that value equation.

[Rick Patel:]

And just a quick clarification on gross margin, is it safe to assume that the factors that will result in higher gross margins in 2Q will presumably continue or even improve further as we go through the back half given expectations for sequential comp improvement and that would mean that gross margins would probably be up in the back half of the year?

[Michele Santana:]

Yes. So again, we don’t provide net facility gross margin guidance I know on the call we definitely wanted to get some color just given the moving parts. No longer recognizing bad debt we will for sure continue to have a favorable impact, but keep in mind we will start to comp some of that in the fourth quarter when we had not sold the prime portfolio at the end of Q3. So we will continue to expect to see that benefit in some positivity in the gross margin rate as we move forward. The other thing I would keep in mind is on the negative impact of it is the R2Net does have a lower gross margin rate, the discontinuation of credit insurance and a small impact for revenue recognition, but as I also noted on the call when you think about the credit insurance discontinuation in the R2Net, we will start to comp those by the end of third quarter.

[Rick Patel:]

Thank you very much.

[Michele Santana:]

Thank you.

[Operator:]

Your next question comes from the line of Oliver Chen with Cowen & Company. Your line is open.

[Jonna Kim:]

Hi, this is Jonna Kim on for Oliver today. Thank you for taking our questions. We are just curious about potential opportunities to improve in-store experiences and what can be done more to resonate with younger generation of customers? And just another question is could you just provide a little more detail as to key priorities of the new Chief Supply Chain Officer? Thank you so much.

[Gina Drosos:]

Sure. So in terms of in-store experiences, I think there are couple of things that are really exciting on the horizon for us. When I talked about pretty extensively in the call is how we connect the offline and online shopping experience. So for our customers we know that the jewelry buying journey, especially in bridal is an omni-channel journey, there can be 7 to 9 steps on the journey about half of which are online and about half of which are in store. So the more we can connect that seamlessly for the customer, the better that experience will be and things like the ability to view online inventory, the ability to order and ship to store so that you have a chance to see the product or maybe also see other comparable products, those are big improvements we think given the way that customer wants to be able to shop and what that typical journey is. Another digital innovation, I talked a bit about the program we have in Jared, but just to dimensionalize that further, we have bought beautiful retina screens that are now in about 70 Jareds and we have the capability to show customers over 100,000 diamonds that are in our inventory. We take proprietary photos of those diamonds more than 500 photos, so we can show them in 360 degrees at 40x magnification HD consumers have never seen a diamond in such a beautiful and transparent way and that’s allowing us to augment several 100 stores that might be in physical inventories by also showing them a digital inventory that really presents a best-in-class experience for them. Beyond that, we have been working on augmented reality. We have a couple of programs over the holidays that were very interesting and we now have ring try on, on our websites, which is very interesting use of augmented reality and we are working through our R2Net team, which has really been at the forefront of digital innovation to also bring some virtual reality into our stores as the testing. So, I think the in-store experience has a lot of opportunity to become very exciting for customers. In terms of Steve Lovejoy, our Chief Supply Chain Officer, we are thrilled to have him on board. He will be focused on driving agility and efficiency in our supply chain. I think that looks like speed of delivery to our stores and ability to better leverage our store inventory for e-commerce capability whether that’s shipping between stores more quickly to share inventory and he is also working very much on the cost savings aspect of path to brilliance that Michele and I both talked about.

[Jonna Kim:]

Thank you so much.

[Gina Drosos:]

Sure.

[Operator:]

And your next question comes from the line of Paul Lejuez with Citi. Your line is open.

[Paul Lejuez:]

Hi, guys. Can you talk about your Mother’s Day performance this quarter and how much your comp guidance assumes a similar trend to what you are already seeing this quarter versus something better or worse than what you have seen? And I think you mentioned transfer rates as you think about closing a store as you hope to see 30% transfer rates, correct me if I am wrong, but I am curious what you have seen thus far as you do close stores? Thanks.

[Gina Drosos:]

Thanks, Paul. So we don’t talk about results when we are in the quarter so about the trends, but I will say that our guidance for the second quarter includes the trends that we have been seeing so far. So that will be your first question. And then on transfer rates, 30% is about what we have seen on average over time. I am hopeful that that’s a conservative estimate, because we have also been working on creating some new programs that can help to increase sales transference. So for example, we have been giving more notice to our stores when we will be closing or repositioning a store which allows us to be able to help customers make the transition to another location. Also make sure that we can make the customer experience seamless in that context. And then we have some marketing programs that we have put in place that can help us over time on transference rates. So, these are all things that we are testing and learning about, but we are hoping that can help us to improve on that 30% over time.

[Paul Lejuez:]

And just to follow-up does that 30% include e-comm transfer as well or you are talking strictly stores?

[Gina Drosos:]

That’s strictly the physical transference rate and it doesn’t include all the important efforts that we are also doing for e-comm.

[Paul Lejuez:]

Great. Thanks and good luck.

[Gina Drosos:]

Thank you.

[Operator:]

We have no further questions at this time. Thank you, ladies and gentlemen. This concludes today’s call. You may disconnect.