Express, Inc.
Q2 2017 Earnings Call Transcript

Published: 23 Aug 2017

[Operator:]

Greetings and welcome to the Express, Inc.'s Second Quarter 2017 Earnings 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 your host, Mr. Mark Rupe, VP of Investor Relations. Thank you. You may begin.

[Mark Rupe:]

Thanks, Audrey. Good morning and welcome to our call. I'd like to open by reminding you of the Company's Safe Harbor provisions. Any statements made during this conference call, except those containing historical facts, may be deemed to constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual future results may differ materially from those suggested in forward-looking statements due to a number of risks and uncertainties, all of which are described in the Company's filings with the SEC, including today's press release. Express assumes no obligation to update any forward-looking statements or information, except as required by law. In addition, during this call, we will make reference to adjusted operating income, adjusted net income and adjusted diluted earnings per share, which are non-GAAP measures. Information necessary to reconcile these non-GAAP measures to operating income, net income and diluted earnings per share can be found in our press release and in the investor presentation, which has been filed with the SEC and is available on the Company's Investor Relations Web-site. Our comments today will supplement the detailed information provided in both the press release and the investor presentation. With me today are David Kornberg, President and CEO; Matt Moellering, Executive Vice President and COO; and Perry Pericleous, Senior Vice President and CFO. I will now turn the call over to David.

[David Kornberg:]

Thank you, Mark. Good morning and thank you for joining us. While we continue to operate in a transformative environment, we are pleased with the progress we have made against our initiatives. Second quarter comparable sales of negative 4% and adjusted EPS of $0.01 came in at the top end of our guidance. Our strategy continues to be focused on taking a holistic approach to driving improved sales and profitability, and this quarter's performance demonstrates that we are moving in the right direction. E-commerce sales growth in particular was very strong, increasing 28% and accounting for 19% of total sales, up from 14% last year. We continue to invest in expanding our omni-channel capabilities and I'm pleased with the success we are seeing from our 'ship from store' launch, which is now active in 150 stores. At the same time, we remain focused on driving performance in our retail stores, which showed further sequential improvement in the second quarter. We have improved the clarity in our stores through choice count rationalization and increased depth per choice, allowing us to speak to clearer fashion stories and trends. Our marketing efforts are resulting in improved trends in customer engagement and we believe they will drive increased customer acquisition and retention. And we completed the relaunch of our customer loyalty program, NEXT. The early results are very encouraging with a significant improvement in customer sign-ups during the quarter. In terms of merchandise, our women's business this quarter saw better than comp average performance in pants, shorts, denim, and swim. Our men's business performed slightly ahead of women's with suits, knit tops, shorts and accessories outperforming the comp average. As we look to the balance of the year, we are committed to driving further improvement in our performance. The momentum of our initiatives continues to build and we expect their impact to be more meaningful going forward. We are optimistic about our fall and holiday assortments where we are well-positioned in our top items and on-trend attributes. We expect e-commerce sales growth to remain solid and store performance to improve sequentially, with incremental sales and margin contribution from our expanded omni-channel capabilities, and we remain focused on managing our costs and see clear opportunities to enhance the overall efficiency of our business. I will now discuss in more detail the progress we are making on our key initiatives in the context of our strategic objectives, which are, improving profitability through a balanced approach to growth, increasing the brand awareness and elevating our customer experience, transforming and leveraging IT systems, and investing in the growth and development of our people. First, as it relates to improving profitability through a balanced approach to growth, we are committed to improving sales productivity and profitability by focusing our resources on areas of the business that have the greatest potential to generate a strong return on investment. We continue to view growing our e-commerce business, building our omni-channel capabilities and optimizing our store footprint in both retail and outlets as the most promising opportunities. We are aggressively attacking each of these areas. E-commerce sales increased 28% in the second quarter, driven by higher online traffic and conversion, with the most significant growth coming from mobile. Our women's e-commerce performance continues to benefit from expanded sizing and assortments, including the successful launch of Petites and we see a larger opportunity to improve our men's e-commerce business and have assets in place to begin capitalizing on this in the third quarter, one example being the recent launch of our men's Tall Shop where we feature longer lengths and inseams. We are also enhancing the overall experience through improved functionality and speed. As we execute our omni-channel strategy, customers will increasingly have a seamless experience across our platforms. We began piloting 'ship from store' in the second quarter, and have recently expanded it to 150 stores, slightly ahead of our original end of August target. The initial results of the launch are encouraging, validating our future ability to leverage store inventories to maximize sales, drive inventory productivity and reduce markdowns. The contribution from 'ship from store' will have a greater impact going forward and we will further expand it into 2018. We are also optimistic about the upcoming pilot of 'buy online, pick up in store', which we see as another way of fulfilling our customers' expectations through a seamless shopping experience across channels. We will launch the pilot in a small number of stores beginning next month. As we have previously communicated, omni-channel represents a significant opportunity for our Company. We believe that it can increase our overall productivity and profitability through greater sales conversion and improved inventory management. Stores will continue to represent an important element of our omni-channel strategy and we are focused on making progress in improving their financial profile. As we discussed on our last earnings call, we are realigning occupancy costs with lower traffic levels and obtaining greater flexibility in our leases by way of shorter lease terms, kick-out clauses and co-tenancy agreements. To date we are pleased with our progress. On lease renewals signed in 2017, we have obtained meaningful reductions in occupancy costs. We have also demonstrated our willingness to walk away from locations where the future store economics were not sustainable and have shown the ability to transfer a good portion of the closed store's volume to nearby locations or e-commerce. We will continue with this approach going forward. We have constructed a flexible real estate portfolio with approximately 50% of our U.S. retail store leases coming up for renewal in the next three years and are focused on ensuring that we are aligned with where customers are shopping. We have also had success in converting lower volume retail stores in B and C malls to outlets. While largely opportunistic, we have been able to maintain our brand presence and significantly improve the productivity and profitability in these locations. We converted 19 retail stores to outlets late in the second quarter. The conversions went well with sales exceeding our expectations. Based on initial results, we are optimistic about the prospects for improved results from these locations during the balance of 2017 and into next year. And lastly, we are very focused on managing costs across our entire business. As a part of our overall $44 million to $54 million cost savings initiative, we are on track to achieve $20 million in 2017, which does not contemplate the impact of store actions. Turning to our second objective, increasing brand awareness and elevating our customer experience, Express is an important and relevant brand, supported by the millions of customers that shop us each year. However, our potential is much larger and we have initiatives in place to build engagement and increase customer acquisition and retention. In early 2017, we introduced a new brand architecture focusing on the individual style of our customer. Our marketing efforts are now more holistic and leverage a bigger brand message more consistently across all of our platforms. Our August Fit For You denim campaign is an example of the success we are seeing from our efforts. The campaign features a broad mix of more than 60 of our customers from around the U.S., including Express brand ambassador, Karlie Kloss, displaying our fit, styles and technology. The creative has clearly connected with our customers, driving important increases in engagement across our digital and social platforms. In the second half of the year, we will further our efforts through a greater emphasis on content creation and continue to work with fashion influencers to expand awareness and familiarity of our products. We are also seeing a positive trend in engagement from higher customer touch-points. Late last year we returned customer touch-points back to 2015 levels, following a planned decline in 2016. We began to see higher attached sales during the second quarter, which we view as a positive sign. We have also talked a lot about the significance of our NEXT customer loyalty program relaunch and specifically it being another very important customer acquisition and retention tool. During the second quarter, we completed the final phase of the relaunch, integrating social media engagement into the program. For example, customers can now earn points by linking their NEXT and Instagram accounts and can earn additional points by sharing a photo using #ExpressLife. While early, we are thrilled with the results we are seeing. Customer sign-ups during the second quarter were up significantly year-over-year for NEXT and the EXPRESS NEXT credit card, driven by a strong program supported by solid institution by our store associates in enrolling customers. We see this as an important leading indicator in our ability to drive future sales as NEXT customers have historically shopped more frequently, spent more and remain customers longer than non-loyalty customers. We feel good about the progress we are making through our marketing and customer initiatives. Our marketing is proving effective and we are beginning to see improvement in key brand metrics. Engagement is building and our NEXT relaunch is leading to encouraging trends in our customer base. To capitalize on this momentum, we plan to increase our short-term demand generation and longer-term brand building marketing investments during the second half of the year. We expect to port it through other marketing offsets. As we have discussed in the past, we see a significant opportunity to strengthen women's familiarity and increase men's awareness of Express, and given the general uncertainty in retail with many pulling back, we feel the timing is right to be more aggressive in capturing greater mind share within our demographic and enhancing our overall market position. Our third objective is transforming and leveraging our IT systems. We are beginning to leverage the new tools and resources of our IT systems. We are reacting faster to trends and planning at a more granular level, which is apparent in our fall assortment, and we are launching important omni-channel capabilities as I discussed a moment ago. We continue to believe that we will begin to see the initial benefits from our systems investments during the back half of this year, with greater benefits realized in 2018 and beyond. Finally, our fourth objective is investing in the growth and development of our people. We have an outstanding and dedicated team here at Express. We are highly focused on executing our strategic initiatives and as a team are determined to succeed. We are also dedicated to giving back to our local communities. Collectively, our associates volunteer thousands of hours each year, which we take great pride in. We remain committed to attracting outstanding talent to the brand and developing that talent to grow and add value to the organization over the long term. In summary, we are pleased with the progress we have made against our initiatives and the direction in which our business is moving. Our confidence in our strategy and conviction in our long-term opportunity remains resolute. Express is a vibrant and relevant brand to our demographic, evidenced by the strong 28% year to date e-commerce sales increase and the positive trends we are seeing in customer engagement. With the majority of our initiatives now in place, we expect our results to improve during the balance of the year and into next year. We are optimistic about our fall and holiday assortments and the expansion of our omni-channel capabilities and we see clear opportunities to enhance the overall efficiency of our business. We are managing our capital structure prudently, recognizing that our strong balance sheet and solid cash flow fundamentals provide us a tangible competitive advantage in the current retail environment. I want to close by thanking everyone at Express for their dedication and relentless effort to improving our business and performance. Express has a great future and we are committed to delivering long-term value to our shareholders. I would now like to turn the call over to Perry.

[Perry Pericleous:]

Thank you, David. Good morning everyone. I'm going to start by reviewing the second quarter results, followed by a brief update on our Canadian exit. After that, I will discuss our third quarter and fiscal 2017 outlook. During the second quarter, we saw sequential improvement from the first quarter across many of our key metrics. Second quarter net sales were $479 million, a 5% decline from last year. Comparable sales were down 4%, which was an improvement relative to the first quarter decline of 10%, driven by strong e-commerce growth of 28% and better store performance. Merchandise margin contracted by 120 basis points, driven by the highly promotional environment and cost related to our Canadian exit. This was a relative improvement from the 380 basis point contraction experienced in the first quarter, and buying and occupancy expenses deleveraged by 120 basis points, driven by the lower sales. However, this was also a relative improvement from the 240 basis points of deleverage experienced in the first quarter. As a result, second quarter gross margin rate contracted by 240 basis points to 27.5%. We continue to monitor our expenses effectively. SG&A was down slightly despite increases in depreciation expense and other wage inflationary costs. This reflects the progress we are making in our cost-savings initiatives and to a lesser extent variable cost reduction. SG&A was 27.5% of net sales, an increase of 110 basis points to last year. GAAP operating loss of $15.9 million included a negative $17.6 million impact related to our Canadian exit, resulting in adjusted operating income of $1.7 million. Second quarter loss per share of $0.15 included a net negative $0.16 per share impact related to our Canadian exit. As a result, adjusted EPS was $0.01. I will now provide a brief update on our Canadian exit. In June, we closed all 17 of our stores and are currently working through the CCAA process to wind down the Canadian business. In the second quarter, recognized a negative $17.6 million impact to operating income, consisting of $16.3 million of restructuring costs and a $1.3 million inventory adjustment included in cost of goods sold, which was partially offset by a tax benefit of $5.1 million, resulting in a net negative $12.5 million impact to net income, or $0.16 per share. The total negative impact to operating income incurred in the first and second quarters was $23.9 million, which was partially offset by a tax benefit of $12.4 million, resulting in a net negative $11.5 million impact to net income or $0.15 per diluted share. In summary, the total after-tax cash impact during the first and second quarters was $10 million, and as we have previously stated, exiting Canada will eliminate an annualized net loss of approximately $6 million. Now turning to our balance sheet and cash flow, our balance sheet remained healthy. Inventory at the end of the second quarter totaled $261 million, representing a 2% increase over last year, driven primarily by support from our e-commerce growth and retail to outlet conversions that occurred late in the second quarter. We ended the quarter with $173 million of cash and cash equivalents, up from last year's $120 million. And year to date capital expenditures were $30 million, down from $50 million last year, due to lower IT spending and prioritized store investments. The final topic I want to address is our guidance for the third quarter and full-year. Our updated guidance reflect adjusted numbers excluding the impact from our Canadian exit. Our guidance assumes that sales and margins will further improve during the remainder of the year. With that overview, I will now provide the guidance details. For the third quarter of 2017, we currently expect comparable sales to be in the range of negative low single digits, net income in the range of $5 million to $8 million, and earnings per diluted share in the range of $0.06 to $0.10. In addition, we expect third quarter net interest expense to be approximately $1 million and the tax rate to be approximately 40%. Based on the midpoint of our third-quarter guidance, we expect our operating margin to contract by approximately 80 basis points, driven primarily by SG&A expense deleverage, offset partially by merchandise margin expansion. Turning to our full year 2017 guidance, which is a 53-week year, we are affirming our outlook and currently expect comparable sales to be in the range of negative low single digits, adjusted net income to range from $32 million to $38 million, and adjusted earnings per diluted share to range from $0.41 to $0.48. The full year guidance excludes the negative $0.15 per share impact incurred during the first and second quarters related to our Canadian exit. We expect net interest expense of $3 million and a tax rate of approximately 41%. The 53rd week will be in our fiscal fourth quarter and is expected to represent $0.04 in diluted EPS. Based on the midpoint of our full year 2017 guidance, we expect our operating margin to contract by approximately 160 basis points, driven by gross margin contraction and SG&A deleverage. As it relates to our cost-savings initiatives, we remain on track to deliver a total of $44 million to $54 million of annualized savings over the 2016 to 2019 period. In 2017, we are confident in our ability to realize $20 million in savings. While SG&A drove the majority of these savings during the first half of 2017, we expect merchandise margin to be the principal driver in the second half. In terms of capital expenditures, we are planning for $60 million to $65 million, which at a midpoint is more than $35 million below 2016. It is important to remember that Express has a history of generating strong operating and free cash flow, and 2017 is no different. Our current guidance implies that we will generate solid operating and free cash flow. Lastly, in terms of store activity, during the second quarter we closed 40 retail stores, 19 of which were converted to outlets, and opened four new outlet stores. On a net basis, we reduced our store count by 17 and ended the quarter with 635 stores. For the year, we now plan to close 58 retail stores, 21 of which are conversions to outlets, and open 17 new outlet stores. We expect to end fiscal 2017 with 636 stores, consisting of 494 retail and 142 outlet stores. In summary, we are confident we have the right strategy and initiatives in place to improve our sales and profit trends. We are pleased with the progress we are making against our initiatives. We have seen sequential improvement from the first to second quarter and are optimistic about our prospects for the balance of the year. We look forward to updating you on our progress in late November. I would now like to turn the call over to the operator to begin the question-and-answer portion of the call.

[Operator:]

[Operator Instructions] Our first question comes from the line of John Morris with BMO Capital Markets. Please state your question.

[Trevor Lamb:]

This is Trevor Lamb on for John Morris. I was wondering, could you give us a little more color on the merch margin? I believe on last call you expected 2Q merch margins to be down 30 basis points. So were you guys more promotional than planned or it was mostly from the impact of exiting Canada, any color there? Thanks.

[Perry Pericleous:]

So when you look at the expectation that we had on the merchandise margin, I think a couple of things to call out is, we had an expectation of the merchandise being down about 50 basis points. When you look at the GAAP financial statement, it shows approximately 150 basis points. When you exclude the impact of Canada, you can look at approximately anywhere between 90 to 100 basis points of margin contraction in the second quarter, which diluted significant improvement from where we were in Q1 of 380 basis points. That contraction to the initial expectations at the beginning of Q2, it was driven by increased promotional activity based on the environment. But just to put in perspective, we are up about 50 to 60 basis points, which when you look at these on a $500 million quarter, that approximates to about $3 million off on the merchandise margin.

[Operator:]

Our next question comes from the line of Adrienne Yih with Wolfe Research. Please state your question.

[Doug Drummond:]

This is Doug Drummond for Adrienne today. Just to piggyback on the merch margin thought, obviously you are looking for a sequential improvement here and actually positive merch margins year-on-year. I guess can you help frame that given the promotional environment and what you expect for the upcoming quarter?

[Perry Pericleous:]

Yes, absolutely. So when you look at the midpoint of our guidance for Q3, the operating margin is expected to be 80 basis points contraction compared to last year. And part of that contraction is based on a merchandise margin improvement. And I said that midpoint of the guidance Q3 improvement is expected to be at about 50 basis points. That improvement is driven by the fact that as part of our $44 million to $54 million of savings, we said that we expect $20 million of savings in 2017, $10 million of which are going to be in the first half of 2017 as part of SG&A and the latter part of 2017 we are going to see the other $10 million that is going to be in merchandise margin driven by sourcing and production opportunities. So that is the driver of the Q3 improvement as we look at it today. We are expecting approximately 50 basis points at the midpoint of the guidance.

[Doug Drummond:]

And then I guess if I could just follow up with that, how are you I guess seeing the promotional environment in the quarter, Dave?

[David Kornberg:]

We're seeing it very similar to where it's been. We see it continuing to be heavily promotional out there and doesn't see any change, and obviously we will prepare for that to continue.

[Operator:]

Your next question comes from the line of Jay Sole with Morgan Stanley. Please state your question.

[Jay Sole:]

David, there has been a lot of talk about on the athletic side of the apparel business that some of the trends have been kind of not improving, getting a little bit worse in their performance. Fabrics and that kind of apparel is not selling as well as it was. Is it possible that maybe there is a big picture fashion trend changing to more non-athletic clothes that could be a tailwind for you as we go through the back half of this year and into next year?

[David Kornberg:]

I think that – clearly I don't think that fashion changes that quickly in terms of what you are seeing from people's second quarter results in the athletic apparel side of the business. What we do see continuing though is a continued trend in terms of performance apparel, and when I talk about performance apparel, I mean performance benefits to the product, such as stretch, such as wicking properties, easy care, et cetera, and we see that becoming much more important in terms of sportswear and in terms of the wet work side of apparel. So, I see that it's transitioning over to apparel in a bigger way, which is our area of the business. We see good reads. We are seeing some very good early reads for fall, so we are encouraged by that. But in terms of the overall shift from athletic apparel to sportswear and wear to work, I don't see a very quick shift.

[Operator:]

Your next question comes from the line of Simeon Siegel with Nomura Instinet. Please state your question.

[Julie Kim:]

This is Julie Kim on for Simeon. Could you just give more color on the main factors of the SG&A deleverage in the quarter, what levels you are expecting for the back half and the main drivers there? Thank you.

[Perry Pericleous:]

So when you look at the SG&A deleverage in the second quarter, it's driven primarily by the reduction in the comp. When you have a negative 4% comp, some aspects of SG&A are fixed in nature and that is the driver of the deleverage in Q2. When you look at overall the back half of the year, we are expecting SG&A to also deleverage but not to the same extent that it deleveraged in Q1 or Q2. We are expecting slight improvement in the deleverage, and as part of the improvement is driven by the fact that we are expecting better top line performance in the latter part of the year versus the first half of the year.

[Julie Kim:]

Okay, great. And then just in terms of marketing expense there for the back half, do you expect increased levels or similar levels to what you saw in the first half?

[Perry Pericleous:]

On a relative basis to the first half, we are expecting on an absolute dollar basis to obviously spend more in the second half than the first half on an absolute dollar basis. And as a percent of sales, we are spending more in the second half than the first half as a percent of sales, but relative to compared to last year we are spending at the same levels as last year in terms of percent of sales.

[Operator:]

Our next question comes from the line of Susan Anderson with FBR Capital Markets. Please state your question.

[Luke Hatton:]

This is Luke Hatton on for Susan. I was just wondering how did the traffic trends compare in the second quarter versus the first quarter, and then what are your expectations for the back-to-school season and the second half of the year?

[Perry Pericleous:]

When you look at the traffic trends, we saw improvements from Q1 to Q2, as evident by our performance in the overall comp going from a negative 10 in Q1 to a negative 4 in Q2. And given that e-commerce performance between Q1 and Q2 remained the same, you can easily assume that the improvement in performance overall was driven by stores, and we have seen improvement in traffic. As it relates to the latter part of the year, the second part of the year, it's everything baked into our guidance of that positive low single-digit for the second half of the year, and that is assuming a sequential improvement going from Q1 to Q2 and then from Q2 into Q3 and to Q4. And we believe that sequential improvement will come driven by our initiatives that we have in place, mainly the launching of our brand campaign as well as the NEXT loyalty program, the customer touch-points, and everything that David had described during his prepared remarks.

[Operator:]

Our next question comes from the line of Paul Trussell with Deutsche Bank. Please state your question.

[Paul Trussell:]

Wanted to ask about the store footprint optimization program, just wanted to know if you could quantify at all the term of meaningful reduction when it comes to occupancy cost, and just also is that related to malls that specifically lost an anchor and so there was some type of trigger in co-tenancy clauses or is the reduction in occupancy cost something that you are actually able to achieve on the majority of the fleet that comes up for lease renewal?

[David Kornberg:]

This is David. What I'd say is, look, we signed a broad mix of renewals in 2017 across all tenants and all mall tiers. The percentage reductions vary by mall and by tenant, but they are generally reflective of what is an overall challenging retail environment. I can't be specific in terms of meaningful of what that means, but what we're seeing is generally across mall tiers and across landlords. In terms of the timing, we'd expect to see rent expense decline in 2018 driven by the anticipated reduction in square footage that we have executed in 2017, which also includes the Canadian exit and the lower rents that we are currently executing.

[Paul Trussell:]

That's helpful. And just to follow up on that, you have obviously continued to close doors, 40 here in 2Q and a number over the past few years, what are you seeing in terms of recapture of those sales in other nearby stores or online in those zip codes, or are you finding a scenario where your e-commerce business actually decreases in those areas once you no longer have a store present?

[Perry Pericleous:]

So, a really good question, Paul. What we have said in the past is what we are typically seeing is 25% to 35% volume transferring either in nearby locations or on the online business. That percent varies drastically depending on the density of the market and the nearby stores and the e-commerce presence. So we are seeing a broad variety of performance when we have closed stores, and again, the factors that makes a difference is how many stores do we have in nearby locations and the strength of the e-commerce business. In some instances where we have a local store nearby, we see a much higher volume transfer to the nearby location and less on the online.

[Operator:]

Our next question comes from the line of Roxanne Meyer with MKM Partners. Please state your question.

[Roxanne Meyer:]

I just wanted to better understand the differential between the stores and Web performance. I mean, obviously you're seeing some great e-commerce strength and you mentioned in part that comes from things like extended sizes like in petites, but I'm just wondering if you could talk to any other categories or trends that are particularly strong on the Web versus stores?

[David Kornberg:]

Look, I think the most important message here is that we recognize our demographic is spending much more time online and we are seeing the consumers shifting to online, and that is primarily the reason. The e-commerce I would say benefited from being able to communicate a stronger and clearer marketing and merchandising message. As you said, it benefited from expanded sizing in assortments, particularly in women's, and we also saw great growth in terms of mobile traffic and mobile transactions as well. Men's growth was obviously not as high as the women's but we have plans in place and we obviously see it as an opportunity to extend the aisles of our stores, so to speak, through our Web-site and to be able to drive significantly increased sales, and we see that the opportunity continues for the balance of the year and into 2018 to continued double-digit growth online.

[Operator:]

Our next question comes from the line of Marni Shapiro with Retail Tracker. Please state your question.

[Marni Shapiro:]

Congrats on the improvements. So I mean outstanding digital growth. Can you talk a little bit about your ability to take advantage of that, I guess what percentage do the majority of the consumers return products to store and are you able to convert those to sales, and have you trained your salespeople to convert them and maybe up-sell them when they come in the store?

[David Kornberg:]

I think that's a big opportunity for us going forward, particularly with the buy online pick up in store for us to be able to up-sell. But clearly it's an advantage of having a reasonably large store footprint that we are able to create essentially in our stores a three-dimensional Web-site in bricks-and-mortar. So, going forward, you're going to see that more and more. We want to test buy online pick up in store, and as I said, that's going to happen very soon in a small number of stores and we see the potential to be able to roll that out in a big way going into 2018. But it's really all about creating a seamless experience for the customer, whether it's online, whether it's in store, and that's the way in which we are going forward. We've made great progress with our app and the convenience of the way in which the customer consult with us online has improved massively over the last 18 months. So we see that continuing.

[Marni Shapiro:]

Do you see most of your returns coming to store or most of them ship back to the warehouse?

[Matthew Moellering:]

This is Matt. We see significantly more of the online orders return to store than going back to the warehouse. And to your point, that is definitely an opportunity for us to convert those customers when they come back in, either to sell new products or exchange our product form immediately. So we believe that is certainly a competitive advantage versus pure play online retailers and we are continuing to work on the customer experience to make that even more of a seamless experience for the customer when they come in with those returns.

[Marni Shapiro:]

Fantastic. Thanks guys. Best of luck for fall.

[Operator:]

Our next question comes from Janet Kloppenburg with JJK Research. Please state your question.

[Janet Kloppenburg:]

Congrats on the progress here. I was wondering if you guys could talk about the strategies you have in place to improve the store performance, maybe some engagement events or whatever to help traffic there? And David, on the clearer fashion stories that you want to present, I'm just wondering do you feel like you are there, do you feel like you will complete that, or do you feel like that's a project that will be completed later in the third quarter? And if you could also comment on what seems to be a Bottoms trend at the expense of dresses and how you think that may impact your business? Thank you.

[David Kornberg:]

So I think that was three questions there, Janet. I'll start with the last one. In terms of the Bottoms trend, yes, our Bottoms business is very good. I think there is a big opportunity for us going into September-October with the back-to-school period – sorry, with the wet work period becoming obviously more important. Sorry, there is a lot of feedback on our line here, Janet. Could you mute?

[Janet Kloppenburg:]

Sure.

[David Kornberg:]

Okay, sorry. So we see that as a big opportunity for us going forward, particularly with our strength in the wet work category and knowing that we are coming in September, and so we see that actually with upside potential. Your second question was in terms of the clearer fashion stories. I think that by rationalizing our choice count, it's enabling us to tell clearer stories. It's something we've been focused on for the past year to reach this point. We have our choice count under control, and as we get into holiday, I think that the beauty of what you are seeing online will be much clearer as you see it in stores. As I talk about, the stores are an opportunity for us to be able to create a 3D Web-site, and part of our marketing and part of our signage and communication is very much around that, and is getting stronger as we get further into the fall season. And then I think your first question was around what are we doing in stores in terms of elevating the customer experience? So there are a lot of things that we are doing, and I think that part of what I talked about so far in terms of clarity of message, is an important way in which we can improve this for the customer. So, whether it's navigation, whether it's price point library, whether it's the signage in store, brand communication, all of those kinds of things are really helping us in terms of elevating the customer experience. Having said that, the visual merchandising of the store is another way of improving the customer experience, simplifying the buying process for the customer, so things like being able to checkout with mobile devices in store, which we have expanded in a big way, the customers being able to checkout where they see an associate as opposed to going through the cash rep is another way. I think our operational effectiveness in terms of in-store processes is helping us improve the customer experience. And then also, as Matt mentioned, the ability for the customer to be able to make easy online returns and for us to be able to up-sell in a bricks-and-mortar environment is another way. So, I think that there are a lot of other things that we are looking at in terms of elevating the customer experience in store, which I don't want to go into at the moment for competitive reasons, but we are clearly on it and we are doing everything that we can in terms of trying to ensure that the experience in store is a great experience for the customer and builds the brand in their mind.

[Janet Kloppenburg:]

So, as one last question on when you said the categories in women's that were doing better, pants, shorts, denim, and I'm missing something.

[David Kornberg:]

I said pants, shorts, denim and swim, which is obviously a smaller category, and that was in terms of the Q2 results.

[Operator:]

Our next question comes from the line of Rebecca Duval with BlueFin Research Partners. Please state your question.

[Rebecca Duval:]

Congratulations on the progress. So as you're kind of thinking about your omni-channel capabilities and the ramp-up events, I know you have online exclusives, do you have any in-store exclusive merchandise that you would be able to kind of turn on to your online to offer that to the consumer, that's my first question? And then just if I can quickly ask, you talked about men's, David, is it more of an online assortment expansion or are we going to see kind of revamped merchandising efforts there? Thank you.

[David Kornberg:]

In terms of men's, what you can see is a greater expansion in terms of the online assortment, increased number of choices, styles, and that's what's really, as we think, starting to making the difference in terms of the men's business. In terms of in-store exclusives versus online exclusives, it's not something that we are really looking at, at the moment. And I think that it's really in store it's about elevating the experience for the customer. That's the biggest way in which we can make that difference.

[Rebecca Duval:]

Sorry, if I could just clarify, so you don't have any in-store-only product, and if you do, my question really is, as you are kind of going towards this more omni seamless channel inventory, would you have the ability to kind of turn that on, so if you have something that's in stores, kind of turn it on to your online environment?

[David Kornberg:]

Then if you put it in the online environment, it wouldn't be an in-store exclusive.

[Matthew Moellering:]

Everything in our stores is also available online for the customers to purchase today.

[David Kornberg:]

Yes.

[Rebecca Duval:]

Okay, no in-store exclusives.

[David Kornberg:]

No.

[Rebecca Duval:]

Great, thank you. Best of luck.

[Operator:]

Our next question comes from the line of Steve Marotta with C.L. King & Associates. Please state your question.

[Steven Marotta:]

Most of my questions have been asked and answered. I just have one, I want to make sure I'm thinking about this right, implicit in the current year guidance and the initial guidance for the third quarter is a positive comp in the fourth quarter in the range of roughly 2% to 5%, Perry, I want to make sure I'm thinking about that right, and if I'm not if you could tell me where I'm wrong?

[Perry Pericleous:]

The way to look at it is, at the midpoint of the Q3 guidance, and let's call it a negative 2%, in order to achieve the low single-digit – the negative low single-digit for the year, you are looking at a positive low single-digit in Q4, that's how you need to look at that. And then if you're going to look at it between first half and second half, the second half with a positive low single-digit. I think the differentiation in Q4 and the second half is just Q4 is slightly better because of the sequential improvement that we expect from Q3 to Q4.

[Steven Marotta:]

Very helpful. Thank you.

[Operator:]

Thank you. There are no further questions. That does conclude our question-and-answer session. I will now turn it back to the President, David Kornberg, for closing comments.

[David Kornberg:]

Thank you again for joining us this morning and for your ongoing interest in Express.

[Operator:]

This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time.