Express, Inc.
Q4 2012 Earnings Call Transcript

Published: 13 Mar 2013

[Operator:]

Good morning, and welcome to the Express Fourth Quarter 2012 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Marissa Jacobs, Vice President of Investor Relations at Express. Ms. Jacobs, you may begin.

[Unknown Executive:]

Thank you. Welcome to our call. I'd like to open this call by reminding you of the company's Safe Harbor provision. Any statements contained in 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 these forward-looking statements due to a number of risks and uncertainties, all of which are described in the company's filings with the SEC, which includes today's press release. During this call, we will refer to 2 non-GAAP measures

[Michael A. Weiss:]

Thank you, Marissa. Good morning. I'm happy to be speaking with you this morning. The fourth quarter results we are reporting today demonstrate the measurable way the tremendous progress we've made in the final quarter of the year. When problems emerged during last year's second and third quarters, we quickly recognized them and tackled them head on. Our data driven process and are insistent on detailed hind-sighting enabled us to identify our missteps. In response, we put in place corrective actions that resulted in sequential gains in the final quarter of the year. The change in trend from Q3 to Q4 was significant and a shift we find encouraging. Comp sales rose from negative 5% in Q3 to plus 1.5% for Q4, and our diluted EPS came in just above the high end of our provided guidance. Paul will review the additional financial details with you in a few minutes. I want to focus on how we move the needle in Q4 and where we are concentrating our efforts in 2013. Let me begin with the product, which is our first priority. We largely fixed the women sweater business for holiday with 4 key silhouettes that performed very well, and this trend is continuing into spring. It's also an important data point for what will follow. We've repeatedly seen that strength in new spring sweater style is predictive of a strong fall and a holiday sweater season. Secondly, we layered in opening price point items in key categories, especially our cotton sewn knit tops. Spring merchandise, in general, was very well-received during the holiday and continues to perform well. In fact, we've seen the best Woven Top performance in years. Our third priority is ensuring that we clearly communicate our value proposition. We've clarified our promotional messaging by limiting our buy 1 get 1 offers and communicating a simpler message of either a specified percent off or precise price point. You saw this with our 50% off the whole store offer, which led -- that was a Black Friday, excuse me, which led to our record Black Friday in terms of both sales and margin dollars. With holiday behind us, I know that you are interested in what's ahead of us for 2013. I've already mentioned that early spring weeks had been very good. At the same time, traffic is down noticeably compared to last year. Consumers appeared cautious due to the macroeconomic environment and uncertainty around budget cuts and also the impact of higher payroll taxes. So in spite of the opportunities we'll be discussing during the remainder of this call, we know it is prudent to take a cautious approach to 2013 guidance. Our first quarter guidance also reflects the fact that we are up against the tough comps from last year, which was our strongest quarter in 2012. With that as a backdrop for this year's first quarter, we expect negative low-single digits to flat comps. Diluted earnings per share are anticipated in the range of $0.34 to $0.38, which includes some incremental expenses versus last year. Paul will review our guidance in more detail shortly. In terms of our priorities for driving the business, we remain very focused on our 4 pillars of growth. David will talk with you in a minute about product-related initiatives to drive sales at our existing stores. Our marketing initiatives also play a key role in driving sales and allowing us to touch our existing customers and attract new ones to the brand. We continue to leverage our large database of customers to communicate brand stories and offers, sometimes customized to the individual buying patterns. This drives sales both in stores and online. We've committed to an expanded television presence in addition to our advertising on cable shows, appealing directly to our demographics. We're testing the impact of allocating some of our advertising dollars to major network programming by airing commercials in a couple of important cities. We have also mixed in some high-profile events to more broadly showcase Express and what we are all about. Our pop-up shop at the Super Bowl was a big hit. I'm guessing that quite a few of you would have enjoyed the opportunity to shop along the big players from the Ravens and 49ers. We're also very excited about our participation in NBC's Fashion Star, which had its season premiere last Friday. One of our key members is buying designs for Express and viewers can order product immediately following the show on our website and later in the season in select stores. We were thrilled to see that 90% of the people clicking on the Fashion Star products right after the show were new visitors, and almost everyone buying the item was making their first purchase on our site. It's initiatives like these that will extend our brand reach and drive the traffic that inevitably leads to productivity gains. Our e-Commerce business continues to grow in an exciting pace. E-Commerce sales reached $272 million last year, grew 32% and represented better than 12.5% of our business. We have been saying that e-Commerce sales should reach 15% of our business. We now believe it should be even higher. There are 2 other pieces of exciting news regarding our e-Commerce business I want to mention. First, we have completed the process of bringing our platform hosting in-house. This will enable us to begin executing against the strategic initiative discussed previously. And we recently announced we have free shipping to customers who purchased $125 or more on our website -- We are excited about the expected impact of both of these items on the continued growth of our e-Commerce business. New store openings will continue during 2013 in both the U.S. and Canada. 16 locations have been identified. There is something even more important I want to talk about in terms of our real estate discussion. When you look across the landscape of existing malls, it's clear that some are becoming much more important and generating much more business while others are stagnating. The first group are becoming key social hubs where people are congregating with increased frequency to socialize and to shop. As we think about our growth pillar tied to adding new square footage, it's not just about getting into a new mall. We're moving quickly to enhance our presence at these winning hub locations. It's an important way for us to build sales, promote the brand and introduce Express to new customers. For example, at the San Francisco Center, we have added the second level to our store, and it's just about doubling our square footage there. Later this spring, at the Las Vegas Fashion Show Mall, we are going to vacate our current location and move into a new space that is more prominent, significantly larger and will really boost our presence within that mall. In June, we're doing the same thing in Dadeland. The point I really want to emphasize is that it's not just about adding square footage, it's about doing it where it counts that really makes the difference. On the Canadian front, our business is still relatively new and we are continuing to support its growth. We're adding a country manager, and we've been expanding the training we give our staff there to enable it to better convey our brand story. We are also stepping up our local marketing activities, including television in certain markets, and our efforts to increase our database will continue. Since we began, our anniversary stores in Canada were generating positive comps. Regarding our Time Square flagship store, unfortunately, the opening date is going to slip into spring 2014. Our landlord recently informed us that he will be late in turning the property over to us. International expansion remains a key focus, and our 2013 plan call for our existing franchisees to open between 13 and 16 new stores. The stores opened last year in Latin America and then Middle East as well as previously existing stores are performing well, and those results mirror our belief that Express is the brand that translates extremely well around the world. Right now, we're exploring the possibility of partnering with new franchisees that will bring Express to additional markets, and our 2013 plans call for us to sign 2 new deals this year. I also want to talk about an initiative I'm personally very excited about since it will ultimately drive significant new growth. We are working on an outlet store strategy to attract new customers interested in Express brand, but at different price points of -- than our regular stores. Many of our competitors already operate outlet stores, as do quite a few very high-end retailers, and it's been a highly successful approach for them. More importantly, it is the fact that our studies indicate that it's a real opportunity for us. One of our first priorities, which is fairly well along, is to hire a dedicated general manager to spearhead this initiative so the senior management team remains focused on our core business. And some of you may not know this, but we already operate 5 outlet locations used now to sell distressed merchandise. These could easily be converted into factory outlet stores with little effort. The same is true of another 5 regularly priced stores we currently operate in outlet malls. Let me be very clear about one thing. Because this is an early-stage initiative, we haven't included anything relating to the impact of this in our guidance, and we'll provide an update on our future call. As I look at 2013 as a whole, we are applying the lessons learned with 2012. We have a brand that serves our core customers across multiple-wearing occasions. For spring, we're delivering fresh on -- fresh on-target fashion to them. We're also focused on improving and adapting to earn their continued loyalty. Operationally, we do best when we properly execute our go-to-market strategy. We need to continue to clearly communicate our incredible value proposition to our girl and guy. Beyond that, we're focused on retaining our existing customers and attracting new ones. We used new market campaigns that introduce web and mobile upgrades that continue to enhance the shopping experience, and we'll upgrade our real estate portfolio to enhance our presence where our customers are congregating, whether in a hub mall or a busy outlet center. The challenge of delivering a year better than the one we've just ended is a motivating force to each of us. With that, I'll turn the call over to Dave.

[David G. Kornberg:]

Thank you, Michael. Good morning, everyone. It's great to be here with you again. By now, I'm fully immersed in my new role and enjoying the opportunities to oversee both the men's and women's businesses. It's enabling me to cross-pollinate best practices and good ideas, and I believe that we are forging a stronger team as a result. Let me jump right into a discussion of what we are doing from a product perspective. Mid-year in 2012, we identified some important initiatives and have made real progress executing against them. First is improving the discipline around the execution of our go-to-market strategy. I've worked extensively with the women's merchant to ensure that the entire team has a deep understanding of this strategy and how it should be used to gain knowledge that is actionable and that can drive the business. The efforts are paying off. I think you would agree that the change in trends in Q3 and Q4 is evidence of that. As an example, the go-to-market strategy has helped us to recognize the potential of the Portofino shirt. Don't get me wrong, it's just one of many tools we use, and retail will always be part op, as well as part science. But this tool helps shift the balance a bit in favor of the science part. So we'll continue to focus on this proper execution. Second is price points. We have a few initiatives in place to capitalize on our opportunities here. We introduced relevant opening price point fashion items in certain key categories that our customers come to us for year round. We've ensured that these products is being value-engineered to protect margins. Our pricing profile compared to other specialty retailers is always top-of-mind. We're paying particular attention to the price value equation to ensure we're offer an attractive price while not sacrificing quality. Our goal is not to be the cheapest, but to offer the right value. Third is a heightened focus on maximizing the overall potential of our Women's business. This represents approximately 60% of our sales. So improvement here can really move the needle. We're very pleased that some of the new spring styles and silhouettes we've delivered, that's generating strong reads since we began flowing them into the store late last year. The Portofino shirt is working across all the lifestyles. It looks as great with a suit, as with jeans or shorts, and our customers are buying it in multiple colors and prints. It's also being delivered in sleeveless and short sleeve silhouettes. I also want to note that with a $49.90 ticket, this is not an opening price point item. Our skater and fit and flare dresses are performing very well, as our peplum tops, as well as anything with lace or studded trims. Michael mentioned the importance of colored bottoms last year and I want to touch on that as well. When we brought them in, they represented the kind of newness that lures the customers into the stores, and they are still selling well. This year, in addition, we are seeing a renewed interest in the indigo jeans, including crops and ankles. We're using a number of interesting new washes and also featuring more vintage and destroyed looks. Black is also definitely back, and black and white stories are working very well for us. The Men's business turned in a strong performance last year, and I'm expecting great things to 2013 as well, since we will continue to deliver terrific quality and value to our guy. We're particularly proud of our suits and jackets, which have become 2 of our fastest-growing categories in terms of both dollar and percentage increases. All of us were excited last year when we got a call out from Esquire describing our Men's as providing extraordinary value at great prices. And with jackets being mixed and matched in new ways, they're working on a bigger cross spectrum of casual and dressy looks and appealing to a broader population. I want to make sure it continues to be strong, and we're also seeing an ongoing demand for shirtsleeves woven shirts and updated versions of our branded logo polo. Ties and other accessories are building nicely, and we expect them to boost product productivity going forward. Lastly, we have an opportunity to improve our customer experience, and that is our fourth area of focus. After all, it's one of the keys to driving conversion. We spend a lot of time working with our store-based employees to make sure they understand the crucial role they play as brand ambassadors. We are particularly instrumental in introducing our customers to the Express NEXT loyalty program, with focus on driving membership because our Express NEXT customers are more highly engaged and generate higher sales than the balance of our shoppers. So we have a busy and exciting year ahead, as we continue to drive improvements throughout the chain. It's an environment characterized by cautious shoppers, however. We know that to succeed, we have to continue to deliver product in which the value proposition is clear in terms of design, quality and price. We are up to the challenge, and I'm very encouraged by the selling I am seeing across key items and key categories of business. With that, I'd like to turn the call over to Paul.

[Dominic Paul Dascoli:]

Thank you, David. Good morning, everyone. Let me begin with a brief recap of our fourth quarter 2012 results before turning to our 2013 guidance. After a difficult second and third quarter, we had a stronger fourth quarter, which benefited from great momentum over the Black Friday week in the last 2 weeks before Christmas. As you've already heard, we began to see positive results from the corrective measures put in place during the back half of the year. Net sales for the quarter totaled $729 million, an 8% increase over last year's Q4 sales of $673 million or 4% increase, if you back out the 53rd week. Our e-Commerce sales, inclusive of the 53rd week, grew 44% to $121 million and represented 16.7% of the business or grew at 40%, if you back out the 53rd week. Comparable sales increased 1.5%, following a 5% increase in the fourth quarter of 2011. As a reminder, this is comparing the 14 weeks ended February 2, 2013, to the 14 weeks ending February 4, 2012. Gross margin was 35.1%, down 210 basis points from the prior year's 37.2%. This reflects the expected sequential improvement from the third quarter that we've discussed in our last call. As a point of reference, our third quarter gross margin declined by 390 basis points. Merchandise margin declined 170 basis points, reflecting the promotional competitiveness in the marketplace during the quarter. Our decision to go 50% off the entire store for Black Friday certainly impacted our merchandise margin rate. However, it drove significant traffic to our stores. And since we eliminated the use of CRM during those key sale dates, we generated record gross margin dollars during the sales period, which helped boost our overall gross margin dollars for the quarter. [indiscernible] occupancy expense increased by 40 basis points due in part to $4.3 million in incremental pre-opening rent expense associated with our Time Square and San Francisco flagship locations. Without that incremental expense, BNO, as a percent of sales, would have been about flat. Selling, general and administrative expenses were tightly managed, and we realized the benefit from greater leverage during additional week in the fourth quarter. Overall, SG&A expense increased to $144 million or 19.8% of sales, from $142 million or 21% of sales in last year's fourth quarter, a 120-basis-point improvement. Operating income was $111 million, representing 15.3% of net sales. This compares to $109 million or 16.2% of net sales in the fourth quarter of last year. Income tax expense was $42 million, representing an effective tax rate of 39.7%, compared to $41 million at an effective tax rate of 40.3% in the prior year's comparable quarter. Net income for the fourth quarter was $64 million or $0.75 per diluted share on 85.3 million diluted weighted shares outstanding. The 53rd week of 2012 accounted for approximately $0.04 per share of this amount. This compares to net income for the fourth quarter of 2011 of $60 million or $0.68 per diluted share on 89.1 million diluted weighted average shares outstanding. Adjusting for non-operating cost, last year's earnings per diluted share were $0.70. Now let's turn to the balance sheet, which as you can see, reflects our ongoing fiscal strength. Cash and cash equivalents rose 68% to $256 million at the end of 2012, even as we invested $65 million to purchase approximately 4 million shares of our common stock since the buyback program began last May. This cash balance reflects the benefit of approximately $45 million related to the timing of certain payables that will most likely reverse itself next year. At year end, we had approximately $35 million remaining under our $100 million repurchase authorization, which runs through November 2013. Capital expenditures during the quarter were $26 million. Total inventory increased 1% to end the year at $215 million. On a per-square-foot basis, inventory on hand was 6% lower than at the same time in 2011. As we enter the quarter, we believe the quality of the inventory to be in good order. However, there are some categories that could have benefited from some additional inventory at the end of the fiscal year and into February. While we don't generally give inventory guidance, for purposes of constructing your models, we do want to let you know that we expect inventory to grow during the first and second quarters as we look to invest in some key categories heading into the summer months and fall. We're also investing in more inventory versus last year in core year-round denim so we can fill the denim walls in our stores to ensure we're in stock at all sizes and the customer knows we are an authority in this category. Our long-term debt at year end was $199 million, flat with last year. And at the end of the quarter, we didn't have any borrowings outstanding under our revolving credit facility. Turning to our full year results. Net sales increased 4% to $2.15 billion, inclusive of the benefit of approximately $27 million from the 53rd week. Comp sales were flat versus last year's 6% gain. Remember, this is being reported on a 53-to-53-week basis. Gross margin was 34.6%, down 180 basis points. SG&A totaled $491.6 million or 22.9% of sales, compared to $483.8 million or 23.3% of sales for 2011. And finally, EPS was $1.60 per diluted share and included approximately $0.04 per share from the 53rd week. This compares to last year's adjusted EPS of $1.66. Total capital expenditures for 2012 were just under $100 million, compared to $77 million for the same period last year. Increase year-to-year was primarily in real estate spending and information technology to support our pillars of growth. Now I'd like to turn to our 2013 guidance. As Michael already noted, it reflects 2 conflicting sentiments. One being the strength of our spring offering and the internal progress we've made since the middle of last year. And two, being the reality of a cautious customer creating a challenging retail environment. Negative traffic trends are reflected in our Q1 expectations. With that in mind, our expectations for the first quarter offer comparable sales ranging from negative low-single digits to flat. This compares to a positive comp in last year's -- positive for comp in last year's first quarter. Our effective tax rate is estimated at 39.5% for the first quarter of 2013, and interest expense is expected to be $5 million. Net income is expected to be in the range of $29.5 million to $32.5 million, or $0.34 to $0.38 per diluted share on 85.5 million weighted average shares outstanding. Our first quarter guidance includes approximately $12 million in incremental buying and occupancy costs. It's a significant number, so I wanted to lay out the main components

[Michael A. Weiss:]

In conclusion, 2012 was a difficult year, but one that concluded on a relatively positive note when contrasted against the third quarter. We are approaching 2013 both cautiously and optimistically. Cautiously, because of traffic concerns and macroeconomic uncertainties. Optimistically, because I believe in our product, and our customers are telling us that we have some winning items. I know, without a doubt, that the Express brand remains strong and relevant. We will continue to deliver fashion-right products that is well-made and fairly-priced to retain our core customers. At the same time, we are continuing to look for new offerings and for ways to introduce new customers into the Express brand. Armed with a flexible business model, a proven and successful team, adequate cash for reinvestment and strong cash flow, we know that our goals are attainable. [Operator Instructions]

[Operator:]

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

[Paul Alexander:]

It's Paul Alexander for Lorraine Hutchinson. Could you guys give us a little more color on the first quarter comp guidance? You mentioned seeing good conversion and being excited about some products. But other companies have told us that there has been some stabilization since early February, have noticed some other factors, maybe a normalizing weather or later tax returns that's really negatively impacted early February that shouldn't be a drag going forward. So I guess my question is, does your first quarter comp guidance reflects any acceleration from February? Or are you projecting February trends straight across first quarter? Or have you seen any stabilization?

[Dominic Paul Dascoli:]

Our guidance takes into consideration what we've seen in February, which was a challenging month from a traffic standpoint. As we've gotten into March, we have seen somewhat of an improvement in traffic, and we have seen an improvement in conversion. So we try to take into consideration that improved trend coming out of February, but we do have a hindsight of having our February business behind us. So it reflects both of those things.

[Operator:]

Our next question comes from the line of Simeon Siegel with JPMorgan.

[Simeon A. Siegel:]

So I was just hoping we could drill into the margins implied in your guidance. Given kind of the improved conversion and those positive spring reads, what's the right way to think about the merch margin decline for Q1 given that it sounds like you are experiencing strong sell-through as you work through that weaker traffic? And then Paul, I apologize, my math could very well be off and I don't know if I got all the incremental B&O lines. But does that translate to roughly 220 to 250 basis points of buying and occupancy pressure in the first quarter? And you gave the flagship second and third quarter impacts. What's the right way to think about those going forward?

[Dominic Paul Dascoli:]

Okay, great. So Simeon, there is some degradation in merch margin in the first quarter to consider. Part of the increased conversion results are related to some increased promotional activity that we've had -- we've experienced in the first quarter. So you should be thinking about a slight degradation in margin. And in terms of B&O, you're in the zone in terms of the -- that deleverage in the B&O. So I think -- what was the third part of your question?

[Simeon A. Siegel:]

I guess just finishing, so the -- you gave the flagship impact for the rest of the year, the other 2 pieces. So I assume the e-com should continue. Is that -- is it a similar degree for the next 2 quarters?

[Dominic Paul Dascoli:]

Yes, that's a variable expense, obviously but as the e-commerce piece of the business continues to grow, that piece will grow in terms of absolute dollars. We would expect to see, as we're moving through a year, hopefully, some improvement in overall margin sequentially from quarter to quarter, as we work our way through to the back end of the year.

[Simeon A. Siegel:]

All right. And then just lastly, it looks like -- I mean, you guys brought it up. It looks like this is the first quarter, I think, since the IPO where you have a net cash position. You spoke to the roughly $35 million left on the authorization. Can you just give us general guidelines of cash cushions you'd look to keep and kind of the way we should be thinking about where you guys are thinking about returning cash?

[Dominic Paul Dascoli:]

Yes so our cash -- our thoughts on cash really haven't changed that much. We, first and foremost, look for opportunities to invest in the business. Michael has talked about one new opportunity today, and we see to continue to invest in the business. And secondly, we have talked about wanting to pay down debt at the appropriate time and return to shareholders through the share repurchase or other means. We actually continue to talk to the board about the right things -- the appropriate things to do with cash. And at our upcoming board meeting, we actually have a plan and pretty comprehensive review of our capital structure with them.

[Operator:]

Your next question comes from the line of Neely Tamminga with Piper Jaffray.

[Neely J.N. Tamminga:]

Michael, I just wondered if you can weigh in a little bit on what the earlier Easter is for you, kind of you hear both sides of the debate out there. I'm just wondering with a seasoned veteran like you, how you're viewing it as it relates to your business. And I have a follow-up.

[Michael A. Weiss:]

I'm sorry?

[Dominic Paul Dascoli:]

The change in Easter timing.

[Michael A. Weiss:]

Oh, the Easter timing change. I'm sorry. Yes. So we have the Easter -- the buildup to Easter week, a week earlier, basically. But by and large, we don't think that makes much of a difference. I think what does make a difference is what they feel like that week. Historically, we have not looked -- for bookkeeping purposes, absolutely, March and April are separate months. But historically, we've always thought about the 9 weeks as being [indiscernible] because Easter constantly does change. Historically, it doesn't really matter if the spring break traffic or the cruise traffic or the vacation traffic, whatever you want to call it always is in March. When Easter falls in April, theoretically, you get 2 busy times. When it's in March, it's one busy time. But generally, it adds when it's supposed to, Neely.

[Neely J.N. Tamminga:]

Okay. And then just looking at your business, I know you guys have been offering free shipping on orders over $125. I think the winds are about possibly within sort of free shipping 24/7 on all orders for much of retail over the next couple of years. I was just wondering where you guys are planning to adopt on that curve, if you've done some analysis around it, your data-serving companies, just wondering whether or not you think that there is support accelerating that?

[Dominic Paul Dascoli:]

Neely, I think, right now, we continue to look at that and look at the competitive set on that. We studied hard the $125 threshold for free shipping, and it was a positive thing for us to do overall for the business. Right now, we don't have any plans to move to free shipping all the time, but we'll continue to look at the competitive set and look at what it will do -- could do for us from a business perspective.

[Neely J.N. Tamminga:]

Paul, are you willing to share what the shipping cost would have weighed down on your P&L in Q4 then?

[Dominic Paul Dascoli:]

I couldn't hear your question, Neely.

[Neely J.N. Tamminga:]

Are you able to share with us what the shipping cost on the free shipping component would have weighed down on your gross margin?

[Dominic Paul Dascoli:]

It wasn't that -- it really wasn't that significant in Q4. I don't have that right in front of me. If you want, you can follow up with me on that.

[Operator:]

Our next question comes from the line of Richard Jaffe with Stifel.

[Richard Ellis Jaffe:]

Just following up on your outlet strategy and wondering about the timing and the strategy behind it. I know today, you're consolidating clearance from better stores into the 5 clearance stores. I'm wondering if the outlets will be a continuation of that strategy or if you'll make -- or unique for that product, that channel? And then just if you could clarify, you mentioned the Black Friday initiatives and the absence of the use of CRM improving the margin. Could you spend a little time to help us understand that?

[Michael A. Weiss:]

Sure. Let me start with the first one. The answer is no. It won't be a continuation of the same strategy. The strategy that we currently have leads to a very, very, very up-and-down business. We do quite well when we ship, and we do next to nothing the weeks that we don't ship. The other big issue is we do better in the -- at current outlet when we've done worse in the regular stores because there are more ranges of size and color. So quite obviously, when we study competition in terms of outlet, there is clearly, clearly merchandise that's made and you can tell by the label for the outlets. So they do 52-week business, which is what we really want to do. I think that what we have done in our current outlet is we have to use that opportunity to cut up a fabric set we have too much of. And to tell you the truth, Richard, that has been very, very successful. We've not done enough of it. So our new outlet strategy will be much more of a factory-store kind of a strategy as opposed to just clearance.

[Matthew C. Moellering:]

And add on to that -- Richard, this is Matt. When you look at the return on investment of our capital and you rank what the return on investments look like for the company, international franchise, because there's no capital involved and very little overall investment, is typically the highest ROI followed by e-com. Outlet would be the third highest return on investment, followed by company-owned stores. We get very attractive investments on all of these activities. But outlet is above even company-owned store given the economics associated with this channel. And we have done a lot of work studying the channel. As we talked about, we are hiring a head of outlet to head up this channel for us. We have talked with some experts. We've done a lot of due diligence on our own to put together a model of what we think this channel can do. And what we want to do before we come out with specifics on timing and of rolling this out, we want to get the head of the outlet channel on board and verify the assumptions that we have in place. But we certainly are 100% in agreement that we are going to move forward with an outlet strategy. And I think if you look at other retailers out there, there is significant opportunity really across the board for all retailers.

[Michael A. Weiss:]

Richard, your other question was about the percent off a whole store and the CRM and its effect on the margin. Is that correct?

[Richard Ellis Jaffe:]

Correct.

[Michael A. Weiss:]

Okay. So here is how it works. A year ago, we -- when we did 50% off this year, it was up against 40% -- we did 50%, 40% after 1

[Richard Ellis Jaffe:]

Could you quantify? Is that possible to put a percentage of the impact or...

[Dominic Paul Dascoli:]

Richard, just from -- it really drove a record gross margin week for us.

[Michael A. Weiss:]

And a record volume week.

[Dominic Paul Dascoli:]

And a record volume week, from a dollar standpoint. We haven't disclosed the actual dollar amount.

[Operator:]

Our next question comes from the line of Jay Sole with Morgan Stanley.

[Jay Sole:]

So I have a question about -- in the press release, you mentioned successful initiatives in the women's business including introducing entry price point fashion in key items. So when I look in a store, I see $9.90 camis, dolman sleeve tops. That's a relatively small percentage of the overall mix in the store. My question is, are there more items hitting this entry price point group than maybe I'm seeing? And is it a big part -- big enough part of your assortment right now as it stands?

[David G. Kornberg:]

Jay, it's David. Jay, I think its about putting entry price points in the right places, okay. And I think, as I mentioned on the prepared remarks earlier, you've got an itemized Portofino shirt, which is an excellent item and it's ticketed as $49.90. So it's not an opening price point item. I think it's about getting customers back into the brand in the department where opening price points are important. And that's the way we're looking at it. And I think the example of that on the tops in both dressy and casual, I think we have great opening price points within woven shirts. And we're looking at denim in a bigger way as well in terms of the way that we approach opening price points go forward. So that's really it.

[Jay Sole:]

Okay. And maybe if I can just shift to SG&A. SG&A dollar growth was up only 6% in 4Q. What's the outlook for SG&A dollar growth in 2015? And what percent of SG&A would you say is earmarks for investments in future growth like e-com, for example? And what part is essentially just ongoing operation?

[Dominic Paul Dascoli:]

So Jay, to start with the first portion. That question has 3 or 4 pieces to it. Just let me make sure I've gotten it.

[Jay Sole:]

All right. So I was noting that SG&A dollar growth seem pretty well controlled in 4Q, up only 6% year-over-year. And I was wondering what is the outlook for SG&A dollar growth in 2013. And then on top of that, if you could kind of break it up into what part of the SG&A is kind of earmarked for investments in future growth and what part is essentially ongoing operations.

[Dominic Paul Dascoli:]

Yes, most of the SG&A is earmarked toward ongoing operations, honestly. I mean, there's a depreciation component in that related to the investments that we talked about from an IT perspective, from a CapEx to support the 4 pillars of growth. But most of our SG&A, honestly, is directed to ongoing operations. And our focus has been, throughout this entire year with the challenge that we've had, to control SG&A, we will continue to have discipline over. And I think from a percentage basis, percentage-of-sales basis, I think you should be thinking about us trying to not grow that on any significant basis -- percentage of sales, I'm sorry.

[Operator:]

Our next question comes from the line of Betty Chen with Wedbush.

[Betty Y. Chen:]

I was wondering if you can, Paul, talk a little bit. We heard about merchandise margin in the first quarter. How should we think about that in the balance of the year especially as you lap some opportunity in Q2 and Q3? And what does that mean for gross margin as we progress through the year as well?

[Dominic Paul Dascoli:]

So from a merch margin perspective, we would hope that the decrease in merch margin that we're seeing in the first quarter would be the worst throughout the year. That's what -- that's how we would be looking at that. We'd start to see some progression -- some progressive improvement as we go through Qs 2, 3 and 4. Keep in mind, again, in Q2, there will continue to remain pressure on our gross margin as a result of having the incremental flagship cost that we didn't have last year in that quarter similar to Q1. And so as we get into Qs 3 and 4, we'd see some relief of pressure compared to prior year because we'll be lapping those incremental cost. So I guess the easiest way to put it, we would hope to see progressive improvement throughout the year in our -- both our merch margin and gross margin.

[Betty Y. Chen:]

And then, I guess, David, can you talk a little bit more about the planned investment in some key areas and around core denim? Are we -- I guess, how should we expect that do? And would it continue to grow even beyond the end of Q1, as we heard from Paul? Or -- and how significant an increase should we expect that to continue?

[David G. Kornberg:]

Yes, I can't give you details in terms of the percentage increase. So we're going to look to increase the -- we are looking to increase our investment in the quarter in the category as we go forward through the balance of the season. I think there are a couple of areas. Obviously, we have a great position in the denim business. And as I look at it, I think that we shouldn't have come out of length in our core denim, and we are returning to a place where we have got length or go forward in our core denim as we deliver into fall. And so I'm very excited about what that will present for us. But also, we're seeing success in terms of the crops and the ankle within denim as well at the moment. So go forward, I believe that, yes, it's a big opportunity for us and you will see increased depths in terms of our core denim.

[Matthew C. Moellering:]

And the other piece of that is that what we're really trying to do here is ensure that we have the core denim wall build throughout the year and make sure that we are on authoritative -- we have an authoritative position in the store when the customer arrives. What we found is that we were out in sizes in some instances. Based on size runs on the inventory, we were holding particularly low portions to the volume year. And it's important to note that the core denim wall that we're talking about here handles year-round denim. So it's not the fashion denim we're talking about that has more markdown risk associated with it. It's the year-round denim that we're maintaining in the walls.

[Betty Y. Chen:]

That's really helpful, Matt. I guess my last question, if I could, is what are we seeing in some of the most prominent locations like San Francisco? What's the initial action as it is a much more impressive presentation? And also, in some of those larger locations, we've noticed an enlarged presentation of accessories like shoes. Any early reads on that front will be really helpful.

[David G. Kornberg:]

So in terms of the specifics to San Francisco, there, I can't speak to that as one store. But in terms of these new categories of business, I'm very excited about the opportunities that it presents for us. I think when you look around the marketplace, obviously, shoes is a very, very important business out there. And I think we're getting some very exciting reads in terms of what we're seeing going into spring with our shoe business. And I see upside, only upside in terms of the shoe business. The other 2 new areas of business that we've gone into that I'm very excited about are personal care, which is predominantly fragrance; and then also the watch business, which we went into in the fall season across all stores. And we saw very, very good response to that and continue to grow that going forward.

[Operator:]

Our next question comes from the line of Janet Kloppenburg with JJK Research.

[Janet Kloppenburg:]

I have a couple of questions for David and Michael on the merchandising front. I just wanted to clarify whether or not you think inventory is constraining your comp performance right now. And also if your merchandise margin guidance with degradation, takes into consideration, the fact that you've got pretty promotional last April when the knit business softened up a bit. I'd like sort of sequential guidance there on merchandise margin degradation. And also, for Paul, I'm a little confused on your guidance. The first quarter, you called out $0.09 in, I believe, incremental or onetime occupancy expense pressure. And I'm wondering if it's legitimate to add that back to your first quarter guidance.

[Dominic Paul Dascoli:]

So Janet, I'll answer that. I'll take the last question first, I guess. I don't think you'd add it. You don't add it back into the guidance, these existing expenses. It's just operating [ph] cost and expenses that were incremental to what we experienced last year to try to help you reconcile where some of the guidance is -- some of your guidance is -- or excuse me, your estimates are right now compared to our guidance.

[Janet Kloppenburg:]

Right, no, I understand that we can't back it out. But on an apples-to-apples basis, we could consider it a $0.09 in incremental expense versus last year?

[Dominic Paul Dascoli:]

Yes, that's why I called it out.

[Janet Kloppenburg:]

And is that the same level that we should be thinking about for the first -- for the full year as well?

[Dominic Paul Dascoli:]

It starts to level out actually as you get through the year. It's really related to the timing in some of the leases that we entered into after Q1 of last year, some of the larger leases we've entered into that Michael was referring to like San Francisco -- the extra floor in San Francisco and what we're doing in Las Vegas. But it starts to kind of even itself out throughout the year. And then part of that was also the flagship cost, as we talked about it, $4 million in Q1, $4 million in Q2 and $1.3 million in Q3.

[Janet Kloppenburg:]

And also some loss revenue from that flagship opening shift from the fourth quarter to the first quarter of next year.

[Dominic Paul Dascoli:]

That's accurate. We took the revenue out of our full year projections for the New York flagship location.

[Janet Kloppenburg:]

Okay, great. And on the merchandising front?

[Michael A. Weiss:]

On the -- let me stop at the -- to your inventory question because I've been thinking about it. The answer is no. We've not self-constrained in terms of purchasing goods that we need. Clearly, some of the items that we started to sell has not been funded to the extent that they needed to be funded. And we were not hampered in rebuying those things. So I would say that we've not experienced inventory constraints. What I would say is that in certain categories, maybe we cut back a little too far in inventory, but there is none of the major categories. We did put the dollars behind the major categories, where they needed to go. And when we went back to rebuy, especially for the really heavy time of year, which, as you well know, is April, May, June. It's March clearly, but March is -- sometimes, weather constraints, sometimes not -- by the time April, May, June, comes it is spring/summer. And we need a lot of merchandise. And what we bought is what we felt we could sell and what we needed. We were not, in any way, constrained in terms of purchasing. David, do you want to add?

[David G. Kornberg:]

I don't think there is any to add, honestly. I think, Michael, is absolutely on the mark. We are not constrained in terms of the selling. As we set at ICR, we kept a significant amount of dollars open for the balance of spring. And we've been able to chase into very proven winners in terms of making the balance in spring go forward.

[Matthew C. Moellering:]

Yes. And Janet, just to clarify as well. While we weren't constrained, inventory per square foot was down 6 percentage. It's hard to generate positive comp. We're now heading into February. What we have done is we are -- there is more receipt coming in, starting in early March to mid-March. So we'll be in a much better inventory position on the Q2 and the back half of the year call you'll see that will -- the inventory levels will increase.

[Janet Kloppenburg:]

Okay. And also on the merchandise degradation question, David, if you could address the guidance with respect to the fact that, I believe, your merchandise margins become much easier in April versus February and March of last year?

[Dominic Paul Dascoli:]

Yes. Janet, this is Paul. We, obviously, have February behind us. So we've seen the impact of the promotional activity on our markdowns. We know -- without talking about what are -- we believe we know what our promotional cadence will be as we look through the balance of the quarter. And all that's been taken into consideration in our guidance.

[Janet Kloppenburg:]

Okay. And then on the categories, it sounds like almost everything is working. Is there any category of business where you're disappointed or where you're feeling greater than expected promotional pressure from competitors?

[David G. Kornberg:]

I think in terms of opportunities for us, I think our skirt business leads us to a big opportunity go forward. We didn't come out of the gate in the way that I would have liked, but it's not a terribly significant overall part of our inventory in our position go forward. But in general, I'm very, very pleased in terms of where we stand today.

[Operator:]

Our next question comes from the line of Eric Beder with Brean Murray.

[Eric M. Beder:]

Could talk a little bit about some of the pieces of the men's business and how they're doing? And how is suiting doing? And how -- what are you seeing in terms of the watch business going forward?

[David G. Kornberg:]

I've got to tell you, I'm delighted with men's business. It continues to grow. As we've said now for a very long period of time, it's continued to grow. I think that we have a lot of newness coming through and we have a lot of innovation. Looking at what we're delivering this month, we've got the 1MX coming in, in an easy-care fabric, which I'm very excited about in terms of what that presents for us. And as I said earlier on the call, on the prepared remarks, suits and jackets have really given us the biggest dollar and also percentage increase that we've seen season-to-date. So in general, across all men's categories, I'm delighted with what I'm seeing. I'm sorry. What was the second part of your question?

[Eric M. Beder:]

What is going on with the -- I know you've been rolling out watches. It's coming out for women's, too. How has that business been accepted? And are there other -- what is the biggest new accessory category you want to go into?

[David G. Kornberg:]

I think, obviously, I want to consolidate the businesses that we have, as it stands on accessories at the moment and continue to grow them. I'm very pleased with what we've seen in watches. We've seen significant growth, obviously. We had a very, very good reception of the business that we had. We delivered men's for the chain at the beginning of October. We delivered women's to the chain in the beginning of November. And when I look at it, the first 5 -- 4, 5, 6 months that we've seen, I'm very excited about the potential it presents us with.

[Operator:]

Due to time constraints, our final question comes from the line of Marni Shapiro with The Retail Tracker.

[Marni Shapiro:]

Can we focus a little bit on your online business because -- a few things. There's been a lot of competitors come into your space that are maybe half-baked but are still competitors. And there are a few things that I'm seeing on your website that I'm wondering if you could just talk about. You have some footwear that you run free shipping and returns, but that's not on the apparel. On the handbag assortment, it's much more extensive online and looks interesting to me. So if you could talk a little bit, I guess, about -- how you feel about the landscape online competitively, what you're doing new and interesting online. And also how are your customers reacting? Are you seeing the same trends online that you have in stores, the way she reacts to promotions or weather? Or is it very different online?

[David G. Kornberg:]

Okay. In terms of our -- obviously, we are thrilled with what we've achieved in the past 4 years in our online business. And we said on the call, we reached the number of about $270 million last year within a space of time of 4 years. Obviously, we have learned a lot over that time, a lot over that time. And we continue to see significant growth in the channel. When I look at it by category, there are certain categories that he and she are both really, really responding to online, one of which is tailored. But really, what we see is that the best items that we sell, we sell online. And the hottest fashion that we can sell, we sell online. And we literally look at it every single week in terms of our top sellers online versus our top sellers in the store channel. And we're seeing a really, really good response. I think that the other thing to say is that we're doing other categories online. So for instance, in men's, we've gone off to swim this season in a much bigger way. We're going to be delivering swim next month in women's, which we're very excited about. And then when you look at certain categories, it gives us the opportunity to broaden the assortment that we can't do in the store channel. So whether it's dresses, dressy dresses and casual dresses, we offer a broader assortment. Or whether it's in tailored products, we offer a broader assortment. Generally, across the board, we're offering more choices online than we're offering on the store. So we continue to see it getting bigger and bigger. And as Michael said in the opening, it's about 13% of the business as we stand today. And we don't see why it shouldn't be significantly bigger go forward.

[Matthew C. Moellering:]

Yes, the other thing, we are investing significantly in e-com, the e-com front end platform as well, as we talked about. So we've made investments this past year to bring that in house versus have it outsourced. And that will allow us to significantly enhance the shopping experience for the customer, everything from the aesthetic of the website to checkout to search over time. And we're working through that this year. And along with that, the omni-channel out there is, obviously, a big buzz word and we are working on initiatives in that space as well to really stay at the forefront of the e-com, in the mobile/e-com experience for the customer. We are working on ship from store -- order online, ship from store, things of that nature as well. That will be out and available at back half of the year.

[Michael A. Weiss:]

Marni, the one thing I'd like to echo in terms of what David said is that we are really, really surprised at the potential of online for selling much broader assortment. We have been so tuned into a store that we -- it took us a while to get to the fact that you don't have to edit as far down online as you do in store. And the more you have there, the better off you are. The other big surprise, which I've mentioned in the past that I had online, was that what we sell online is the best of what we have, the highest price points, the tailored, the highest fashion is what is best online. So I find that to be very, very, very encouraging in terms looking at it in the future.

[Operator:]

Mr. Weiss, we have reached the end of the question-and-answer session. I would now like to turn the floor back over to you for closing comments.

[Michael A. Weiss:]

Thank you for joining us this morning. We look forward to speaking with you again in May. Thanks again.

[Operator:]

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your line at this time. Thank you for your participation, and have a wonderful day.