Bob LaPenta - Treasurer Tom Kingsbury - Chairman and CEO Todd Weyhrich - CFO.

Paul Lejuez - Wells Fargo Advisors John Morris - BMO Capital Markets Brian Tunick - JPMorgan Stephen Grambling - Goldman Sachs Kimberly Greenberger - Morgan Stanley Tom Nikic - Sterne Agee John Kernan - Cowen & Company Dana Telsey - Telsey Advisory Group David Glick - Buckingham Research Group.

Greetings and welcome to the Burlington Stores, Inc. Second Quarter Fiscal Year 2014 Earnings Conference Call. At this time, all participants are in a listen only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.

It is now pleasure to introduce your host Bob LaPenta, Treasurer at Burling Stores, Inc. Thank you. You may begin..

Thank you, operator and good morning everyone. We appreciate everyone’s participation in today’s conference call to discuss Burlington’s second quarter fiscal 2014 operating results. Our presenters today are Tom Kingsbury, our Chairman and Chief Executive Officer and Todd Weyhrich, our Chief Financial Officer.

Tom will begin with a brief overview of the quarter’s financial results and update you on the progress we made towards the goals we outlined during our IPO. Todd will then review our financial results and future outlook in more detail before we open the call for questions.

Before I turn the call over to Tom, I would like to inform listeners that this call may not be transcribed, recorded or broadcast without our expressed permission. A replay of the call will be available for seven days.

Also remarks made on this call concerning future expectations, events, strategies, objectives, trends or projected financial results are forward-looking statements and are subject to certain risks and uncertainties.

Actual results or events may differ materially from those that are projected in such forward-looking statements, such risks and uncertainties include those that are described in the company’s S1 and in our other filings with the SEC all of which are expressly incorporated herein by reference. Now let me turn it over to Tom..

Thank you, Bob and good morning everyone. I am delighted to share with you another quarter of strong results that included significant progress toward our long-term goals. Once again, we performed at a very high level.

Our top and bottom lines exceeded our guidance and even more gratifying is that we surpassed the increased comp sale guidance we provided in mid-July. We believe our consistent strength demonstrates the improved execution, our off price model and the successful implementation of our growth strategies by our team.

We continued to believe we are in early stages of realizing the full benefits of our operating model with considerable runway ahead on our growth initiatives thus position us well for the second half of the year and the longer term. Let me share with you some specific highlights of the second quarter.

We reported strong sales momentum with total sales rising 8.3% comparable store sales rose 4.7% on top of a 7.8% increase in the second quarter last year. This represents our sixth consecutive quarter of positive comp sales. In addition, we have reported comp sale increases in 15 of the last 18 last quarters. Gross margin expanded.

We leveraged our SG&A and adjusted EBITDA grew $11.2 million or 24% in the second quarter last year. And we had a net loss per share of $0.01, a significant improvement from a loss per share of $0.19 last year. In addition, we are pleased to report the following accomplishments during and subsequent to quarter end.

Comparable store inventories decreased by 18% contributing to a 22% faster comparable store inventory turnover during the quarter.

We continued our store expansion and we entered the third quarter with a much more current inventory position and significant open to buy liquidity to take advantage of the great buying opportunities we see in the marketplace.

We increased our financial flexibility and reduced interest expense going forward to the refinancing of our debt that was completed on August 13th. Later, Todd will take you through the details of our financial performance and our 2014 full year and third quarter guidance.

Fueling our comp store sales increase were strong performances in key businesses that catered to our core female customers such as missy sportswear, dresses and suits, accessories and ladies shoes. In addition, our men’s, kids and athletic shoes -- men’s and home businesses outperformed the Company average.

We’re able to achieve these results with improved execution of our off-price model. This includes having substantial liquidity to take advantage of the great in-season buying opportunities, continuing to expand our vendor and brand base and improving our merchandise localization.

All regions delivered positive comps with the Northeast and West outperforming a reported comp in the Midwest and the Southeast below. The continued growth in the quality and quantity of our vendor base has helped fuel this strong performance. We continue to increase our better and best receipt unit penetration as well as our branded receipt units.

Traffic and AUR were essentially flat for the quarter. Our 4.7% comp was driven by higher transactions based on increased conversion rates and a higher average baskets based on more units per transaction.

We believe the increase in conversion rates was not only driven by better assortments but also by our continued improvement in the in-store experience.

We remain focused on simplified merchandizing, clear navigational signage, size fixtures, well organized selling floors, and a better alignment of our selling hours to customer traffic, which all translate into a better customer experience.

I’d like to provide an update on the few other initiatives that positively impacted all of our regions and categories. We continue to make progress in terms of tailoring our assortments across brands, lifestyles, sizes, and climate.

For example, we improved the timing of our seasonal product deliveries by region allowing us to get the right product to the right locations at the right time. This contributed to a significant reduction in spring seasonal product ownership at the end of the quarter.

We’re looking forward to the continued benefits localization will have on our results. Inventory management continues to be an important initiative in driving comp performance, and we continued to make great strides on this front during the quarter.

We are very pleased with the level and currency of our inventories at the end of the second quarter as our comparable store inventory level decreased 18% versus last year with our comparable store inventory turnover improving by 22%. In addition, the level of aged inventory decreased significantly versus last year.

All these metrics has helped us in improving the freshness on our selling floors, which we are focused on providing to our customers every day. At the end of the quarter, pack and hold inventory represented 28% of our total inventory versus 21% last year.

As we have stated before, we do not set targets for inventory levels for pack and hold product as our buys are opportunistic and depended on the availability of highly desirable branded product or key seasonal merchandise at strong values.

Our expanded retail store base also contributed to our growth in the quarter, delivering a $36 million increase in the sales from new and non-comparable stores. We remain pleased with the performance of our new stores.

We remain excited about our business prospects as we enter the second half of the year and expect the continued implementation of the three key priorities that we outlined during our IPO to enable us to maintain our positive performance in the remainder of fiscal 2014 and longer term.

First, we expect to drive comparable stores sales as we continue to benefit from our enhanced off-price model to deliver the most sought after brands, the right trends and compelling value every day.

As a release for the third quarter, we began in a great position with substantial liquidity, less aged goods and our plan to deliver more fresh products in each month of the third quarter. In addition, we had a higher penetration of pack and hold products as percent of total inventory.

In addition, we believe we’re starting to capitalize on the investments we’ve made in our home business. The home business outperformed the Company average in second quarter and is gaining traction. We have performed well on housewares and luggage for some time and now we’re starting to see nice progress in home decor and home textiles.

We look forward to providing more color on this opportunity on our future calls. From the store execution standpoint, we have made substantial progress. With that said, we continue to identify way to improve the customer experience.

We’re constantly conducting various tests within our stores ranging from faster movement of receipts of the selling floor to different fixture types. As soon as our testing platform indicates the positive return on investment, we look to roll out company wide as soon as possible.

We have a number of completed tests in roll-out mode that we believe will have a positive impact on comp store sales in the fall season. Second, our store expansion will continue. We’re excited about our approved deals for 2014 which span from coast to coast. We now expect to add 24 new stores this year and close two.

Due to the later than expected delivery of new store facilities, we have decided to move three stores we have been planning to open in the fourth quarter to spring of 2015. This raises our expected store expansion for 2015 to 28 new stores.

Our 2015 pipeline is shaping up well and we continue to believe that we have significant wide space for growth to reach 1,000 stores over the long term.

Third, we expect to enhance our operating margins as we continue to optimize our initial pricing and markdowns also continue to tailor our assortments by store remain vigilant with inventory management disciplines. Operating margins are also expected to benefit as we grow our top line and leverage fixed cost.

And now I’d like to turn the call over to Todd to review our financials and outlook in more detail..

Thanks Tom and good morning everyone. Thank you for joining us today. We’re extremely pleased with our second quarter performance.

We surpassed our top and bottom line guidance and saw progress across our key operating metrics including strong comp store sales, expansion in gross margin, leverage in operating expenses and lower depreciation, amortization and interest expenses. We are obviously very happy with the performance for the quarter and for the first half of the year.

I will begin with a review of our operating results. For the second quarter, as Tom indicated, total sales rose 8.3% and included a comparable store sales increase of 4.7% following a very strong 7.8% comparable store sales gain in the second quarter last year.

Comparable store sales trended positively throughout the quarter and ended strong with July comps ahead of May and June. Gross margin was 38.2% representing an increase of 50 basis points versus the second quarter last year.

This improvement more than offset a 40 basis points increase in product sourcing cost which included cost to process goods through our supply chain and buying cost, both of which are reported in selling, general and administrative expenses.

The continued improvements and the freshness of our inventory and localization efforts has helped to drive our strong sales results and deliver good margin expansion year-to-date, very much in line with our plans.

As a percentage of net sales, selling, general and administrative expenses is exclusive of advisory fees and product sourcing costs decreased 70 basis points to 29%. Expense leveraging was achieved primarily in store payroll and other store related expenses as well as from other SG&A improvements.

The improvement in leverage included a 20 basis point benefit from a shift in timing of expenses to the third quarter. This was offset by a 30 basis point impact of an unanticipated increase in legal reserves.

Our adjusted EBITDA increased by 23.8% or $11.2 million to $58.1 million representing a 70 basis point increase in rate for the quarter, depreciation and amortization expense exclusive of net favorable lease amortization decreased by $0.4 million to $34 million.

Interest expense decreased by $7.8 million to $25.5 million driven by principle payments made on our Holdco Notes and term loan as well as interest savings on the company’s term loan as a result of the May 2013 refinancing. Our adjusted income tax benefit was $0.6 million compared to a benefit of $7.2 million last year.

The adjusted effective tax rate was 39.9% versus 34.5% last year. The increase in the tax rate is the result of certain tax credits not legislatively approved and available on the current year and other one-time discrete items recorded in the prior year.

Combined these resulted in an adjusted net loss of $0.9 million versus the net loss of $13.6 million last year. Adjusted net loss per share was $0.01 versus the loss of $0.19 last year and our weighted average shares outstanding was 74 million shares versus 72.9 million pro forma shares last year.

For the first half of fiscal 2014, total sales rose 7.1% and included a comparable store sales increase of 3.6% following a 5.5% comparable store sales gain in the spring last year. Gross margin was 38.1% representing an increase of 60 basis points versus the first half last year.

This improvement more than offset a 30 basis point increase in product sourcing cost. As a percentage of net sales, selling, general and administrative expenses exclusive of advisory fees and product sourcing costs decreased 40 basis points to 27.9%.

Expense leverage was achieved primarily in store payroll and other store related expenses as well as from other SG&A improvements. Additionally, as I mentioned before, a small portion of the leverage gain versus our previous expectations is due to timing of expenses between the second and third quarter.

Adjusted EBITDA increased by 18.9% or $23.9 million to $150.4 million, representing a 70 basis points increase in rate for the spring season. Depreciation and amortization expense exclusive of net favorable lease amortization decreased by $0.9 million to $68.7 million.

Interest expense decreased $15.5 million to $52.1 million, driven by principal payments over the past 12 months and the May ’13 refinancing I mentioned earlier. The adjusted effective tax rate was 40.3% versus 29.6% last year.

The increase in the tax rate is a result of certain credits not legislatively approved and available in the current year and other one-time discrete items recorded in the prior year. Combined, this resulted in an adjusted net income of $17.7 million versus an adjusted net loss of $7.4 million last year.

Diluted adjusted net earnings per share were $0.23 versus a loss of $0.10 last year. And our diluted shares outstanding were 75.6 million shares versus pro forma basic shares outstanding of 72.6 million last year. Turning to our balance sheet, Merchandise Inventories were $711.5 million versus $748.3 million at August 3, 2013.

The decrease was primarily driven by a comparable store inventory decline of 18% as part of our ongoing initiative to reduce inventory levels, increase inventory turnover and ultimately drive incremental sales through continually improving product offerings.

This decrease was partially offset by a $41 million increase in pack and hold purchases and inventory related to the opening of 20 net new stores since August 3, 2013.

Accounts payable increased $8.9 million to $564.5 million versus the end of the second quarter of last year, representing 76 days of accounts payable outstanding reflective of our normal payment terms for inventory.

Our year-to-date cash flow provided from operations was $52 million, which was offset by $94 million in cash spent for capital expenditures and $62 million in cash used in financing activities, primarily debt repayments. We expect 2014 net capital expenditures of approximately $180 million, net of $40 million of landlord allowances.

This includes approximately $70 million for store expenditures and approximately $30 million to support continued distribution facility enhancements.

We continue to expect to use the remaining capital to support information technology and other initiatives including approximately $40 million related to the construction of our new corporate headquarters. We will continue to utilize free cash flow to pay down debt when available. Our debt totaled $1.373 billion at quarter end.

Following quarter end on August 13, we refinanced and replaced our existing term loan facility with a $1.2 billion term loan priced at LIBOR subject to a 1% LIBOR floor plus 3.25%.

The proceeds from this new loan along with a $217 million draw on our ABL were used to redeem all of our higher cost debt, which included $450 million of 10% notes and approximately of $70 million of 9% notes. We also repaid our previous $830 million term loan, which was at the same rate at the new facility.

The new term loan has a seven-year maturity with a minimal 1% annual amortization paid quarterly. We also renewed our 600 million ABL facility for an additional five years taking advantage of current market pricing.

The new capital structure is expected to reduce interest expense for the second half of 2014 by $18 million benefitting EPS by approximately $0.15 and by an estimated $40 million for fiscal 2015 benefitting EPS by approximately $0.31. The new debt also has no prepayment penalties and fewer covenant restrictions than our previous capital structure.

Concurrent with the new debt structure the company has also put in place the interest rate caps to hedge against interest increases in the future for a majority of the debt. As Tom mentioned earlier, three stores that have been planned for the fourth quarter of fiscal year ’14 will now open in the spring of fiscal year ’15.

This will bring our expected fiscal year ’15 new store openings to 28 for the full year and our expected spring openings to five to eight new stores. Turning to our guidance.

We are raising our fiscal year 2014 outlook based on better than expected sales and net income performance during the first half of the year and our expectations for the balance of the year including a reduction of interest expense associated with the debt refinancing.

For the third quarter of fiscal 2014, ending November 1st this year, we expect net sales to increase in the range of 6.4% to 7.4%; comparable stores sales to increase in the range of 3% to 4%; interest expense to approximate $17 million reflecting the debt refinancing; adjusted net income per diluted share in the range of $0.09 to $0.12 on 75.8 million diluted shares outstanding.

This compares to an adjusted loss per pro forma basic share of $0.05 in the third quarter of fiscal 2013 and we also expect to open 17 new stores as we close one existing store resulting in a total store count of 539 at the end of the third quarter.

For the full fiscal year 2014 ending January of 2015, we currently expect total sales to increase in a range of 6.5% to 7.2% versus our previous expectation of an increase in the range of 5.8% to 6.8%, and comparable store sales for the full year of approximately 3% at the high-end of our previous guidance.

These estimates include a comparable store sales increase of 2% to 3% in the fourth quarter consistent with our previous guidance. The fourth quarter last year benefited from colder weather during most of the quarter which was a key contributor to performance in colds [ph] and in other cold weather related items.

We also experienced disruptions from the unusually stormy winter weather that affected many parts of the country last year. The expectation is for more normalized weather this winter. Our full year gross margin rate net of product related cost, remain unchanged from our earlier expectations.

Adjusted EBITDA margin expansion for the full year is expected to be in the range of 20 to 30 basis points versus our previous expectation for 10 to 20 basis points. This reflects our current expectation for stronger sales, which improves SG&A leverage partially offset by our continued expectation for occupancy deleverage.

We expect interest expense of approximately $85 million. A tax rate of 40% and fully diluted adjusted net income in the range of $1.52 to $1.58 per share utilizing a fully diluted share count of 75.7 million shares, this compares to our previous expectations for fully diluted adjusted net income in the range of $0.25 to $0.35 per share.

We also expect to have opened 24 new stores and closed 2 existing stores resulting in a total store count of 543 at the end of the year. In summary, with the second quarter, we’ve recorded six consecutive periods of sales and profit growth which is the direct result of the improved execution of our off-price model.

We continue to believe we’re in the early stages of maximizing the power of our dynamic operating platform and believe our strategies have us positioned to continue our success in the second half of the year and the longer term. I will now turn the call back to Tom..

Thanks, Todd. In total, we’re very proud for second quarter and first half results, and as our guidance suggest, we continue to expect fiscal 2014 to represent a strong year and another period of significant accomplishments towards our long-term goal.

We remain confident in our ability to continue our positive momentum in future years given our dynamic operating model, our disciplined execution in the significant runway ahead on our growth strategies. Operator, we’re now ready for questions..

At this time, we’ll be conducting a question-and-answer session. We ask that you please limit yourself to one question with one follow then return to the queue for any additional questions. (Operator Instructions) Our first question is coming from the line of Paul Lejuez with Wells Fargo Advisors. Please proceed with your question..

What percentage of your assortment would you consider to be better and best in terms of brands and where do you see that going longer term? And then I’m also just curious about your comp performance at some of your older store classes versus the younger classes of stores where are you really seeing these comp being driven which classes are outperforming? Thanks..

This is Tom. I’ll take the first question then I’ll let Todd address the second question. As far as better and best, we just continue to grow that as a percent to our total. We haven’t really stated exactly the level, but we’re very pleased with the progress that we’ve made overall.

We really feel that part of our formula for growth in the future and the good news is we haven’t had any real resistance obviously from the customer based on our comp performance as we added more better and best products.

So, we really feel it’s an important part of the formula we’re going to continue to push hard to deliver more better and best products on our selling floor..

This is Todd. I’ll take the question on comp stores sales. It has been the case for a good while now, what is the key indicator of where we have strong comps where we execute well. We did have positive comps across all of our major territories for the quarter, so the consistency of performance continues to get better across the other store base.

But when we look at which stores performed better, it really doesn’t have to do with vintage. It doesn’t have to do with geography. It really has to do with execution within the four walls. The good news is as a full group, the entire group of stores is performing better. So there is really not a correlation with age or size..

Got you and could you talk about any categories that maybe underperformed your expectations?.

I’ll take this one. Really the only category that we were unhappy with and it’s really continuation from the first quarters are Baby Depot business, right now it’s underperforming, underperforming the Company.

We’re working really hard to get that turn around and we really feel that hopefully in the fourth quarter and beyond we’ll have a strategy in place that will correct that efficiency..

Thank you. Our next question is coming from the line if John Morris with BMO Capital Markets. Please proceed with your question..

First, really gross margin and SG&A questions.

First of all Todd maybe could you just gave us a little bit more color and remind us little bit more about the increase coming from product sourcing what your initiatives are there? How you expect that to pan out in the back half in terms of the increases that you’ve been seeing? I know it’s not a new thing.

I just want to get a little bit more color behind it and understand kind of where the payoff is. And then on the SG&A side, with the increase that you saw in SG&A is that related to expansion of the buying team? And if so when we’d begin to anniversary some of that and what is the outlook there? Thanks..

As it relates to product sourcing cost so you’re really from a obviously the sales standpoint we’re very pleased with how it’s shaping up but how the expense structure is trending is very much in line with how we expect it for the year.

The product sourcing costs are up but it is absolutely in support of the buying model as our buyers are buying more goods opportunistically and we’re taking advantage of the great deals that are in market some of those goods we have to touch a little bit more.

The good thing is it’s been a lot of quarters in a row now where the merchant team has done a very good job of understanding what the right pricing to the customer is out of the gate and making sure that the price we buy the goods at is covering the product sourcing cost that we’re going to have to flow those goods through.

So our margin, our gross margin, and our margin for our after product sourcing cost for the full year and so far through the year is very, very much in line with our initial plans. So, as I indicated in the initial comments, we’re basically right on where we thought we’re going to be for gross margin gross product sourcing cost.

That’s working the way we expected to and we’ll continue to flex our infrastructure to support what the merchants are executing.

On the SG&A front, that’s really coming out as we expected as well the only thing that was unexpected, as we indicated in the script, is we did have a legal reserve increase that we were not anticipating but we will be able to cover that for the whole year and we were able to for the first half.

So the expense structure is really shaping up the way we thought the only thing that’s different is our sales are a little better so far during the year and that’s giving us a little bit of leverage for the full year versus how we originally expected it to play out..

Thank you. The next question is coming from the line of Brian Tunick with JPMorgan. Please proceed with your question..

I guess to questions maybe from a traffic perspective, we know it’s not easy out there you’re clearly out-comping your peers. But between your new marketing campaign, testing, new brands, just a lot of things you’ve made changes in the last few years.

What do you think is holding back traffic to your stores? And then the second question really on inventory turns and again versus your peers, I think you’ve mentioned before you carry 10,000 to 12,000 coats a year on the selling floor.

But just wondering where are you in making the selling floor more productive, what’s happening to women’s sportswear anything you could share with us of how you’re thinking about the coat inventory going forward. Thanks very much..

This is Tom. I’ll talk about the traffic. Our traffic obviously as I stated was flat for the quarter. We’re working hard in terms of delivering improved assortment from the selling floor we really feel that that’s going to pay dividends in the future overall. We’ve worked hard.

Our marketing team is working really, really diligently on becoming more and more efficient in terms of how we deliver the message to the customers. So we’re able to in the fall and holiday season to be able to deliver more GRPs to our customers than we have previously really especially in network TV. So those are the things that we’re doing.

We really feel that our new marketing campaign that we’re working on right now, the stall positing and customer testimonials is resonating really well with our consumers. So we feel that that’s going to help us overall. So we’ve increased our circulation, our cadence of direct channel communications, both in email and direct mail.

So we worked on all those. But as we continue to execute the model and continue to deliver value, we really feel confident that the traffic will improve and as other retailers have indicated on other calls they’ve had a decline in traffic. So but one thing we’re really encouraged by is the fact that our conversion is very good in the stores.

Our customer likes when they get in the store, they like what they’re seeing. And obviously they’re buying more product overall. As far as turn goes, I mean we finished with 18% less inventory on a comp store basis than last year. Our turn was 22% faster than last year inventory turns.

We feel very good about that but we have a lot of opportunity to continue to improve our comp store inventory turns. We’ve made significant progress over the last five years and we’ve really worked on every aspect mostly on reducing the amount of aged goods that we have in our selling floor especially in the coat area.

We’ve done, our merchant team has done an outstanding job of reducing the amount of inventories in coat that we’ve carried into the spring season in a significantly less than we have previously and we are able to utilize that square footage in the store to be more productive but also we have less inventory tied up in that kind of product.

So I feel we’ve made a lot of progress, we need to continue to work harder on increasing our turns, it’s going to be an ongoing long-term strategy for us to continue to increase our terms and that comes from product selection, it comes from improved weekly sell throughs, sale activities as I mentioned.

So it’s an ongoing strategy for us and we really feel that even though we’ve made a lot of progress, we feel that we can continue to make even more. .

And if I could one housekeeping question for Todd, just the average size of the new store leases that you guys are signing for next year?.

I can address that as you know, I mean in ’13, the average was around 60,000 square feet and ’14 is around 63,000 square feet and the ones we’ve signed so far for 2015 is around 59,000 square feet. So we continue to look to reduce the size of our box. .

Thank you our next question comes from the line of Stephen Grambling with Goldman Sachs. Please proceed with your question..

Hey, good morning and thanks for taking my questions and both are really just following up on actually Brian’s line of thinking on traffic here.

The first as I look at the quarter -- as you look at the quarter, the traffic turned positive when you saw the comps accelerate?.

As we went through the quarter our comps -- as Todd articulated, our comps did improve overall and we had a very nice, we had a very nice July performance and it just built as we were finishing up on July. We really don’t give traffic by month to be honest with you but we are pleased with our comp performance as we completed the second quarter. .

And then as you think about longer term and you look at driving traffic, can you just talk about some of maybe even digital efforts and whether that’s mobile or online and are you thinking about any opportunity for improving in omni-channel experience with something buy in line and pickup in stores that even something that from an infrastructure standpoint is possible? Thank you..

Digital marketing and social media have become an important part of how we go to market, but that said it’s still a small piece of our media spend in general. But long term we want to continue to evolve our media mix to include more digital. We want to be more relevant with the customer.

But we have seen a measuring and trying to improve our marketing overall. Our e-commerce site, that obviously helps us from a digital perspective. We’ve seen nice growth in e-commerce over the years now and we see that continuing to grow.

Will it be a high percent of total? Not sure, but we still see a lot, we still see a lot of growth overall in terms of our e-commerce business. So we are pleased with what’s happening there right now and that will also play into the -- obviously the social media and et cetera..

Our next question is coming from the line of Kimberly Greenberger with Morgan Stanley. Please proceed with your question..

Really terrific performance here in the second quarter, I will add my congratulations. .

Thank you..

I wanted to ask Tom about the inventory management, obviously you’ve been working on improving in store inventory turns now for five years.

Is this something where we could actually see progress every year for the next one, two, three, four years or do you think you are getting to the point with the significant progress being made here in 2014 that it will largely be done by the end of the year this year?.

I think we are in the early innings of improving our inventory turns relative to what some of the other people in our channel are doing currently.

I think that we are going to continue to have improvement, we are being very disciplined in terms of our receipt management, our inventory management and I really feel that we can continue to improve the turn and reduce our comp store inventories for the foreseeable future and we just have a lot of catching up to do.

So we really feel that there in the future we’re going to continue to improve. .

Terrific.

Todd, a 50 basis point improvement in gross margin was that entirely merchandise margin driven?.

Yes, the increase is really coming from the initial margin and net of markdown.

So as I indicated before, we’ve continued to improve these last many quarters now in terms of striking that write downs when our buyers are out with the vendors of understanding what a product is likely to sell out and negotiating to the right initial margin and as we’ve improved what we buy and how we allocate it, how we localize it, we’ve been selling more through at full rate and so that’s expanded our margins for merchandizing.

And as we bought more opportunistically, our supply chain cost and product sourcing costs have gone up a little bit. But as we’ve indicated all along we’ve more than covered that and the net rate of those is coming in right where we wanted it to. We think we’re striking a very good balance here to drive rate value on the selling floor..

Okay, terrific.

My last question is you’ve got 17 stores opening here in the third quarter, how many have opened so far and how’s that process going?.

The stores are weighted towards the end of the quarter. We’re happy with where we’re with those stores at this point. The details of when we open them we really haven’t shared..

Our next question is coming from the line of Ike Boruchow with Sterne Agee. Please proceed with your question..

Hi, guys. This is actually Tom Nikic on Ike. Tom, take my question. Congrats on the great quarter.

I just want to ask about the guidance for the back half, you’re calling for sequential deceleration in both Q3 and Q4 on the comps and if my math is correct to hit the EBITDA guidance you need margins flat to slightly down in the back half, so I am just wondering if you guys are just being conservative in a relatively challenging retail environment or if there is something in particular the back half that we should be thinking about? And if there is anything other than that, yes, thank you..

This is Tom. I’ll take the comp question. We looked at the third quarter as plus three to plus four, when you look at our spring season, we picked up 3.6%. So we really felt that was right in the middle of it.

We did have a very strong second quarter on top of a very strong second quarter, but historically we’ve been underdeveloped in the second quarter, so we’re catching up their overall. But we feel that three to four in the third quarter is a good number relative to our total performance in the first half of the year.

And as far as the fourth quarter goes, fundamentally we feel that we’re offering very-very strongly really fundamentally there really isn’t any difference. We just feel that it’s better to be cautious this far out from the fourth quarter. So we felt 2% to 3% was the right number overall.

We know it’s going to be the highly promotional quarter as it always has been, but we really feel that fundamentally we’ve done a pretty good job of offsetting any of those promotion by delivering more and more value. We continue to enhance our gifting strategies for the fourth quarter, so that should help us.

But we just feel that it’s prudent to be this far out to have 2% to 3% comp. But fundamentally we feel we’re in good shape..

This is Todd. I’ll just add to that is as Tom indicated, we don’t think anything is fundamentally different from our previous thinking. We did have a small amount of expenses shift from Q1 to Q3 and with the somewhat more conservative numbers that were we’re utilizing in the guidance for the Q4.

We do have a little bit of occupancy deleveraging in the fourth quarter as we had called out in previous guidance.

So the way we’re thinking about it is the year is absolutely shaping up very much in line with how we were originally thinking about it; except our flow through to adjusted EBITDA, we expect to be a little bit higher as our sales so far this year has outpaced our original plan..

Thank you. Our next question is coming from the line of John Kernan with Cowen & Company. Please proceed with the question..

Can you just give us an update on the West Coast buying office? Any update on some of the products you’re seeing come out their? And then I hate to ask a buying model question but looks your interest expense implied into expense guidance for the fourth quarter is around $15 million, is that the run rate we should expect on a quarterly basis into the next year after the refinancing? Thank you..

Okay, I’ll take the first. Yes, we feel good about what we’ve done in the West Coast so far this year. We were able to get access to a lot of products that we wouldn’t have got access to previous. But we’re still in the early stages and we opened the West Coast office in October of last year. We’re building out the team. We feel very good about the team.

It’s a small team in general. As always we want to be very plan full in term of how we expand that office up there. But we’re getting good access to lot of good products in women and ladies sportswear and junior sportswear, et cetera. Yes, but we’re really in the beginning stages and we really feel most of the benefit is going to come in future years..

John, this is Bob LaPenta. I’ll take the question on interest expense for the back half of the year. So the guidance we gave for the interest pay due to the refinancing for the back half of the year. The refinancing took place on August 13th, so you don’t get a full third quarter benefit.

So when you look at what third quarter sale is going to be its a little less than what you’re going to expect in fourth quarter.

So you can’t really straight line it, but if you sort of back into taking first half of year actual expense and then the guidance we gave for Q3, it’d get you to fourth quarter number that is going to be pretty consistent with the one rate for 2015..

Our next question is coming from the line of Dana Telsey with Telsey Advisory Group. Please proceed with your questions..

Good morning everyone and congratulations on a terrific quarter.

Can you talk a little bit about new store productivity and what you’re seeing out of some of the new stores and what your expectations are for them to ramp compared to other stores that you’ve had in the past? And lastly, as you think about the SG&A buckets any change to store labor and the processes that are going into store labor?.

On store productivity as Tom indicated before we have continued over these last couple of years to look at a broader range of square footage that we can operate or model in and given the inventory management we continue to look at smaller stores those that we’re looking that we’ve been underwriting and been looking at most of them are in the 50,000 to 60,000 square foot range and the average is coming down again as Tom indicated.

Our hurdles for productivity at the top line and bottom line really haven’t changed over the last couple of years. Our performance versus the underwriting model has continued to get better we moved along in time. Undoubtedly, we’re happy with our underwriting process we’re happy with the new stores that we’ve been getting.

And the good thing is with our continued strong performance we have one more land lords that want us in their property. So we’re excited about a lot of the stores that are already underwritten for this next year and those that we expect will come in for the rest of the year. So we’re happy with that productivity. The hurdles haven’t changed.

The performance has continued to come in closer to the underwriting model. As it relates to how they ramp still very consistent with what we said in the past. Our new stores mature very quickly and are cash flow positive in the first year. So we’re happy with our real estate..

And then just on labor anything changes on the labor side?.

Yes. So we did get good leverage on store labor there are number of initiatives that the stores team has put in place over the last number of years a lot of it has to do with simplifying what we do in the stores and make the shopping experience easier and simpler for our customers.

And by simplifying the way we display goods and the way to flow goods it’s resulted in some good leverage on store payroll. So the benefits that we’ve seen in the first half of the year we expect to see some of that in the back half and that’s really embedded in the guidance that we’ve given..

Our next question is coming from the line of David Glick with Buckingham Research. Please proceed with your question..

Thank you and congratulations for team on strong quarter. I have a question about the free cash flow is generating ability of the company. And if you think about some of your initiatives and how they’re shaping up CapEx appears like it’s coming down once you get past the headquarters’ investment this year.

You’re clearly generating some working capital benefits from reducing inventory and your net income is growing very nicely through reduction interest expense and improved operating metrics.

I was wondering if you could give us an updated thought on how you’re thinking about the free cash flow generation ability of the company whether you have any new thoughts on what kind of target leverage you’re looking for and at what point and what leverage would you have to be at to start thinking about returning cash to shareholders through either dividends or share repurchases?.

So I’ll take that David. So just I think the high level all the comments that you made are right directionally all the things that we’re doing we think long term are going to improve free cash flow. And we’ve said, for the next foreseeable future, our priority with free cash flow is going to be a pay down debt.

It will be something we evaluate every year. So haven’t set any targets for leverage and we’ll look every year at what we think the best opportunity to add shareholder value will be. And as we make those decisions we’ll share them with you..

And then just a follow up question for Tom I mean one of the unique things about the company is the large store size and as I think about and obviously that gives you the opportunity to distort certain categories.

But if you think about the objective of reducing in store inventory and you layer that into a kind of a larger box than the industry average.

Does that create some merchandising challenges for you guys and how do you deal with kind of those potentially conflicting objectives and alternatively are there some categories that you couldn’t introduce to take advantage of some extra space that you may be generating or some categories that you can significantly expand?.

First of all, we really feel that we’re comfortable with 50,000 to 60,000 square foot box now.

And as I’ve explained a few times there are certain categories that we distort that need extra square footage versus our competition Baby depot requires 8,000 to 10,000 square feet coats needs about 8,000 to 10,000 square feet, and tailored clothing 8,000 to 10,000 square feet.

So apples-to-apples we think we’re in pretty good shape when we get the 50,000 to 60,000 square feet overall. As far as adding another categories to our store we’re always looking at things that we want to add to our assortments overall. Nothing really at this point in time we report that’s really extremely meaningful overall.

We just kind of operate stores with less inventory and make the experience better for the customer, easy to navigate.

Even though we have a big box, as we reduce our inventory, we can continue to open up the store a little bit and just make it easier for them, for the customer to get around and customers that have really voted for obviously less inventory in our stores based on our current performance overall.

But, going forward, we’re just going to really focus on boxes that are between 50,000 square feet and 60,000 square feet and we do own all boxes that are bigger and they are just going to have less inventory in their stores and I will take it as a challenge I think it’s just going to help the customers have a better experience. .

Thank you. It appears we have no further questions at this time. I would like to turn the floor back over to management for any additional concluding comments..

Well thanks everyone for joining us today we look forward to speaking with you when we report our third quarter results in December. Thanks..

Thank you. Ladies and gentlemen, this does conclude today’s teleconference. We thank you for your participation and you may disconnect your lines at this time..