Express, Inc.
Q3 2017 Earnings Call Transcript

Published: 30 Nov 2017

[Operator:]

Greetings and welcome to the Express, Third Quarter 2017 Earnings Conference Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Mark Rupe, Vice President of Investor Relations for Express. Thank you, you may begin.

[Mark Rupe:]

Thank you, Melissa. 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 net income and adjusted diluted earnings per share, which are non-GAAP measures. Information necessary to reconcile these non-GAAP measures to 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 are available on the company's Investor Relations website. 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. Our country has been impacted by a number of natural disasters and unfortunate events that have weighed heavily upon us all. As an organization we provided help and support to many associates within the Express family affected by these tragedies. Our people are of major importance to us and are paramount to our brand. I’m proud of the resilience those affected have shown, along with their ability to manage through adversity. I would also like to thank our local teams for their tremendous efforts and leadership in the face of these challenges and the broader organization to providing donations to support both our associates and other relief efforts. Approximately 16% of our stores were directly affected by hurricane activity in the third quarter, resulting in temporary store closures that negatively impacted net sales and earnings by approximately 1% and $0.02 per share respectively. Even in these difficult times we worked hard to maintain our momentum. Our third quarter results came in at the top end of our guidance, when excluding the hurricane impact demonstrating that our holistic approach to driving improved sales and profitability is gaining traction in a transformative retail environment. Comparable sales of negative 1% continued to sequentially improve and were unaffected by the hurricanes, consistent with our comp methodology that removed temporary store closures. EPS was $0.08 and included a negative impact related to the hurricanes of approximately $0.02. Some of the key highlights in the quarter included another outstanding performance in eCommerce with sales increasing 23% on top of 15% growth in the same period a year ago; further sequential improvement in our retail store performance driven by merchandise that resonates with our customers and greater clarity in our fashion message; significant enrollment growth in our NEXT loyalty program with customer signups already achieving our 2017 targets; initial success from our expanded omni-channel capabilities, including positive sales contributions from 'ship from store' and the pilot launch of 'buy online, pick up in the store'. And lastly, we strengthened our balance sheet by improving our inventory position and ended the quarter with $198 million in cash, up significantly year-over-year. In terms of merchandise, our women's business was led by knit tops, denim, pants, and jackets. I’m pleased to note that woven tops turned the corner in October and finished the quarter on a positive trend, and sweaters and outer wear have improved significantly as we move further into the fall season. Our men’s business performed slightly ahead of women’s led by suits, casual pants, and accessories, along with sequential improvement in shirts and denim. So we are pleased with the progress we are making towards returning our business to growth. Our third quarter results showed solid sequential improvement, and we entered the important holiday season with positive momentum. In the fourth quarter, we expect to drive further improvement in our performance with a return to positive comps and year-over-year earnings growth. The basis for our optimism is the progress we are making against our key initiatives, which I will now discuss in more detail in the context of our strategic objectives, which are to improve profitability through a balanced approach to growth, increase brand awareness, and elevate our customer experience, transform and leverage IT systems, and invest 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 investing in areas of the business that offer the greatest potential return on our investments. Growing our eCommerce sales, expanding our omni-channel capabilities, and optimizing our store footprint continue to be our primary areas of investment focus. eCommerce sales increased 23% in the third quarter and represented 24% of sales, up from 19% last year. Growth was driven by increased online traffic and conversions and was balanced across our woman’s and men’s assortments. Year-to-date eCommerce sales have increased 26%, which puts us well on track to reach $500 million this year. At this pace, we expect eCommerce sales will exceed 40% penetration of our total sales within the next five years. We see this as a meaningful opportunity for the Express brand and our continued relevance well into the future, while recognizing it represents a significant transformation in how we engage with our customers and support their diverse shopping preferences. We, as a leadership team, have spent considerable time aligning our strategic initiatives to support this ongoing transformation of the brand. Along these lines, we will continue expanding our omni-channel investments and capabilities, while also optimizing our store footprint. During the third quarter, we successfully expanded our 'ship from store' capabilities to 150 stores. We are pleased with how this has demonstrated our ability to drive incremental sales. In addition, we are also gaining important learnings regarding the opportunity to drive inventory productivity and reduce markdowns. These include utilizing 'ship from store' to clear through eCommerce exclusive items returned to store and redirecting the fulfillment of e-commerce demand to stores to leverage store inventory. We expect the contribution from 'ship from store' to build in the fourth quarter as we continue to learn and adjust our processes and have a more significant impact in 2018 when we expand the capabilities to a majority of our retail stores. We are also optimistic about the potential of' ’buy online, pick up in store' which benefits customers by providing them quicker access to the product and benefits us by driving additional store traffic and another opportunity to engage. We launched the pilot in a small number of stores during the third quarter and are pleased with the early results. We plan to expand this capability in 2018. Our omni-channel strategy hinges on us having the right locations and brand exposure to serve our customers when, where, and how they choose to shop. We will continue to take a holistic approach to managing our store footprint, recognizing a future where demand across channels is more balanced. As we have outlined in the past, we are exercising financial discipline and making progress in improving the economics of our stores through three primary areas. First, we are seeking significant occupancy cost reductions and greater flexibility in lease terms and are expecting to see benefits from our efforts in 2018. Second, we are closing the underperforming stores where the future economics no longer make sense. We have constructed a flexible real-estate portfolio and have demonstrated the ability to transfer a good portion of closed doors volume to nearby locations or eCommerce; and third, we are converting a select number of lower volume retail stores in B and C malls to the Express factory outlet format. We’ve converted 21 retails stores to outlets so far in 2017 and have seen a significant improvement in the productivity and profitability of these stores. In the fourth quarter we will convert three additional stores. We also remain focused on managing costs across our entire business. We are on track to achieve our overall $44 million to $54 million cost savings initiatives, which did not contemplate the benefits from any of the store actions I just discussed. Turning to our second objective, increasing brand awareness and elevating our customers’ experience. In 2017 we have successfully executed against our key marketing and customer initiatives and are beginning to see positive return. The re-launch of our next customer loyalty program has been highly successfully. Customer signups are up significantly year-over-year and have already achieved our 2017 targets. We believe that this positions us well to drive improved results for the remainder of the holiday season and into 2018. This continues to be an important and ongoing initiative for us. We are also seeing continued momentum in social and digital engagements. We’ve increased our content creation capabilities and expanded our partnerships with fashion influences. Our efforts are beginning to drive positive results, which we expect will continue to in the coming year. We are also working to expand our men’s awareness and know that our partnerships with professional athletes in the past have proven to be effective. Last month we launched a league-wide marketing partnership with the NBA where our game changers campaign will highlight the role of fashion and Express lifestyle offering played in the daily lives of four young up and coming NBA starts playing in the four key U.S. markets. We will leverage the campaign across all of our channels. We are excited and optimistic about this new partnership and its potential to drive men’s brand awareness and customer acquisition in the coming year. For holiday, our campaigns building on our new brand architecture focusing on our fashion authority along with the individual style authenticity and self expression of our customers. Express brand ambassador Karlie Kloss and several other exciting young artists project the key fashion story to help our customers be their best selves this holiday season. Our third objective is transforming and leveraging our IT systems. As I previously mentioned, in 2017 we launched important omni-channel capabilities which are off to a great start. We expect their contribution to build in the fourth quarter and have more significant impact in 2018. We also continue to invest in digital transformation and personalization, which enables us to target customers with a greater precession through our digital marketing, as well as on our website and mobile app. We are seeing positive results in the areas where we are using it and we’ll expand our efforts in 2018. Finally our fourth objective is investing in the growth and development and our people. We are committed to supporting our people and ensuring that Express remains a great place to work and grow. We will continue to evolve a high performance culture to attract outstanding talent and to insure that it aligns with the changing dynamics of our business. In summary, we are pleased with the progress we are making towards returning our business to growth. Our third quarter results demonstrate that our initiatives continue to gain traction and our 26% year-to-date eCommerce growth validates and Express remains a highly relevant brand. We will continue to manage our capital structure in a way that appropriately balances our business, our business needs with our commitment, delivering long term value to shareholders. In line with this goal, we announced in today’s earnings release that our Board of Directors has approved a new $150 million share re-purchase program. Before closing I would like to comment briefly on our recent business trends. Our performance during the month of November, including the recently completed Black Friday week is contemplated in the guidance we have provided for the fourth quarter. While the majority of the quarter is still in front of us, we believe we have the right assortment and marketing plan in place to continue out quarter-over-quarter sequential improvement. I want to thank everyone at Express for their dedication and relentless effort in executing against our key initiatives in 2017. Together we have done great work to position the business to succeed during the holiday season and beyond. 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 third quarter results, and then I’ll discuss our fourth quarter and fiscal 2017 outlook. During the third quarter we saw further sequential improvement across most of our key metrics. Third quarter net sales were $499 million, a 1% decline from last year. Comparable sales at a negative 1% showed further sequential improvement highlighted by 23% eCommerce sales growth and better relative store comps of negative 7% versus negative 10% in the second quarter. Comparable sales did not include the impact of hurricane activity in the third quarter, which is consistent with our methodology. However, we estimated the hurricanes negatively impacted the total net sales by approximately 1%. Merchandise margin increased by 30 basis points versus last year, driven by sourcing-related cost savings partially offset by the highly promotional environment. Buying and occupancy expenses deleveraged as a percentage of sales by 50 basis points. This was a relative improvement from the 120 basis points of deleveraged experience in the second quarter. As a result, third quarter gross margin rate was down slightly at 29.8% compared to 30% last year. We continue to manage our expenses effectively. SG&A expenses were up slightly year-over-year due to the wage inflationary costs and incentive compensation. As a percentage of sales, SG&A deleveraged by 60 basis points to 27.6% of sales. Operating income was $11.2 million or 2.2% of sales. It included restructuring costs of $300,000 or a 10 basis point impact. Now turning to earnings, as a reminder it is important to remember that last year’s third quarter EPS of $0.15 included a $0.04 net tax benefit driven by certain discreet tax items. This year’s third quarter EPS of $0.08 includes a negative impact related to the hurricanes of approximately $0.02. Now turning to our balance sheet and cash flow, our balance sheet remained healthy. We improved our inventory position, which was essentially flat year-over-year at $343 million. We’re comfortable with the level and composition of our inventory heading into the important holiday season. We ended the quarter with $198 million of cash and cash equivalence up from last year’s $102 million. Our cash balance and third quarter operating cash flow benefited from $20 million received as part of our recently amended private label credit card agreement, which was disclosed in our second quarter 10-Q. Year-to-date capital expenditures were $42 million, down from $81 million last year, due to lower IT spending and prioritized store investments. The final topic I want to address is our guidance for the fourth quarter and full-year. Our updated guidance reflects adjusted numbers, excluding the impact from our Canadian exit. It is important to note that while we have narrowed our full year adjusted EPS outlook, which includes the negative EPS impact related to the hurricane, we are affirming our previously implied fourth quarter guidance. With that overview, I will now provide the guidance details. For the fourth quarter of 2017 we currently expect comparable sales to be in the range of positive low single digits, net income in the range of $32 million to $35 million, and earnings per diluted share in the range of $0.40 to $0.44. As a reminder, 2017 is a 53 week year with the extra week included in the fourth quarter. We expect it to represent approximately $28 million in net sales and $0.04 in diluted EPS. In addition, we expect fourth quarter net interest expense to be approximately $300,000 and the tax rate to be approximately 40%. Based on the midpoint of our fourth-quarter guidance, we expect our operating margin to expand by approximately 200 basis points, driven primarily by gross margin expansion, offset partially by SG&A expense deleverage. Similar to the third quarter we expect higher SG&A expenses in the fourth quarter due to wage inflation costs and incentive compensation. On an absolute dollar basis SG&A expenses will increase due to these items, plus the impact of the 53rd week. Turning to our full year 2017 guidance, we currently expect comparable sales to be in the range of negative low single digits, adjusted net income to range from $34 million to $37 million, and adjusted earnings per diluted share to range from $0.43 to $0.47. The full year guidance excludes the negative $0.15 per share impact incurred year-to-date related to our Canadian exit. We expect net interest expense of $2.5 million and a tax rate of approximately 40%. 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 are confident in our ability to realize $20 million worth in savings in 2017 and remain on track to deliver a total of $44 million to $54 million of annualized savings over the 2016 to 2019 period. In terms of store activity for the year, we plan to close 61 retail stores, 24 of which are conversions to outlets and opened 17 new outlet stores. We expect to end fiscal 2017 with 636 stores, consisting of 491 retail and 145 outlet stores which is down 20 stores from the end of fiscal 2016. In terms of capital expenditures, we plan to spend $58 million to $63 million in 2017, which is nearly $40 million below 2016. Express has a history of generating strong operating and free cash flow and our current guidance implies a similar outcome in 2017. As a result, we are pleased that our Board of Directors has approved a new $150 million share repurchase program. We tend to be thoughtful in the execution of this new program, which gives us the flexibility to be opportunistic in repurchasing our shares in the future. In summary, we remain confident in our strategy and continue to believe Express has a bright future. We are optimistic about our prospects for the balance of the season and beyond. We will continue to invest in our eCommerce and omni-channel initiatives while further optimizing our store footprint and we will continue to align our strategy initiatives to support the ongoing transformation of our business. We look forward to updating you on our progress in 2018. 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.

[John Morris:]

Hi, good morning everybody. Good work on the progress and the nice improvement here so far.

[David Kornberg:]

Good morning.

[Perry Pericleous:]

Thanks John. Good morning.

[John Morris:]

Yeah, you bet. Maybe talk Perry and/or David, a little bit more about the outlook for the product costs and the savings that you’ve been getting. As we go forward into next year, how much longer can we continue to expect some of that improvement and good work that you guys are doing there. It certainly seemed to contribute in the current quarter. And then David maybe talk a little bit about the marketing plans I guess as you see them going into next year. I think this new partnership with the NBA sounds interesting. I am wondering what it – you know in total marketing spend, you might be looking at on a go forward basis. Thanks.

[David Kornberg:]

Okay John, to your first question in terms of looking at the outlook for product costs into next year, obviously our team here has made great progress. We have very strong relationships with our suppliers, and you know we’ve learned a lot over the last few years through the growth of the Express factory outlet business, in terms of other countries of origin, other places where we can manufacture, and that has clearly benefited us this year. It is still ongoing work. It is not something that is won and done. We are constantly looking at ways in which we can speed up production, ways in which we can improve our product costs, and I see that continuing into next year and also beyond. I think that we had concerns in the past in terms of going into some of the countries that we’re working with, but a lot of progress has been made in those countries and we feel very comfortable with it, and what we’ve seen this year is there has been no detriment to the quality of the product that we’ve delivered and there has been no delay in the product that we have delivered to our stores. So overall, we’re very happy with the moves that we’ve made, and we will continue along that path into next year. In terms of marketing plans, you mentioned the NBA. We are very excited about that partnership. As I said on the call, on the prepared remarks, it’s a great way of expanding the reach for the men’s business and also for increasing customer acquisition. We know the NBA reaches most millennial males and actually has more millennial fans that any other sports leagues out there, and so we’re excited about it. The players that we’re working with, Brandon Ingram, Denzel Valentine, John Collins, and Jamal Murray are all up and coming players who are new to the game, who reflect the values of Express, who are everyday achievers, who are looking to get to next in their career, and we see that it’s a fabulous partnership as we go through the balance of the year and on the position today in terms of talking about some of the marketing plans that we have. But I believe that the work that we’ve done this year has really helped us in terms of customer acquisition and retention, in terms of building the next program, and I think what we have created is a very, very clear format and brand architecture that we can carry into the future.

[John Morris:]

David, it seems like the men’s business has had some pretty nice improvement after a slower spell, and I am wondering if I am reading that correctly and what might be behind that and then I’ll turn it over to the rest of the...?

[David Kornberg:]

Ultimately it’s about product and you know as we always say, everything starts with product and I think that what we’ve done in men’s and we’re also doing in women’s is we are driving much better key items. We are doing better fashion storytelling. A lot of the men’s dressier products has been doing particularly well. Suits which has done very well is continuing growth on top of growth and we see that continuing. The other thing is we’re seen a turnaround over the last few weeks in terms of our men’s shirt business which has also got a lot better. So I think it’s about the clarity of the assortment, I think it’s the fashion storytelling, but above all else it’s having the right key items that can drive the volume.

[John Morris:]

Great. Good luck for holiday. Thanks guys.

[David Kornberg:]

Thanks John.

[Operator:]

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

[Roxanne Meyer:]

Great. Thanks, good morning. Just wanted to follow up on the product question. On the women’s side I’d be curious to hear the same thing. A little bit more color on what it is that’s been seeing the most improvement within third quarter and into holiday and what categories still represent an opportunity for improvement?

[David Kornberg:]

What I would say is, it’s the same ideas, the same story. It’s really it’s about having the right key items that can drive significant volume. You know we talk a lot about the few that can drive the many, but in addition to that, it’s also having the right fashion items and it’s about having the right fashion storytelling and the clarity of that storytelling in store and online, and as you look at it in terms of the categories and the performance, we had a great quarter in dressy pants, really, really great quarter in dressy pants. We had a very good quarter in denim, also in knit tops and in jacket. So, predominantly it was really the worst side of the business, but we’ve also as I said in terms of knit tops and denims seen progress on the casual side of the business as well.

[Roxanne Meyer:]

Great, and then when you think about the categories that are most important for holiday, I would think sweaters maybe become a little bit more important. How are you feeling about some of those more seasonal and gift giving categories?

[David Kornberg:]

I feel very good about them, very good indeed and you know sweaters got off to a slightly tougher start to the season, but as we moved further into the fall, it has been very good indeed. So pleased with the sweater performance, pleased with the outer wear performance as well.

[Roxanne Meyer:]

Okay great. And then just a follow up on the NEXT program and maybe the impact. You said that you know you’re seeing a nice healthy lift in the number of signups which is great. I am wondering if that ended up having a positive impact on either your number of transactions sequentially this quarter and/or on your conversion metrics.

[David Kornberg:]

So what we did see is we saw an improvement in conversion in the quarter. As you look at it and you look at it online, all of the metrics were positive and all were very, very good indeed. Really the wild card as we have talked about for a while has been in terms of store traffic, which was down slightly.

[Roxanne Meyer:]

Okay, great. Well thanks, and best of luck for holiday.

[David Kornberg:]

Thank you very much.

[Operator:]

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

[Paul Trussell:]

Just to continue the conversation on comps and I appreciate the color you have given in terms of category performance already. But just you know in terms of their flex in here in the fourth quarter to positive comps, you know maybe just discuss a little bit more detail of how you expect that to be balanced between stores and online and also how you are thinking about traffic versus AUR and conversion and any other color, you could provide around what you saw in these first few weeks of November would be helpful.

[David Kornberg:]

Well Paul, we didn’t talk about intra quarter details and I think that the color that we’ve given you is the color that I gave you on the prepared remarks in terms of our performance over thanksgiving and I think overall the key message is that we’re pleased with the progress that we’re making towards returning the business to growth. In terms of the actual metrics that we’re seeing in AUR and ADF, I can’t go into that detail and I also can’t go into it by segment either for what we’re seeing quarter-to-date.

[Paul Trussell:]

Fair enough. So on the margins, you know do you see an opportunity for merchandize margins to be similar or potentially outperform 3Q results in terms of this fourth quarter. And on buying and occupancy, you know in 3Q I believe you deleveraged by about 50 basis points. I just wanted a little bit of help on how to think about that line generally speaking. I can certainly look back at prior periods, like in the first quarter of ’16 for example when you were able to put up better results on worse comps. If you can just help us think about the puts and takes there. Thank you.

[Perry Pericleous:]

Paul, thank you for the question. I think you have a two part question over there. First of all from a merchandize margin stand point, you’ve asked the question on how to think about that in terms of Q4. We’ve seen improvements in Q3 and we’re expecting to see some improvements in Q3 as we stated in the Q2 earnings call. In Q4 we’re expecting to see more of an improvement in the merchandized margin driven by the fact that we start the initially of the sourcing production and the low cost initiative countries. We expect more of that to take effect in Q4 versus Q3 based on timing of deliveries and obviously we expect that to continue into Q1 and Q2 of next year in terms of those savings flowing through and as David mentioned earlier, we’re going to further look for opportunities to improve the cost structure there. As it related in B&O, in Q3 our B&O deleveraged by 50 basis points. There are a couple of things to keep in mind from a B&O standpoint. One is, the fact that from a hurricane standpoint that impacted the top line sales by approximately 1% and well you have certain fixed course within the B&O such as duty precision and rent that they don’t flex with the sales and that negatively impacted the B&O in Q3. In addition to that, the other thing to keep in mind is the robust growth of eCommerce, growing to 23% in Q3 moving from 19% of net sales in last year’s Q3 to 24%. eCommerce has a lot of variable costs and as such it impacted the B&O. So as we look at on a go forward basis, again the B&O will be impacted whether we leverage or deleverage based on the mix of stores in eCommerce, but as we said previously, we expect to start getting robust rent concessions starting with the beginning of 2018 that can obviously help offset the impact from the shift into eCommerce.

[Paul Trussell:]

Thank you for the color. Best of luck.

[Operator:]

Thank you. Our next question comes from the line of Susan Anderson with B. Riley FBR. Please proceed with your question.

[Susan Anderson:]

Hi, good morning. Nice job on the quarter. Good to see the improvement there. I think you had mentioned that store traffic was down slightly in the quarter, which relatively actually seems pretty good. Just wondering if you can maybe talk about the trends there over the year? It seems like it probably has improved. And maybe give some color on what you think is driving that improvement, and then also on the traffic front. Just wondering if you’re doing anything special over holiday to drive traffic into the stores after Black Friday. I know some retailers are doing some new things such as maybe offering coffee or in-store only products or you know other incentives. Thanks.

[David Kornberg:]

I think as I’ve said before, it always starts with the products in terms of being able to get the right level of traffic and having the right key items, the right fashion items and the right storytelling and the right message and the right marketing and when you put all of that together, the expectation is that that’s what’s going to drive it. I think we’ve done a lot of work because we talked about it earlier in terms of the new brand architecture. The work that we’re doing in digital and social, I think that the new NBA partnership that we have is going to be a driver as well. You know some of the work we’ve done around omni-channel capabilities is going to continue to help us in terms of traffic, but above all else, it all goes back to the product and that is what’s going to really make the change in terms of the traffic that we see in the store. Obviously there is an overview of store traffic that everybody’s heard about from all the other calls that has been going on for the last few years and the decline in more traffic that we’ve seen and we have been a part of that, but we’ve got to control what we can control and it’s about putting out the best product that we can put out there with the right emotional, functional and technical benefits that resonate and appeals to our customer.

[Susan Anderson:]

Great, that’s helpful. And just one last one if I could say then, on the omni-channel initiatives, I know you talked about last quarter you felt that they were going to be a big part of the improvement in sales for third quarter and going forward. Maybe if you could just give some color on kind of the impact there, how you saw it help to drive sales in the quarter and just kind of expectations going forward.

[Matt Moellering:]

Yeah, so this is Matt. Obviously as we talked about, we rolled out the ‘ship from store’ initiative to 150 stores. That helps us in a few different ways. One, it helps cover any out-of-stocks we see on the eCommerce website. It also has opportunities for margin improvement over time as we get the algorithms we’re fine and really elevate pockets of debt inventory within the stores. So we are very excited about what we’ve seen to-date in the omni-channel arena. We’re also piloting ‘buy online, pick up in store,’ but ship from store alone we don’t give out the exact impact of it, but it has contributed to the success to-date. The really exciting news is its only in 150 stores today and we plan on rolling that out to the majority of the fleet in 2018 and we’ve just started piloting in three stores, buy online and pick up in store. We think that has huge opportunity for us as well and we’re going to refine that process within the stores and then start to roll that out later in 2018 as well. So there is a lot of big upside opportunity to come there we believe.

[Susan Anderson:]

Great, that sounds good. Good luck next quarter.

[David Kornberg:]

Thank you.

[Operator:]

Thank you. Our next question comes from the line of Pam Quintiliano SunTrust Robinson Humphrey. Please proceed with your question.

[Pam Quintiliano:]

Hey, thanks so much and congratulations on the improved execution guys.

[David Kornberg:]

Thanks Pam.

[Pam Quintiliano:]

So you had mentioned about the lease negotiation opportunity in the market place. Can you just give us any insight directionally if its easing anymore or what you’re seeing out there?

[Perry Pericleous:]

So Pam, as it relates to the leases what we’ve said and what we have been seeing is that our ability to negotiate and get rent concessions because improved sequentially over the last nine months to a year and we continue to see those negotiations and maintain the same type of rent concession. So we’re very pleased with what we’ve seen. What we’re seeing in the expectations or what we’re expecting over the last few months and we’re going to continue to look at opportunities to both, give their rent concessions, as well as maintain highly flexible store fleet.

[Pam Quintiliano:]

Great. And then just a follow-up with the real estate. When we think about the stores that you’re converting from full lines to outlet, so the ones that are in the B and C malls. Is there anything that you could talk about with the economics there in terms of how much costs or how long the stores are down for and then when we think about and then ultimately where you end up and how that helps. And then can you talk about the opportunity for next year, both in terms of potential new outlets within more traditional centers as well as ongoing conversions within the malls.

[Perry Pericleous:]

Yeah, so from an outlet standpoint, when we convert retail stores to outlet the downtime is less than a week. The investment that we have in these conversions is pretty minimal and it has to do mainly with just replacing the right on top of the store. As it relates to what we see out of these conversions, we see a significant improvement in the top line results and also significant improvement because of the top line to the bottom line results. Now in some instances, some of the stores that we convert are at the lease expiration and not only we get the top line improvement of the results but also we get rent concessions. In that case as I said earlier, we maintain highly flexible store fleet and therefore we only commit ourselves to many be one or two years out. In the cases that we convert some stores before the expiration, then the improvement is pretty much the top line and the margin flow through on the top line. So we see really nice financial results out of these conversions. As it relates to 2018, we are planning for more, some more outlets in 2018, both in new and conversions. We're evaluating obviously, our fleet and we are going to discuss further as to the specific plans during our Q4 call.

[Pam Quintiliano:]

And then if I could just ask, last quarter. Just your thoughts on the competitive landscape overall for holiday and how you are planning that within, I think you made it very clear that you are happy with the direction that the products is improving and that’s drawing the customers online and stores. But can you frame that for us relative to what we are seeing out there overall.

[Perry Pericleous:]

Sorry. So you are asking in terms of ..

[Pam Quintiliano:]

Just how you are planning inventories reflecting the competitive landscape; your thoughts on promotional activity just given that it still, we’ve heard some positive earlier signs out there regarding Black Friday and Thanksgiving Weekend, but we still have a while left and retail is still not as healthy as it once was.

[David Kornberg:]

Yeah, I think in terms of the inventory positioning, we are happy with where the inventory is positioned going into the quarter. I think that our sales through inventory spread is a good place and our plan going forward is to ensure that our sales are always ahead of our inventory. In terms of what we are seeing for the balance of the quarter and going into the Christmas time frame is that it is going to be promotional. It has been promotional for many, many years. We prepare for that, we built that into our cost base, we built it into our professional plan, and we are ready for it.

[Pam Quintiliano:]

That’s great. Well, thank you very much. Best of luck!

[David Kornberg:]

Thank you.

[Operator:]

Thank you. Our next question comes from the line of Janet Kloppenburg with JJK Research. Please proceed with your question.

[Janet Kloppenburg:]

Good morning everyone and congratulations on the progress. Just a couple.

[David Kornberg:]

Good morning Janet.

[Janet Kloppenburg:]

Two question – you’re welcome – two questions in relation to the third quarter results and then a couple of a go forward outlook. Could you quantify for us the hurricane impact on the gross margin rate? Gross margin improved a little bit less than I was expecting, so I’d love to know what impact you thought came from that outside event. And then Perry I know that inventories are – I think you said they are flat. What are they on a comparable square footage basis, that would help a lot and just on the go forward David I think you men’s outperformed woman’s. Do you think that – and then woman’s can comp positively in the fourth quarter given what you are seeing in the trends in the woman’s business. And just sort of to frame out, to work a little harder on Palm’s question, thanks Pam. I was just wondering, with your inventory situation and being better and trends being better, if you thought that Express could be less promotional in the fourth quarter year-over-year. Thanks.

[David Kornberg:]

Okay, that was a lot of question Janet. I think the one I will answer first is the question about whether woman can come positive in the fourth quarter, that’s our goal. I think that you know we don’t breakout by segment in terms of what the comps are, but you know we’ve guided to a positive low single digit comp for the business for the fourth quarter and that’s what we intent to achieve. So I can’t break out whether woman’s will be ahead of men’s or men’s will be ahead of woman’s but the goal is the comp and the comp that we guided for is the positive low single digit.

[Janet Kloppenburg:]

On the promotional outlook, could it be given that – I mean that was pretty good operating margin guidance from Perry, I mean that should translate to potential lower promos now?

[David Kornberg:]

I think we are prepared for whatever we are going to see out there for us to be able to take on the landscape. Obviously our hope is that it will be less promotional.

[Janet Kloppenburg:]

Okay great, and then Perry on the two items relates to the third quarter?

[Perry Pericleous:]

Yeah, and Janet you asked the operative margin improves that we are guiding to and I wanted to provide a little bit more color to that. One thing to keep in mind is we have the 53rd week, the 53rd week with extra volume get to leverage, rent and depreciation. So out of that 200 basis points on a 53 week, if you were to look at it on a 52 week basis, the 53rd week a 50% basis point impact on Q4 as a benefit to that 200 basis improvement. So that’s one, two we are expecting improvements in merchandise margins. As mentioned earlier we are expecting to see improvements driven by sourcing and production savings, especially as based on the timing of the delivery, we expect a lot of those savings. I mean we saw some in Q3. We expect more of those to come in Q4 based on how we position that inventory. Moving on the hurricane impact in Q3, the top line impact on hurricanes was approximately 1%. When you adjust for that, the gross margin was impacted by about 20 to 30 basis points negatively, because you didn’t have the sales on the expenses. And then as it relates to the inventory, when you look at the November B&O inventory or the Q4 B&O inventory, our inventory was slightly up and when you look at it on a per square foot basis it’s in essence relatively flat.

[Janet Kloppenburg:]

Okay, great. Lots and lots of the holiday season. I’ll talk to you later.

[Perry Pericleous:]

Thank you.

[Operator:]

Thank you [Operator Instructions]. Our next question comes from the line of Adrienne Yih of Wolfe Research. Please proceed with your question.

[Adrienne Yih:]

Good morning. Great job on the progress, so congrats there. David, can you talk about sort of, you know we always look at sort of these silhouette shift and kind of over a multi-year horizon. Last year we were sort of in that early adoption cycle. Where do think we are kind of late early adopter, kind of getting into more of the maturation phase and how long could it last? And then Perry, could you actually give us the year-over-year change in the AUC, its obviously the first time it’s called out. Does it get increasingly better in the fourth quarter as you said and can we expect that continue throughout 2018? Thank you very much.

[Perry Pericleous:]

I think we are starting to see a shift in bottoms, clearly towards wide ledge and more volume and I think that it is really very much at the beginning, but when you look at the performance that we’ve delivered in dressy pants and we are a destination in dressy pants and a market share leader at dressy pants, it would say that the customer recognizes it and they are responding the fashion and the newness that we are delivering in that category. In terms of the timing of how long it can last, look at it, skinny pants lasted 10 years and also continued to be very good. I think ultimately the decision is going to be the customer’s decision, how long that last but we got to be prepared to be able to drive as much volumes as we can throughout that trend. But we are clearly into that change and we are seeing the response in a lot of our key categories.

[Adrienne Yih:]

Great.

[Perry Pericleous:]

Adrienne to answer your question on the AUC, we don’t provide specifics on AUC but I would tell you the improvement that we are seeing from a source in production. Obviously you have a benefit on the AUC and we are expecting this AUC benefit to continue at least in the first half of 2018 as stated as part of the $44 million to $54 million of annualized savings. And then beyond the first half of 2018, we expect that we are going to continue to look for opportunities to further improve sourcing and production in the AUCs. And again as a reminder, some of the AUCs impacted also by mix of product within the categories of course. That’s why we don’t break out AUC specifically.

[Adrienne Yih:]

Great. Thank you very much. Best of luck!

[David Kornberg:]

Thank you.

[Operator:]

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

[Marni Shapiro:]

Hey, everybody, congrats. The stores look really fantastic.

[David Kornberg:]

Thank you, Marni.

[Marni Shapiro:]

I just had one follow-up on the men’s side. Because nice performance there, and I was curious if you can just give a little insight as to how well the performance suits were doing. You had a really strong presentation in stores for the performance stretch suits and I thought they looked fantastic. And then if you could just talk, your social media has been very strong and I’m curious if you guys are able to track. Are you seeing new customers coming in because of the social media and is she entering the brand through fashion, or is she entering the brand through denim and wear-to-work.

[David Kornberg:]

Okay, so the first question, I talked about in the comments about suits and the strength that we have in suits. Performance suits have been particularly good. I think that you know we talk about the emotional functional and technical benefits of the products and we have already focused the NBA game changers story around the performance suits and it appears to be working. It’s a product that does that have emotional functional and technical benefits and we are communicating it in a very, very strong way, so very, very happy about it. In terms of new customers you said coming from social media, your question around that. yes we are, but I think we’re also really getting it through influences and through the fashion story telling that we are doing on social media. And we do it in many different ways across different platforms. So if you follow us on SnapChat, you’ll see one different view of stories and storytelling and content and films that we put on there and then you will see it communicating in the very different way on Instagram through the images that we put out there and we shoot and we also communicate with the customers. So we look at it really between social media, we look at it through the fashion influences that we have and the cost of product categories where we can really drive the most new customers.

[Marni Shapiro:]

Is she coming into the brand though to first buy a dress or a fashion item from your or is she coming in first and buying you know the editor pant for example?

[David Kornberg:]

I think that the editor pant, when you look at it in terms of some of the established key items its really more of the existing customers. It’s the fashion that –you’ve obviously got to focus on the fashion and the fashion storytelling to be able to pull her into the store.

[Marni Shapiro:]

Fantastic! That’s great. Best of luck for the holiday season.

[David Kornberg:]

Thank you very much indeed.

[Operator:]

Thank you. Mr. Kornberg, there are no further question. I’ll turn the floor back to you for any final comments.

[David Kornberg:]

Thank you all, again for joining us this morning. We wish you a happy and healthy holiday season and New Year.

[Operator:]

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