Express, Inc.
Q3 2015 Earnings Call Transcript

Published: 3 Dec 2015

[Operator:]

Greetings, and welcome to the Express Inc. Third 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. I would now like to turn the conference over to your host, Mrs. Marisa Jacobs, Vice President of Investor Relations for Express. 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. Actual future results may differ materially from those suggested in forward-looking statements due to a number of risks and uncertainties, all of which are described in the company's filings with the SEC, including today's press release. Express assumes no obligation to update any forward-looking statements or information except as otherwise required by 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 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 delight to be here with you today to discuss our strong third quarter. We successfully executed on our strategy, delivered great product, approached inventory levels and the timing of our buys with discipline and reduced the breath case [ph] and frequency of our promotions. This enabled us to once again grow topline sales and expand our operating margin. For the quarter our sales increased by 10%, our comparable sales increased by 6%, our operating income grew 46% which lifted our operating margin by 200 basis points to 8.1% and our EPS grew 82% to $0.31. This marks our third consecutive quarter of growth. We also resumed our share repurchase programs which Perry will elaborate on it shortly. All of you who have heard me say that when it comes to our performance its starts with the product. So let me begin the call with a few observation on this subjects. I believe the Express's product keeps getting better, our full collection is stronger and customers are responding positively as we offer a great balance of fashion and must have key items. New product is being introduced more frequently, as we’ve placed intentionally [indiscernible] of fashion, we have given customers a reason to return often. Additionally, as we continue to reinforce our price value position, we are seeing positive results in the form of higher merchandized margin dollars and sales raise, which will lead to fewer units going into our end-of-season sale. In terms of the women's business specifically we saw robust performance, evidenced by solid gains across multiple categories. Our woven top business continues to excel as our customers shop with us for great shirting, both casual and dressy. We are seeing growing strength in knits which extends world beyond the One Eleven line. We had a good full denim season and interest in leggings remain high but it's in denim and casual. Unseasonably warm weather somewhat effected sales of outer wear and heavy dresses, but strong sales in other categories have more than offset the impacts. On our last call I told you about our new capsule collection that was designed to be rolled out in December. I am referring to Express Edition, and in fact it was rolled out online and in 27 stores two days ago. It's a highly targeted collection of refine women's going out pieces that mix runway fashion with street style. We believe Express Edition will further enhance our brand and our business. On a separate note, let me mention Swim for the women, next week we will introduce the latest collection online and we will roll it out to approximately 50 stores in March. We are continuing to evaluate opportunities for growth in this category. With respect to men, Oxygen business continued to show great strength and bottoms also performed well, with casual pants contributing to the growth and denim delivering higher margin as always. Our guys are responding positively to the use of stretch fabric across various departments include underwear, shirt, jeans and Tees [ph]. Men’s stores continue to lag behind bottoms but we believe we put the right corrective measures in place. One final comment on men’s I hope you’ve seen our new featured brand item we’re bringing our online customers a curated assortment of third party branded products. This includes items such as shoes, bags, wallets and technical accessories. This collection complements the internally designed Express collection. Before turning to our growth pillars and strategic initiatives I want to address our performance as at the Thanksgiving period, including Cyber Monday. We were happy with the results. We drove solid performance and we met our expectations. For giving off Tuesday through noon on Friday our offering was 50% off, the same as in 2014. The success we had during that time period enabled us to then transition to Saturday and Sunday promotions that were less deep than the ones we ran last year. The guidance we issued today and which Perry will review shortly takes into account our November results along with our expectations for the balance for the quarter. With respect to our growth pillars we continued to make good progress. We saw a lift in our retail store performance with higher sales, fewer promotions and fewer red lines. Our ecommerce business had another good quarter growing 6%. During last year’s third quarter, we drove a significant amount of business in this channel by running online and new promotions. We ended that practice earlier this year as part of our focus on creating a consistent shopping experience for our customers across channels. Accordingly we are satisfied with the e-commerce growth we delivered while lapping an extraordinarily promotional calendar from last year. In September we upgraded our mobile app and the results have been great. Pages linked and time spent have increased potentially along with monthly revenues. Given the rapid rate at which our customers are adopting mobile commerce, we will continue to optimize our mobile app for appeal and usability. Outlet openings and fleet rationalization continued, we opened 70 Express Factory Outlet stores and converted one retail store to wrap up the quarter with 78 locations. We continue to be very pleased with the outlet channel and expect to end the year with 81 outlet locations. In terms of the retail fleet during the third quarter we opened one store and closed one store. Year-to-date we have closed 23 stores and continue to make progress on our 50 store closing initiatives announced last year and expect to end the year with 573 retail locations. With respect to our outlet I want to reiterate that all Express Factory Outlet product is made specifically for sale only in these locations. The outlet product is derived from retail best sellers but I want to stress that means best sellers from prior season. This approach of selling tested and proven products limit fashion risks at the outlet. It also places a priority on differentiation to minimize the risk of tradeoffs with our retail stores. To-date this business approach has generated strong incremental sales and margins. We went into the outlet business believing that the trade off from our retail stores would be low in the ballpark of 5% to 10%. To-date it appears to be running in the low end of that range. We are also very pleased at the degree to which we are gaining new customers through the outlets. There is a large contingence of price [indiscernible] consumers who do most of their shopping in outlet malls and prior to our arrival there we were simply not serving them. So in total it’s a win-win for our customers and for us. Internationally, we continue to make progress. In Canada, better products and an enhanced customer experience are driving strong sales. Focused marketing investments are increasing brand awareness. As a result of these initiatives our key metrics improved. While a very small part of our business today our international franchisees are seeing customers respond well to the same elevated products that are driving growth in North America. We are however seeing challenges in certain geographies based on the economic conditions ranging from currency devaluation to the impact of lower oil prices on oil based economies. Turning to the 2015 priorities I outlined at the start of the year. They consist of 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 against each one of these. Starting with profitability, we have now delivered three quarters of steadily improving results. Our guidance speaks to our beliefs that continued growth is expected and that we will continue to make progress against our goal of getting back to a double digit operating margin. From a customer experience perspective, the repositioning of certain products throughout the store is enabling shoppers to coordinate outfits more easily. Monthly floor set changes are highlighting the breadth of our new fashion items more clearly than ever before. And the introduction of additional product category enables us to sell an ever expanding portion of our customer’s total needs. Online better product presentation continues to make the shopping experience easier and more enjoyable. Additionally, we continue to reinforce our store associate selling model which is leading to significantly improved customer experience scores at all such points. Initial phases of the brand work we have been carrying out this year are complete. And our updated brand vision has been rolled out across the organization. This work is enabling our associates to better understand the essence of the Express brand and our target customer. It's leading to our sharper filter for our designers and merchants who in turn are creating and buying product with enhanced and targeted emotional content. In addition our Web Site and social media a better reflecting the needs and aspirations of our customers. Our full denim campaign was Karlie Kloss and our [indiscernible] campaign each exemplify our adoption of 360 degree approach to generating content across the full spectrum of traditional and social media offering. Our holiday campaign gift style which launched November the 2nd, is utilizing the same approach. We are also thrilled once again to be featuring amazing personalities who resonate with our customers such as [technical difficulty]. I believe that campaigns such as these in combination with our other impactful marketing initiatives are elevating these [technical difficulty]. Our IT modernization project continues progress and Perry will provide more details on those initiatives. Employee development work is continuing to provide opportunities for our associates and to ensure that Express remains a great place to build a career which embodies being challenged, supported and appreciated. As we move into the final quarter of the year a bit of a hindsight seem fitting. These past few years were challenging, we analyzed our performance, determined what adjustments were most appropriate and took swift and decisive actions. We have made great strides since the year began, we have grown sales and delivered solid comps and we are well on the way towards returning our business to double digit operating margins. But there is so much more, numbers alone don’t tell the full story. We’re delivering more frequent units and improved fashion and opportunistically expanding the collection. Through improved sorting and inventory discipline we are buying smarter. We are communicating better, enhancing the brand and introducing new customers to Express. We are rationalizing our real estate fleet to better serve our customers and where they are shopping. We are upgrading our IT to enhance operational flexibility and enable omni-channel and international expansion. And while the list goes on, I’ll stop there. Collectively, all of these advances are paving the way for a long runway of success. I would like to conclude by saying that I am fortunate to work with such talented and hardworking professional. The Express team is dedicated and focused on the growth of our brands and our business. I want to take this time to thank our entire team for all that they do. At this time I am going to turn the call over to Perry.

[Perry Pericleous:]

Thank you David. Good morning everyone. David’s enthusiasm for the business is evidence but I want to add that I am also very pleased with our third quarter results. We have been pursuing a number initiatives since the beginning of the year with a goal of delivering balanced growth that’s sustainable, both in the short and long term. Three quarters of good result coupled with our fourth quarter expectations show that we’re on the right track. With respect to the third quarter [indiscernible] the key metric in the P&L. Net sales grew 10% and comparable sales which rose by 6% came in at the high end of our guidance. The product was strong and customers responded favorably throughout the quarter. These positive results were complimented by higher merchandize margin which expanded by 160 basis points during the quarter, this is higher than what we expected in August when we provided guidance. Once again we acted opportunistically and succeed in driving further gains. We have set our upcoming promotions and as we determine that some were unnecessary, we canceled them. For example we eliminated all six of the 40% [ph] of days contained in last year's third quarter. Other promotions were ranging in as well and through inventory discipline David spoke about, was a further contributor. Binding occupancy as a percent of sale improved by 170 basis points, as strong comp results enabled us leverage cost. Collectively merchandized margin and binding occupancy improvements enables us to expand our gross margin by 330 basis points. SG&A as a percent of sales was 26.8% leading to 140 basis points of deleverage primarily driven by incentive compensation, outlet opening and investments in IT and marketing. The increase in spend was anticipated and in keeping with our commentary on the last call. Operating income for the quarter increased by 46% to $44.5 million this represented an 8.1% operating margin compared to the 6.1% in last year's third quarter. At the start of this fiscal year we announced our objective of returning to double digit operating margin within the next few years. The 200 basis points gain we just delivered speaks to the progress we are making. Net income grew by 80% to $26.3 million from $14.6 million. Diluted earnings per share were $0.31 representing an 82% increase over the $0.17 per diluted share reported in the third quarter of 2014. Shares repurchase activity which I’ll discuss in moment contributed less than $0.025 to the total. Our balance sheet remains very healthy, cash and cash equivalents were at $91 million at the end of the third quarter compared to $218 million at the same time last year. This decrease is primarily related to debt repayments and share repurchases. Earlier in the year we used $215 million to redeem our senior notes. Since the last earnings call we repurchased $40 million of our common stock, $22 million of which took place during the third quarter. Lastly, capital expenditures were $34 million compared to $27 million. We ended the third quarter with $365 million of inventory representing a 4% increase over the same time last year. This included approximately $59 million of Express Factory Outlet inventory, a significant portion of which relates to new stores. With respect to our retail business, inventories decreased approximately 6% in aggregate and 4% on a per square foot basis. We’re comfortable with both the level and composition of our inventory. Let me turn now to our IT projects, on our last call, I told that length of our legacy IT systems and the work that is underway to upgrade them, we’ve continued to make good progress in this area and we have completed system upgrades on a large number of projects. Our retail management enterprise planning and order management systems are still scheduled to come online next year. We have however decided to reverse the order of implementation. We will bring order management online in May as initially planned to be followed by the refill management and enterprise planning systems shortly thereafter. The project management plan for each of these systems involves testing at multiple stages to ensure amongst other things that foundational data is carried over with accuracy. We recently made a decision to layer in some additional test and investigation work in an effort to ensure a successful implementation. We’re excited about bringing these systems online which should provide long term benefit in terms of sales and margin expansion. As a result of this decision the year-end inventory levels will follow normal pattern and will not be elevated at the end of Q4 as previously indicated. Let me conclude by turning to our guidance for the fourth quarter and full year 2016. For the full quarter of 2016 we currently expect that comparable sales will grow at low single digits and net income will range from $50 million to $54 million or $0.60 to $0.64 per diluted share. On a full year basis, we expect comparable sales to increase in the mid-single digit range and adjusted net income to range from $116 million to $120 million or a $1.38 to $1.42 per diluted share. We now expect capital expenditures to range from $112 million to $117 million compared to $116 million spent in 2014. This concludes my comments. At this time I am turning the call back to David.

[David Kornberg:]

Thank you, Perry. We have made significant progress since the year began and I believe we are well positioned for the holiday season. Our stores look great, and our Web site continues to elevate the online shopping experience. Whether shopping at our stores, online, or using both channels, customers will find a compelling assortment of products. We excel at interpreting the most important looks of the season in a manner most suited for our customers. I want to close by addressing that as we continue to execute with discipline and advance our pillars of growth we will be poised to delivered profitable growth well beyond the fourth quarter. Before turning to Q&A, I am 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, so that we can get everyone in the queue. Operator, please open the lines so that we begin the question-and-answer portion of the call.

[Operator:]

Thank you [Operator Instructions]. Our first question comes from the line of Simeon Siegel with Nomura Securities. Please proceed with your question.

[Simeon Siegel:]

Can you just talk about your store comp metrics for a second, I mean you put a fixed comp with e-comp up 6, so it seems like pretty impressive store results, which is just really not the message many are giving. So any color there, and then just follow up Perry. Given the initiatives if any color on SG&A dollar growth for the quarter and then what to think about for next year? Thanks a lot.

[Perry Pericleous:]

From a constant point we see the comp coming from mainly our ADR and our ADS given the pulling back on our promotional activity. From a traffic standpoint we saw average store traffic to be slightly up and our conversion was fairly flat. What was the last part your question Simeon?

[Simeon Siegel:]

Just autumn wear, context on SG&A dollar growth given the initiatives going on?

[Perry Pericleous:]

So from an SG&A standpoint we’ve said at the end of Q2 that we are expecting our SG&A to remain in Q3 higher given our incentive compensation, our IT investment as well as our outlet openings specifically in Q3 our outlet openings were 17 compared to 9 last year and therefore we sold -- given at the timing of the openings a little bit more preopening expenses in Q3 than we had seen previously.

[David Kornberg:]

So the other thing I would add Simeon, is obviously overall we are very pleased with the comp that we delivered across all of our channels. And as you noted clearly don’t many people are delivering that out there, but we are focused on delivering consistent, profitable, sustainable growth, and that's the path that we are taking and we have those expectations whether it's across our buying groups or it's across our stores or it's across e-commerce and it's about consistency of improvement and clearly it's about an out-comping the comp for next year.

[Operator:]

Thank you. Our next question comes from the line of Tom Filandro with Susquehanna Financial Group. Please proceed with your question.

[Tom Filandro:]

Hi. Let me add my congratulations to a very well executed quarter congrats, across the board. Perry could you just kind of offer some puts and taken on the gross margin into the fourth quarter and just a view on how we should think about that pass to double digit Op margin. What do you need to see in terms of comp and what should be the makeup that change sort of the SG&A and gross margin. Just broadly that would be helpful. Thank you.

[Perry Pericleous:]

Our guidance right now the fourth quarter, what it reflects is merchandize margin is going to improve, not at the same rate as we have seen in the last few quarters given that the holiday season in specifically Q4 is fairly promotional. From a P&L standpoint and gross margin we’re expecting obviously a continuous improvement, but again we don’t expect it to be as the same rate that we have seen in the last three quarters. As it relates to SG&A leverage we will be -- from a deleveraging stand point we expect SG&A to be deleveraging at a far lesser rate than we've seen in Q3 and more comparable to, if not less than what we've seen in Q2 and we do expect operating margins to improve in Q4.

[Matt Moellering:]

Tom. This is Matt. We -- as with every holiday season it tends to get it’s a very promotional quarter in the year in general for the industry and what Perry talked about here is the fact that we have contemplated that in our guidance then we’re prepared to react as necessary, but staying with the fact that we want to make sure we have a very clear customer value preposition as well.

[Operator:]

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

[Adrienne Yih:]

My first question is one the Capsule. So we saw that happen online, obviously they’ll be rolled out to the stores. How many Capsule do you think you can do a year and does that impacts the number of returns for year and then my follow-up question is. Can you give us any insight into 2016 AUC trends do you think they could be down and any color there would be very helpful? Thank you.

[David Kornberg:]

Okay. In terms of -- you’re talking about the capsule collection edition that we just launched two days ago?

[Adrienne Yih:]

Yes.

[David Kornberg:]

Yes, okay. Looks it's clearly just two days into it, it's the first one that we've really done which is in contributing across all departments. We’re very pleased with what we've seen over the first two days, its early days, but I'd like to think that this is something that we can clearly take forward to the business and that it presents us with some significant opportunities going forward. I'm very-very pleased with the execution of it and I think that it’s something that we can clearly take forward in a bigger way for the business overall. Your comment about AUC we are looking to go forward really at about a flattish AUC. Obviously we are opportunistically looking at opportunities in Asia based on the devaluation of currencies, but in terms of our overall strategy on sourcing it continues in the way that it has been, but really looking at around flattish.

[Perry Pericleous:]

And we’ll provide more color on that in the Q4 earnings call.

[Adrienne Yih:]

Okay. Great best of luck.

[Operator:]

Thank you. Our next question comes from the line of Betty Chen with Mizuho Securities. Please proceed with your question.

[Betty Chen:]

Good morning congratulations on a great quarter. I was wondering if you can talk a little bit more about merchandize margin opportunity, nice gain in the third quarter and can you remind us where we are maybe against historical average or peak levels and what are some of the opportunities for next year and in similar to that effects, it seems like the stores are driving traffic way about some of your mall peers. Is that potentially another comp driver for next year or should we look for whether it’s TVT [ph] or ADS to be a bigger factor going forward? Thanks.

[Perry Pericleous:]

So from a merchandize margin standpoint we’ve obviously have seen significant improvement this year and I am going to remind you in Q1 we saw 200 basis point improvement in Q2 we saw 240 basis point improvement and now in Q3 160 basis points improvement. So as it relates to our historical as well as street performance, I would say another [ph] uptake performance from a merchandise margins standpoint. As it relates to 2016 we have not given guidance on merchandise margins in 2016 but consistent with what we have been saying going forward we’re going to focus on a balanced growth approach where we’re going to modest low single comp growth along with merchandise margin expansion and SG&A leverage and having said that, we’re going to continue to manage our inventory with business lines and looking at the promotional activity and evaluating and therefore striving to achieve further improvements in our merchandise margins.

[David Kornberg:]

If I could just add to that, you asked about traffic as an opportunity I think for next year. I think clearly yes that is an opportunity for us as we go forward. We saw improvement in terms of average store traffic in our stores this past quarter but really it’s about us focusing on delivering consistent profitable and sustainable growth as a business. And the way in which we’re going to do that above all else the biggest opportunity is us continuing to deliver differentiated fashion and exclusive products, continuing going down the path of elevating our brand, constantly improving the experience for our customer. And as Perry said taking this balanced approach to our financial sector, we are focused on consistently a result and continuous improvements across the business and I want to be really-really clear about that Betty.

[Operator:]

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

[Neely Tamminga:]

Good morning and solid execution indeed. So David I’ve a question for you on product. So my first question is on men’s and then the follow up is on holiday. So on men’s, it sounds like men’s tops aren’t working too well, is it -- in your test and react model you guys have the advantage of being able to just test a lot of ideas. Are ideas not hitting right now or are ideas hitting and things are being executed well. So we’re just trying to understand a little bit more of what’s going on in men’s tops? And the follow up is on holiday, it sounds like you’re finding more frequent fashion clothes as being a good strategy. So how are you applying that into holiday particularly we’re looking at the weak post-holiday, any changes there? Thank you.

[David Kornberg:]

So your first question was men’s and is the product in the tops area just not hitting, yes?

[Neely Tamminga:]

Yes.

[David Kornberg:]

So the men’s business, bottoms obviously continues to be very strong, suits continues to be very strong, we are seeing signs of progress where we are bringing in the frequency of units in men’s that we have been bringing in in women’s and where we’re seeing that particularly is in graphics. We have had a very descent men’s select season overall by bringing in frequency of the units and frequency of fashion. And I believe that we’ve got the corrective measures in place particularly on shirts and we’re doing a lot of testing on this. So I think that there is opportunity to go forward in men’s for us to really start making some good progress and so I feel good about that overall. You also asked about the frequency of fashion flow. Clearly, we’ve delivered a lot of spring already and we are starting to see some really good results, particularly on our spring sweaters that we brought in on women’s. So it’s really clearly it’s about the frequency of flows and the frequency of delivery and about us transitioning into seasons sooner, which we are doing it very-very well. But yes transitioning in seasons the transitioning into seasons in a wear now appropriate way.

[Operator:]

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

[John Morris:]

David really impressed with what you guys are doing with Express One Eleven. In the elements there as I understand it are really doing a great job in your approach to how you’re sourcing that product at good cost, so you’re able to be very competitive in pricing and realize good margins and yet also have great quality. So, it’s really win-win across the board. I am wondering if you’re applying some of the same initiatives to Express Edition, can we be expecting the same kind of unique strategy approach to that. And also as you look ahead into 2016 with what you guys have been doing on One Eleven and now Express Edition, should we expect to see more innovation in that sub-branding category going forward that I guess really helps make you increasing a destination and more and more of a brand in the customer’s minds? Thanks.

[David Kornberg:]

Thank you, John. Good question. I think that the frequency of sub-branding yet is very important for us. We’ve got to be clear that that everything that we are doing is about overall elevating the Express brand. The Express brand is at the center of everything that we’re doing and I think that the fundamental difference between Express One Eleven and Edition is Express One Eleven is about introducing shopper price point that enable us to get more traffic into this stores. And obviously it’s in our mid-top category where we are able to do that, the difference between that and Edition, is Edition is really us going after the upper end while everybody out there it going after the lower end and we are offering a very elevated collection of dressy going out party pieces, which clearly is only two days into it, but appears to be resonating very nicely in terms of the what we’re seeing. So it’s about elevating -- obviously everything that we’re doing is about elevating the Express brand. Sub-brands I think are an important part of our ability to continue to increase traffic into the store and continue to increase in units and frequency of visits for our customers so that they are clearly seeing units whenever they are coming in, and we going to go forward with that.

[John Morris:]

So is Edition have the same potential in terms of profitability contribution or profitability profile directionally as One Eleven does?

[David Kornberg:]

I believe that it does, yes.

[Operator:]

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

[Marni Shapiro:]

I just want to follow up on some of the IT work that you guys are doing. I am curious as you invest behind the old technologies and roll outs and new ones, when should we start to see things like find -- I see your find in-store, so when should we see things like reserve in-store, is this something you are planning to roll out? And I have noticed online over the last -- little while you have things like in-store only which I find very interesting, if you could just touch a little bit on the thought behind that?

[Matt Moellering:]

Yes Marni, I’ll take the first question as you alluded to both of our systems are about 25 years old today that’s what we’ve been operating with for quite a while. And we have been on a program of implementing saving in our systems in the business, we are almost done with that at this point. We have already implemented several of the systems over last couple of years. We have the RMS and enterprise planning systems that will go live in the back part of Q2 and the element systems in June. And so what these systems do for us is that they lay the foundation for omni-channel capabilities, the ship from store, the reserve online, picked up in store, et cetera. where we can meet the customer's needs where they want it, when they want it. And then it also helps us with things like multi channeled planning, so today our system is such that we plan everything in a single system. For example we have almost $400 million e-commerce business and we planned that as an average store within our planning system, sounds crazy but it's true. We are able to get the results we have with them, but when will be this systems come online, we will be able to plan by channel, we will be able to implement on the channel capability and we’ll be able to increase our speed to innovations with more flexible systems as well. All of these things should provide some significant top line and margin upside and we are taking a crawl, walk, run approach to this, over the next two to three years we should start to see some of this upside materialize for the business which does give us a good tailwind for the business.

[David Kornberg:]

And in respond Marni to your second question about store -- I think it’s been shown as in-store only, obviously in segway from Matt’s answer, we’re not in a position yet where we can shift from store and we are get into that point. But fairly when something has sold out online, but it is still available in the store, whether it's in Eastern or in 34th Street or in Flatiron, the customers is able to find it in their local store based on the global inventory visibility that we’ve introduced.

[Marni Shapiro:]

So just to clarify, in-store only is because it's sold out online, not because you are trying to -- I thought it was because you are trying to drive people into the store, like too bad you can’t buy it here?

[David Kornberg:]

The reason is, it's not that we are putting exclusive item in store, it’s because we will have sold out of that item online but when the customer is able to see the item based off of global inventory visibility they’ll be able to go and pick it up at the local store because we haven't got the capability yet to ship from store.

[Operator:]

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

[Susan Anderson:]

I was wondering the product looked really great lately, if you could talk about your test, read, react, strategy. Are you doing anything different there than what you’ve done in the past? And then maybe if you could touch on open-to-buy this quarter versus historically? And then on the e-commerce business any plans down the road to take it in house? Thank you.

[David Kornberg:]

Your first question, test and react, we really -- we’ve refined it, we haven’t changed it. And I think the key to it us obviously keeping more units open longer so that we’re able to really buy much closer in. And as you obviously look at the target the more information that you have on the target the more accurate you’re going to be in the terms of the shop that you’re taking. So we clearly are continuing to test, we are continuing to test probably over 75% of the units that we are selling in the store, but the key to it is us being able to keep the units open longer and take a really clear centralized approach to how we are releasing those open to buy dollars so that we are going into the season with a much larger kitty than we have had in the part. We are in the same position as we are looking at spring now and feel very good about the amount that we have opened into Q1 and Q2 at this stage.

[Susan Anderson:]

Great. That's helpful. And then on the e-commerce business any thoughts, down the road on taking it in-house?

[Perry Pericleous:]

October played [ph] in and out of the front end of our e-commerce business is in-house today with ETG platform, but fulfillment is not in-house and at this time that business continues to grow very rapidly we have a -- we have third party fulfillment that is very flexible and so at this point in time we don’t feel it’s appropriate to build a distribution set on or around, spend the capital because we've getting a very competitive rates and it gives the flexibility as the e-commerce business evolves overtime to be more flexible on whether we want a single multi-distribution center set up et cetera.

[Operator:]

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

[Richard Jaffe:]

Just a question on some of the details on the outlet business, fairly a source of confidence you guys are growing it quickly. Could you share with us some of the metrics that give you that kind of profit, as per square foot or the opportunity for greater source line, with margin and SG&A leverage here at the regular store? Thank you.

[David Kornberg:]

So from a productivity standpoint outlook source are more productive and we’ve said before they’re one and a half times more productive than our retail stores. From some of the other metrics the AUR of the outlet locations is about 20% to 25% lower than the AUR of the retail locations but also from an AUC standpoint our AUC is about 20% lower and therefore when you look at the merchandized margin, the merchandize margin of the outlet locations is top most to the overall merchandize margin of the retail locations. As you move down to the P&L from a BNO [ph] standpoint the BNO of the outlet location is fairly attractive given the rent deal and therefore from management some points is similar to the retail business. So overall present margins for the outlet continues to be very favorable to us.

[Operator:]

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

[Roxanne Meyer:]

Perry mentioned and reiterated that your margin gains quarter -- year-to-date, obviously very strong and into first three quarters. So as we look into 2016 where do you see the biggest opportunities, we’re still in early days of appreciating the potential in terms of whether it's inventory management or continuing to execute on more frequent flows or other things that should drive continued margin gains? Thanks.

[David Kornberg:]

I think the number one thing is us continuing to offer the best fashion that is available out there in the mall in a differentiation way and continuing to offer our exclusive product and elevating our brand. I think that is the number one big opportunity for us. And we been continuing to do that.

[Matt Moellering:]

Yes and we've made big strides this year with several other things with inventory discipline while we've made big strides there is still more opportunity there from holding more back in reserves as David talked about a minute ago to while we have a good -- pretty fast supply chain today looking for opportunities to continue to increase the speed in the supply chain as well. So we think there is still big opportunities there along with the growth in the after channel.

[David Kornberg:]

In addition to that we are moving all of our deliveries -- relevant deliveries back to the Westside now as well, so that's also another opportunity for us.

[Matt Moellering:]

But the good news is as Perry said we are bucking the trends to some extent with traffic in stores which is a positive and I think that a lot of that is driven by the brand work that we have done along with the great products that we have in the store.

[Operator:]

Thank you. Our next question comes from the line of Lindsay Drucker Mann with Goldman Sachs. Please proceed with your question.

[Eddie McLaughlin:]

Hi. Good morning this is Eddie McLaughlin on for Lindsay. You mentioned that online business is going up against heavy promotion last year and implied to that weighted somewhat on growth. Are you seeing any similar impact in your brick-and-mortar businesses and are you comfortable with the current level of promotions or do you see any room to throttle in any other direction over the next few quarters?

[David Kornberg:]

What happened last year with e-commerce business was we had specific ecommerce only promotions that we ran last year and we’ve made the decision this year to have a single view to the customer around promotional activity whether it’d be in stores or online, it should be the same customer experience, a consistent experience to the customer. And so we pulled off some of the e-com only promotions that we have on last year and that’s what led to the 6% comp online in the third quarter. We believe this is absolutely the right thing to do from the long term health of the business and it will help us overall long term with the overall customer experience.

[Operator:]

Thank you. Our next question comes from the line of Liz Pierce with Brean Capital. Please proceed with your question.

[Liz Pierce:]

Just talking off of this frequency in your supply chain, are you -- is this the best that it can be in terms of your deliveries or I just want to make sure I understood your comments a few minutes ago in terms of, are you going get to daily deliveries or perhaps just shed some light on it? Thanks.

[David Kornberg:]

The way we’re working in here is we are constantly looking at continuous improvements in every area of the business. And there are clearly opportunities filed with outsourcing for us to be able to get faster, I think in terms of the work that we have done over the last six to nine months has been magnificent in terms of moving on speed. But there is more of that that we can do, there is always more of it that we can do and we’re clearly focused on that.

[Liz Pierce:]

Just to follow up, just to make sure, and you still think that you can keep that 75% of what you’ve test before and continue to increase the frequency of deliveries?

[David Kornberg:]

Yes.

[Operator:]

Thank you. Mr. Kornberg, there are no further questions at this time. I’d like to turn the call back to you for any final concluding remarks.

[David Kornberg:]

Thank you. This concludes our call for today. Thank you for joining us this morning and for your ongoing interest in Express. Please accept my best wishes for the holiday season.

[Operator:]

Thank you. This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.