Express, Inc.
Q2 2015 Earnings Call Transcript

Published: 26 Aug 2015

[Operator:]

Greetings, and welcome to the Express Inc. Second Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Marisa Jacobs, Vice President of Investor Relations. Thank you. You may 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. 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 laws. In addition, during this 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 Perry Pericleous, Senior Vice President and CFO. I'm now going to turn the call over to David, he will be followed by Perry, and then we'll turn to Q&A.

[David Kornberg:]

Thank you, Marisa, good morning everyone, and thank you for joining us. I'm very pleased to be here with you today to discuss another quarter of greatly improved financial and operational performance. Our comparable sales rose by $0.07, our gross margin expanded by 480 basis points, and our diluted earnings per share rose to $0.25 from $0.08 in last year's second quarter. We know consistently that it all begins with the products and our product is on the trend and it is being well received. The momentum in the women's business is continuing and men's is improving. During the second quarter, we delivered strong fashion, which is both conservatively enabling us to use higher levels of open-to-buy dollars to chase into successful performers. We’ve reduced the breadth, depth, and frequently of our promotions and focused on growing our channels of distribution, stores, e-commerce and outlets, while rationalizing our retail store fleet. In total, this enabled us to deliver a record second quarter in terms of net sales, operating income, and diluted earnings per share. I am extremely pleased with the magnitude of our accomplishments during the second quarter. It reflects the coordinated team work taking place across our organization which is united and is focused on a balanced approach to running the business so as to deliver consistent, sustainable, and profitable growth. During the quarter, we advanced our growth pillars which consist of enhancing the productivity of our existing stores, continuing to grow our e-commerce business, optimizing and expanding our store base, and international expansion. Existing fleet productivity improved during the quarter with store comps up 5%. We reduced promotional activity significantly, we ran narrower, less deep, and fewer all -tore promotions to preserve margins. We also ran fewer and less deep CRM offerings and fewer online early promotions which were structured to include only those items we wanted to clear through. Furthermore, we shortened our semi-annual sales. Perry will provide more details on this later in the call. Those changes had other important results. They set the stage for us to better highlight new fashion and the results of new traffic and transactions being spread more evenly throughout the quarter. E-commerce grew by 21% during the quarter, driven by the strength of our product, and an enhanced customer experience. We created a compelling reason to buy by placing a greater emphasis on showcasing fashion and enhanced story telling versus promotions. E-commerce also benefitted from the work we've been doing to ensure consistent pricing across our retail distribution channels. While being more restrained in terms of promotions, we continue to provide great values online for our clearance customers using our After Party sale. It's a six hour offering that runs on Sunday nights and offers additional discounts on clearance product. It also provides us with an opportunity to clear through select items at a faster rate. As part of our effort to highlight fashion and product equity as opposed to broadcasting promotions, we introduced the Edit. This new online feature is a place for our customers to see our latest fashion story, video, and social content. It builds upon our work with fashion bloggers, who are curating personalized product catalogue and enables us to post user generated content. In terms of optimizing our store base, our outlet business continued to grow. We opened 12 new stores during the quarter, and which should be at approximately 80 Express Factory Outlet stores by year end. The results continue to be accretive and exceed our initial expectations. Our 50 retail store closure plan is on track. We now expect to close a total of 24 stores in fiscal 2015, 22 of which have already been closed. Together, all of these initiatives are leading to more engaged shoppers which in turn have and continue to generate higher sales and increased profitability. We have a milestone to announce in terms of our omni-channel journey. Global inventory visibility, which means seeing what is in stock in every store and in our e-commerce fulfillment center is an essential component and one that we lacked until very recently. We are completing the process of rolling it out to our store associates enabling them to serve the customers more quickly and locate requested product. Starting this fall, as customers browse online, they will be able to check product availability by store, better connecting our digital and physical experiences before the holiday season. It's certainly not the endpoints of our omni-channel journey, but it is a feature we know our customers will find useful. On the international front, we still anticipate opening two additional franchise locations before the year end, one in Panama City and the second Johannesburg shop-in-shop location. In March, I laid out five priorities for the year; increasing profitability, elevating our customer experience, sharpening the Express brand position, continuing to upgrade our systems and processes, and further developing our people. We are making progress on each of these. We have already touched on our improved profitability in Q2 and our Q3 and full year guidance clearly illustrates that we expect those improvements to continue. The project is underway to enhance the customer experience and our brand to develop our employees and to ensure that Express continues to be a great place to work are all continuing. We are making good progress on our IT project and Perry will provide more color on those in a moment. Turning to the women's retail business, we had a great quarter from a top line margin dollar and margin rate perspective. We accomplished this with great product and tight inventory control measures. In terms of specific categories, our woven top performance continues to deliver strong growth and the same was true during the second quarter for dresses, Denim, and jackets. Knits have seen a positive trend change and One Eleven continues to be a standout performer within the casual knit category. Let me elaborate a bit on Express One Eleven. In case anyone isn't familiar with it, it's a collection of open price point casual knit tops that we began testing in 50 stores in mid March. What happened since then perfectly illustrates the value of our gross market strategy. Customer reception to the product was immediately positive. Based on data we compiled on every item in the initial collection, we collaborated with our manufacturing partners to quickly refine and expand the collection. In less than four months, we launched and expanded One Eleven collection across the entire fleet of retail stores and re-launched it online. It's early, but so far we are very pleased with the performance of the collection. Additionally, it's worth nothing that One Eleven has been largely incremental sales. Our next product rollout is the expansion of EXP Core, our performance active line which will begin shortly. We first tested Core in a small store group and online late in 2013 and in the intervening time have learned a great deal. We have narrowed the choice count to hone in on the best performing style, improved the color offering, and above all introduced new fabric that represents an upgrade from a performance perspective. With the roll out, Core will be available in 100 stores up from 30. This launch will be supported by fresh new inventory [ph]. From a trend perspective, the key trends of the second quarter will continue its fall. It's still very much about Boho along with 60s and 70s looks. Of course, the color palette will darken after fall and we are introducing new patterns and prints reflecting the transition into a new season. Denim is always a key area of focus at this time of the year. And we've got up all out to highlight the three attributes that make our Denim still great, fit, fashion, and quality. In terms of styles, leggings, girlfriend and flares are our three key silhouettes although the total denim collection encompasses additional files all of which are performing ahead of expectation. Our Karlie Kloss denim campaign, Fit for You, is in full swing. It's a breakthrough 360 degree campaign, representing some of our best marketing work to date. It marks our return to television with 15 and 30 second spot, appearing on network, cable, and online video over a five week period that began in late July. The overall response for the campaign date is very encouraging, driving sales and simultaneously enhancing our brand and increasing customer engagement. We have a new initiative coming in the fourth quarter, which I want to mention. I'm referring to a new line we will sell called Express Edition. Edition exemplifies our velocity of mixing runway fashion with street style. In this case, we developed a capsule collection with a refined aesthetic. The assortment is comprised of 15 styles focusing on our going out wearing occasion. The styles will include items such as the perfect tuxedo suits along with cocktail and party dresses. Look for this to launch online and in approximately 25 stores in early December. Turning now to the men's business, it's good to report that we are making progress. We mentioned on the last call that we had identified important areas where we could improve our performance. In fact, we did beat our operating plan until the turn around begin more quickly than we had initially contemplated. The best performances were in our casual pants, shorts, and suits. Before I wrap up, let me reiterate my belief that by adhering to our growth pillars and pursuing our 2015 objectives, we will position ourselves for long term success. We are presenting improved collections that deliver more fashion items in units to our customers, while also keeping our high volume key items new and appealing. Our marketing is more engaging and by pulling back on promotions we are simultaneously enhancing the Express brand and making it possible to deliver stronger margins which in turn translate to a stronger bottom line. It's been a good start for the year, but we are not taking anything for granted. We are all completely aligned on the need to continue to operate this business with focus and discipline, so that the gains of the past two quarters may have a solid foundation for future gains over the coming years. Finally, I would like to thank the entire Express team for everything they did to deliver such a strong quarter and take away for the greatly improved second half of the year. I work with an amazing group of people, who are talented and committed and their efforts deserve to be recognized. At this time, I am going to turn the call over to Perry.

[Perry Pericleous:]

Thank you, David. Good morning everyone. I have been in my new role for almost two months and of course, this is my first earnings call as the CFO of Express. I met some of you last month at investor meetings and conferences, and I'd like to thank everyone I met for their gracious reception. For those of you I haven't yet had the pleasure of meeting, I'd like to formally introduce myself. I began my professional career as an accountant, working first at Drug Emporium and then at Value City Department Stores. I joined Express in 1999 and, except for a brief stint over at Elk Brands I have been here ever since moving across the finance and accounting organization into position of increasing responsibility. In 2010, I became the Vice President of Finance and since then I've led the financial planning and analysis function. I've been deeply involved in developing Express's financial architecture along with long range and strategic planning, I'm fortunate to be surrounded by very strong finance team and we will continue providing you with transparent disclosure to assist in evaluating our Company and our prospects. With respect to our financial results, I believe it's fair to assume that each of you have read our press release and have easy access to the financial tables. So I'm going to link the amount of time spend reviewing that information and focus primarily in what drove the results and also in our guidance for the third quarter and outlook for fiscal 2015. First, let's recap the second quarter. Our revenues grew by 11%, comparable sales grew by 7% and EPS grew by 213%. In terms of topline income, we plan for low single digit growth and build our inventory accordingly. This enabled us to maintain the flexibility needed to take a restrained approach to promotions. We clearly did a good job of engaging with our customer and providing them with product and a shopping experience that they responded too with greater enthusiasm than we had anticipated. That translated into robust topline and comparable sales growth, one of the prompt in our balanced approach to growth. The next prompt is margins, and we saw gains there as well in the amount of 240 basis points of merchandise margin improvement, obviously driving improvements in this key metric is central to our growth strategy. Our appropriate inventory levels going to the quarter made a big difference in terms of our promotional cadence as we never under pressure to clear through excess inventory. In fact, we only ran four days of all-store promotions during the second quarter, down from May during last year's second quarter. We also cancelled certain other promotions and CRM offering that back in May we had anticipated at running during the quarter. And as the quarter came to a close, our high sales through rate enabled us to enter the swing semi-annual sales with significantly less unit than in 2014. You might have ascertained as much when you saw us shorten the duration of that sales by approximately a week. The combined impact of all of these changes resulted in significant merchandise margin gains. Moving to buying and occupancy, we generated 240 basis points of leverage compared to the second quarter of 2014. The increase in absolute dollar which resulted primarily from higher incentive compensation was more than offset by topline growth. Collectively, the merchandise margin and buying and occupancy improvement enabled us to grow our gross margin by 480 basis points. SG&A as a percent of sales was 26.2%, the 90 basis points of deleverage was in keeping with our prior commentary anticipating this movement. The increase in our spend was driven by the addition of outlet related expenses, incentive compensation and catch up expense tied to our 2014 performance based equity compensation, as a result of the improved trend in the second quarter. Operating income for the quarter increased by 145% to $36 million. Net income grew three fold to $21 million from $7 million last year. This was driven by increased operating income and lower interest expense following our debt repayment which more than offset a higher tax rate. Diluted earnings per share were $0.25, representing more than a three-fold increase over the $0.08 per diluted share reported in the second quarter of 2014. As David noted earlier, we focused our efforts on balancing topline growth, margin improvement and expense leverage. This ensures that we did not need to generate outsized movement in any online item with the P&L that pressures our ability to succeed elsewhere. This balanced approach served us well this quarter and it will remain as the heart of our go-forward strategy. Our balance sheet continues to be very healthy. Cash and cash equivalents were $156 million at the end of the second quarter compared to the $253 million at the same time last year. This decrease is primarily related to our use of $215 million to redeem our senior note on March 1. Capital expenditures were $28 million compared to $33 million in last year's second quarter. We ended this second quarter with $272 million of inventory, representing a 13% increase over the same time last year. This included approximately $42 million of Express Factory Outlet inventory, a significant portion of which was driven by new stores. With respect to retail alone, inventory increased approximately 1.5% in the aggregate and 5% per square foot basis. We're comfortable with both the level and composition of our inventories. During David remarks, he referenced that we’re making good progress with the IT projects that are essential to positioning us for future growth. With Express - when Express became a standalone public company back in 2010, we developed a multiyear plan to upgrade our IT systems and capabilities. The goal was to create a platform that would enable us to operate the business more effectively. To that end we require assistance that would work across expanding business channel and that would enable us to evolve into a truly global company functioning in an omni-channel world. At this point, we have completed system upgrades on a large number of projects. The three other projects that are central to the entire overhaul are scheduled to come online next year. Specifically our retail management and our enterprise planning systems going live in February and our order management systems launch in late spring. Collectively these systems will allow us to work smarter, more analytically and globally which should boost efficiency. Additionally, as we realize the full benefits of the new technology overtime, we expect to fill a greater percentage of customers orders more quickly and in a manner that optimizes our inventory, driving topline sales and reducing mark down activity. As we prepare for next year's system migration, we will be front loading inventory shipment late in the fourth quarter of 2015. All stores in our e-commerce distribution central will receive approximately two additional weeks of receipts to ensure that they remain fully stack while the system migration occurs. This will of course impact our year end closing inventory significantly which is why we want to call it to your attention well in advance of the quarter. Our best estimate at this time is our year ending inventory levels will be approximately 15 percentage points higher than our normal percentage point increase. So for those of you who model these metrics, please keep this in mind. Let me conclude by turning to our guidance for the third quarter and full year 2015. For the third quarter of 2015, we expect that comparable sales will grow at mid single digit rate and net income will range from $22 million to $25 million or $0.26 to $0.29 per diluted share. On a full year basis, we expect comparable sales to increase in a mid single digit range and adjusted net income to range from $111 million to $117 million or $1.30 to a $1.37 per diluted share. In addition, we mentioned earlier this year that on a full year basis SG&A as a percent of sales was expected to be flat or close to each. Based on the strength of our business in the first half of the year and our second half forecast, we now anticipate approximately 60 points of deleverage primarily driven by the projected achievements of incentive compensation and equity targets this year. We continue to expect capital expenditure to range from $114 million to $119 million compared to the $115 million spent in 2014. This concludes my comments. At this time I am turning the call back to David.

[David Kornberg:]

Thank you, Perry. The year results to a positive start and we are optimistic about the second half of the year as well. Early reads on our fall product indicates that it is being well received and we are managing the business in a way that should enable us to fulfill our promise to deliver consistent, sustainable and profitable growth. More than ever, I believe that Express is prepared and positioned for successful future. Before turning to Q&A, I'm going to turn the call back to Marisa for one quick announcement.

[Marisa Jacobs:]

Thank you, David. I would like to request the Q&A participants 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 begin the question-and-answer portion of the call.

[Operator:]

[Operator Instructions] Our first question today is coming from Betty Chen of Mizhuo Securities. Please proceed with your question.

[Betty Chen:]

Congratulations on a great quarter. The product looks great. I was wondering if you can talk a little bit about - and my apologies, I jumped on a little late - but if you can talk about the product costing opportunity in the back half or maybe in spring 2016? And any sort of outlet performance that you can share with us on how that channel is performing since I think it has been performing ahead of plan year to date. Thanks.

[David Kornberg:]

Okay. Betty, so in terms of product costing opportunities in the back half and into spring, we are planning our AUCs [ph] really around flattish, and obviously we are constantly looking for improvements and working on getting improvements in terms of the way in which we are looking at it, we are planning it flat. We are obviously delighted with the performance of our Express Factory Outlet business. It continues to be very strong. As of today, we are at 65 stores open, and by the end of this year, we will be at approximately 80 stores completely open. So we will be looking at over a period of 18 months having taken our Express Factory Outlet business from a standing start to an 80 store chain.

[Betty Chen:]

And David, the One Eleven collection continues to look terrific in the stores and we have noticed that it also remains excluded from a lot of the CRM events inside the stores. Can you tell us how it has done since it has been more broadly rolled out into I think at least 200 stores if not the entire chain? And how you are feeling about that business potentially longer-term? Thanks.

[David Kornberg:]

One Eleven has gone to the entire chain Betty. We are thrilled with the performance of it, and it looks to be largely incremental to our existing business, and we plan to go forward with it.

[Betty Chen:]

Okay, wonderful. Thank you so much. Again, the stores look terrific.

[David Kornberg:]

Thank you, Betty.

[Operator:]

Thank you. Our next question is coming from John Morris of BMO Capital Markets. Please proceed with your question.

[John Morris:]

Thanks. Congratulations to everybody, and really terrific work in a challenging environment. David, I think a question for you. On thinking about the new initiatives that you have underway from a product standpoint, you talked about Express Edition and also Express Core. Thinking about those two that are coming on the horizon, are you taking elements from One Eleven, your learnings there? You talked about collaborating with manufacturers and applying them and what I want -- to both of those new launches. And I am wondering if you can just talk in terms of how that might be in terms of sourcing speed, pricing, and whatnot. Thanks.

[David Kornberg:]

Okay. So clearly our go-to-market strategy is the foundation of our business, John, and it is the way we think about any products that we are going after. In terms of Express Edition, we are still seeing in the same way and approaching it in the same way as we would approach any of our products. It is planned as I said to go to 25 stores, it will be launching at the beginning of December. In terms of the pricing, it will open up at around $68 opening price points and there will be accessories in the collection starting at around 29.90. So I’m excited about it, I think it adds another tier to our business and adds a top tier to the business and I think it will have a halo effect to the brand. So very excited about what it is capable of delivering for us.

[John Morris:]

And on Express Core, can you give us some color on that?

[David Kornberg:]

Yes, Express Core as I said is going to 100 stores. We did a launch of it in 30 stores in January - at the beginning of January, and we had in the hot zone of our store as opposed to having clearance in the hot zone of our store and had in the entry zone of the store, and it was extremely good. And as a result of the business that we did really well with that in January, we decided to roll it out to 100 stores, and we're going to take it forward from there and decide how - based on performance in September.

[John Morris:]

Great. Good luck for fall and holiday.

[David Kornberg:]

Thanks John.

[Operator:]

Thank you. Our next question is coming from Simeon Siegel of Nomura. Please proceed with your question.

[Simeon Siegel:]

Thanks. Good morning guys, and congrats on a great quarter.

[David Kornberg:]

Thanks, Simeon.

[Simeon Siegel:]

So just really impressive new store productivity. Can you share any data on the new stores or how much more productive the outlets are? And then just a follow-up, what is the implied gross margin within guidance? Can you talk to your path to recapturing gross margins, maybe breaking down merch margin and occupancy leverage? Thanks.

[Perry Pericleous:]

So, Simeon, from productivity standpoint, we said that the outlet stores are expected to be about 1.5X the average retail store on an apples-to-apples basis. So, from an outlet, if we look at the overall structure, we expect that the retail prices are about 20% to 25% lower than the retail prices, but also from an AUC standpoint, we expect the AUC to be also about 20% lower, and therefore producing similar close to the retail merchandise margins. As it relates to the guidance around the gross margin and what the guidance implied, right now with a mid-single-digit comp what it would imply from a gross margin standpoint is a leverage and an expansion of the gross margin to last year but not to the same level as we have seen during Q1 and Q2.

[Simeon Siegel:]

Great, thanks a lot, guys. Best of luck for the rest of the year.

[Perry Pericleous:]

Thank you.

[Operator:]

Thank you. Our next question is coming from Richard Jaffe of Stifel. Please proceed with your question.

[Richard Jaffe:]

Thanks very much. One of the things that really is impressive is the growth of e-commerce without the sacrifice of retail sales that everything seems to be growing at once. Obviously product is a key part of it. But could you address some of the things you are doing with e-commerce to drive people to stores and, vice versa, to move some of the store visits into transactions online, how you are developing the synergy because it seems exceptional?

[David Kornberg:]

So, in terms of the way in which that's working, clearly we're delighted with the results that we're seeing across both channels. I think the work that we do with digital marketing, we see a natural transference to stores that we get. So, we obviously put a lot of effort into it and we put a lot focus in terms of our digital marketing because we believe that the major factor in terms of driving the customer into the store. We've obviously made huge progress on the look and feel of our website, and I think that it is – in terms of some of the feedback that we're getting, we're seeing some very, very good results in terms of the overall customer satisfaction that we're seeing. We look data from external resources and we see that we have increased our scores consistently, whether it's in site performance, whether it's in the look and feel of the site, whether it's in the merchandise and the navigation of the site. So, we're thrilled with what it does, and as you know, and as we see in many surveys that are done at the moment, a significant amount of in-store sales start off their life as online searches. So, we clearly see it as a major part of our omni channel approach forward.

[Matt Moellering:]

This is Matt. There are a couple of other things as well. So, you mentioned the inventory visibility initiative that's just been completed, in the next couple of months here, next few months we will have the ability for customers to look online if the product is not available to understand the product inventory is available in stores but not available today. So that's should provide a tailwind for us going forward. And as Perry talked about with the RMS and enterprise planning, implementations that are going to occur February that will lay the foundation for future omni-channel initiative. So, we haven't implemented a lot of ship from store capability to reserve online, pickup in store capabilities. Once this foundation is laid, it will allow us the opportunity to execute some of these omni-channel initiatives to drive these in more traffic between channels so that simply upside in out years for our business as well.

[Richard Jaffe:]

And just a follow on. Is there paid advertising either online or through I guess the Google searches and such that facilitate this or are you doing it just yourselves?

[David Kornberg:]

Absolutely there is both. There is paid search, there is affiliate search and organic search.

[Richard Jaffe:]

Great. Thank you very much.

[David Kornberg:]

Thank you.

[Operator:]

Thank you. Our next question is coming from Adrienne Yih of Wolfe Research. Please proceed with your question.

[Adrienne Yih:]

Good morning. I'm going to add my congratulations on the product and the business momentum. Can you give me an update on the marketing. The television that you have on, it looks great. Is that incremental to last year? And then for fall, is there incremental marketing expense to last year? And then there was a pause in the repurchase activity over the past call year and a half. I am wondering with next year on an annualized basis that cash interest being saved just under $20 million, any revisiting of the repurchase and/or instituting a modest dividend to appeal to yield investors? Thank you very much.

[Perry Pericleous:]

Sure. From a marketing standpoint, the question around with this incremental, the campaign is incremental compared to last year, this year we did not a TV campaign last year. As relates to the overall marketing expense, we've said that we expect marketing to be above 5% for the year and we've said in the last couple of calls. As it relates to the overall marketing expense compared to last year at this point we expect it to be flat slightly above last year from an absolute dollar standpoint to an overall 5% marketing expense. As it relates to the repurchases, I want to remind everybody that we do have $100 million share authorization that is through the end of November of this year. As of now we have not had any share repurchases completed and that we constantly have discussions with the Board and we talk about the prioritization of our excess cash. From an excess cash standpoint, we're comfortable, we have in the beginning of the year cash balance of anywhere between $125 million and that can get us through the working capital fluctuations throughout the year. As we have noticed at the beginning of the year we paid off $200 million of senior notes and at this point our balance sheet is strong and being clear from any debt. We're going to be having our Board meeting next week and we have further discussions around returning cash to the shareholders.

[David Kornberg:]

Adrienne, if I could add about the advertising campaign. Obviously it's early in terms of the results that we're seeing. It's a five week campaign. But what I'm really thrilled about is that we're starting to see increases in the number of its new customers coming into the brand. And I think that that's very important metric we should be looking at consistently.

[Adrienne Yih:]

Absolutely. Well, the stores look great as does the product. Good luck.

[David Kornberg:]

Thank you, Adrienne.

[Operator:]

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

[Jay Sole:]

Hi, good morning. Thanks for taking my question. David, it is very clear that you put your stamp on the business just given all the new initiatives and how all of them seem to be really working together. Have you - if we just take a step back, have you set any goals internally about where you would like to see sales gross margins go or EPS growth? And can you share any of those with us?

[David Kornberg:]

Well, obviously, I think I laid out priorities since the beginning of the year for the business and it was very clear that the number one priority that we have to do is get back to the levels of profitability that we achieved in the past, and I think that the most important step that we can take is really starting to get back to double digit operating income margins. And I think this year in terms of what we've seen in the first half of the year, we are well on the road to getting back to those numbers. I can't set an exact time frame on that, but we're making progress against this. So, it's an important priority for us.

[Jay Sole:]

Are there -- on that goal to get back to double-digit operating margins are there certain checkpoints like kind of paths on the road to get there where you have done a few things but you still see more down the road that you plan on getting to as we go through this year and next year? Or is kind of everything in place and it is a matter of just executing it from this point -

[David Kornberg:]

I think Jay is the most important thing is that we're taking a balanced approach to the business and that we are going after topline sales, we are going after margin expansion and we are going after leveraging our expenses, and we are seeing progress against all three of those metrics this year. And those are the most important ways in which we're looking at it towards getting back to the double digit operating income margin. I think Perry, do you want to add something?

[Perry Pericleous:]

No. David, you've addressed it. I think -- one of the things I have talked about in the past, the path to get there is by picking up 200 basis points of merchandized margin improvement, approximately 100 basis point of B&O improvement, and then leveraging SG&A by 100 basis points. Thus far this year we’ve seen the improvements in merchandized margin and B&O, and we're obviously planning to continue to look for improvements in those areas and then leveraging expenses.

[David Kornberg:]

Then the other thing I'd add to that is, we talked about this RMS enterprise planning implementation. Frankly today we're operating with 20 to 30 year old planning and planning systems and merchandise systems that were homegrown years and years ago, we're getting into the current age with these new system upgrades and I would anticipate overtime, not immediately, because there is a learning curve, but overtime there should be some margin improvement associated with these new implementations as well. We're talking a crawl, walk, run, approach, to the system implementation. So, we will see the impact there immediately but that should provide a tailwind over the next couple of years as well.

[Jay Sole:]

Got it. Thanks so much.

[David Kornberg:]

Thank you.

[Operator:]

[Operator Instructions] Our next question is coming from Tom Filandro of Susquehanna Financial Group. Please proceed with your question.

[Tom Filandro:]

Hi, kudos across the Board, and Perry nice timing, sir. I jumped on a little late, so apologies if this has been addressed. But can you guys give an update on what's happening in the non-apparel piece of the business, experiences in those categories, what is trending up or down? And any initiatives for the fall or holiday season worth highlighting? And just a quick follow up, just, when can we start to see the leveraging of the EXPRESS NEXT loyalty program? Thank you.

[David Kornberg:]

In terms of the non-apparel side of the business, we are seeing nice progress there especially on the women side, I think that our shoe business is going to have a great year, our accessory business -- we are seeing really great results on the sales of wraps and ponchos and ruanas. And we're starting to see some real progress now on our jewelry business as well. So, feel very good about that. On men's, we sold progress in the tie business which you can see is obviously a major part of our accessories business as we got into Q2, and I don't see any reason why that shouldn't continue as we go into Q3 and into Q4. We also did a re-launch of our underwear in our top 50 stores -- our men's underwear in top 50 stores and we've seen a very good response to that. That will be rolling out to the balance of the chain in the pool.

[Tom Filandro:]

Thank you, David.

[Matt Moellering:]

And Tom, on your second question about the loyalty program, we believe we've gotten some benefit out of the loyalty program. One of the big things that we have done in this current year and will continue into the fall, is we are developing a customer data link across all channels of distribution to really sync all of the customer information. We're also implementing digital asset management tool that will allow us to manage our creative activity much better. The combination of these two things along with the information we have in the loyalty database that we have collected over the last few years will enable us to get to more personalization and more targeted marketing to different segments of the population. So there should be benefit out of that as well heading into 2016.

[Tom Filandro:]

Thank you, Matt. And best of luck, guys.

[Matt Moellering:]

Thank you.

[Operator:]

Thank you. Our next question is coming from Neely Tamminga of Piper Jaffray. Please proceed with your question.

[Kayla Berg:]

Great, good morning. This is Kayla Berg on for Neely. Just congratulations first off on really good solid execution this quarter. And welcome, Perry, it is great to have you on the call. My first question is as we -- obviously there is strength in denim, your One Eleven collection, which is great. Just wondering as we think about your inventory position for the back half, do you think you have enough inventory given the strength of the underlying comps there? And then my follow-up question is just about those incentive compensation incremental expenses that you guys mentioned, are you expecting a balance cadence between Q3 and Q4, or is it going to be more heavily weighted towards one versus the other? Thanks.

[David Kornberg:]

So, first of all from an inventory standpoint, we are finishing up Q2 with an inventory that is up 13.4%. And as we've mentioned on our call, a lot of it has to do with new outlet inventory. So from a retail standpoint, we have inventory that is up by 1.5%, and from a square footage standpoint it's up about 4.8%, 5%. We do believe and then based on our recent approach of inventory management that we have enough inventory to capture the upside. This is similar to what we've done at the end of Q1 and the inventory position that we were aiming to Q1 and then based on our recent [indiscernible] trends of the business, we're able to chase into upside. What we don't want to do is obviously frontload the inventory ahead of the upside trend.

[Matt Moellering:]

And to add to that, we have done a significant amount of work over the last six months around working on speeding up the supply-chain, we have a very good supply-chain for years, we always have, but we've continued on improving the supply-chain speed in fabric platforming and in really focusing on the few that drive many around positioning capacity in fabrics where we really believe we want to place bets and read the business to maneuver quickly. And so the combination of the reduced inventory levels with the speed that we've introduced in the system has allowed us to be much more nimble but still react to the upside in the business where it's appropriate.

[Perry Pericleous:]

To answer the last part of your question around incentive compensation and the impact on the last half -- the second half of the year, between Q3 and Q4, we expect the impact to be above the 40% in Q3 and 60% in Q4.

[Kayla Berg:]

Great, thanks.

[Operator:]

Thank you. Our next question is coming from Janice Ong of UBS. Please proceed with your question.

[Janice Ong:]

Hi good morning guys. And congrats on a great quarter. Just was wondering if you were giving any commentary on quarter-to-date trends and how that compares to your mid-single-digit comp guidance for the quarter. And if you are seeing any -- or you are anticipating any impact from the later Labor Day?

[David Kornberg:]

So, the quarter-to-date trend that we've seen are building our guidance of the mid-single digit, we don't -- we don't disclose monthly comps.

[Marisa Jacobs:]

Operator, can we move onto the next caller, please?

[Operator:]

Certainly, our next question is coming from Susan Anderson of FBR. Please proceed with your question.

[Susan Anderson:]

Good morning. Congrats on a great quarter. I wanted to maybe follow up on the AUC question earlier on for the back half, I think you guys said flat. Is that because you are putting more into the product? Because I was thinking I guess with oil and cotton and the Yuan devaluation maybe it would be down. And then also I may have missed this because I jumped on late, but if you could give some color on AUR UPT and transactions in the quarter?

[David Kornberg:]

Yes, so there are puts and calls certainly to the AUC and there is a mix of the business as well. We do believe there will be some potential benefit coming into 2015, we're already into -- almost into September here, so when you look at the fabric positions that we placed in anticipation of chasing product. Also the fact that we only have about third of our production in China, there is some upside benefit there from an AUC standpoint, probably not a whole lot in the back half of the year more into 2015, we might see some slight improvement there. And Susan in terms of the second half of your question, we are seeing traffic continuing to improve, conversion is really flattish, AUR continues to increase and ADS continues to increase.

[Susan Anderson:]

Great, thank you. Good luck next quarter.

[Operator:]

Thank you. Our next question is coming from Marni Shapiro of The Retail Tracker. Please proceed with your question.

[Marni Shapiro:]

Good morning, everyone. Congratulations. I have one quick follow up. I know you said you shortened the sale days, but I did notice you left sale racks in the store and I was curious if that was successful for you. And then just one of these big picture good problem/bad problem situations. You have had some really good momentum here, the stores look fantastic. Come holiday time, particularly Black Friday in those last couple of weeks of December your stores have been very busy in the past even when business was just okay. Have you started to think about how you are going to manage that, whether it is iPads, technology, et cetera? Any insight you can give us?

[David Kornberg:]

Okay. I didn't fully hear your question about sale racks but I think what you’re saying was, why on the sale rack done on the back of the store, is that right.

[Marni Shapiro:]

Well, that you left - I actually like that you left them back there. Was that successful for you, that you shortened the sale but left some of the sale racks in the back?

[Matt Moellering:]

One of the things we’ve done as we move to monthly markdowns as well versus just taking of the sales so that helps us to move through product. One, we have less overall distressed inventory in total. But as we see products that we don’t, - that we would like to clear through quickly, we move through that faster so we keep sales rack in the back of the store. What that does for us is we have more fully branded full price projections in the front of the store worked more days out of the year with some sale racks in the back where if you have a customer who was looking for that deep discount that's still available to them. And that helps us clear through our product

[David Kornberg:]

In terms of your back half of you question which is about mobile POS and technology and as we get into holiday, we continue to expand into more and more of stores so that we have the ability to create transactions really in any area of the store as opposed to just at the cash but we are making major progress in terms of rolling that out.

[Marni Shapiro:]

Fantastic. I would wish you luck with the back half of the year. The product looks great.

[David Kornberg:]

Thank you very much.

[Operator:]

[Operator Instructions] Our next question is coming from Liz Pierce of Brean Capital. Please proceed with your question.

[Liz Pierce:]

Thanks good morning. I will add my congratulations. So kind of related to that on technology, do you have any comments on what you saw with your Apple Pay? And then if I am not mistaken, are you wanting a new app at the end of this - in Q3? And then I do have a follow-up question about the Express Edition.

[David Kornberg:]

Okay. Sorry, your first question was about Apple Pay right.

[Liz Pierce:]

Yes.

[David Kornberg:]

So we launched it a few weeks ago, it's obviously in its very early stage, please in terms of what we’re seeing, I think that what we are seeing overall is that, the customers are using Apple Pay, spending a higher ADS in terms of their transaction than we’re seeing on other payment methods. But overall it's something that I think is obviously going to build as we get into the future but very pleased with the initial instructions of it. So, what was your second question?

[Liz Pierce:]

Well then I was also - I thought you were launching a new app and then I had a question on Express Edition, if that is just confined to holiday or is that going to be something that we will see throughout the year but still kind of on a small capsule?

[David Kornberg:]

Yes, I'd like to first of all learn at holiday what we’re going to see from Express Edition but assuming that it is successful and I’d like to believe that it is successful we will go and continue to run it throughout the year. And in terms of our new approximately, we have a done a soft launch of our new app which I’m delighted, I think is very advanced and I think has a fantastic user interface. We will be launching it to the public with more marketing around it in the month of September.

[Liz Pierce:]

Great. Thanks and best of luck.

[David Kornberg:]

Thank you very much.

[Operator:]

Thank you. Our next question is coming from Paul Alexander of BB&T Capital Markets. Please proceed with your question.

[Paul Alexander:]

Hi, thank you for the question. Just a follow up on the comp guidance. Having just posted plus 7 and guiding to mid-single-digit comps it doesn't sound like you are expecting a major deceleration. but you may still be expecting a slight moderation. First, would you agree with that interpretation? And then second, what is the thinking there? Is it about the more difficult comparisons or just planning more conservatively? Thank you.

[David Kornberg:]

So, from a comp guidance standpoint, obviously you have seen the Q1 plus 7 to Q2 plus 7. Our guidance of mid single digit reflects what we see in the quarter, what we believe we can achieve. At this point we will as I said earlier, we are positioned from an inventory standpoint to be able to chase into the upside once we are getting through the quarter.

[Paul Alexander:]

Thank you very much.

[Operator:]

Thank you. Our next question is coming from Steve Marotta of C.L. King. Please proceed with your question.

[Steve Marotta:]

Good morning everybody. Just one question. What is the plan, the number of promotional full days off of store in third quarter of this year versus third quarter of last year?

[Perry Pericleous:]

Yes, we don’t disclose forward-looking promotions obviously there is a competitive issue with that. So, but we are planning less certainly.

[Steve Marotta:]

Okay, I will look back and see what was in last year's. Thank you.

[Perry Pericleous:]

Yes, thank you.

[Operator:]

Thank you. Our next question is coming from Janet Kloppenburg of JJK Research. Please proceed with your question.

[Janet Kloppenburg:]

Good morning everyone and congratulations. Just a couple questions. I think, David, you said that the store comp was actually up 5%. I was wondering if you could give us some metrics behind that, pretty impressive number. And also, David, if you could talk a little bit about the men's comp. I think you said men's was improving. Did you comp positive in men's? Are you able to talk about that? And what would be driving that? Would it be tops, bottoms, both? And also just for Perry, SG&A was up about 15% in the quarter. Should I be thinking that level is the correct level going forward for the back half of the year? I think you said 60 basis points of deleverage. I guess I could work that out, but perhaps you could give us a little help. Thanks so much.

[Perry Pericleous:]

Okay. In terms of the comp for the quarter, as I said we see traffic continuing to improve, we are seeing our conversion is flattish and then for the quarter we saw our AUR up and we saw it increase in ADS as well. We don’t breakout the comps by gender and so I can’t give you information on that. But as I said on the call, the men's business beat its operating plan and it saw a significant improvement going from Q1 into Q2.

[Janet Kloppenburg:]

And, David, on the store comp - it's the store comp I wanted you to talk about. I think you said the store - in-store comp excluding e-commerce may have been up 5%. Am I right on that?

[David Kornberg:]

Yes.

[Janet Kloppenburg:]

Yes. And was that driven by the overall metrics you gave for the overall comp?

[David Kornberg:]

Yes. It was very similar.

[Janet Kloppenburg:]

So you saw higher traffic - you saw higher traffic in the second quarter?

[David Kornberg:]

We saw traffic continuing to improve and it was flattish.

[Janet Kloppenburg:]

Okay. Thank you.

[Perry Pericleous:]

And from an SG&A standpoint in Q2, to your point we saw a 15% increase for this back half of the year for full season we expect to improve compared to the Q2 amount. But one thing I would want to guide you more to is that Q3 will be more similar to Q2 from a percent increase last year.

[Janet Kloppenburg:]

Thanks Perry.

[Perry Pericleous:]

Thank you.

[Operator:]

Thank you. At this time, I would like to turn the floor back over to David Kornberg for any closing comments.

[David Kornberg:]

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

[Operator:]

Ladies and gentlemen, thank you for your participation. This concludes today's teleconference. You may disconnect your lines at this time and have a wonderful day.