Francesca's Holdings (FRAN) Q4 2017 Earnings Conference Call Transcript

Francesca's Holdings (FRAN)
Q4 2017 Earnings Conference Call
March 27, 2018 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day and welcome to the Francesca's Holdings Corporation Fourth-Quarter 2017 Earnings Conference Call. Today's call is being recorded. At this time, I'd like to turn the call over to Kelly Dilts. Please go ahead.

Kelly Dilts -- Executive Vice President and Chief Financial Officer

Thanks, Steve, and good morning, everyone. We appreciate your participation this morning in Francesca's Fourth-Quarter Fiscal Year 2017 Conference Call. Earlier this morning, we issued a press release outlining the financial and operating results for the fourth quarter and full year ended February 3, 2018. Please note, the following discussion includes forward-looking statements, and actual results may differ materially from these statements.

Additional information concerning factors that could cause actual results to differ materially from projected results are contained in the company's filings with the Securities and Exchange Commission. As usual, a replay of today's conference call will be posted on our corporate website. Francesca's undertakes no obligation to update or revise any forward-looking statement to reflect subsequent events or circumstances. We will begin today's call with comments from our president and CEO, Steve Lawrence.

Steve?

Steven Lawrence -- President and Chief Executive Officer

Thanks, Kelly. Good morning, everybody, and welcome to our fourth-quarter and full-year earnings call. During our call today, Kelly and I will give you some additional color around the fourth-quarter performance but spend most of our time providing visibility around our 2018 guidance and how we plan to get the business back on track. As you know, the back half of 2017 was a challenging time for us.

We ended Q4 with sales of $138.5 million, reflecting a negative 15% comp. The deleveraging in sales, coupled with aggressive markdowns to liquidate slow-selling merchandise resulted in an adjusted EPS of $0.20. However, this enabled us to get our inventories lean and well-positioned to help us move from defense to offense in 2018. For full year 2017, comps were down 11% and adjusted EPS was $0.52.

While 2017 did not meet our expectations, we look at it as a transition year, where we put in place the building blocks for better execution and strategically layered on much-needed investments for the future. We believe that the foundational work that was put in place in 2017 will help us get the business back on track in 2018 and drive consistent top-line revenue growth as well as improved sustainable profitability into the future. Shifting gears into 2018. We have the entire organization aligned on three primary focuses, and they are: reinvigorate merchandising, reenergize our boutique experience, and reengage with our core customer.

We've invested a lot of energy and effort on our first priority of reinvigorating merchandising. Step No. 1 was to develop a laser focus on our core customer. We worked with key stakeholders throughout the company to create a detailed profile of our target guests that we shared across merchandising, marketing, and T&A teams and will act as a consistent edit point for all merchandising and marketing decisions moving forward.

This singular view will enable better alignment across categories and create a cohesive assortment and allow for head-to-toe outfitting. This also drives our marketing communications and boutique experience. Second, we're putting in place disciplines that will allow us to consistently deliver against our core merchandising philosophies. Our planning and allocation teams have been working with the marketing team to create new processes that we believe will give us tangible benefits in 2018 and beyond.

I'd like to highlight a couple. First is a focus on creating and sustaining a constant flow of newness for customers. It's clear from all the work and research that we've done over the past year that our target consumer has a voracious appetite for newness in our assortments. The teams have completely reengineered our financial plans to architect a much more consistent and even receipt flow going forward.

This will allow us to work with lower average inventory levels in our boutiques with minimal back stock, driving more goods from door to floor. This approach also reduces workload for our stores and more importantly, gets new product in front of our guests on a much more rapid basis. Secondly, we've put a lot of work in crafting assortments that are both broad and shallow. Our goal is for our guest to see something new and recognize that we only have one or two of the items in her size, which will incentivize her to buy now versus waiting until later.

In order to hit the right mark, we've made several major improvements in our process. We've realigned the planning and allocation team so that each buyer is partnered with an assortment planner. Having a dedicated assortment planner to optimize the assortment is freeing up more of the buyers' time to concentrate on creating and buying the special and unique product that sets us apart from other specialty stores. This will also enable us to expand our assortment breadth by 20% to 30% and eliminate deeper key item statements.

After putting a lot of improvements around the science of our buys, we've been spending even more energy around improving the art of picking better product. As the teams work to amplify newness in our assortments, they are shopping new markets and looking at new vendors to help us discover those unexpected items or categories that surprise and delight our guest and are aligned with how she lives her life. Our plan is to relentlessly test new items and categories and aggressively roll out the wins for our full team in a well-curated assortment that will be highlighted both in boutique and in our marketing. The team is also focused on storytelling, looking for more holistic cross-category slate of ideas that are topical and relevant to our target guests.

This concept plays right into our strategy of selling the complete outfit. In addition, we're improving the quality of our product. We're doing this by adding better fabrics, trims, special details back into our assortments to ensure that our product is special, unique, and inspires our guest to convert from a shopper to a purchaser. Lastly, the team is doing a lot of work around pricing to ensure that we're offering a high-quality item that is on-trend and has no guilt value.

Simplistically, we want her to see the intrinsic value of the item and be wowed by the price. We believe that by better connecting the art and science of merchandising, combined with improving processes and execution, we'll start to build an emotional bond with our consumer. The long-term benefit of building this bond is that it moves us away from a transactional relationship that is reliant on promotional activity and more importantly, creates a differentiated shopping experience for our customer and makes Francesca's her destination of choice. Our second major focus for 2018 is to reenergize our boutique experience.

As we progress through the back half of 2017, we continue to see strong selling in our dot-com business while generating softer results in our brick-and-mortar boutiques. We believe that one contributing factor is that it is easy for us to showcase newness on our website. New products are posted at the top of the presentation pages so that these guests see these items first. On the brick-and-mortar side, new receipts get sequenced in with older product, which, in many cases, can overwhelm the new.

Second, we've also been doing a better job of curating ideas and telling stories online and in our marketing vehicles. Based on these insights as well as all the customer research we've been doing over the past year, we've created a three-pronged plan of attack to help reenergize the shopping experience in our physical locations. Our first big push is to highlight new ideas and trends more prominently in our boutique windows, front fixtures, and face-outs. We're also moving trend tables to the front of each boutique and focusing on new ideas that will rotate in and out every four to six weeks.

Our second action is get back to surprising and delighting our guest on a regular basis by changing how we merchandise boutiques. We've conducted several tests where we've created more curated vignettes that tell a story by cross-merchandising categories. These tests have been encouraging. And as a result, we've recently rolled out a greater degree of cross-merchandising throughout all of our boutiques.

Our third action to help reenergize our physical location is to embark upon a meaningful remodel program. We believe that it is critical for us to keep our brands current and relevant for today's consumer. As we've covered in previous calls, we've piloted a new boutique design in some local stores in Houston from Q2 through Q4 of 2017. We're pleased with the results of the pilots and saw sales lifts versus our control groups.

Based on this success, we'll roll out this new format as we refresh 80 to 90 existing boutiques this year. Our goal will be to stay on this pace of refreshing our existing fleet in future years. Our plan is also to use this format in all of our new boutiques that we open up going forward. One change in strategy for us that we announced a couple weeks ago is to slow the pace of new boutiques for 2018.

Based on our comp performance in the back half of 2017, we believe that it is prudent to reduce the pace of growth in our new boutiques and focus our energy and efforts around rejuvenating our merchandising assortments, which we believe will lead to stabilization in comp-store sales. Our current plan is to open 35 new boutiques in high-traffic locations during 2018. We've also raised the bar on our existing portfolio, and we now plan to close roughly 20 underperforming boutiques, primarily in C and D centers. I'll point out that between the 35 new boutiques and 80 to 90 remodels, we will be able to have roughly 17% of our fleet in our new format, which is a really big deal.

Our third priority is to reengage with our core customer. We believe that one of our biggest opportunities to drive sales is increase the frequency of visit with our core guest while also gaining a bigger share of her wallet. Many of the merchandising initiatives I mentioned earlier will go a long way to helping with this. In addition, we have several other strategies that will help -- that we expect to help us on this front: First, the POS roll-out that we completed in 2017 has opened up a couple of key omnichannel capabilities.

Our buy-in-boutique and ship-to-home capability is allowing us to drive sales by saving sales by opening up the dot-com inventory and assortment for her to shop in our brick-and-mortar boutiques. The buy-online and ship-to-boutique capability we now have is also a big unlock for us that will help drive store traffic and give us the ability to sell her other items while she's in our store. The second focus for us on this front is that we now have the ability to capture customer email and phone number in our boutiques as guests check out. We believe that we'll be able to more than double our customer file in 2018, which will increase our advertising effectiveness by allowing us to cast a much broader net when we market.

To help fund this, we're planning to also grow our marketing spend by 20% this year. Finally, we see our new loyalty program as a way to get our guests to increase their engagement with our brand. We plan to roll the program out chainwide as we head into the back-to-school season. The program is based on offering free gifts, special events, and early access to promotions.

We'll give you more details on our loyalty launch during our first-quarter earnings call as we get closer to the chainwide deployment. We believe that our strategies to regain momentum, including reinvigorating our merchandising, reenergizing our boutique experience, and reengaging with our core customer, will help us drive sequential improvement in our business during 2018. While it is still early in the year, we've been encouraged, as we've seen several categories start to rebound as a new force that was implemented in March. We've seen improvements in sales in footwear, accessories, jewelry, and gift.

Clothing continues to be our biggest challenge. But beneath the surface, we've also seen our dress business strengthen. The tops and seasonal categories have been slower to improve, but we expect sales to be back on track for all businesses as we turn the corner into the back-to-school selling period. We believe the combination of having our new merchandising approach fully in place coupled with the nationwide launch for a loyalty program will allow us to start driving positive comps in Q3.

Now I'm going to turn it over to Kelly to walk you through the Q4 financials and more importantly, our guidance for 2018. After that, we'll open up the call for Q&A. Kelly?

Kelly Dilts -- Executive Vice President and Chief Financial Officer

Thanks, Steve. I'll begin with a review of our fourth-quarter 2017 financial results, followed by a discussion of our 2018 first-quarter and full-year guidance. Net sales for the fourth quarter decreased 5% to $138.5 million, compared to $146.3 million in the same quarter last year. The 14th week contributed $5 million to net sales in the fourth quarter.

Comparable sales declined 15%, primarily due to a lower conversion rate as well as lower traffic in boutiques. Additionally, in order to work through our slower-selling inventory, we took aggressive markdowns, which led to a decrease in the average unit retail. The comp decrease was partially offset by sales from 50 net new boutiques opened since the fourth quarter of last year. Comps declined across categories, with apparel being the most challenging.

There are a few bright spots within each area of our business, including earrings, sweaters, scarves, shoes, hat and hair, beauty, and kids. However, the penetration of these items within their respective categories was not material enough to result in a positive category comp. Total gross margin for the fourth quarter decreased 250 basis points from last year to 43.9% due to occupancy cost deleverage. Merchandise margin increased 30 basis points as the mark-out of stock taken was not as big as last year.

If you remember, last year we took a large inventory write-off and ended the year with inventory that was 30% lower per boutique than the prior year. This year, our inventory per boutique is up 4%, but it's being compared to inventory levels that were at a historical low. We believe that the inventory levels in boutique at the end of the year from both the unit and aging perspective were in a better position than that at the end of last year. We will continue to be aggressive in our markdown cadence to ensure we are hitting the desired sell-throughs and that inventory levels remain appropriate.

Fourth-quarter SG&A expenses increased $6 million, or 14% compared to the prior year. This increase was primarily due to increased selling expenses associated with the increase in boutique count, corporate and distribution payroll, legal fees associated with labor-related litigation, cost associated with our technology investments, and marketing and website expenses. These increases were partially offset by lower performance-based incentive expenses. Our GAAP effective tax rate for the fourth quarter was 63.9%, compared to 37.7% last year.

The increase in our effective tax rate was due to a $3.3 million non-cash expense, or $0.09 of diluted EPS impact, resulting from the remeasurement of our deferred-tax asset using the lower corporate income tax rate under the Tax Cuts and Jobs Act enacted in December 2017. Excluding this $3.3 million, the fourth-quarter effective tax rate would have been 31.5%. As we noted in our previous press release, the Tax Cuts and Jobs Act is expected to lower our effective tax rate to around 26% in fiscal 2018. Diluted EPS for the fourth quarter was $0.10, compared to $0.39 last year.

Adjusted EPS, excluding the deferred-tax asset adjustment, was $0.20. Now let's turn to the balance sheet. As noted earlier, inventory increased 4% on a per-boutique basis and 12% in total. On a per-boutique basis, our ending inventory was approximately $37,200, which is a low on a historical basis.

We ended the quarter with $31.3 million in cash, compared to $53.2 million at the end of the fourth quarter last year. The company had no debt outstanding at the end of the quarter and did not borrow during the quarter. We did repurchase $1.5 million, or 248,000 shares, of our stock under a $5 million 10b5 plan that continued into the first quarter and was completed on March 9. As of today, we have approximately $40 million remaining under our current share-repurchase program with the completion of this most recent plan.

Capital expenditures for the year were $27 million. And system investments classified as other assets were $3 million for a total of $30 million, as expected. We spent $19 million in new boutiques and $5 million on existing boutiques, primarily due to remodels, handheld, and HVAC replacements. The remaining CAPEX was spent on technology and e-commerce investments.

In 2017, we also spent $3 million in system investments for our new POS and HRIS system, which are classified in other assets and amortized over the useful life of the software. During the quarter, we opened nine new boutiques and closed two, bringing our total boutique count to 721 as of the end of fiscal 2017. This consists of 350 mall locations and 371 non-mall locations, including 70 outlets. For fiscal year 2017, we opened a total of 60 boutiques and closed 10, for a net addition of 50.

Now let's move on to our guidance. Our full-year 2018 guidance is based on our expectation that we will see sequential improvement in our 2018 comp sales each quarter with negative comps in the first half of the year and positive comps returning in the back half as we lap double-digit comp decline. We plan to open 35 boutiques primarily in the first half of the year and to close approximately 20 boutiques mostly in the back half of the year. To support improved short-term performance and long-term growth, we will continue to make investments this year in both capital expenditures and SG&A.

These investments will support the three primary focuses Steve just discussed. To help fund these investments, we are using existing operating cash flow and an approximate 20% tax savings reinvestment, with the remaining tax savings being returned to shareholders through EPS. The primary 2018 investments include refreshing 80 to 90 of our existing boutiques to reenergize our boutique experience; launching a loyalty program to reengage our customer; implementing a warehouse-management system that will provide a single view of the inventory, enabling us to enhance the omnichannel experience, supporting our efforts to reengage our customers; reopening our L.A. buying office to reinvigorate merchandise by having boots on the ground, thereby better positioning us to provide an improved broad and shallow assortment and potentially reduce lead times on certain products; and, finally, enhance employee benefits to support the people who engage with our customers.

Additionally, I'd like to note that our revolving line of credit matures in August, and we are currently working on an asset-based plan, or ABL, as the replacement. Our current revolver is $75 million, and the new line is expected to be around $50 million, which we believe is adequate for both current and future needs. Because maintaining a conservative balance sheet is important to us, we will work toward building more cash on the balance sheet to compensate for the reduction in the revolver availability. That said, when we believe we have excess cash, we will evaluate the best use of that cash, considering both long-term growth investments and returning cash to shareholders through repurchases, although it should be noted that share repurchases are not included in our guidance.

Now for the numbers. For the full year of fiscal 2018, we expect net sales of $485 million to $499 million, a 3% to 6% increase over last year, which included $5 million in sales for the 53rd week. This assumes a low-single-digit decrease in comparable sales and approximately 15 net new boutiques. We expect total gross margin to increase slightly compared to last year, driven by higher merchandise margins, primarily to increases in the back half of the year as we anniversary the deep markdowns taken to deal with last year's merchandise.

This increase is expected to be modestly offset by deleveraging occupancy costs -- or mostly offset by the deleveraging occupancy costs. For the year, our inventory per boutique is expected to be down low single digits. We expect full-year SG&A to increase in the mid- to high single digits compared to fiscal year 2017. This increase is due to selling cost associated with new boutiques and total higher sales; higher performance-incentive pay for boutique, field, and corporate employees; higher software service and depreciation expense associated with both current and last year's technology and e-commerce investments; and higher marketing spend.

Diluted earnings per share for fiscal year 2018 is expected to be in the range of $0.53 to $0.63. The number of average diluted shares for the full year assumed in our guidance is 35.5 million, and our effective tax rate is estimated to be 26%. Capital expenditures for the year are expected to be approximately $30 million, including $14 million for the 80 to 90 refreshes, $8 million for the new boutiques, and the remainder for the warehouse-management system, loyalty program, and other technology and corporate investments. For first quarter, we expect net sales of $100 million to $103 million, a decrease of 4% to 7% compared to last year.

This assumes a 13% to 15% comparable-sales decline. We expect to open 20 to 25 new boutiques during the quarter and close approximately five. For the first quarter, total gross margin is expected to decrease significantly compared to last year as occupancy deleverages substantially and merchandise margins decrease by approximately 200 basis points. This decrease is primarily related to deeper markdowns as we are seeing discipline in our markdown cadence to achieve desired sell-throughs.

While we have seen some of the new products performing and some categories comping positively, we still have the most work to do in the apparel category. Inventory per boutique is expected to decrease in the low single-digit range. First-quarter SG&A dollars are expected to increase in the high single digits compared to fiscal year 2017. About half of this increase is due to selling cost associated with new boutiques.

And the remainder is primarily due to higher software, service, professional, and depreciation expense associated with both current year and prior-year investments. Diluted loss per share for the quarter -- first quarter 2018 is expected to be in the range of $0.10 to $0.13, and it is expected to be the only quarter in 2018 with a loss. This concludes the financial review, and we'd now like to open up the call for questions. Operator?

Questions and Answers:

Operator

Thank you. [Operator instructions] We'll take our first question from Randy Konik of Jefferies. Please go ahead. Your line is open.

Randal Konik -- Jefferies & Company -- Managing Director

Yes, thanks a lot. Steve, I just wanted to get some -- a little bit more color on -- you talked about the positivity around some of the initial remodels, and you gave -- I think the term was the different lift. You said there was some lift there. Is there any more specifics we can get on the incrementality of what you're seeing and the type of payback from a duration perspective you expect to see on these remodels?

Steven Lawrence -- President and Chief Executive Officer

In the short term, I would say no. When we're -- you've got to remember, the remodels were done here in Houston. So there were a lot of noise going on within the region and district that they were put in because, obviously, we had a hurricane that happened right in the middle of all this, and there were pretty severe disruptions. So when we started looking at them, we created peer groups both -- that we can compare them against both on a regional, district, and chainwide level.

And against all of those peer groups or competitive groups, they had noticeable lifts. We also, though, at that point in time, had not value-engineered the cost of the remodels as well. We were doing them very quickly, so we didn't have a really good finely tuned cost on the whole thing. So I think as we start to roll these out in 2018 and we've now value-engineered the remodel package, the fixture package, we've really fine-tuned the amount of days that it's going to take to get these remodels done, we'll start building a financial model that we can probably share with you down the road.

But right now, we don't have really good data on that.

Randal Konik -- Jefferies & Company -- Managing Director

I understand. And I guess, then if we can transition to when you look at some of the positives around, I think, it was footwear and some other categories offset by apparel, is -- the apparel issues from a merchandising standpoint, is that really impacting more traffic or is that you're basically seeing just a sequential deceleration in conversion or both? What kind of is the bigger issue? Is it the actual traffic walking through the door? Or is it more just conversion because of that category being such a large category?

Steven Lawrence -- President and Chief Executive Officer

So we get conversion on a total level. We don't get it down to the category level necessarily. We have seen some improvement in conversion candidly in spring relative to fall, which is a good thing. You have to remember, when we're talking about trying to diagnose what we saw as the issues, conversion was kind of the smoking gun that we're looking at.

So to see conversion start to move in the right direction was a good thing, although we're not out of the woods there yet. Really, when we're looking at it, we saw February as kind of a continuation of the fall merchandise because it's a big clearance month, and we were kind of going through the tail end of clearing out all that merchandise. And we were really curious to see kind of how the spring merchandise performed once we got to the spring set, which was in March Week 1. And I got to tell you, we were very encouraged, candidly, by a lot of the categories' performances.

We saw footwear flip to a positive trend for us. We saw jewelry flatten out and get almost to positive. We're seeing great sales in earrings in that category. Accessories has been really strong for us.

So really, the biggest category that we're still kind of working our way through is clothing. And even beneath the surface in clothing, we saw our dress business really start to come back, so we're excited about that. So I think there's still more work to do there. I feel like the assortment is better than where it was for fall, but it's obviously still not good enough.

And I think that as we see the assortment improve, we'll see conversion improve, and we'll see the business improving. Ivy and the team have done a lot of work on clothing. I would say that she started right after Thanksgiving. So she's had some impact, not a lot, on some of the product that's on the floor right now.

As we get deeper into the spring, I'd say if I had to assign a number, maybe she's been able to impact 20% of the product right now. As we get deeper in the Mother's Day and Memorial Day time period, maybe closer to 50%. And then, obviously, by the time we get to back-to-school, she would have a full impact on all the product. And that's also when we really think things are going to start clicking in and moving back to a positive comp.

Randal Konik -- Jefferies & Company -- Managing Director

Got it. And the last question is just being very good -- proactive with existing real estate. And you spoke, I think, 20 stores closed -- closing in 2018. It mostly sounds like you've seen delocations.

Any perspective that we can get around how many of the units of the balance of the chain are you seeing delocations that could be potentially looked at? Or -- just trying to get some thoughts around how we're thinking about long-term direction of existing real estate and what has to change and what doesn't.

Steven Lawrence -- President and Chief Executive Officer

When we cited this before, we've said that about 80% of our locations are in A and B centers with about 20% in C and D. That hasn't changed dramatically. But obviously, as we start whittling away at the stores that are in C and D, that number should decline as a percent of total. And everything that we're opening up is only in A and B centers.

Randal Konik -- Jefferies & Company -- Managing Director

Great. Thank you.

Operator

Our next question comes from Ed Yruma of Keybanc Capital Markets. Please go ahead.

Noah Zaztkin -- KeyBanc Capital Markets -- Analyst

Hi, this is Noah on for ed. Thanks for taking our question. Can you talk about trends you're seeing in e-commerce, particularly as you flow increased newness? Has performance been better there relative to in-store? And then maybe can you remind us where penetration is and where you expect channel penetration to go over time? Thanks.

Steven Lawrence -- President and Chief Executive Officer

So yes, the dot-com business, that was one of the highlights candidly even through the back half of last year, where business was tough. We saw a pretty big bifurcation between our dot-com performance and our brick-and-mortar performance to the tune of double-digit positives on the brick-and-mortar -- on the dot-com side, with, obviously, large negative declines in the brick-and-mortar side. That's continued in the spring. That hasn't necessarily changed.

But we're hoping and believing that we'll start seeing the brick-and-mortar trend more come in line with the dot-com trend as we take some of the ideas that worked in dot-com and apply into brick-and-mortar. In terms of penetration, we were around 5% in 2017. We grew at around 7% last year. Our goal long term over the next five years is get into the high teens.

So you can kind of waterfall that out, but it implies that we're going to improve our penetration 200- to 300 basis points a year pretty much every year for the next five years.

Noah Zaztkin -- KeyBanc Capital Markets -- Analyst

Thanks a lot.

Operator

[Operator instructions] We will now take our next question from Janet Kloppenburg of JJK Research. Please go ahead.

Janet Kloppenburg -- JJK Research Associates -- President

Morning, everybody. Just a couple questions on merchandising, and then on the first-quarter outlook. I know that you're setting up your front tables, and it sounds like dresses are better. But I was wondering about the bottom cycle we're in, Steve, and how you thought you could take advantage of that.

Or if you're just going to play into the strengths of Francesca's, which has historically been tops and dresses. And also, for the year, Thanks.

Steven Lawrence -- President and Chief Executive Officer

I'll take the first question on bottoms. Janet, you're spot-on right. I mean, obviously, there is a bottoms trend. There's really a denim trend going on out there.

We have historically not had a large presence there. In spring, we do a decent short business and plan to continue to do a good short business this spring. But I think you're going to see, as we round the horn into the fall back-to-school time period, a much bigger emphasis on denim in our assortment. It's something that we've spent a lot of time working with the merchant team on there, really refining the program, making sure that we're putting in a value-packed program that has a point of view that makes sense for our guests, paying attention to all the details and really offering a great denim program.

And that will launch as we get closer to back-to-school.

Kelly Dilts -- Executive Vice President and Chief Financial Officer

And I would say you're absolutely right, Janet, on the operating margin. It is under pressure for the full year, again, with the -- estimated of the comp sales being in the low single-digit decline. For Q1, as far as clearing out aged product, it's really more about clearing out products that may be a little bit more slow-moving. We have established a markdown cadence now to identify that product so that we don't [Inaudible].

So if we have lower sell-throughs than we had anticipated on anything, we'll work through that inventory to make sure that it gets sold in Q1.

Janet Kloppenburg -- JJK Research Associates -- President

I just have one more question for Steve. So maybe you could talk about the process change or the filters that you put in place that -- where just these kinds of missteps in merchandising -- I know you're talking about buying now lower and shallower and such -- but do you have the process in place where you can -- the way the concept started is you could feed back -- chase back into trends very quickly and not commit as much open-to-buy as you move forward. Are those kinds of filters back in?

Steven Lawrence -- President and Chief Executive Officer

Yes, they are, actually. I mean, so it's kind of a two-pronged plan of attack, to be honest with you, and we tried to articulate some of that in the script. But it's, first, the science, right? We hired somebody to head up D&A about nine months ago, and he's really put in place a lot of really good disciplines around receipt-flow inventory management. So literally now, we're going out open to buy on a weekly basis.

So we're not -- the buyers aren't having the ability to kind of go and front-load or bring in a bunch of goods at the start of a month or a season. It's giving us a much more even receipt flow. And what that allows us to do is keep our powder dry so that if new trends emerge, we're not fully committed. We can jump on trends as we used to in the past.

So that would be kind of the science piece that we put in place. And then the other piece of it is Ivy has really spent a lot of time working and really kind of retraining the team to all align on the consistent view of the customer and really have some good work around that so that everybody is singing from the same hymnal and knows exactly what the mission is. So that even if she's not there, they pretty much know exactly what to do. And I think in the past, sometimes we weren't always set up that way.

So that training and that -- creating that customer profile that I spoke to is really kind of a big deal and a new thing for us. And then making it and putting it in a language that we broadly communicate to everybody so that everybody knows what our edit point is. That's a new thing and a big thing for us that I think will really help us.

Janet Kloppenburg -- JJK Research Associates -- President

Thanks so much.

Operator

Our next question comes from Susan Anderson of B. Riley FBR. Please go ahead.

Luke Hatton -- B. Riley FBR -- Analyst

Good morning. This is Luke Hatton on for Susan Anderson. I was wondering, can you talk a little bit about the positive merch margin that you saw in 4Q? And sort of what drove the increase there given the negative comps?

Kelly Dilts -- Executive Vice President and Chief Financial Officer

Sure. Really, it's a comparison to last year is where we had a large MOS, or marks-out-of-stock, that we took in Q4 of last year. Because we have been pretty disciplined in Q3 and Q4 of selling through the slower-moving products, we weren't -- we did not have to take that same level of mark out of stock.

Luke Hatton -- B. Riley FBR -- Analyst

Got it, OK. And then also, just wondering, how is the POS roll-out coming along? And so are you beginning to see the benefits there in terms of greater data on the brick-and-mortar customers?

Steven Lawrence -- President and Chief Executive Officer

So we've completed the POS roll-out into all boutiques, the physical system itself, and we are starting to collect customer data. So we're actually hitting a pretty high number. We set an internal goal, and we're more exceeding that goal right now in terms of capturing a percentage of transactions. So we're excited about that.

So right now, we're in that data-building kind of phase. And then, obviously, what's really important is what you do with the data and how you analyze it later. And so we're still working on that. There is a second phase of POS functionality that is rolling out in Q1.

And the two things that we talked about there are handheld scanners, which should make things like markdowns much easier. The scanners are now out in all stores, and we're pretty much wrapped up with that. And then another functionality we're adding in is automated promotionality so that as the guest comes up, everything pulls up at the right price versus in the past, the associate had to key it in. We have that right now rolled out to one district, and we're just waiting until after Easter to push it out to the remaining districts.

It seems to be stable and working fine, so we just wanted to get through a big sales phase before we pushed it out to the whole chain. So we should have all that complete by the end of Q1.

Luke Hatton -- B. Riley FBR -- Analyst

Got it. Thank you very much.

Operator

Our next question comes from Steve Marotta of CLK. associates. Please go ahead.

Steven L. Marotta -- C.L. King & Associates -- Senior Vice President

Good morning, everybody. As it pertains specifically to the in-store experience and how you anticipate enhancing that in the current year, can you talk a little bit about the number of days of deliveries per store per week this year estimated compared to last year? And will there be additional tables that are changed out from one category to another more productive category? And maybe you could quantify that a little bit as well.

Steven Lawrence -- President and Chief Executive Officer

So I would start with I don't -- on a delivery per day per boutique, that's a really tricky number to get at. It's really driven off of volume. We deliver to stores based on volume need. They can get a box every day candidly.

I think the thing that has changed, though, is that in the past, because we've -- we weren't as good around managing space in place, a lot of that product that would be delivered wouldn't necessarily go to the floor that day. We were carrying too much inventory on a per-boutique basis. The goods would come in, they're instructed to kind of manage it on first-in, first-out basis. So in a lot of cases, those goods might go to the back stock room, sit for a week, two weeks, three weeks, in some cases, and then pushed out to the floor.

So through better inventory management and managing the receipt flow, the goods are going to come in and should go almost door-to-floor, where in the past, they weren't doing that. So from a receipt-flow basis on a store -- weekly store basis, it may be very similar to what was in the past. But I think it's more of the door-to-floor activity that's going to be new and changed. What was the second question?

Kelly Dilts -- Executive Vice President and Chief Financial Officer

Additional table change.

Steven Lawrence -- President and Chief Executive Officer

Additional table changes, yes. One of the things that I think we'd gotten a little too formulaic, maybe, in terms of how we merchandise boutiques -- if you've shopped us for any period of time and you walked in, it was pretty similar for the last several years. Double table of jewelry right at the entrance. We had clothing kind of ringing the parameter.

We had two tables of gifts in the back and a table or a cabinet full of handbags at the left. And that was kind of our merchandising formula. And we started doing some tests back in the fall and changing up where and how we merchandise certain categories and saw some sales lift off of that. And so what we decided to do is start -- being more bold about remerchandising boutiques.

So if you walk in any one of our boutiques, we reset all 720-plus at the start of March for the first time in a long time. Jewelry is not at the front entrance. We've moved it about halfway back into the boutique. It's now kind of off-center, so you can actually shop more sides of the jewelry table.

And we've put a trend table up front. If you look at our handbag cabinets, we're breaking those up, and we're merchandising home gifts and other things in those categories as well. We've taken the cabinetry that's back behind the cash reps, which, generally, people sometimes are kind of shop it, kind of not shop that, using that differently. We've started using it as a way to display all the different footwear styles that we've had.

And so now the guest can actually see the footwear we have versus in the past, it's kind of buried underneath all the clothing runs. And we've seen really good returns off of footwear. So I think you're going to see a lot more of that happen over the course of the year. We're going to continue to experiment with that and try to merchandise and pull ideas and stories together into curated vignettes.

It seems to be working for us, and I think you're going to see us lean into that a little harder.

Steven L. Marotta -- C.L. King & Associates -- Senior Vice President

That's helpful. And my second question had to do with marketing. What was the absolute marketing dollar spend in the previous fiscal year? And I assume that the increase that you've already mentioned will be a little bit more concentrated in the back half given the data that you're currently pulling from the POS system.

Kelly Dilts -- Executive Vice President and Chief Financial Officer

Yes. So we haven't given that number before, but it's -- as Steve said, it's a 20% increase over LY. And you're absolutely right, it is more back-half loaded, particularly as we launched the loyalty program.

Steven L. Marotta -- C.L. King & Associates -- Senior Vice President

Great. That's helpful. Thank you.

Operator

Our next question comes from Rebecca Duval of BlueFin Research Partners. Please go ahead.

Rebecca Duval -- BlueFin Research Partners -- Vice President

Good morning and thank you for taking my question. I kind of want to piggyback a little bit on what Janet was asking in terms of the inventory and the merchandise coming in. Is there -- are you guys testing it per se, like the ability to bring in a smaller amount in, say, warmer-climate stores and actually really test the merchandise? And can you kind of explain where you are with that process? And then secondly, in terms of the gross margin guidance, you talked about markdowns really being the pressure there. But how should we think about, as you are starting to see some wins with some of the newer assortment, should we be thinking that overall store promotions will be up as well on a year-over-year basis? Thank you.

Steven Lawrence -- President and Chief Executive Officer

We'll start with the testing. Yes. I mean, what you described is exactly what we're working on doing. So clearly, you can -- if you're -- if you have a good base of stores down in Florida, for example, you can set up an early, we call it, a resort test, where you land product that's going to be coming in for most boutiques in spring in the November, December time period and get a read on that and use that to inform full-chain buys for spring.

The same works on the other side of the year. We create a test group of stores that are more northern climates, start landing more cold-weather, cooler product and use that to help inform the buys roll-out for the fall season for the full chain. So we absolutely do that. But then beneath the surface, we're constantly always going to be testing new ideas, putting them out there in a small store count, reading the results for them, and then very quickly, when we see results from them, roll them out more aggressively.

One of the things that was really kind of interesting as we went through the back half of the year, we had new ideas. And in a lot of cases, the new ideas did very well and outperformed the older ideas. We just didn't have enough of them to help offset the decline in the older items or categories. And so one of the things that we're really working hard on is building a test react-and-roll-out strategy that gets these categories to a much bigger kind of critical density to offset some of these declining categories on a much faster basis.

A great example of that is beauty. We saw beauty emerge as a category in the back half of the year. It was kind of scattered throughout a lot of different points in the boutique. This spring, we pulled together a full table of beauty.

And every store has a full table of beauty right now, but the full elements of it was -- we have some trays and things we had to roll out with that we've got in about 160 stores, rolling it out in another couple hundred stores in the next month. And that category has gone from a very small contributor in our gift world to being one of the key drivers in a very, very short period of time. And you're going to see things like that happen in all the other categories of the business.

Kelly Dilts -- Executive Vice President and Chief Financial Officer

From a gross-margin guidance, I would just say that as sell-throughs get back to more historical levels, then we'll be able to reduce the number of markdowns that we're taking. And we do anticipate to that -- to start to occur through the various quarters in the year. From a promotional perspective, we'll do what we need to do to regain traffic momentum. And right now, we're not being much more promotional than we were last year.

But if we need to, to drive momentum, we will.

Rebecca Duval -- BlueFin Research Partners -- Vice President

That's really helpful. If I could just follow up really quickly, Steve. On the testing, where do you think you are in terms of like what inning you are in that testing phase? Like, you talk about beauty and if you took it by like category by category, what inning are you in to be able to roll it out to every single category, the testing?

Steven Lawrence -- President and Chief Executive Officer

Well, every category, we're doing testing in. We have tests that, I would say, are at the various levels of being able to be rolled out, right? So I would say beauty was one that -- was one of the first ones we did. We're working on a couple other, I don't want to necessarily share them, that we have in 30 to 50 or -- tests right now. Assuming that those ideas work, I mean, we could have those in place in second quarter in most stores.

I mean, we can move pretty quickly on some of these things.

Rebecca Duval -- BlueFin Research Partners -- Vice President

That's very helpful. Thank you. Best of luck to you.

Operator

It appears there are no further questions at this time. Mr. Lawrence, I'd like to turn the conference back to you for any additional or closing remarks.

Steven Lawrence -- President and Chief Executive Officer

Thanks, operator. I'd like to thank the entire Francesca's team for all of their hard work over the past year. I believe that all the blood, sweat, and tears put in during 2017 has positioned us to regain our momentum and to start transforming our business in 2018 and ultimately will lead to sustained growth and profitability in the future. We appreciate you joining our call today, and we look forward to talking with you again during our first-quarter earnings call.

Operator

This concludes today's call. Thank you for your participation. You may now disconnect.

Duration: 47 minutes

Call Participants:

Kelly Dilts -- Executive Vice President and Chief Financial Officer

Steven Lawrence -- President and Chief Executive Officer

Randal Konik -- Jefferies & Company -- Managing Director

Noah Zaztkin -- KeyBanc Capital Markets -- Analyst

Janet Kloppenburg -- JJK Research Associates -- President

Luke Hatton -- B. Riley FBR -- Analyst

Steven L. Marotta -- C.L. King & Associates -- Senior Vice President

Rebecca Duval -- BlueFin Research Partners -- Vice President

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