Express, Inc.
Q4 2014 Earnings Call Transcript

Published: 11 Mar 2015

[Operator:]

Greetings and welcome to the Express Inc. Fourth Quarter 2014 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. I would now like to turn the conference over to your host, Marisa Jacobs, Vice President of Investor Relations. Thank you, Ms. Jacobs, you may now begin.

[Marisa Jacobs:]

Thank you. Good morning and welcome to our call. I’d like to open by reminding you of the company’s Safe Harbor provision. 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 the 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. In addition during the call we will make reference to adjusted net income and adjusted earnings per diluted share which are not 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 Paul Dascoli, Senior Vice President and CFO. I’m going to turn the call over to David, who will be followed by Paul and then we’ll start the Q&A.

[David Kornberg:]

Thank you, Marisa. Good morning everyone and thank you for joining us today. This is my first time speaking with you in my new role, and it’s good to be able to start off by reporting that our fourth quarter results exceeded both our original and the increased guidance. Our comparable sales declined by 2% falling less than the mid-to-high single digit decline that we originally guided to. This result also surpassed our January guidance which called the comps to decline by 3% to 4%. Our full quarter earnings per share of $0.49 exceeded both our original and increased earnings per share projections. Paul will review our guidance with you in a few minutes. Before he does, however, I want to note that we expect to deliver both topline growth and greater profitability in 2015 starting in Q1. The fourth quarter ended very differently than it began. November was disappointing, particularly around the Thanksgiving holiday. Then, during the last two weeks of December and throughout January, we saw business strengthen as customers came back in force and responded well to our early spring deliveries. This has continued into the first quarter of the New Year and is reflected in our guidance. As the fourth quarter wound down, we took a more restrained approach to promotion and I am encouraged by the results. In January, for example, we did not anniversary two events. The five-day all store 40% off promotion, and a four-day e-mail event. This helped us to preserve and protect the value of our newest and best selling items, and the overall inventory level of our spring goods. Our merchandise margin and our bottom line both benefitted which is part of the reason that we exceeded our original Q4 guidance. Consequently, we began fiscal 2015 in a better position than last year. I want to comment briefly on the topic of promotions. They have been part of the Express DNA and they will continue to be. All-store promotions and CRM, for example will each remain in our arsenal; however, they will be used more sparingly going forward. We have structured in many of our future promotions to be more targeted, and at times less deep and less frequent. This will help us to communicate a clearer value proposition to our customer. The benefits we saw from this approach in Q4 will carry over into 2015 and will be an integral part of returning the company to profitable growth, which I will comment on shortly. Normally, we would now turn to an update on our growth pillars. Instead, Paul will touch on them when he discusses our financial results. I would now like to take this opportunity to discuss my vision and priorities for our company. I want to be clear that this does not involve a shift in strategy. Our four pillars of growth continue to be the key areas of focus for our team. What will be somewhat different is how we think about advancing them to return Express to predictable, sustainable, and profitable growth. I’ve been in my new role for a little over a month now and have been meeting with associates at all levels of the organisation. It has been a valuable experience. I’ve also participated in extensive meetings with my colleagues on the executive committee to discuss how we can best maximize the potentials of our brand so that Express will prosper in the years to come. All of this work culminated in our priorities to 2015, which I have begun sharing with the organization, and which I want to share with you this morning. The focus on five key areas, namely; increasing profitability, elevating our customer experience, sharpening our brand position, continuing to upgrade and enhance our systems, and further developing our people. Let’s start with increasing profitability. We understand that the creation of shareholder value is intrinsically tied to our ability to grow, but it can’t be just any kind of growth. Our focus is on delivering predictable, sustainable, and above all else profitable growth. To accomplish this, we intend to take a balanced approach to managing the business. First, we intend to increase our revenue base across all channels. We expect to return our retail stores to positive comps as we deliver stronger assortments and increase our connection with the customer through our high impact marketing. Our outlet business will continue to grow as new stores are opened. We are also planning for e-commerce to grow faster than last year as we build out our e-commerce offerings and improve site functionality. Lastly, we intend to grow our international business by opening additional franchise locations and adding franchise partners to bring Express to other parts of the world. Second, it’s imperative that we improve our merchandised margin. Pulling back from promotions is one essential ingredient and I touched on that earlier. Another essential element is better inventory management and control. To accomplish that, we have a number of initiatives that will allow us to buy smarter, turn goods faster, and optimize our inventory once it is on hand. We will for example capitalize on the agility of our supply chain to leave more of our open to buy dollars for later in the season so that we can aggressively chase into winning products. Third, we expect to better leverage our expenses over the coming years to drive operating margin gains and anticipate making some progress here in 2015. At the same time, we will continue to invest in a high return growth initiatives such as opening new outlet stores. I assure you that we have set the right tone within the organization as it relates to expense management and everyone understands that discipline in this area is essential. Our second priority revolves around the customer, where our intent is to provide the exceptional experience across all touch points and become a truly customer accepted company. We know from a third party study that 70% of buying decisions are influenced by the customers’ experience with the brand. We also note that we have the opportunity to create a deeper and more engaging customer experience. The essence of this world is focussed on evolving from a service model to a service and selling model with greater emphasis on customer interaction that is explaining more about our product and how to wear and accessorize it. To do this, we will migrate our communication away from a promotional message first and more to a brand and fashion story telling message while also highlighting a great value that we offer. We will deepen our customer engagement with the brand across all touch points, whether in stores, on-line, or through our various social media channels. As we do so, we expect brand loyalty and customer retention to follow leading to higher conversion and sales. This is why our transformation to a true omni-channel retailer remains a key objective. We have a very clear roadmap of activities over the next three years that will help us achieve this objective. This includes initiatives such as creating a single view of the customer to drive real time interaction and better personalization of messages, global inventory visibility, ship from store, buy online and pickup in-store along with same day delivery. I mentioned our brand a moment ago, which is the third priority I would like to address. The Express brand is strong, but it can be even bigger and stronger. We intend to protect our leading positions in wear-to-work and [Indiscernible] and to elevate our position as a destination to denim and casual wear. We are currently engaged in work that will sharpen the communication around our brand essence, vision and promise. This will enable us to more clearly articulate what we stand for and to better differentiate us from others in our space. Part of this involves consistent messaging around operating that it is uniform across our retail and e-commerce channels. As I mentioned earlier, this also involves reducing the breadth, depth and frequency of promotions throughout the year. All of these things in combination when coupled with a strong product offering and a clearly defined value proposition will deepen our emotional connection with our customer and house our brand equity and contribute to the growth of our business. Fourth, systems and their processes are the heart of execution, and this is an area in which we continue to invest. To that end, a number of transformative projects are underway, such as the retail management and enterprise planning systems that we have discussed with you on prior occasions. We are also in the process of bringing our order management system in the house to facilitate omni-channel capabilities. These systems upgrade are at the heart of our ability to deliver a truly customer centric experience. Lastly, but certainly not least are the people who make up the Express family. Without them nothing can be accomplished. We are fortunate to have an exceptionally talented, dedicated and engaged team and we depend upon them each and every day. Our culture is one in which we challenge our teams and we challenge each other. We do this in an atmosphere in which people of both supported and appreciated. Collectively, these priorities will pave the way this year and beyond as we continue to build over the long term. We always ask a lot of the Express team and will continue to do so. Their commitment to the brands is evident and for that and for everything else that they do for Express, I want to thank you all. In closing, I would like to thank everyone for the tremendous support and best wishes offered to me as I moved into my new role. Throughout my tenure at Express, I have been proud to be associated with its amazing brand. My new vantage point has solidified my ability, but our future is bright and that many years of sustainable and profitable growth lie ahead for Express. We have a strong brand and a loyal and expanding customer base that we are serving by delivering a great fashion with compelling value proposition. As we focus on the priorities outlined above, we will try to have profitability that builds value for our shareholders. At this time, I’m going to turn the call over to Paul.

[Paul Dascoli:]

Thanks David. Good morning, everyone. I’m going to begin by reviewing our fourth quarter and fiscal 2014 results, then I’ll turn to our outlook for 2015. Net sales in the fourth quarter grew 1% to $726 million. Our comparable sales declined by 2% which was better than we anticipated when we issued our January update. We grew our merchandised margin by 70 basis points. This gain reflects the disciplined approach we took to promotions during the last month of the quarter. As David mentioned earlier, moving away from some of the all-store promotions used last year drove gains in margin dollars and margin rates. Operational gains in areas such as fabric cancellations and shrink were offset by higher freight costs as we continue to rely more on air shipments and deliveries to east coast ports to avoid west coast port delays. As a percentage of sales, buying and occupancy expenses deleveraged by 100 basis points compared to Q4 of 2013 due to the impact of higher rent expenses and depreciation charges. This led to a net decline in gross margin of 30 basis points or a ratio of 31.7%. SG&A as a percent of sales came in at 21%. The 90 basis points of deleverage was mainly driven by our negative comp that increased investments in e-commerce outlet in marketing as well as IP-related activities. Our effective tax rate was 39.8% compared to last year’s fourth quarter rate of 39.9%. Net income came in at $42 million or $0.49 of diluted earnings per share. This compares to $48 million of net income and $0.57 of diluted earnings per share in last year’s fourth quarter. In terms of the progress made against our growth pillars, 2014 was generally productive. While we did not price gains and store productivity we made progress during the year and our fourth quarter as retail store comps were significantly better than those of the first quarter. Looking ahead, our objectives are to drive more traffic towards stores, improve our conversion, manage inventory in a more disciplined manner and most of all ensure that we have the fashion our customers want; in combination this will drive store productivity gains. With respect to real estate, our 2014 outlook rollout exceeded our expectations on all levels. We ended the year with 41 stores in operation, 22 of which represented conversions from full price retail stores located in outlet malls or from our clearance stores. Together they generated approximately $55 million of incremental revenue, far surpassing our initial estimate. Looking ahead, we anticipate opening another 30 plus outlet stores in 2015. The rationalization of our retail fleet began last year and will continue. We ended 2014 with 600 full priced retail stores down from 632 when we began the year. This net 32 store decrease consists of nine openings, 22 conversions and 19 retail store ownerships. As previously discussed, between 2015 and 2017 we anticipate closing approximately 50 additional stores around the time of their natural lease explorations. Our e-commerce business grew by 4% in the fourth quarter and for the full year as well. Throughout the year we continued to invest in IT initiatives and to upgrade our website and our mobile platforms. Those investments are driving results in terms of heightened conversion and sales. In 2015, we expect increased growth in our e-commerce business as we continue to invest in capabilities as well as product expansions and e-commerce exclusives that will contribute to the business growth. Turning to our international business, we entered 2014 with 34 locations, two more than the 29 and 32 store range anticipated at the start of 2014. This spring, our first standalone Express store will open in South Africa. Overall, our existing franchisees are expected to open six new stores this year. We are also continuing to explore opportunities to bring Express to new markets through additional franchise relationships. Returning to our financial results, our capital expenditures during the quarter were $29 million compared to $27 million last year. For the year in total, our capital expenditures were $115 million compared to a $105 million in 2013. Our balance sheet continues to be very healthy. We ended the year with $346 million of cash and cash equivalents compared to $312 million at the same time last year. Our revolving credit facility remains on track. Of course it should be noted that on March 1 we used approximately $215 million of cash to redeem our senior notes. This amount included principal, accrued interest, and the call premium. This redemption will eliminate approximately $19 million of interest expense annually. We ended the year with inventories of $241 million up 13% from last year. This included approximately $26 million of inventory related to outlet stores. Retail and inventory, exclusive of our outlet product increased approximately 1%. This was primarily due to inventory in transit, which was higher due to longer lead times associated with utilizing east coast ports. We feel very good about the level and composition of our inventory as we started the year. For information related to our full year financial results, please refer to this morning’s press release. I’m now going to turn to our guidance for the first quarter and full year 2015. Our outlook for 2015 is one which we believe realistically balances risks and opportunities. The work we’ve been doing to deliver fresh, relevant product and managed promotions is continuing as our fleet rationalization and expense initiatives. At the same time, we recognize that the overall promotional environment remains intense. For the first quarter of 2015, we currently expect that comparable sales range from a low single digit to mid single digit increase. Our tax rate will approximate 47%, keep in mind that that rate is an unadjusted or GAAP rate, for your modelling purposes the rate used to derive our adjusted net income would be approximately 43%. Adjusted net income will range from $9 million to $12 million or $0.11 to $0.14 per diluted share based on approximately 84.9 million diluted shares outstanding. Net income on a GAAP basis will range from $3 million to $6 million or $0.04 to $0.07 per diluted share using that same share accounts. On a full year basis, we expect our comps to increase in the low single digit range, our tax rate to be approximately 40%, our adjusted net income to range from $79 million to $91 million or $0.93 to $1.07 per diluted share based on approximately 85.1 million diluted shares outstanding. And our net income on a GAAP basis will range from $73 million to $85 million or $0.86 to $1 per diluted share based on that same share count. Our guidance also incorporates the elimination of the interest expense following the redemption of our senior notes. During the first quarter we will have approximately $10 million of non-core operating charges related to the redemption of our senior notes which we have excluded for purposed of calculating adjusted net income and adjusted diluted earnings per share. The non-core operating charges include the call premium, the write-off of unamortized issuance costs, and the write-off of the debt discount. Interest expense, exclusive of the aforementioned $10 million is expected to be approximately $3 million for the first quarter reflecting one month’s interest under senior notes and the interest associated with the accounting treatment of our flagship leases. Interest expense for the balance of the year is estimated at $1.2 million per quarter and relates primarily to the accounting treatment of our flagship leases. Capital expenditures are expected to be between $114 million and $119 million compared to $115 million spent in 2014. That concludes my comments. At this time, I’m going to turn the call back over to David for his closing remarks.

[David Kornberg:]

Thank you, Paul. 2014 was the year in which we did not meet our expectations. We regularly hindsight [ph] our performance and have identified opportunities for improvement that give me confidence heading into 2015. As I noted earlier, we have a plan in place to deliver improved results. We are always working to make our apparel and accessories more compelling as to further strengthen our price value proposition, drive profit and improve margins. I feel very good about our spring assortment and its ability to drive our business. We are examining budgets to see if further expense reductions are possible. We are transforming our service model to provide an exceptional customer experience. We are examining all aspects of our brand with an eye towards enhancing brand engagements and customer loyalty. Lastly we are examining processes and procedures to see how we can work smarter, faster and more effectively. Express is a nimble organization that has successfully evolved overtime and we see this continuing as we proactively address new challenges and opportunities. I look forward to meeting with many of you in the coming months and to updating you on our progress on the future calls. At this time I am turning the call back over to Marisa for one quick announcement.

[Marisa Jacobs:]

Thank you, David. I would like to request that everyone asking questions limit themselves to one question and one follow-up so that we can get to everyone in the queue. Operator, please open the line so that we can began the question and answer portion of the call.

[Operator:]

Thank you. [Operator Instructions] Our first question comes from the line of Neely Tamminga with Piper Jaffray. Please go ahead with your question.

[Neely Tamminga:]

Great. Thank you. Good morning. David, congratulations to you and the entire Express team on this great, strong start.

[David Kornberg:]

Thanks, Neely.

[Neely Tamminga:]

You bet. So, we want to ask a little bit around the product and what I'm really trying to derive here is how far along you are in certain of your initiatives that we have seen. So, by and large, it seems to be that there are some broader fashion trends working towards knits. I would love your perspective on that or what some of the overarching fashion themes really are right now? And then, could you talk about One-Eleven and what do you expect from that? What you are seeing, early signs, what you expect from that, and maybe also throw in swim so far, too? Thanks.

[David Kornberg:]

Okay. That's a number of questions, Neely. All right. I'll start with the Express One-Eleven. Express One-Eleven, it’s a new collection of casual women's knit tops as you've seen. We introduced it into a very select number of stores; 50 stores and online. It's been in the stores now for two weeks. Obviously, two weeks is very early in terms of being able to speak to the results of the test, but I'm very encouraged by what we've seen. Very encouraged by what we've seen. We launched swim online this week. It's also going to go to a small number of stores, about 15 stores. But again, I think it speaks to what we've done with Express core, what we're seeing with Express One-Eleven and now also with swim. We think that we're able to launch in a much better way for the integrating campaigns. And – but again its very early days. Swim has been online now for about I think four days in total. Moving on to your question about trends. In women's, there are thematically there are three major trends that we're looking at. First of which is boho, which we're seeing some very good results across the board. Whereas the second is really the sort of Southwestern trend where we're seeing sort of a merge of boho in kind of fringe product, product with fringes, but really has sort of the Southwestern look and appeal to it. And then thirdly, it's very much a 17 glam look, which works particularly well on the dressy, going outside of the business. In men's, we're looking at chinos and joggers delivering very good results. We are starting to see some very good results in men's at destroyed denim, as that delivers in greater depth and we're also seeing in tops, textured fabrics looking very well.

[Neely Tamminga:]

Thank you.

[David Kornberg:]

Thank you.

[Operator:]

Our next question comes from the line of Tom Filandro with Susquehanna International. Please proceed with your question.

[Tom Filandro:]

Hey, thanks and congratulations as well on the much improved execution, and David thank you very much for that vision overview? Best of luck.

[David Kornberg:]

Thank you.

[Tom Filandro:]

My first question is related to SG&A. You had that 6% increase and you guys highlighted that was due in part to higher marketing spend. So how should we think about the marketing spend in 2015, and could you expand on how you're leveraging the brand ambassadors? And just very quickly on that comment about maximizing the agility of the supply chain, does that suggest any adjustments to the testing process or is this simply increasing open to buy? Thank you.

[David Kornberg:]

In terms of the supply chain, Tom, it's really about keeping our dollars open and really positioning ourselves into a chase mode, so that we're chasing off the items that are proving themselves to be the best sellers, and we can get back to them in much greater depth. In terms of the brand brand ambassador strategy, we have been working obviously with Kate Upton for approximately a year. I think it’s 11 months at this point. In men's, we've started with Stephen Curry and then also for Express core we're working with Anastasia Ashley. I think there are plenty of opportunities going forward for us to work with brand ambassadors. And I think, what it does is it's broadens the overall appeal of the brand to a population who knows these faces and can relate to these people. And then finally in terms of the marketing spend, I think – our marketing spend for the year last year was approximately 5%. This year, as we look it going forward, I see its being somewhere in the region of 4.5% to 5% as well again.

[Tom Filandro:]

Thank you very much. Best of luck, David.

[David Kornberg:]

Thanks, Tom.

[Operator:]

Our next question is from the line of Adrienne Yih with Janney Capital Markets. Please proceed with your question.

[Adrienne Yih:]

Good morning, everybody. Let me add my congratulations. The stores really look good, so kudos. My first question is on test and reorder. Can you – I'm assuming at this point you're testing some products for early fall. So, can you give us any color as to is that testing better than some of the product that you had tested for spring? And my follow-up is, I don't know if you mentioned anything about impact of the port issues to 1Q or the first half of 2015? Thank you.

[David Kornberg:]

Sorry. Could you just repeat your last question again?

[Adrienne Yih:]

The follow-up, was any residual impact from the West Coast port issues in the first half of this year, 1Q or the first half?

[David Kornberg:]

Okay. So in terms of the testing and reordering strategy, we're very encouraged by what we’ve seen in terms of spring early reads, and really our bulk deliveries that we've had. We're constantly testing – we're testing for Q3 at the moment. And we're seeing some very good key items as well as the ability to reorder some of the things that are working very well as well at the moment. So, overall very encouraged by what we're seeing there and I'm going let Paul take the question about the West Coast.

[Paul Dascoli:]

With respect to the West Coast for Q3 and Q4 we talked about, we felt an impact of somewhere around $4.5 million. We talked about that during the last conference call. As we think ahead into Q1 and Q2, clearly we'll moving more things to – or have everything still go to the East Coast and some via air. So the impact in Q1 we estimate about $1 million to $2 million, but that's all taken into account in our guidance.

[Adrienne Yih:]

Great. Wonderful. Best of luck.

[David Kornberg:]

Thank you.

[Paul Dascoli:]

Thanks.

[Operator:]

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

[Simeon Siegel:]

Thanks. Good morning, guys and congrats on the results.

[Paul Dascoli:]

Thanks, Simeon.

[Simeon Siegel:]

So, Just on the gross margin, so merch margin was up nicely for the second quarter in a row. Can you talk about your merch margin expectations embedded within the guidance? And then, you've clearly seen meaningful occupancy deleverage for the past few years. Can you help quantify what degree of occupancy leverage you might get or you'd expect backed into that low single-digit full-year comp guidance?

[Paul Dascoli:]

So, from a first quarter perspective, we would expect very modest improvements in our merch margin and we're really trying not to be too aggressive in our assumptions as we continue as David said, it’s a pullback on our promotional strategy, really see how that works for us. And I would suggest the same on a full year basis that it would be a very modest. In terms of leverage then we might get in terms of B&O. We would expect on a full year basis to see a little bit of leverage there as we guided toward having some positive comps. And the same in the first quarter, but again not being too aggressive in those assumptions with respect to B&O leverage.

[Simeon Siegel:]

Great. Thanks. And best of luck in the coming year.

[Paul Dascoli:]

Thanks, Simeon.

[Operator:]

The next question is from the line of Janet Kloppenburg with JJK Research. Please proceed with your questions.

[Janet Kloppenburg:]

Hi, everybody. Congratulations on the progress you've made.

[Paul Dascoli:]

Thanks, Janet.

[Janet Kloppenburg:]

Couple of questions. On the knit and active introductions that you've made early in Q1, I was wondering if the outlook is for that to be a full chain rollout in stores. I think I've seen the One-Eleven and the actives product and it's pretty exciting and differentiated for the brand. And I'm just hoping that we can start to see that in wider distribution, particularly as one of your main goals is to drive store traffic in the store fleet going forward. And also, I was wondering if you could comment on whether your cost side interest reflective of current trends and if you felt there had been a weather impact to your quarter-to-date business trends? Thank you.

[David Kornberg:]

Okay. Janet. Hi. In terms of Express One-Eleven and active, active, we saw very good results with in January. The issue we have with active is the lead time. It was tested in 30 stores. Our aim is take it to over 100 stores for September and to build that even further for January for next year. Express One-Eleven is obviously a very different story. So it's knit top products that we can chase after very quickly. As I've said, its very early, the test has been out for two weeks, and I'd like to hold on that in terms of how far and how fast we're going to expand it until later.

[Paul Dascoli:]

In terms of comp guidance, I'd always, we take into account the current trends in the business what we've seen from the start of the quarter until we do our conference as well as what we think is going to happen in the back half of the year or back half of the quarter. And as we spoken about before, we triangulate from a variety of different ways with historical data to estimate what we think the comps will be. So we set our guidance this time no differentially than we have in the past. And from a weather perspective, we think the weather has had a nominal impact on us over the last few weeks. Clearly there have been a couple days where we've had stores closed, but we don't think it's anything of significance right now.

[Janet Kloppenburg:]

Okay, great. Thanks so much and good luck.

[Paul Dascoli:]

Thank you, Janet.

[Operator:]

Our next question is coming from the line of Richard Jaffe with Stifel. Please go ahead with your question.

[Richard Jaffe:]

Thanks very much and a really quarter guys, a great – especially great finish. A couple of quick questions on, well, the inventory being essentially flat in stores and the positive trend, have you guys shifted into chase mode? Are there categories, now that it's middle of March that you are chasing for spring/summer? And then, looking over to the channels you source through, are you finding, one, that chasing as possible and that, two, how are costs coming through? There's been talk of labor increases and challenges on the cost side of the equation, so if you could sort of address both of those? Thank you.

[David Kornberg:]

Okay. So, hi, Richard. Yes, we are in chase mode. We want to be in chase mode. We like being in chase mode. It’s the way we work best. We have a very agile and nimble supply chain and enable us to see what selling and position ourselves in the way that we can get after it. So we're happy to be at that place. In terms of labor, I'm going over to Paul on that.

[Paul Dascoli:]

Richard right now in terms of AUCs in the first quarter and really the first of the year, we expected to be relatively flattish and we've included that. We've taken that into consideration in the guidance and that's also inclusive of the dollars. Right now that would have – we expect to spend by moving things to the East Coast.

[Richard Jaffe:]

So, the answer is, yes, there is some costs that you've had to incur in a year-over-year basis in terms of some of the sourcing issues? Is that safe to say?

[Paul Dascoli:]

This is Paul. I think there offsets, so yes, labor is going up. I think on the flipside, cotton prices are coming down. We also are lapping some costs associated with the West Coast port strike by moving product to the East Coast and also having to air in some additional goods. And then, while fuel costs are also coming down, while diesel hasn't really come down that much at this point that could be a tailwind as well. So when you add all of that together including the increases for labor, we're still looking at about a flat AUC for the year.

[Richard Jaffe:]

Right. Got it, that's helpful. Thank you.

[Operator:]

Thank you. Our next question is from the line of Lindsay Drucker Mann with Goldman Sachs. Please go ahead with your question.

[Lindsay Drucker Mann:]

Thanks. Good morning everyone. I wanted to ask a question about the promotional approach to this year. You obviously had success in dialing down the rate of promotions in the fourth quarter. As you think about the plan to take promotional activity down across the full year, is it sort of – what kind of order of magnitude are you thinking? Is it similar to what we saw in 4Q? Will you be first testing to see how she is responding to the reduced promotions, and if it's not working, you will be able to up the volume a little bit? That is my first question. The second is the outlet store openings versus conversions. Maybe you can help us understand from a dollar profit per store how accretive the outlet conversions are and how that compares with the new outlet openings? Thanks.

[David Kornberg:]

Okay. I'll take the first question, Lindsay, promotional activity. Yes, we plan to continue to reduce the amount of promotions that we're doing. We actually – we also in February, the President's Day weekend, we reduce the amount of promotions that we were doing then. We are seeing benefits from it overall. And we want to speak to the equity of our product overall, and the fashion position that we take as oppose to speaking the whole time about promotions and price. Clearly, we want to be able speak to the values that we offer, but we want to speak to first and foremost the equity that we have and that we put into our product. We're constantly testing reduced promotions and we have the flexibility that if we see that there is some kind of negative turnaround that we can change back. But our goal is long term to reduce the amount of promotions. As I earlier, speak to a more balance approach of the business of topline increase in margin dollars and leveraging our expenses.

[Paul Dascoli:]

Yes. And the follow-on to that a little bit. As David talk about we are going to take a very careful approach. We will always have promotions in our business as most other retailers will. We're talking about we're reducing promotions and we're not going to just hold our promotions off in one year. Obviously, that would not be beneficial for us. So, we're weaning off of promotions. You will still see small store promotion for almost this year less than we have last year and we'll continue to look for opportunities to reduce the promotions and create a much healthier business long term.

[Matt Moellering:]

And Lindsay, with respect to the outlets, we'll continue to say that they performed well beyond our expectation means, stores that we've converted at comps quite positively. And as you know we expect that these stores to show productivity of upwards development of 150% and in some cases of our full price retail stores and the operating profits in those stores or formal profit to be upwards into the mid 20s. So, they continue to do extremely well. We're excited about opening up 30 plus stores next year, so we would expect to end the year at a minimum with 71 to 76 stores next year.

[Lindsay Drucker Mann:]

Thanks so much.

[Operator:]

Our next question is from the line Marni Shapiro with The Retail Tracker. Please proceed with your question.

[Marni Shapiro:]

Hey, guys, congratulations, the stores look fantastic.

[David Kornberg:]

Thank you.

[Paul Dascoli:]

Thanks, Marni.

[Marni Shapiro:]

Can you just remind us – it looks like you are adding quite a number of outlets next year. Could you remind us what or where is your thinking long-term as to how many outlets Express should have? And could you also remind me, is everything in the outlets made for outlets at this point versus fill back?

[David Kornberg:]

Hi, Marni. We and as Paul just said, are looking to be at end of this year at 76 stores. Long term, we're looking to be at 150 stores, 150 more than we believe are sensible for us to be in. And in terms of the product it is all made for outlet entirely.

[Marni Shapiro:]

And then, are you able to pull back on the promotions in the outlets? Because I know the outlets have been very promotional. Have you been able to pull back there as well?

[David Kornberg:]

We’re not seeing that as an issue really. As we growing the business there, clearly the outlet business is operating at a lower AUR than the frontline retail stores. And we don't see any impact from that at this stage, any negative impact. Everything looks positive there.

[Marni Shapiro:]

That's interesting.

[Matt Moellering:]

Yes.

[Paul Dascoli:]

And we don't allow any kind of coupons or email. There are 800 CRM to be used in outlet stores anyway.

[Marni Shapiro:]

Fantastic.

[Matt Moellering:]

Some of what you might have seen recently too, is our first flow through of some of the clearance merchandise which we try to continue to markdown and move right through the outlets. We're in a full-priced retail stores we will market out of stock at some point and take it off the floors. So, some what you might have been seeing is our efforts to clear through our first round of clearance merchandise.

[Marni Shapiro:]

Fantastic. Best of luck, guys. The stores look fantastic.

[David Kornberg:]

Thank you.

[Matt Moellering:]

Thanks Marni.

[Operator:]

The next question is from the line of Susan Anderson with FBR Capital Markets. Please proceed with your question.

[Andy Schmidt:]

Hi, guys. This is Andy Schmidt on for Susan. Congrats and good quarter, first of all.

[Matt Moellering:]

Thanks, Andy.

[Andy Schmidt:]

So, question on the service and selling model. How should we see that enacted in the stores? Should we expect to see more labor or is that simply a change in processes? And then my follow-up question is on use of cash. Given the retirement of your senior notes, how should we think about your priorities for cash going forward?

[David Kornberg:]

Yes. For the change in the selling model in the stores, it's really focusing on the customer feedback and using existing labor and repurposing some of that labor and also doing some incremental training in hiring the right skill sets for individuals within the stores to do the combination of versus just being a service model. So, we believe we have the right leadership group in place, the store managers, district managers to change this focus and to make some good traction in the year ahead.

[Paul Dascoli:]

And with respect to the cash, Andy and we were constantly reviewing with the board opportunities for the best deployment of cash. So, clearly the – we've paid off the senior notes at this point, so we're virtually debt free. Clearly at the appropriate time or buyback of shares could be appropriate and we'll continue to talk to the board on ongoing basis about that.

[Andy Schmidt:]

Great. Thanks. Best of luck.

[David Kornberg:]

Thank you.

[Operator:]

Our next question is coming from the line of Betty Chen with Mizhuo. Please proceed with your question.

[Betty Chen:]

Thank you. Good morning. Congratulations for a great quarter.

[Paul Dascoli:]

Thanks, Betty.

[Betty Chen:]

I was wondering, David, if you can talk a little bit more about the order management system. It sounds like that could really unlock some omni-channel capabilities on top of what you already have. Can you just walk us through some of the timing and benefits of that? And then, my follow-up is regarding the inventory. It sounds like some of that number was also impacted by in-transit. Do you happen to have what that number would be excluding that and whether we should expect in-transit impact Q1 in inventory as well? Thanks.

[Matt Moellering:]

This is Matt. For your first question around the order management system, yes, we're bringing, as David mentioned, bringing the order management system in-house. And we believe this is core capability that we need to have in-house versus outsourcing. That will be completed in early 2016, mid-early to mid-2016. What this will enable us to do is a lot of the omni-channel activities that we lack today such as things like ship from store, buy online, pickup and store reserve and collect all of those type of activities, the new omni-channel system over the next couple of years we'll able to add on those capabilities by bringing this in-house.

[David Kornberg:]

The other thing I would add to that, Betty is that the single view of the customer and inventory visibility for us should in place across all channels by the end of this year. And then, Paul.

[Paul Dascoli:]

So, Betty in terms of the – you're right, you're absolutely right. There was an increase in terms of our inventory in transit. From a retail inventory only standpoint we actually were been down low single-digits without the increase in in-transit year-over-year and you could expect a little bit of increase – or someone of an increase in in-transit in Q1 too, but as you know, we general buy forward-looking inventory guidance.

[Betty Chen:]

Thank you so much. The stores look great. Best of luck for spring.

[David Kornberg:]

Thank you, Betty.

[Operator:]

Our next question is coming from the line John Morris with BMO Capital Markets. Please proceed with your question.

[John Morris:]

Thanks. Good morning everybody. My congratulations as well, especially coming in such a difficult challenging environment, really nice job.

[David Kornberg:]

Thank you.

[John Morris:]

David, thank you for sharing with us some of the category performance. Question about -- my question is about bottoms, the category there. How is that performing? Maybe talk a little bit about denim in particular and dresses. And then, if you were to say what's not as strong, because it sounds like a lot is working, where do you see the opportunity for improved performance? And then my question for Paul would be, unless I missed it, can you give us a feel for where SG&A year-over-year increase in dollars would be for next year? What kind of a percentage increase in the guidance for SG&A next year? Thanks. David?

[David Kornberg:]

Okay. Hi, John. So, in terms of the women's performance, we're up across the board in terms of tops, bottoms, ready-to-wear. We're not up in accessories. Denim, we've seen a really good turnaround in that as we come into the spring season. Improvement in Denim really being driven by the girlfriend jeans, by destructions, and we are also getting some very good initial reads on flares to encourage about that. The dress business, we've seen a very good performance on the dressy dress business and the casual dress business usually comes into its own in a much bigger way as we get into the end of Q1 and as we move into Q2. As the men's business has been more challenging than the women's business, during the fourth quarter the men's business decline more than women's and we didn't deliver enough newness, especially in our shirt and sweater businesses. But I believe that we have the right measures in place to turn the men's business around very quickly.

[Paul Dascoli:]

So John, in terms of SG&A on a percent of the sale basis, we would expect on a full year basis to be relatively flat year-over-year. Our overall expenses would be up we believe in the mid single-digit range. Marketing in terms of absolute dollar should remain flattish as David said, we would expect to be somewhere in the range of 4.5% to 5%. We would expect to see increases in operations, some of that attributable to the increase to the number of stores that we have particular the outlet store increase that we've been talking about. We're also seeing an increase in our IT spend and some of that has to do with the increase in depreciation that we're seeing with respect to the implementations that we've been talking about retail management system, the planning system. And then, we also would expect and hope to see an increase in our incentive compensation this year as we performed better and hopefully can pay our associates for that performance.

[John Morris:]

Great, you deserve it. And good luck for the balance of spring. Nice job.

[David Kornberg:]

Thank you, John.

[Operator:]

Your next question comes from the Pam Quintiliano with SunTrust. Please proceed with your questions.

[Pam Quintiliano:]

Right. Let me add my congratulations and best of luck. It sounds like everything is going great. I just have a quick question on the health of the core customer. How is she feeling and is she benefiting from the lower gas prices? And then also a second question on the consumer. Any change in the composition of who is shopping with the new products hitting? Are you losing any customers as you are weaning off of those promotions that you have had for a while? And who do you see shopping the outlets?

[David Kornberg:]

Okay. So you're asking – sorry, the first question was about are we're seeing benefits from reduced gas prices.

[Pam Quintiliano:]

Yes.

[David Kornberg:]

And the health of the customer. Yes, I think looking at the results that we've seen, the fact that we saw traffic increase at the end of December and into January we saw traffic was slowed in February as most people saw, but we're able to offset that. I think with increases in conversion in AUR and ABS, along with less promotion that we did, says that she -- the customer who is coming out is feeling healthier and is liking what she sees and is prepare to pay for it. So that's how we view that in terms of the health of the customer. Clearly we feel very cautious. We've been through a very tough couple of years, and I don't want to at this point say that we are completely out of the wood. Your other question was around, sorry.

[Pam Quintiliano:]

Yes, who is shopping and are you seeing any change in the composition from the perspective of attracting a new customer with the newer product, but also losing anyone as you are doing less promotions; and then, just who is shopping the outlets?

[David Kornberg:]

In terms of the outlets we're seeing a very different customer. And there is an element of a customer that is overlapping across both channels, so frontline retail stores, e-commerce and outlet, but by and large we're seeing more new customers coming to the outlet stores as it stands today.

[Pam Quintiliano:]

And in the existing stores, is there any difference in the composition?

[David Kornberg:]

We're not really seeing at this stage. It's very early on.

[Pam Quintiliano:]

Thank you very much. Best of luck.

[David Kornberg:]

Thanks Pam.

[Operator:]

The next question comes from the line of Roxanne Meyer of UBS. Please go ahead with your questions.

[Roxanne Meyer:]

Great, thanks let me add my congratulations on your improved performance.

[David Kornberg:]

Thank you.

[Roxanne Meyer:]

My first question is a follow-up on the merchandising. I'm just wondering if you can address how you are doing in knit tops and cut-and-sew knit tops generally. I know it's early days for you testing that new collection, but in general wondering if you are seeing some of the strength in that category, a resurgence that a few other retailers are calling out. And then, secondly, I'm just wondering if longer term you can help us think about how much opportunity there is in the merchandise margin specifically but also at the gross margin in terms of what we can target longer term. Thanks a lot.

[David Kornberg:]

Roxanne, your question on knit tops, we are seeing progress in dressing and we are seeing a much much more decline in casual. I’ll let Paul take the call on the margin.

[Paul Dascoli:]

Roxanne, I think in terms of margin maybe the way to look at it you know our goals, our goal still remains to get ourselves back to couple this year’s operating profit margin clearly with the discipline that we are trying to exhibit around inventory management and promotions you know we would expect that there to be a couple of points many within our gross margin love to get. And then obviously to get some leverage as we grow comps against our expense structure but -- to maybe see another point coming out of D&O and a point of so coming out of SG&A.

[Roxanne Meyer:]

Okay, great.

[Paul Dascoli:]

It’s important to understand that that’s not something that you know we expect that we’ll see this year that that’s overtime.

[Roxanne Meyer:]

Absolutely. Thanks and best of luck.

[Paul Dascoli:]

Thanks, Roxanne.

[Operator:]

Our next question comes from the line of Barbara Wyckoff with CLSA. Please go ahead with your question.

[Barbara Wyckoff:]

Hi, everybody, good job. Can you talk about denim again, high-rise, midrise, low rise? And then dark versus light? And then secondly, could you talk about the performance in the New York and San Francisco flagship and the penetration of e-commerce to total sales? Where would you like it to be say, by the end of next year?

[David Kornberg:]

Okay. Question on denim, the strength in the denim business on rise is largely coming from the midrise. The high-rise have been very decent, but not to the level of the penetration that we’re seeing on the midrise. In terms of wash, really it’s about processing and it’s about disruption that we’re seeing. As we look at penetration of e-commerce, our e-commerce business is now upto 16% of our total. We are very happy with the contribution that we are seeing there. And as I said earlier on the call we plan to aggressively ramp up our sales that we are seeing on the e-commerce channel of distribution. And then finally your question was about San Francisco and Times Square, the sales are really not meeting the overall levels of expectation but we are constantly looking at the assortment the mix and the merchandising that needs to be done to get them to the right place.

[Barbara Wyckoff:]

Great. Thank you.

[David Kornberg:]

Thank you, Barbara.

[Operator:]

Thank you. Our last question is coming from the line of Jay Sole with Morgan Stanley. Please proceed with your question.

[Jay Sole:]

Hi, good morning.

[David Kornberg:]

Good morning, Jay.

[Jay Sole:]

Could you just go back to how your outlet strategy is affecting your clearance strategy and how it might affect your intention to clear goods online?

[David Kornberg:]

So Jay, really the two are not related at all because the clearance that sold in the full price retail stores we MOS [ph] those and we sell this to a third party. And we do not use any – we have not used the outlets to get rid of any clearance from the full price stores. Any clearance that you see in the outlet is all made for outlet product.

[Jay Sole:]

Got it. And then just looking out to 2015, you've done some great things, getting the stores more productive by introducing categories that take up a small amount a lot of space but generate a lot of sales. Are there any opportunities to maybe reorganize the store, reconfigure the store that you think can boost productivity this year?

[David Kornberg:]

I think in terms of improving productivity is about us having the right product what he and she wants, when she wants it and driving increased sales, increased volume but also ensuring that increased volume is profitable and that will lead to the best increases in productivity.

[Jay Sole:]

Got it. Okay, thanks so much good luck.

[David Kornberg:]

Thank you.

[Operator:]

Thank you. I will now turn the floor back to management for closing comments.

[David Kornberg:]

Thank you. This concludes our call for today. Thank you for joining us this morning and for your ongoing interest in Express. Thank you.

[Operator:]

Thank you. Today’s teleconference has concluded. You may now disconnect your lines at this time and thank you for your participation.