Robert LaPenta - Vice President, Treasurer Thomas Kingsbury - President and Chief Executive Officer Marc Katz - Executive Vice President and Chief Financial Officer.

Lorraine Hutchinson - Bank of America Merrill Lynch Mathew Boss - JPMorgan Stephen Grambling - Goldman Sachs Kimberly Greenberger - Morgan Stanley Dana Telsey - Telsey Advisory Group John Morris - BMO Capital Markets Pamela Quintiliano - SunTrust Robinson Humphrey Krista Zuber - Cowen and Company Jarrod Feinstein - Buckingham Research.

Greetings, and welcome to the Burlington Stores Second Quarter 2015 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.

I would now like to turn the conference over to Bob LaPenta, Treasurer of Burlington Stores. Thank you, Bob. You may now 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 year 2015 operating results. Our presenters today are Tom Kingsbury, our Chairman and Chief Executive Officer; and Marc Katz, our Chief Financial Officer.

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. We take no responsibility for inaccuracy that may appear in transcripts of this call by third-parties.

Our remarks and the Q&A that follow are copyrighted today by Burlington Stores. Remarks made on this call concerning future expectations, events, strategies, objectives, trends or projected financial results are subject to certain risks and uncertainties.

Actual results 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 10-K for fiscal year 2014 and in other filings with the SEC, all of which are expressly incorporated herein by reference.

Please note that the financial results and expectations we discuss today are on a continuing operations basis. Reconciliations of the non-GAAP measures we discuss today to GAAP measures are included in today’s press release. Now, here’s Tom..

Thank you, Bob, and good morning, everyone. We delivered a strong second quarter, highlighted by increased comparable stores sales and a significant rise in earnings per share, both of which exceeded our guidance.

We are extremely pleased with our performance, which continues to validate strength of our off-price operating model and the successful execution of our growth and strategic initiatives by our team. Let me share with you some specific highlights of the second quarter. We reported strong sales momentum with total sales rising 9.6%.

Comparable store sales rose 5.6% on top of a 4.7% increase in the second quarter last year. This represents our 10th consecutive quarter of positive comp sales. In addition, we have reported comp sales increases in 19 of the last 22 quarters.

Gross margin net of product sourcing costs expanded by 50 basis points, we leveraged our SG&A exclusive of product sourcing costs by 60 basis points. Adjusted EBITDA grew $17 million, or 30% from the second quarter last year. This led to net income per share of $0.19 of significant improvement from a loss of $0.01 per share last year.

In addition, we are pleased to report the following accomplishments. Second quarter represented our fourth consecutive quarter with an increase in traffic. Comparable store inventory decreased by 7%, contributing to a 13% faster comparable store inventory turnover during the quarter.

We entered the third quarter with a more current inventory position and sufficient open to buy liquidity to take advantage of the great buying opportunities we see in the marketplace. And we utilized $25 million in cash to repurchase 450,000 shares of our common stock during the quarter.

Dueling our comp store sales increase were strong performances in bath, cosmetics, fragrances, home, men’s, shoes, and juniors.

In terms of the three businesses we highlighted in Q1, I’m pleased to share that ladies’ shoes performed above the company average in both ladies dresses and suits and handbags showed nice improvement versus the first quarter trend.

From a geographic point of view, our comp growth was broad-based as we experienced comp increases in 28 out of our 31 regions. In terms of territories, the Midwest and the Northeast was the strongest and the southwest was the weakest on a relative basis. In addition, we continue to improve the quality and quantity of our vendor base.

We continue to increase our better, and best, and branded unit receipt penetration. As in previous quarters, we believe the increase in comp sales was not only driven by better assortments, but also by continued improvement in our store experience.

We remain focused on simplified merchandising, clear navigational signage, size fixtures, well organized selling floors, and a better alignment of selling hours to customer traffic, which all translate into a better customer experience. I’d like to provide an update on a few other initiatives that position us well for the future.

We continue to make progress in terms of tailoring our assortments across brands, lifestyles, sizes, and climate. We continue to improve the timing of our seasonal product deliveries by region, allowing us to get the right products to the right location at the right time.

We remain pleased with the performance of our new stores that continued to perform in line with our underwriting model. In total, new and non-comp stores contributed an incremental $47 million to our second quarter net sales.

We remain excited about the business prospects as we begin the third quarter and expect the continued implementation of our three key priorities that we outlined during our IPO to enable us to maintain our positive performance in the second-half of the year and beyond.

First, we expect to drive comparable store sales as we continue to benefit from our enhanced off-price model, much improved store experience, our marketing testimonial campaign and our merchandize localization strategy. We began the third quarter in a strong inventory position with sufficient open to buy.

We will continue our plan to deliver more fresh products each month of the quarter. In addition, a higher penetration of pack and hold as a percent of our total inventory will help us deliver more great values on the floor.

By category, we expect to see continued sales growth from the investments we’ve made in our ladies’ apparel, home, bath-and-body and accessories businesses. We continue to be underdeveloped in these areas and are very excited about the opportunity for the remainder of 2015 and beyond.

From a store execution standpoint, we are consistently conducting various tests within our stores ranging from faster movement of receipts through the selling floor to different fixture types. When our testing platform indicates a positive return on investment, we look to rollout these initiatives companywide as soon as possible.

In addition, last year we converted from a customer phone survey to a web-based survey to provide more detailed actionable customer feedback. Store managers now have the ability to immediately review online feedback from his or her store and react accordingly.

As we have now anniversary the start of this new survey, we are happy to see our overall customer satisfaction scores are improving versus last year. Second, expansion of our store fleet continues to be a critical growth driver for us. We’re excited about our new 2015 store program, which spans from coast-to-coast.

We remain on track to open 25 net new stores in 2015, and our pipeline for 2016 is ahead of where we were last year at this time. We continue to believe that we have significant white-space for growth to reach 1000 stores over the long-term.

Third, we expect to enhance our operating margins as we continue to optimize our markdowns, tailor our assortments by store and remain disciplined managing our receipts. Operating margins are also expected to benefit as we grow our top line and leverage fixed costs.

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

Thanks, Tom, and good morning, everyone. Thank you for joining us today. We are very pleased with our second quarter performance.

Our sales and net income handedly exceeded our guidance, driven by balanced increases across our financial metrics including strong comp store sales, expansion in gross margin, leverage in operating expenses and lower interest expenses. Moving to a review of the income statement and starting with sales.

For the second quarter, total sales rose 9.6% and comparable store sales increased 5.6%, which follows two years of strong comp growth including a 4.7% comp increase in the second quarter of 2014 and a 7.8% comp increase in the second quarter of 2013.

Our growth in comparable store sales was driven by increases in traffic, conversion and units per transaction, while average unit retail was flat with the prior year. This represented our fourth consecutive quarter with an increase in traffic. Our gross margin rate was 39.2%, an increase of 100 basis points versus last year.

As we remain focused on inventory management, our gross margin continues to benefit from lower levels of aged inventory compared to the prior year. Accordingly, the primary driver of the reported margin increase was a lower markdown rate in last year.

While the overall markdown dollars spent was in line with plan, the stronger-than-expected comp sales resulted in incremental rate improvement. Our margin rate also benefited from reduced freight costs driven by product mix, resulting in lower pounds per unit and by lower fuel costs.

Partially offsetting the gross margin improvement was an approximate 50 basis point increase in product sourcing costs, which include cost to process goods through our supply chain and buying costs, both of which are reported in selling and administrative expenses.

For the second-half of the year, we expect reported margin improvements versus last year to slightly outpace product sourcing costs increases versus last year. As a percentage of net sales, selling and administrative expenses, exclusive of product sourcing costs and advisory fees declined 60 basis points to 28.4%.

Expense leverage was achieved primarily in occupancy, store payroll, and marketing costs, slightly offset by increased stock-based compensation. Adjusted EBITDA increased 30%, or $17 million to $75 million, representing a 100 basis point increase in rate for the quarter.

Depreciation and amortization expense, exclusive of net favorable lease amortization increased by $2 million to $36 million. Interest expense decreased $11 million to $15 million, primarily driven by the savings realized as a result of the 2014 term loan refinancing and principal payment made during the previous 12-month period.

The adjusted effective tax rate was 40.8% versus 39.9% last year. The increase in tax rate is result of a one-time discrete item recorded in the second quarter, offset partially by state credits available to us for our new corporate headquarters.

Combined, this resulted in an increase in adjusted net income of $16 million to $15 million for the quarter, compared to a loss of $1 million last year.

Diluted adjusted net income per share increased significantly to $0.19 versus a loss of $0.01 last year, and our fully diluted shares outstanding was 76.5 million shares versus 74 million basic shares last year.

For the first-half of fiscal 2015, total sales rose 7.2% and included comparable store sales increase of 3.1%, following a 3.6% comparable store sales gain in the first-half of last year. Gross margin was 39.5%, representing an increase of 140 basis points versus the first-half last year.

This improvement more than offset the 60 basis point increase in product sourcing costs. As a percentage of net sales, selling, general and administrative expenses, exclusive of advisory fees and product sourcing costs decreased 10 basis points to 27.8%.

Expense leverage was driven mainly by reductions in store payroll and occupancy, partially offset by increases in stock-based compensation. Adjusted EBITDA increased by 18%, or $26 million to $177 million, representing a 70 basis point increase in rate for the first-half of fiscal 2015.

Depreciation and amortization expense, exclusive of net favorable lease amortization increased by $3 million to $72 million. Interest expense decreased $23 million to $29 million driven by the August 2014 refinancing and principal payments over the past 12 months. The adjusted effective tax rate was 39% versus 40.3% last year.

The decrease in the effective tax rate is primarily driven by state tax credits available to us for our new corporate headquarters. Combined, this resulted in an adjusted net income of $46 million versus an adjusted $18 million of net income last year.

Diluted adjusted net earnings per share was $0.60 versus $0.23 last year, and our fully diluted shares outstanding was 76.5 million shares versus 75.6 million last year. Turning to our balance sheet. At the end of the quarter, we had $27 million in cash, borrowings of $214 million on our ABL, and have availability of approximately $330 million.

At the end of the quarter, total debt was $1.4 billion. Merchandise inventories were $802 million versus $712 million in the prior year. The increase was primarily driven by increased pack and hold inventory levels and new store inventory, partially offset by a decline in comparable store inventory of 7%.

As Tom mentioned our comparable store inventory turnover improved by 13%. Cash flow used in operations was $0.7 million, primarily related to a $55 million increase in pack and hold purchases, and inventory related to the opening of 23 net new stores since August of 2014, partially offset by our improved operating results.

The company anticipates generating free cash flow during the remainder of 2015 and beyond to fund all of the company’s capital expenditures, business initiatives, and to support any potential opportunistic capital structure initiatives. Capital expenditures net of landlord incentives were $65 million through the second quarter.

This includes approximately $20 million net per store expenditures and approximately $26 million to support continued distribution facility enhancements. As you recall, our board of directors authorized the company to repurchase up to $200 million of our common stock through June 2017.

During the quarter, we repurchased 450,000 shares of stock for $25 million, leaving approximately $175 million available under our current stock repurchase program. We continue to expect our debt leverage to be at or below 2.5 times at the end of 2015, which we believe will continue to decline in future years based on EBITDA growth alone.

We now have the ability to delever our balance sheet and return capital to shareholders at the same time as we opportunistically utilize our recent repurchase authorization. We ended the quarter with 546 stores. We continue to expect to open 25 net new stores in fiscal year 2015, resulting in 567 stores at the end of the year.

Turning to our outlook, we are introducing third quarter guidance and increasing our full-year outlook. For the third quarter of fiscal 2015, we expect net sales to increase in the range of 6% to 7%, comparable store sales to increase between 2% to 3%.

Adjusted net income per share is expected to be in the range of $0.20 to $0.23 versus $0.16 per share last year, utilizing a fully diluted share count of 76.3 million shares.

Turning to our increased guidance for full-year 2015, we expect net sales growth in the range of 6.5% to 7%, comparable store sales to increase 2.5% to 3%, adjusted EBIT margin expansion of 30 to 40 basis points, interest expense to approximate $61 million and adjusted tax rate of approximately 39%, and a share count of approximately 76.4 million shares.

Net capital expenditures are expected to be in the range of $155 million to $160 million, and depreciation and amortization of approximately $150 million. This brings our adjusted net income per share guidance to a range of $2.27 to $2.32. As a reminder, our adjusted net income per share in 2014 was $1.83.

And now, I would like to turn the call back over to Tom for concluding remarks..

Thanks, Marc. Since our IPO, we have consistently executed our operating model which has resulted in sustained profitable growth for our company. And our second quarter and first-half results certainly validates that this opportunity is ongoing.

I continue to believe there is considerable white-space for our company to further improve upon our success to date, as we further optimize our toolset and strengthen our ability to deliver the best trends, brands, and experience for our customers.

I expect our efforts to lead to consistent growth in total sales, comp sales, and earning in the near and long-term. And now, I would now like to turn the call over to the operator to begin the question-and-answer portion of the call..

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Thank you. The first question is from Lorraine Hutchinson of Bank of America. Please go ahead..

Thank you. Good morning. I wanted to ask one short-term and one long-term question.

First, in the near-term, did you see any impact from the back-to-school tax-free shifts for the later Labor Day? And then longer-term, how big is home now, and how big do you think it could be as a percentage of your total sales over time?.

Okay. This is Tom. I’ll take this – I’ll take this one. First of all, when you look at the back-to-school impacts in terms of tax free, it did have a slight impact, but there was really two days. It was really just the last two days of the quarter. So it wasn’t really material overall.

I will say that, we’re pleased so far with our back-to-school business. Obviously, July was strong, which helped contribute to our strong second quarter performance and August is good so far. So we haven’t really seen with the shift of Labor Day and a later Labor Day and factory that really didn’t have much impact.

As far as home goes, we’re really pleased with our home business in the second quarter. We had a significant growth overall. As we articulated, our percent of total is really light relative to what our competitors are and department stores. So we see in the long-term a continued strong growth in home..

Thank you..

Thanks, Lorraine..

Thank you. The next question is from Mathew Boss of JPMorgan. Please go ahead..

Hey, good morning, and congrats on a great quarter, guys..

Thanks..

Hi, Matt..

So as we think about expanding brand relationships over time, can you talk about any learnings so far from the West Coast buying office? I think, the designer showroom up on the website is interesting, and just categories where you see the top branded opportunity over time as we kind of breakdown the store?.

Well, as we – we normally don’t talk about the brands that the relationships we’re building. But we do have an opportunity to continue to build brands. We had a nice growth in our brand penetration last quarter and so far for the spring overall.

The West Coast is having a presence there, gives us the ability to be in that market every single day and looking for new brands overall. The learnings is just that is that, being out there, having the team out there, gives us the ability to continue to foster and build relationships with the West Coast manufacturers.

But, in general, as we stated many times before, we just have a lot of room to grow brands, as a percent of total, where we feel very good about what we’ve so far, but there’s a lot of upside..

Great.

And then just follow-up, on capital allocation, so free cash flow generation of a $180 million to $200 million this year, what’s the best way to think about debt pay-down versus share buyback in the back-half and then just the best way to think about your thoughts on allocation beyond this year?.

So, Matt, this is Bob, I’ll speak to that. As we said in the past, we ended last year with leverage at 2.7 times, which we – was lower than we had planned due to the outperformance in earnings and EBITDA. We expect leverage to continue to decline this year.

We stated that, we think leverage will be at or below 2.5 times at the end of this year and we’re comfortable with that level of leverage. We think it will continue to decline going forward just based on EBITDA growth alone. We initiated an authorization; our board authorized us to buy back 200 million shares over the next two years.

We purchased 25 – or spent $25 million to purchase about 450,000 shares this quarter. And just like this quarter, at the end of every quarter we’ll share with you any activity that we have if any at all..

That’s great. Best of luck, guys..

Thanks..

Thank you..

Thank you. The next question is from Stephen Grambling of Goldman Sachs. Please go ahead..

Hey, good morning. Thanks for taking my question.

Just a quick question on the pack and hold, as it continues to increase year-over-year, is there any CapEx that might be needed just to support that growth, whether it’s incremental DCs or warehouse facilities?.

First of all, as you know, we spent a lot of our capital this year to support our increase in pack and hold. We really feel confident that we can build on our pack and hold significantly based on our actions we took this year overall. But we’ll do what we’ve done in the past.

I mean, if we feel pack and hold needs to be a bigger percent of total we’ll go down and we’ll look for more space. We’ll look for more space to expand it overall. But right now, we feel very good about the money we spent this year and we have room to continue to grow pack and hold..

Stephen, just to put some numbers around that, so we talked about spending $155 million to $160 million in CapEx this year, $50 million of that is supply chain related. And a good portion of that is to support more storage for pack and hold. And as we’ve said before, Stephen, they are highest gross margin by types and more than pay for themselves..

Great. That’s very helpful. And then, I guess, a related question on the competition. There’s been a lot of noise just given the choppy numbers from some of your department store folks, and inventory seems like a little bit elevated.

Anything that you’re doing as you look out at that environment differently or to prepare for any change in the promotional environment? Thanks..

No, our goal really is to stay focused on what we’re currently doing today and continue to deliver great values overall. Obviously, our merchants are in the competition all the time to make sure that our values are very, very strong. But we don’t see any overt strategy changes.

We just want to continue to stay focused on what we’re doing and just deliver great value for our customers..

Sounds good. Thanks so much..

Thank you..

Thanks..

Thank you. The next question is from Kimberly Greenberger of Morgan Stanley. Please go ahead..

Great. Thank you. Really nice show in earnings results today..

Thank you..

Thanks, Kim..

Bob, I wanted to just follow-up on the capital allocation question. You started off with $25 million this quarter.

Would it be prudent for us to model roughly $25 million a quarter in share buybacks going forward? And then, Tom, as you think about this growing opportunity in pack and hold, you’re sitting at 20% of inventory today in pack and hold, is there a sort of target upper limit that you’re working toward over the next one or two years, and if so, what might that limit be? And do you have any sort of color or feel for where the goods are coming from? Are you getting goods that were delayed in the ports? Is there any sort of visibility or is it just kind of generally available in the market? Thanks so much..

Hi, Kimberly, so this is Bob. I’ll take the first question. So I would use the share count that Marc gave in his comments around guidance and that we put in the press release. And just like this quarter, if there’s any additional activity going forward, we’ll share it with you at the end of the quarter on the conference calls..

As far as pack and hold goes, I mean, we really don’t target pack and hold, as we said before. We let the deals available really determine what level of pack and hold we have overall. We originally went out; we felt that pack and hold wouldn’t be more than 10% or 15%.

And now we’re at 28%, because there really is an abundance of products out there and great deals out there. And as Marc said, I mean, it turns faster than other product. It’s higher gross margin. But we really don’t want to target it – I know some of our competitors are – or one of our competitors is much higher than we are.

One is a little bit lower than we are, but overall, we just let the deals speak for themselves. And that will determine what level of pack and hold we have overall. Where are the goods coming from? They’re really coming from many different areas.

There is a little bit dribbling from the port disruption at this point, but it’s not really that material relative to what it was, maybe two or three months ago. But it’s really generally coming from every avenue from cancellations and other things that maybe occurring, but it’s just coming from many different sources..

Thanks so much, Tom, and good luck for the fall..

Thank you..

Thanks..

Thank you. The next question is from Dana Telsey of Telsey Advisory Group. Please go ahead..

Good morning, everyone, and congratulations on the very good results..

Thank you..

I believe last quarter you had talked about taking a look and assessing wages for this – on the store associate rankings and store associates. What are you doing there? What are you seeing there? And how should we think about that going forward? And the web survey was very interesting.

What are you learning? How many people is it surveying? And are you getting any different qualitative information than you got with your old method that you use, and does it impact your planning for holiday? And just one last thing on the pack away, is some of that the cancellation department stores, is it more the issues with port? Thank you..

Okay, Dana. Thanks for keeping it one focus question and one topic..

Oh, yes..

I appreciate that. Thank you. So let’s – I’ll see if I can take a crack at these and Tom will weigh in, if need to be on those. In terms of the wages for store associates on July 5th of this year, we went to $9 an hour for all full-timers, and $9 an hour for all part-timers with, at least, six months of service.

And that was an incremental $5 million in wages, started July 5 through the end of this year. In terms of where do we go from there, that will all be part of our 2016 financial planning process. We’ll take a look at that.

We’ll take a look at whether or not 10 comes into play or not in any other potential headwinds that come our way, and we’ll talk to that more in our Q4 call. But at this point, that’s all that we’ve done there.

Two, in terms of the web survey, right now, and at the bottom of every receipt that prints off at our registers we ask folks to go online and talk to us about their experience. We used to do 50 phone calls per store per month to get our information now with the web coming off on every receipt. We’re getting a lot more information.

We’re getting it a lot more timely. We’re able to get a lot more detailed actionable customer feedback. Stores are excited about it, it is new.

But what I can tell you is, we’ve anniversaried it and we’re finally up against true OI numbers and we’re seeing nice increases in overall customer satisfaction, as we saw for years with the phone survey, so really exciting stuff that the stores feels really happy about. Your third question was on pack and hold.

I think it was about where it’s coming from..

Yes, as I mentioned, it’s really coming from many….

Everywhere..

Yes, everywhere, many different avenues overall. The port disruption, obviously, we had, it was much more meaningful. Earlier as I mentioned before, but is coming from all different sources overall. As far as the customer feedback, both in terms of the survey, it just helps us manage our stores better.

We’re able to quickly react to things that our customers are telling us. And we feel that it should help us for the balance of this year and for the holiday season just because we have much more knowledge about our customers, and we can react to that, as we go into the busiest part of our season..

Thank you..

Thanks, Dana..

Thank you..

Thank you. The next question is from John Morris of BMO Capital Markets. Please go ahead..

Thank you. Good morning, everybody. I want to add my congratulations as well, really nice quarter..

Thanks, John..

I guess, just a quick follow-up on the port disruption, potential positive, but then another more direct question.

So given what you’ve said so far about the benefits there in terms of being able to capitalize on some of that disruption, do you feel like most of that is behind you in terms of what you’ve released into the stores, or is some of it still to come in Q3 and Q4, as you release some of that – some of those goods, that I assume are in pack away? And then my second question is for Marc, the offset on the wages increase you guys have talked before about, I think some of the – using efficiency gains.

And I’m wondering how those gains are progressing and kind of in what areas you’ve been able to squeeze out some that efficiency? Thanks..

As far as pack and hold goes and the port disruption, a lot of goods that we’ll be delivering in the third and fourth quarter were results of the port disruption overall. But with that said, I just want to reemphasize, it’s coming from many different places.

It’s just not because of the port, but lot of those goods that were caught up were more far related and so those would be brought-in in the third and fourth quarter overall.

Marc?.

Yes, and in terms of what’s offsetting the wages, John. We have a very active profit improvement program at our company. So as you think about all our store support areas, we all have what we refer to as PIG goals, Profit Improvement Goals. So we are actively day in, day out looking for ways to become more efficient.

So as we came up with the $5 million number to go to $9 dollars an hour, we allocated that literally to every store support area of the company. And everybody contributed and everybody continues to contribute. And there are absolutely no issues with us in terms of being able to offset that $5 million..

Great. Thanks..

You bet..

Thanks..

Thank you. The next question is from Pam Quintiliano of SunTrust. Please go ahead..

Great. Thanks so much for taking my questions. And let me also add my congratulations to really great execution..

Thank you..

So I have two for you. Just regarding your – the size of your footprint, can you talk a little bit about the performance of some of your smaller stores.

And then, just if you could remind us the average store size of the fleet now, the size of the stores you’re opening or have opened this year and how we should think about it next year?.

Okay. I’ll talk about the footprint and then Marc can talk about the economics of it. As we’ve been seeing all along, we really feel that we need a smaller store.

And if you look at our average right now, we’re around 77,000 square feet, and the stores we’re opening recently in 2013 and 2014, the average is little over 60,000 square feet in terms of new stores. And then, this year, the average is around 55,000 square feet, and we only have ones that are over 60,000 square feet and 62,000 square feet.

So we’re really marching towards a smaller, smaller footprint. Overall, we’ve – our customer, we talking – we talked about the customer survey and one of the things our customers have told us is that they feel more comfortable to have a more intimate experience in a smaller store. So we’re listening to our customers who are making the store smaller.

But as you know, our turns, our inventory turns have gone up significantly. We’ve taken significant inventory out of our stores. Obviously, at the end of second quarter we also had a big reduction in comp store inventory. And we see that reduction happening for the foreseeable future.

We just feel even though we’ve made tremendous progress on increasing our turns, we feel we still have opportunities to do even more of that, so which would necessitate even smaller stores. So, in general, we’re very comfortable with the 50,000 to 60,000 square foot box.

And we actually have our teams looking at boxes even smaller than that, because we feel we’re headed in that direction. So, I’ll let Marc talk about the economics..

Pam, as Tom mentioned in his prepared remarks, the new store performance continues to operate in line with our underwriting models. That’s both from a sales and an EBIT performance point of view. So we’re very happy with that.

What we will say and we have said, and it still continues to be true is that our stores that are less than 60,000 square feet, in terms of sales per square foot, they’re about 22% higher than the chain average..

Okay. Thank you. That was very helpful. And then, if I could switch gears and ask just one other question about Jennifer and I know she is still relatively new.

But just, how do we think about how she’s devoting most of her time right now? And just leave it very broad-based what she’s doing, the impact she’s had on the organization thus far, how we should think about the math there?.

Okay. Jennifer is off to a great start. She is a very strong executive overall. She does have a lot of off-price experience, which she has 14 years of experience in off-price. And she is helping us fine-tune what we’re doing overall. She is working with the merchants in the market. She is spending time on strategy with them.

She is helping us understand the relationship between pack and hold and upfront buys. So she just has a wealth of knowledge that is really helping our team get even better. And she has made great impact early on and we really feel that she’s going to continue for a long time to really help us to solidify how we operate our model..

Excellent.

And just last question, the advertising campaign, just any thoughts on customer response to that?.

Well, we really feel good about our marketing campaign, our testimonial campaign. We’ve been doing it now for well over a year. As our customers talking about the great values they’re getting in our stores, it is real live messages, and it resonates. I mean, our second quarter performance is just an indicator of that overall.

But with that said, we’re looking at spending in marketing dollars comparable to last year. We’re not looking to ramp up a lot overall. We’re focused on obviously continuing to improve our testimonial ads, but we’re really – we’re really driven by the experience the customer has in our stores overall also.

So – but we feel good about our testimonial campaign and you’ll see that for a while..

Great. Thanks so much. Best of luck..

Thank you..

Thanks..

Thank you. [Operator Instructions] And our next question is from John Kernan of Cowen and Company. Please go ahead..

Good morning. This is Krista Zuber for John Kernan. Thanks for taking our questions. Most of my questions have been answered. I just wonder if you could just talk a little bit about how you’re planning outerwear for holiday and fall, and how sort of the cold weather in outerwear affected Q4 last year? Thank you..

Well, we really don’t get into that kind of detail, planning, how we’re planning the business. The cold business, as I said on the call last time, it underperformed our company in the fourth quarter. November was good, but we have an opportunity to do more in December. So it’s more – people are going to buy coats.

It’s just sometimes it’s early, if they have a cold November, or it’s in December, or January, it just happens on in terms of timing.

But overall, one of the things we have done and is, we’re really building categories that help the weather – our company, the home growth that we’re going to experience our bath-and-body business, our fragrance business overall, our ladies accessory business.

So, we’re very – we’re rooted in the cold business historically, but we’ve expanded every other category to make sure that we can – upon intended [ph] we can weather any kind of change in the climate..

Thank you..

Thank you. And our final question comes from Jarrod Feinstein of Buckingham Research. Please go ahead..

Hi. Thank you. Good morning. I’m for David Glick today, congrats again on the great quarter..

Thank you..

My question today is the investments you’re making now will help you reduce the pressure that you’re seeing in higher product sourcing costs in the future, and when you might see those benefits flow through? And then a second one if I can.

Can you give us a little bit more detail on what you meant by the potential opportunistic capital structure initiative, anything specific that you could speak to at this point?.

I’ll take the first one and then I’ll kick it to you. Yes, I mean, the $50 million that we talked about that we’re spending for our supply chain is enabling us – a big part of that is enabling us to be able to take in more pack and hold product.

So if we’re able to take more in and work more, I don’t necessarily think that means you’ll see a reduction in product sourcing costs going forward. What we have said though Jarrod is, whatever increases we do have in product sourcing costs, we will offset with reported margin increases.

We’ve done that for a number of years now and continue to do that..

Yes. And just what we’ve said in the past about capital allocation is given the fact that we expect to generate free cash flow. We will look at how we can return that to shareholders. And we’ll evaluate what we think the right thing to do is over time, and when we decide to do something, we’ll certainly share it with you..

Okay. Great. Thank you very much..

Thank you..

Thank you. I would now like to turn the conference back over to management for any closing comments..

Thanks again for joining us today. We look forward to speaking with you when we report third quarter results in December. Thank you..

Thank you, ladies and gentlemen. This does conclude today’s teleconference. You may disconnect your lines at this time. And thank you for your participation..