Good morning. My name is Carol, and I will be your conference operator today. At this time, I would like to welcome, everyone, to the J.Jill Third Quarter 2018 Conference Call. On today's call are Linda Heasley, CEO of J.Jill Inc., and Dave Biese, Executive Vice President and Chief Financial and Operating Officer. [Operator Instructions]. Before we begin, I need to remind you that certain comments made during this call may constitute forward-looking statements and are made pursuant to and within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 as amended. Such forward-looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from such statements. Those risks and uncertainties are described in the press release and J.Jill's SEC filings. The forward-looking statements made today are as of the date of this call, and we do not undertake any obligation to update our forward-looking statements. Finally, we may refer to certain adjusted or non-GAAP financial measures on this call. A reconciliation schedule showing the GAAP versus non-GAAP financial measures is available on our press release issued today. If you do not have a copy of today's press release, you may obtain one by visiting the Investor Relations page of our website at jjill.com. I will now turn the call over to Linda.

Thank you. Good morning. We continue to make progress on our initiatives and our third quarter results reflect that. We had positive sales momentum, our inventory levels are lower than last year and in line with our expectations, and our e-commerce business benefited from the enhancements we delivered during the year. In retail, we posted our 18th consecutive quarter of positive store comps and e-commerce performed better-than-expected. Before talking further about the quarter's results, I want to speak briefly about where we are. As I said during our last call, 2018 is a year of transition. Since joining the brand as its CEO, I have been working with our teams, visiting our stores, meeting and listening to our customers and prospective customers. Pursuant to what I confirmed and discovered, we continue to address a number of operational areas such as the performance of our e-commerce platform, the level and mix of inventory and parts of the brand projection. We are also in the process of adding management depth. All of this work is ongoing. I see the transition ahead is having two essential phases: the first phase is to complete actions required to secure consistent performance in the near to mid-term, as we discussed in last quarter's call. These actions include listening to our customer in a more focused and actionable manner, providing product that is more relevant and trend-right and improving imagery and messaging to better reflect the brand and better relate our offering to her lifestyle. In addition, we are improving the overall agility and discipline in our planning, merchandising and marketing to ensure we can react to market and consumer changes more nimbly. The second phase will manifest over the longer term. J.Jill was founded as a catalog company and today the business architecture in systems still…

Thank you, Linda. Before going into the numbers, a quick reminder that 2018 is a 52-week fiscal year versus 53 weeks in 2017, and we experienced an impact from the related calendar shift. This shift does not materially impact our annual comparisons but does impact quarterly comparisons, as it moves the timing of sales from the fourth quarter to our third quarter when compared to last year. On a related note, we are using the NRF's restated 2017 calendar to calculate comparable sales in 2018. Moving now to third quarter results. Our total company comparable sales increased 1%. Our stores continued to deliver positive comparable sales, driven by traffic gains, whereas our direct channel drove our performance over our guidance driven by conversion. Total net sales were $174.1 million, an increase of 7.5% versus last year's $162 million and reflecting the calendar shift. Our direct business accounted for 39.8% of total sales versus 39.5% last year. Gross profit was $115.5 million versus $108.5 million last year and gross margin was 66.3% compared to last year's 67%. The lower rate reflect continued clearance activity in August. Our gross margin improved in September and October driven by healthier inventory across those months. SG&A expense was $101.6 million versus $95.2 million last year. Last year's third quarter included approximately $700,000 of nonrecurring expenses related to our transition to being a public company following the IPO in March 2017. As a percentage of total net sales and excluding last year's nonrecurring expenses, SG&A was 58.3% versus 58.4% last year. Operating income was $13.9 million or 8% of sales compared to last year's adjusted operating income of $13.9 million or 8.6% of sales, which excludes the nonrecurring expenses. Adjusted EBITDA for the quarter was $24.2 million as compared to $23 million last year. As a…

[Operator Instructions]. Our first question comes from the line of Lorraine Hutchinson from Bank of America Merrill Lynch.

Some pretty encouraging commentary on the September and October growth margin. Do you expect gross margin to be up in the fourth quarter as you lack the clearance sales from last year?

Well, in our guidance, we are flat to, we said, slightly negative in terms of margin for the fourth quarter, so that's the straight-out answer. In terms of looking at it a little bit closer, the fourth quarter, one of the things we said about the third quarter going into it, was seeing that we left ourselves the right allowance, if you will, to be competitive, I would say, going in the fourth quarter that certainly even more so in terms of seeing that we've left ourselves the room, I'll say, to see that we keep our inventories clean as we exit the year, and we continue to transition into the things we see ahead for editing our inventory and our assortment even further. So when you think about that, though, I would take you back to the first three quarters of the year. In the first half of the year, I'll say, roughly, our gross margins were down about 300 basis points. We improved to about 70 basis points down in the third quarter and now we kind of start to lap a little what happened last year, we're getting closer to flat. As we move into next year, we start to lap some of those down 300 basis points quarter. So we look to continue to firm up our product margins.

Okay. And then there is some commentary about preparing for long-term success in 2019. Should we assume that 2019 will be a year of SG&A growth that maybe higher than sales to get the company ready for longer-term opportunities?

Well, we'll ask for your patience, and we'll be certainly in a better position to talk about that on the year-end. Right now, I would say, we are very mindful of looking to, I'll say, tailor our spending commensurate with our sales. I'll wait to give a commentary on that in the year-end, but we would do what we can to see that our cost structure is in line with whatever we're planning for our sales.

Our next question comes from Kimberly Greenberger from Morgan Stanley.

Dave, I just wanted to follow up on the tariffs, your tariff commentary. Can you just let us know how much of your current production is coming out of China? And then heading into 2019, do you have some targets for how much you'll be able to move out of China. And then Linda, I wanted to ask if you might be able to provide some additional color on the product development or go-to-market calendar. You talked about needing to make decisions I think closer in. So if you could just talk about some of the changes or reengineering to your processes that you are making in that go-to-market calendar that would be really helpful.

Yes, sure. Kimberly, on the first point, currently we are at approximately 30% of our production in China and is largely around our sweater business. We think we can reduce that and frankly are in the process of doing that, I'll say, in a meaningful way. I don't want to share a percentage right now, because some of the work we're doing with either factory base or otherwise is in process. But I think we can meaningfully reduce that and in a time frame where we could do a lot to offset any risk. And I'll just want to reiterate the point we made, to the extent that we keep production in China, we are working now with vendors, with factory basis to understand where opportunities are to minimize any impact in the factory as well as what it is we have to do here in terms of our business to offset that, whether that be price increases or otherwise but we expect that to be frankly very manageable for us relative to others.

And Kimberly, relative to your question on product development, the research we have been doing with our customer and the focus groups suggest that there's more we can do that she really loves and has told us -- has pointed us in the direction of where we have opportunities to do better. More of what she would love is our seasonal approach to the product, which is we drop newness every month she loves. At the same time, she wishes that we were in stock or kept certain programs 12 months of the year not treating them seasonally, like Denim, like some of our pant programs, that's great news for us. So we're in the process now of perfecting and approaching the strategy to having those products more regularly and be in stock and have them refreshed accordingly. When you look at best-in-class or better-in-class retail product development cycles and vertically integrated retail, our calendar, as we stand today, is roughly 20% longer than where we think we need to be, and we -- even best-in-class is 40% shorter and that's the challenge, is to create bandwidth such that we can be near to the consumer expectation of what is happening in the marketplace and what trends are occurring and get it to her faster. Good news for us, our customer isn't always first to a trend. But increasingly, the marketplace is shrinking relative to her access through the Internet and what is happening out. So we know we need to respond a lot more quickly. But we see there is a lot of agility and flexibility in our development cycles and with our vendors, we have a great vendor base. So that's what we're working towards now. Does that make sense?

Yes.

Our next question comes from Oliver Chen from Cowen and company.

Regarding the website and traffic and also the navigation of the website, how are you feeling about the user experience and is it where you wanted to be in terms of some of the earlier opportunities you had? And your hypothesis on digital, Linda, what are your thoughts on the biggest opportunities for you to make sure you're best-of-class omnichannel in terms of what will -- what you'll prioritize earlier and changes there. And lastly just I know you've been focused on making sure that the J.Jill brand has brought appeal across the age spectrum. What are your thoughts about making sure to maintain the loyal older customer while also appealing to a younger customer as well?

I'll need to hit 1, 2, 3. On the website, and the -- over the last two calls, we talked about addressing some of the challenges we have with the replatform of the site to the new technology. And so we doubled down on getting those issues fixed. At the same time, we recrafted the customer experience, expectation and identified things that we know she wanted more of, so for example, adding PayPal to the equation, including Fit Predictor as a way to help her figure out how -- what product is best for her. That has been completed, is in the marketplace now. We're still activating Fit Predictor and perfecting it and what we're finding is it's driving conversion in a really great way. So I think the customer experience is significantly better than it was earlier this year. But we know this area is changing so quickly, we have to stay on top of it. So there's more applications, more capabilities that we're getting ready to roll out and that is -- that work is in progress now. But we're feeling really good about the responsiveness to the site. We're still not out of the work where it's right now. But the metrics that we're focused on is conversion, both traffic and conversion but especially conversion have improved dramatically. That's all good news. To your point on digital and social, I think we had a view that this customer wasn't as focused on digital and social but we're finding that she really is. So we've been testing a lot of applications in both of these types of areas to figure out where do we perfect our spend and focus and attention on her, and so we're still mining for that, more to come on that front. And then your third question relative to how do we ensure that we don't alienate our very loyal customer who tends to be an older customer, as we bring new-to-brand and that is the key question. What we're finding, as I said in talking to the customers, is as we bring in lifestyle imagery, showing her different ways to style the products, we are making our loyal customer happier and we're attracting a new-to-brand customer that is slightly younger. So it is definitely a balancing act, we're very focused on that. But we are showing more resilience and flexibility and versatility in the product, so people can wear it anywhere they wish and that's part of what we're doing. At the same time, we want to give her more unique thoughtful design details and stay behind the quality of the product that has been true to J.Jill.

Our next question comes from Janine Stichter from Jefferies.

I just wanted to ask about the progression of sales during the quarter. I think you talked about August being off to a bit of a slow start, so it seems as though sales did accelerate throughout the quarter even as you chose to walk away from some of the promotional activity. Can you maybe give some color on the comp trend exiting the quarter and then maybe some more details of just what you've seen in terms of the response from the consumer as you've walked away from some of the promotional activity?

Well, in the first point, relative to August, so I think, I mean, the commentary we provided that we still saw -- we still use August as part of that cleaning up of our inventory, so we still had a fair amount of clearance activity in August now with one of the things that impacted the gross margin in the quarter. As far as that being off relative to the rest of the quarter, it wasn't that their sales were significantly different, it's just we used that period to sell-off yet more clearance, which was in line with us always looking towards September of having our inventories more in line. So as I think about the months and that response, I would say, the months generally perform similarly. The margin that we saw in September and October improved and all of this was, I would say, generally in line with what we expected given that we were managing inventory but we were encouraged by the fact that September and October's margins were better and there was a strong response to the product in general.

And then any commentary you can give on the current quarter-to-date trend?

It certainly informed our guidance and that's -- I would say, we were in line with where we had expected the quarter to be. So from that standpoint, we feel positive and that we're not -- it's not dramatically different than what we had anticipated and we're not looking for the balance of the quarter to make the quarter the way we've guided it. So we're feeling pretty comfortable in that regard.

Our next question comes from Paul Trussell from Deutsche Bank.

This is Krisztina Katai on for Paul. I just wanted to circle back on your fourth quarter guidance. So to what extent is the negative comp forecast due to the prior year comparison? And what you've seen quarter to date versus your expectations of customer reaction to some of the changes in the strategy and promotional cadence. I just wanted to better understand how we should think about the fourth quarter expectations.

So if you take out of last year's business, the level of off-sale or off-price sale volume that we had, I mean, it is -- it accounts for the majority of our guide being negative to last year. So that had a big influence, and when you think about last year, that was a 9% comp, so that's pretty healthy in that regard. On the -- I think the second part of your question is just the customer response. I would tell you that we -- the fourth quarter, at least, in our minds, isn't that point in time where you're going to dramatically change your promotional cadence. So I would say that we were very encouraged by September and October. We are looking less to execute necessarily really bringing down the promotional cadence in the fourth quarter just by its nature. So we are, I'll say, in the game and that is certainly something we anticipated as we guided the margin, which we still think has -- show some relative strength versus last year and certainly at the beginning of the year.

Got it. And then just second, you mentioned some of the changes that you're considering regarding the brand and the catalog and merchandising. So could you just talk about your view of how you view these changes and some of the risks that are associated with making changes to the model?

The intent is not to alienate a customer in not to put risk into the model. And so some of the changes we're talking about, as I said, we have newness that comes every single month but we need product that stays 12 months of the year. So that's part of the balancing act that we're going into. We've already started implementing changes relative to lifestyle imagery that you see in the catalog and the styling that you see in the catalog. And it does not appear to be a negative to the customer, in fact, she's actually delighted by it. And we think it's also bringing the new-to-brand that we've been receiving as well as reactivating customers that we had lost.

And I'll just jump in to, to just reiterate, we are very planful and mindful of changes. We have great data that we use to read as we make these changes and for the most part, we're going to test into anything that we think it requires that before you make a much -- more significant move or investment toward it.

Our next question comes from Brian Tunick from Bank of Canada.

I guess, we were curious about two things. One, any learnings from product category distortions either between the digital property and -- versus your stores? And then curious also on the timeline of additional omnichannel initiatives. What are some key areas of focus that you think really could move the needle as we head into 2019?

Relative to product category distortions, I mentioned a few of them already, staying in business on Denim on an annual basis, not just seasonally is part of the pants as well, and that's what you'll seen more coming from J.Jill go-forward. Mind you, we will always stand for tunics and leggings, that's part of -- the core of the DNA of the brand. But at the same time, we can be even more relevant and be more part of her life and be more complete to her. Relative to the timeline and the additional omnichannel capabilities, we're working on that now but what you have seen on the digital platform, on the e-commerce platform, is improved imagery as well as unique product to the online store, our online editions features capsule collections on a frequent basis. Every month, we drop in a new collection that we're finding is attracting a new-to-brand and a slightly younger customer. We're not using the online store as a clearance vehicle only, which is where we had got caught last year, but we are bringing great fashion items on-trend pieces, I should say, to her.

Our next question comes from Ike Boruchow from Wells Fargo.

This is Lauren, on for Ike. I was wondering if you could provide a little more color around the performance of the direct channel in Q3, especially with the delta between the store comps and DTC. What are the primary factors that you attribute this difference to? And also it sounds like you have been doing a lot of work on the website, Linda, do you expect digital to return to growth soon or with the continuous improvements that you're planning, would you expect it for later rather than sooner?

So on the performance, I guess, as I just think back a little bit on where we've been, I mean, our stores have continuously delivered, we've mentioned, the 19 consecutive quarters now. And we've also talked the fact just how strong the portfolio is, how we've seen strength in traffic and conversion and the like. So we're almost an anomaly in that regard and from that standpoint I tend not to try to compare the two channels per se, as it tracks back to what we've talked about in direct, we are pretty, I think, open in the -- earlier in the Internet, we were seeing challenges in both traffic and conversion. I would say that conversion given all the work we've done has showed steady improvement. And in the third quarter we specifically called that out as the thing that really drove our guide. So we're excited or encouraged, I should say, about what we're seeing in conversion. What I'll say about traffic is we are right where we thought we would be and we have an opportunity to turn traffic back on. I'm going to leave it at that for right now in terms of how and when that happens. But it is something that, I would say, as we are working through some of this, we weren't as aggressive as we've been in the past in terms of investing into that traffic. And I do see an opportunity for us to turn that back on and I would ask you to be patient in terms of when and how we see that.

And can you repeat your question to me. I'm sorry.

Sure, just with the continuous improvements that you guys have been talking about, does this push out a return to growth in direct further out.

We're working through that now. We're seeing great responsiveness in the direct channel and to -- as to Dave's point, we are looking at driving traffic to the brand and letting her choose where she chooses, where she wants to shop. And we know often that she does look online to see what's available at J.Jill but a lot of our new-to-brand customers still coming to our store channel. So we're really focused on driving traffic to the brand and focused on giving our holistic brand experience and then making certain that we optimize that regardless of where she chooses to shop.

There are no further questions at this time. I will now turn the call back over to Linda, for some closing remarks.

Thanks all for joining us today. I look forward to updating you on our future results and I wish everyone happy holidays. Thank you.

This concludes today's conference. You may now disconnect.