Express, Inc.
Q3 2016 Earnings Call Transcript

Published: 1 Dec 2016

[Operator:]

Greetings. And welcome to the Express, Inc. Third Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ms. Allison Malkin of ICR. Thank you, Ms. Malkin, you may begin.

[Allison Malkin:]

Thank you, 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 otherwise required by law. In addition, during this call, we will make reference to adjusted net income and adjusted earnings per diluted share which are non-GAAP measures. Information necessary to reconcile these non-GAAP measures to reported net income and earnings per diluted share can be found in our press release. 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, Allison. Good morning and thank you for joining us. Our third quarter results were in line with our guidance with comparable sales of negative 8% and diluted earnings per share of $0.15 which includes the net discrete tax benefit of $0.04 per share. We may progress on our initiatives to correct the issues we faced in the spring. Our ability to quickly assess and take action was instrumental in delivering a double-digit increase in e-commerce sales in the third quarter but continued more traffic headwinds and the additional time needed to fully correct our choice counts impacted sales in stores. I will begin my remarks with an update on the issues we discussed on our second quarter call, followed by an update on our third quarter merchandize performance. Finally, I will highlight the progress we made on our key objectives. Now turning to the issues I defined in Q2. As you may recall, in addition to more traffic headwinds, we mentioned there were three key issues that negatively impacted our performance this past spring. Namely, we skewed too young in our projection, both in our marketing and merchandizing. We had a lack of clarity in our assortment caused by too many choices and we reduced customer touch points compared to last year. I'm pleased to say we are making progress on all fronts. We have taken steps to address the issues we identified in our merchandizing and marketing projection. Our presentation of fall will closely be [ph] in line with our target demographic driving improvements in important brand metric such as familiarity and purchase consideration. We are on-track with our objective to reduce choice counts in the fourth quarter and to be at optimal levels as we begin 2017. We believe the choices that make up our fourth quarter assortment clearly identify, curate [ph] and communicate the important trends. This will be further enhanced with spring delivery. Going forward, we will continue to deliver frequent units but we will tell fewer fashion stories in store to ensure our offerings are clear and cohesive across lifestyles. With respect to customer touch points, beginning in September, we bode our direct mail activity back in line with data full 2015. In addition, we began to relaunch Express Next, our loyalty program. As we mentioned on our future call, the goal of the initial phase of the relaunch was to make it easier for Next customers to become fully engaged with the program and utilize their rewards. During October, we fully activated a portion of our loyalty member base that had not yet completed the registration process. During the first month of the relaunch, we drove a significant year-over-year increase in completed enrollments. We will continue to prioritize Next sign-up [ph] as a productive way to build brand loyalty and drive frequency of visits and highest spend over the long-term. As a reminder, fully enrolled Next customers spend approximately two and a half times that of a non-fully enrolled member, and four times more than non-loyalty customers. We remain on-track for full program refresh set to begin in February and continue through the second quarter of 2017. We were pleased to see the initial traction of our corrective actions result in strengthening customer interest in Express and higher e-commerce sales despite facing a challenging environment which we believe impacted our overall performance. Let me now turn to review our product beginning with women's. In the third quarter, denim dresses and shoes performed above our comp average while we saw tougher results in skirts and casual wear [ph]. As we mentioned last quarter, we also relaunched our studio pants business in September with newness in fabric, silhouette and rise. In regards to choices, new full delivery began to rise late September with sales still down overall but improving in trend. In addition, our knit business responded well for change in our promotional strategy. On the men side of business, suits, tops, ties and accessories performed above our comp average with the men's business overall comping ahead of women's. In suits, we increased our offering in stores and online, and also carried our competencies longer into the season which resonated with our customers. We also introduced the new textures and fabrications in men's shirt which performed well. Turning to an update on our objectives which are improving profitability to our balanced approach [ph], providing an exceptional brand and customer experience, transforming and upgrading our IT systems and processes, and investing in the growth and development of our people. First, as it relates to improving profitability, we continue to take a balanced approach to growth with the goal of increasing sales productivity and profitability as we focused our resources on areas of business that have the potential to generate a strong return on investment, including the growth of our e-commerce business, and the optimization of our retail footprint. E-commerce was a bright spot in the quarter delivering 15% growth as we capitalized on the increasing preference of our customer demographic towards this channel with a strong and clear marketing and merchandizing message. During the quarter, we launched several key initiatives including improved navigation, as well as continued optimization for our search and category changes. We opened five new Express factory outlet locations during the quarter bringing the total to 99. During the fourth quarter, we will be opening four additional stores and we'll convert one existing retail store. We are on-track to end 2016 with a 104 Express factory location and are well on our way to reaching on target of 140 to 150 stores within the next few years. We also continue to make progress on our retail fleet rationalization initiative. We have closed 42 stores since beginning of 2015 and have one additional closure planned for the fourth quarter, leaving us seven shy of our target of 50. We regularly assess our fleet from an overall profit contribution standpoint to determine if any additional closures are warranted. We are also keenly focused on ensuring we have the right balance of locations across channels so that we are providing our customers with the ability to shop when, where and how they prefer. Finally, we have already progressed towards achieving the cost savings goals we outlined with you in August. We remain on-track to achieve $9 million in savings this year and $20 million in incremental savings in 2017. We are also lowering our capital spending levels for 2017. Perry will discuss this in great detail with you shortly. Turning to our second objective, increasing our brand awareness and elevating our customer experience. We are increasing our social media while continuing to communicate through influences, [indiscernible] and brand ambassadors. We've been very pleased with the expanded efforts we've taken in this area and continue to see a positive from our immediate distribution strategies across digital and social channels from an owned and paid perspective. Total brand impressions across these efforts grew significantly in the third quarter, leading to meaningful increases in purchase intent [ph] and lifestyle fit. In addition, our influence of programs continue to see strong momentum and reach. Our Express Instagram Channels continue to build and following on engagement. Our number of followers has now grown to more than 600,000 across the channels and we continue to see solid growth in engagement each month. In regards to brand ambassadors, we are looking forward to next bring the introduction of an assortment [ph] designed and curated in collaboration with Karlie Kloss. On the men's side, we're proud of our association with Kris Bryant, the Cubs Third Basement, World Series Champion and National League MVP. On Kris Bryant, video campaign on YouTube alone drove over two million views which is our best performing video campaign to-date. Express's ongoing mission is to partner with brand ambassadors who are implying, confident and embodied spirit of our customers, and Karlie Kloss and Kris Bryant do just that. For holiday, we continue to engage with our customers through our ExpressLife campaign for making the season and a lifestyle and uses tied back to our product. We are also partnering with millennial to excel in their fields of expertise showing additional lifestyle content in our digital channels. We note that real people resonate with our core demographic and we are excited to align the Express brand with everyday achievers who are making a difference. Our third objective is investing in our IT systems and processes. On our last call, we discussed an important IT systems implementation, the launch at the start of Q3 included new order management, retail management, and enterprise planning systems. During the third quarter, we began working with these new systems and have been pleased with the progress made in our employees use and understanding of our new tools. We have now modernized approximately 95% of our portfolio of systems as the past four years. With most of the investment in focus of these implementations behind us, we can now start to take advantage of using the new system capabilities heading into 2017, including the foundation for us to pursue omnichannel capabilities. We now possess greater insight into our customers shopping preferences which will enable us to personalize and customize promotional offers in conjunction with our loyalty programs. In addition, we are now able to see inventory across the peddle [ph] company giving us a real advantage as we plan and allocate product into 2017 and beyond. Ultimately the systems will allow us to quicken decision-making, increase speed to market and conduct planning and allocation to a more precise level. This effort should enable us to have the right inventory across channels leading to lower clearance and therefore, driving more profitable sales. And the fourth objective is investing in our people. We are committed to ensuring that the Express mandate great place to work, develop and grow professionally and that we continue to attract outstanding talents and brands. We offer a variety of unique associated development program that have received national recognition by leading industry publications. In summary, during the third quarter we refocused our merchandising and marketing projections while making progress of choice count rationalization. We saw increased customer engagement through our enhanced social media and brand ambassador associations and we elevated our loyalty program which will begin to assist us to drive more frequent purchases. Finally, we began working with our new IT systems which will give us more capability to meet our customers' needs as we head into 2017. As you are aware, we just completed Black Friday week which was disappointing and reflected an intensely promotional retail landscape. While the majority of the quarter is still in front of us, and we believe we have the right assortment and marketing plan, we are taking a cautious stand which is reflected in our guidance. I remain confident that our corrective actions taken along with the continued implementation of our key initiatives will move up toward our long-term double-digit operating margin goal in an ongoing effort to enhance value for our shareholders. We have a unique position in the marketplace driven by our ability to serve the many lifestyle needs of our core demographic with a brand only distributed by us, and we are highly focused on delivering consistently strong fashion along with a strong customer experience and value proposition so that Express becomes the top shopping destination for many consumers in our target demographic. This is our goal and one that we believe is well within our reach. I want to close by thanking everyone at Express for their dedication and relentless effort as compared to the holiday season. Additionally, as you may have seen in the 8-K that we filed this morning, Jeanne St. Pierre, our Executive Vice President, Stores, has shared with me her plan to retire at the end of the calendar year. I have appreciated Jeanne's tremendous leadership throughout her years at Express and wish her all the very best. We have a strong and [indiscernible] team and I'm confident in their continued relentless focus on the business. I'd now like to turn the call over to Perry.

[Perry Pericleous:]

Thank you, David. Good morning, everyone. Before I review our financial results for the third quarter, I would like to reiterate our commitment to the key business objectives of improving profitability to balance approach the growth, providing an exceptional brand and customer experience, transforming and operating our IT systems and processes and investing in our people. I'll will now turn to review of our third quarter results beginning with income statement. Net sales were $506 million, a 7% decline from last year's third quarter. Comparable sales declined 8%, in-line with a negative high single-digit to negative low double-digit guidance we provided in August. Merchandize margin contracted by 340 basis points driven by increased promotional activity. Buying and occupancy expenses decreased $2.4 million while our B&O rate increased by 160 basis points as the sales comp decreased led to anticipated deleveraging on fixed costs. As a result, third quarter gross margin rate contracted by 500 basis points to 30%. We continue to aggressively focus on managed expenses. SG&A was $10 million below last year at 27% of net sales. The SG&A total decline of 7% was the result of saving across many categories of expenses and the reduction in sales. The net result was operating income of $15.1 million or 3% of net sales to the 510 basis points contraction to last year was in-line with our expectations. Third quarter diluted earnings per share was $0.15 and it includes a net discrete tax benefit of $0.04 per share. Turning to our cost savings initiative, we continue to plan for a total of $44 million to $54 million of annualized cost savings over the next few years. From modeling purposes, we expect to achieve approximately 40% on the savings in merchandized market, mainly driven by supply chain efforts as we expand our fast resourcing base. Unfortunately 10% of the savings will be realized through B&O from sustainability efforts in our stores and half of the savings will come from SG&A as we continue to enhance the productivity of our and resources to expand profitability. Our 2016 guideline reflects $90 million growth of savings, most of which will be in SG&A. We expect $20 million in savings in 2017 and $15 million to $25 million thereafter which will generally -- generally be in proportion with our total annualized savings breakout. Our balance sheet remains very healthy. We ended the third quarter with $102 million of cash and cash equivalent compared to $91 million last year. Capital expenditures for the third quarter were $31 million and $81 million year-to-date. Inventory at the end of the third quarter totaled $342 million representing a 6% decrease over last year. Our retail business inventory decreased by 5% as we remain focused on our open to buy processes to ensure that our level of inventory is appropriate for our sale trends. The final topic I want to address is our guidance for the fourth quarter and for fiscal 2016. For the fourth quarter of 2016, we currently expect comparable sales to be in the range of negative low double-digit. Net income in the range of $20 million to $23 million and diluted earnings per share in the range of $0.26 to $0.30. Based on the midpoint of our guidance, we expect our operating margins to contract by approximately 670 basis points. This will be driven by merchandize margin contractions along with B&O and SG&A deleverage associated with lower sales expectations. Turning to fiscal 2016, we expect comparable sales to be in the range of negative high single digits. Adjusted net income to range from $63 million to $65 million and adjusted diluted earnings per share to range from $0.78 to $0.82. On a full year basis for 2016, we now expect that at the midpoint of our guidance, operating margins will contract by approximately 420 basis points. This is driven by merchandize margin contraction along with B&O and SG&A deleverage. Lastly in terms of guidance, our capital expenditures are now expected to range from $100 million to $105 million driven by new outlet stores and our IT platform. These -- the $10 million dollar reduction versus our initial capital spending guidance at the beginning of the year. We also plan to take aggressive step to further lower our capital expenditures run rate next year. These actions are consistent with our laser focus on reducing spending in all facets of our business. Overall, we are confident we have identified the right initiatives to improve our sales and profit trend. We're focused on implementing the corrective actions to drive profitable and sustainable growth. And now I would 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 Betty Chen with Mizuho Securities. Please proceed with your question.

[Betty Chen:]

Thank you, good morning everyone. Thanks for taking our questions. I was wondering if you can talk a little bit about the e-commerce discrepancy versus the stores data. It's encouraging to your point that the e-commerce sales grew very nicely, up 15% in the third quarter. Do you think that by the fourth quarter or where we are today, the store better represents the online presentation and where do you hope that to be by spring? My second question if I could is also regarding the inventory planning. It sounds very exciting that system is now in place for you to kind of better plan and allocate inventory unit. How should we think about the Q4 inventory and perhaps bring purchase plans as a result of that? Thanks.

[David Kornberg:]

Okay, I got three questions. First of all, e-commerce versus stores, creakingly [ph] store better represents versus e-commerce and where we expect to be by spring. And thirdly, inventory planning. Okay, if we begin e-commerce versus stores, let's -- we recognize that our demographic spends much more time on line item. We see a transformative environment that our consumer is shifting online. This is what we call here as adaptive change. The world is changing and the industry is changing in that way, and we have to be ahead of it. I think the e-commerce benefited from being able to communicate strong marketing and merchandising message throughout the third quarter. I think that suite count target in stores will be at an optimal place as we get into 2017. And that we're going to be at a point where we are really able -- we have increased the debt per choice and we will be able to increase the productivity per choice. So I feel good about where we are heading into spring. Obviously, I'm delighted with the performance and we delivered online. And so I say again, this is about adaptive change; and when adaptive change happens, you're going to get out in front of it and I think that we're doing everything that we should be. You know, I'd like to -- I'd like to say to you [indiscernible] I think is very important as a message to get across all of you, Express is a stronger and durable brand, it's a brand that's 36 years old, we have a sound balance sheet, we generate a lot of cash and we have very debt. I think that [indiscernible] Perry is where laser focused on reducing our expenses and our capital spend. And going into -- really, the second and third part of the question; spring, we will be in a much, much better position. I feel very good about the assortment. We have good warm weather rise [ph] that we have got over the last few weeks into the southern part of the country. And we will be at this point where we have an optimal choice account. So I feel good about where it is. I think overall in terms of inventory planning, the good news is -- our inventory was down at the end of the quarter, and down as far as it was -- I think that we all are very open and eloquent in terms of the purchases that we can make at the back end of the first quarter and completely eloquent as we look into the second quarter. So we feel very good about where we stand overall in terms of the inventory position. I hope that answers your question?

[Operator:]

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

[Adrienne Yih:]

Thanks, good morning. David, my question for us is, you know the fashion items or however you wanted to discuss and that we would think about that pyramid and then there is sort of a base at the foundation and then you kind of build out to the fashion pieces [ph]. The fashion component, I agree with you, looks great but I feel like it stocked out really quickly. So can you give a little bit more color -- I know you started to -- about spring, how you're distorting that and how you think that the fashion apparel trends build for spring and then more importantly, for fall of next year. Perry, really quickly, is your fourth quarter guidance predicated on quarter-to-date trends, to the macro backdrop at mall traffic being negative, not improving at December or did it call for a little bit of an improvement and people get closer to holiday. Thank you.

[David Kornberg:]

I agree with you, we have sold out pretty quickly on our fashion and that's why we have gone back and increased significantly the depth of our choice. So that we can be more productive. And I think that is also important that you understand that with that increased depth of choice, going into the spring we will also see some very good IMU improvement as well, largely, because we've spread out factory base in a better and a fuller way. So we have gone back, we are buying more engaged the fashion style, I won't add. I feel good about the spring assortment; as I said in response to the first question, we have some very good warm weather rates and I think that the trends which I'm not going to go into detail, here on the call for competitive reasons. And of solidly behind our brand as we go into the spring season.

[Adrienne Yih:]

Okay, I agree there.

[Perry Pericleous:]

And then the second part of your question; as the guidelines reflect what we saw in the month of November and Black Friday week, and it doesn't -- no that's human [ph] improving trend in the balance of the quarter.

[Adrienne Yih:]

Okay. Thank you very much about the work.

[Perry Pericleous:]

Thank you.

[David Kornberg:]

Thank you.

[Operator:]

Thank you. Our next question comes from the line of Neely Tamminga with Piper Jaffray. Please proceed with your question.

[Neely Tamminga:]

Great, thank you, good morning. For David or Perry, you guys are cutting the CapEx guidance which I think is prudent for this year and getting that focused into next year as well. But you could give us a little bit more as two what's behind the reduction. You can't blame some program, due delay in some program, you cannot change in direction, just more strategically what programs and kind of getting readjusted through that. Thank you.

[David Kornberg:]

Again, so overall, I -- clearly in terms of CapEx, the opportunity is in terms of our reader sake. And our IT systems, I want to emphasize that while we're looking at a CapEx reduction that's somewhere in the region of 20% to 25% in 2017. We are not going to do anything that is going to harm the business in anyway shape or form. There are certain IT initiatives that we will delay. And then when you look some of the refabs of stores, we're going to push back some of those as well. But overall, it's absolutely the right thing for us to be doing against 2017.

[Matt Moellering:]

And the good news, this is Matt. A good news is also -- it was the fact that over the past three years, we have done an enormous amount of system implementations, testing why vast majority of our systems; all of that investment is now behind us. We still have a few -- little of system investments going forward but to a much lesser extent. So now have made the investment in the systems, now we can see and enjoy the benefits over the time.

[Neely Tamminga:]

Thanks, Matt. Thanks, David.

[David Kornberg:]

Thank you.

[Operator:]

Thank you. Our next question comes from the line of Richard Jaffe with Stifel. Please proceed with your question.

[Richard Jaffe:]

Given the success of e-commerce or the strength and the growth there, are you looking at real estate with a different eye. Is there an opportunity to reevaluate that and perhaps a more aggressive stands, the much are they doing -- and can you talk about 2017 in light of that possibility.

[David Kornberg:]

Yes, and we're constantly looking at our Wednesday, and in revaluating our portfolios. We -- as we announced earlier on the call, we are almost at the end of our -- fifty still closing in program. But you know, we are reassessing all of the deals, all of the leases and while there is nothing now, we are -- we're looking at it very closely and you need to be aware of that.

[Richard Jaffe:]

Thank you.

[David Kornberg:]

Thank you.

[Operator:]

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

[Roxanne Meyer:]

Great, good morning and thank you for taking my question. First I guess I'm just wondering if you could talk to the differential between online and in-stores and really what's driving outperformance online; where is the strength -- online that maybe you're not singing stores? And then just in terms of the composition of your inventory, just wondering how carry over inventories look ending the third quarter? Thanks a lot.

[David Kornberg:]

Okay, so really the differential between online and stores I think is really the clarity of the message that we can communicate. The sharpness of the marketing that we can put behind us online, and really -- there is obviously no limit in terms of the timing whether the store is online, and this -- and then in terms of the fret [ph], there has to be assortment that you're going to put online. So it enables us to have more choice which is a very different model but I think that the work that we've done in terms of clarifying the choice camp, rationalizing the choice count, and clarifying the look and appeal of the stores; as we went through the third quarter, we made progress, okay; and we made progress in our business as we went through the third quarter. What we've seen is that business got choppier into November and through Black Friday weekend. So we believe that the corrective actions that we identified made a difference as we went through the third quarter. And as we get into the first quarter which I talked about for a while now, I believe we'll be at a point in the store when we are the optimal choice count and we have the right debt per choice. The good news is that I said is we have tested a significant amount of it and we have seen very, very good responses to it.

[Matt Moellering:]

So thinking back on David's comment; from a choice count perspective, when you look at the choice count, it's easy to tell clear stories online with expanded choice counts. When you get to the store where we have talked about the fact that we've expanded choice count and taken inventory down. The combination of those two create a significant drop in the depth of those fashion buys that we're making, and that's what we're correcting heading into the spring season where we'll have tighter choices of much clear message in the store which is hard to tell with broader choice counts and more depth per fashion choice which has all helped the business significantly.

[Roxanne Meyer:]

Okay, great. And on the…

[Operator:]

Thank you. Our next question comes from the line of John Morris with BMO Capital Markets. Please proceed with your question.

[John Morris:]

Thanks. Good morning, everybody. Let's see, a couple of quick questions here. Perry, on the SG&A reductions for next year and thank you for giving us that extra color. The 50% of that $20 million that you're taking, is that really coming across sort of all categories the way you've done at this year? And then David, maybe talk a little bit more about what you've seen? It sounds like that in November, it sounds like the challenge has been sort of through the month, that wasn't just on Black Friday weekend but I'm wondering if that causes you to read [ph] -- I'm thinking that most of that is coming from competitive promotions around you and what you see out there; are you anticipating or thinking about how you want to change up your promotional strategy to the extent that you might consider that at all? And if so, in what direction you might do that, either through the balance of the season or next year at about this time? Thanks.

[David Kornberg:]

Okay, so let me talk about that question first. I think John, the most important thing to understand is that we made sequential improvement as we went through the third quarter, okay. I do the -- as we've gone into November, yes, we did see a change in the promotional environment; it was sharper and I -- we always know going into the holiday timeframe that it is going to be promotional, we are prepared for the promotions. And I think that the important message on the [indiscernible] is that our inventory is under control. And so I think that we are very positioned for the balance of December to be able to hold our RM [ph] and to be able to compete. So I think that's the most important message that came across from that. Perry, do you want to move on the SG&A?

[Perry Pericleous:]

Yes. And John, I actually made some point -- yes, we did speak about $20 million like in savings in 2017, approximately 50% of that come through SG&A and similar to this year we expected savings from our SG&A at some point to be across the business as we continue to look at opportunity to reduce expenses. As we mentioned before, we have a zero base sighted approach to all the expenses and we continue to scrutinize every line item.

[John Morris:]

Thanks guys.

[Perry Pericleous:]

Thank you.

[Operator:]

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

[Paul Trussell:]

Good morning. I just wanted to enquire about the performance of the outlet boxes in the quarter and what your assumptions are there going forward?

[Perry Pericleous:]

So Paul, consistent with a Q2 performance we saw a similar drop in the comps in the outlet business as we had seen in the overall retail business. But we don't get into specific comps between the retail stores and the outlet stores. The overall performance if I were to look at the total stores, we're down from a traffic standpoint and that was the driver of these softness [ph].

[Paul Trussell:]

Thank you.

[Operator:]

Thank you. Our next question comes from the line of Simeon Siegel with Nomura Instinet. Please proceed with your question.

[Unidentified Analyst:]

Good morning, guys, this is Gene [ph] on for Simeon. Thanks for taking our question. First, would you mind sharing the comp metrics for the quarter? And second, I was wondering how we should be thinking about SG&A expense in 4Q and next year? Did you get some color on where we are in terms of getting the new systems fully into place and how the endpoint station has been going? Any updates thoughts on when we should see the benefits?

[Perry Pericleous:]

So from the comps metric for the quarter and I touched that on the previous question; we saw traffic decline in the third quarter. We also saw ABS being down in the third quarter and evident by the merchandize marching performance. As it relates to the SG&A expenses, I think that was a similar part of your question; in Q4 -- we expect SG&A in Q4 to deleverage obviously given the negative low double-digit guidance, when I look at it -- when I look at the SG&A in terms of a percent reduction to last year, I would expect it to be in the same but same as Q3 would. As it relates -- I think, as it relates to next year so my SG&A at some point would have not provided guidance for 2017 in terms of SG&A. But couple of things that we should keep in mind from a 2017 standpoint; one is, we're going to have some of the $44 million to $54 million in annualized savings start showing now in 2017, that's part of the $20 million volatile savings. Then also from a 2017 standpoint would you have to keep in mind that we're going to have increases in SG&A driven by the low inflationary cause such as decreases, such as minimum wage increases, such as reintroducing the incentive compensation into the financial structure. Just a rule of thumb, I would think -- I can leverage final [ph] on the mid-single -- low end of the mid-single digit for leveraging SG&A expenses in 2017. To your question on the IT systems, as you are aware, the majority of the IT systems went live at the end of July; this was a significant effort with significant change management required across mid-functions within the business. The system implementation went smoothly, we are getting our feet under us from a process standpoint and should start to see some leverage in the beginning of 2017 and that will continue to expand into the back half of '17 and into '18 as well. One final system we are implementing is the assortment planning tool which will be implemented in 2017, that will provide additional benefits in '18 as well, as we can get even more granular one-time planning.

[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. The holiday dresses do look really fantastic. I just wanted to focus on two areas that had been very strong for express over the last period of time and that's 1/11 and I was curious how that performed in light of some of the pressure on the knit and tops side? And if you can also talk a little bit about the Portofino shirt for example had been a pretty significant volume driver at one point and I'm curious if you're still seeing good sales there or has there been a replacement to that volume?

[David Kornberg:]

Okay. 1/11, this has been an area, specifically casualness has been an area that has been forming ahead of the rest of the business. And I think -- look, I feel very good about, it's going into the spring season. I think we've got a very good assortment and we are well positioned with the rates that we've had in the room with the climate [ph]. So I feel good about that. 14 [ph] has been hard, it's been very, very tough. I have all the key items in dressing tops but we've been testing a lot of the units and I think we have a good strategy going into the spring season and we have good key items in place to replace the ones that we have. The issue that we had -- if the Portofino was such a big part of the assortment, and such big part of the business. But we have had many years out of it -- many, many, many year's success out of it. But I feel good about the newness is being developed in that area.

[Marni Shapiro:]

If you looked at tops business, X, the Portofino because items like that do tend to come in lumps for a period of time and then they trend up and then they trend down. If you look at the tops business, X sort of that Portofino; is the rest of the business relatively healthy?

[David Kornberg:]

Well, we've got some very good items, we've got some very good solaces [ph], so the business is good. The casual and knit/tie business is good, the casual workshop business looks good. I'm not going to give you actual specifics in terms of catering performance but we have to -- some very positive signs.

[Marni Shapiro:]

Well, thanks. Best of luck for the rest of the holiday.

[David Kornberg:]

Thanks.

[Operator:]

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

[Janet Kloppenburg:]

Hi, I wanted to ask -- you know, the last time we chatted we're seeing like -- it seemed like you thought that comps would improve in the fourth quarter because of some of the SKU reduction and more focused product. And I -- you know, I'm just wondering is it just that the [Technical Difficulty] is it the staff -- maybe some of the…

[Allison Malkin:]

Janet, it's really hard to hear you. Can you repeat your question please?

[Janet Kloppenburg:]

Sure. I'll try again. Can you hear me?

[Allison Malkin:]

Yes.

[David Kornberg:]

Now we do.

[Allison Malkin:]

Yes, better.

[Janet Kloppenburg:]

So I was saying, the last time we chatted, I think your guidance indicated that you thought because of some of the assortment repositioning and SKU reduction that constitute actually improve somewhat in the fourth quarter and I'm just wondering if you just speak to the promotional environment David and how choppy it was. But maybe you could talk a little bit more about the deterrents of the comps improving here in the fourth quarter, was it just a competitive environment? Was it normal weather than expected or was -- are there some assortment issues that continue to need to be refined? Thank you.

[David Kornberg:]

Actually, I think it is the combination of all those factors. I think yes, there was one whether -- yes, there is an promotional environment, I think that the important message to come across is that I said at the beginning, we made very good improvement as we went through the third quarter. And we've -- it's gone tougher as we go into the -- and run into Black Friday weekend. I think that the important message going into spring is that we will be at this position of having an optimal choice account. We will have more depth per choice on both, our key items and also our fraction items. And we have a significant amount of it that has been tested. So yes, I -- clearly, I did say the comps would improve as we went through the full quarter.

[Janet Kloppenburg:]

[Crosstalks]. Yes, I mean…

[David Kornberg:]

And we saw comps improving as we went through the third quarter. So we were coming into it in terms of what we've seen in November so far.

[Janet Kloppenburg:]

Right. Okay, and so do you hold the same amount of confidence in the first quarter or do you think the environment could just remain choppy?

[David Kornberg:]

Look, I think we've got to be prepared for everything. And I think that we've reflected that in terms of our guidance for the fourth quarter. I feel good about our assortment guidance the first quarter.

[Janet Kloppenburg:]

Okay. Just one last question David, just one last question. In terms of the comparisons with Portofino, when do they start to ease?

[David Kornberg:]

I think the comparisons on Portofino will start to ease as we get into the back end of the second quarter.

[Janet Kloppenburg:]

Okay, great. Thanks so much and lots of luck for the season.

[David Kornberg:]

Thank you very much.

[Operator:]

Thank you. [Operator Instructions] Our next question comes from the line of Rebecca Duval with BlueFin Research Partners. Please proceed with your question.

[Rebecca Duval:]

Good morning guys and thanks for taking my question. I was wondering if I could just get a little bit more color on some of the trends that you were seeing in November. Was it mainly due to the traffic just being really weak because it seems like, or were you missing out the conversion -- was the conversion weaker than expected, it seemed like your sweaters were selling, were getting good sell-through especially on the sweaters. And the last time we had talked, you guys were chasing into that category and sound like you would be in the decision [ph] for it. And so I'm just wondering if I get a little bit more color there? And then I'm also wondering, when you have the glitch and the e-commerce that is on Black Friday, was there any way to quantify any loss of sales there? And do you feel like that was just now been corrected on a go-forward basis? Thank you.

[David Kornberg:]

Yes, if I can talk personal about the e-commerce glitch that we had on Black Friday. I think that the important message here is that we made up the volume over the weekend and it is all fixed and we feel very good about the way in which the system is operating. The team got onto it very, very quickly; and we are in a much, much better place. So I think that the important message there is that we made up the volume over the weekend and we wanted to ensure customer satisfaction, so we extended the offer to Saturday and now it worked very well. In terms of your question about November, what we saw in terms of those metrics, we saw a decline pretty much across the board. So we saw traffic decline, we saw our AVS decline as a result of the promotional activity, and the conversion I think you talked about as well, we saw a slight decline in conversion as well.

[Rebecca Duval:]

And the sweaters, David, the sell-through on the sweaters, you guys -- did you feel like you had enough of the right inventory? It seemed like you had through -- good sell-through on initial reads that you were chasing into that were in the stores for Black Friday and more coming in…

[David Kornberg:]

So I think part of the issues we faced is that we carried over a lot of sweaters last year into the spring season. And I feel -- but I feel very good in terms of the sell-through that we've seen on sweaters so far.

[Rebecca Duval:]

Okay, thank you. And best of luck.

[David Kornberg:]

Thank you.

[Operator:]

Thank you. There are no further questions at this time. I would like to turn the call back to Mr. David Kornberg for closing remarks.

[David Kornberg:]

Thank you all again for joining us. 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, and have a wonderful day.