Express Inc (EXPR) 2010 Q1 法說會逐字稿

Greetings and welcome to the Express Inc. first-quarter fiscal 2010 results conference call. (Operator Instructions). As a reminder this conference is being recorded. It is now my pleasure to introduce your host, Ms. Allison Malkin of ICR. Thank you, Ms. Malkin, you may begin.

Thank you and good afternoon. Before we get started I would like to remind you of the Company's Safe Harbor language, which I'm sure you are all familiar with.

The statements contained in this conference call, which are not historical facts, may be deemed to constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual future growth may differ materially from those suggested in such statements due to a number of risks and some uncertainties, all of which are described in the Company's filings with the SEC, which includes today's press release.

Adjusted net income and adjusted earnings per diluted share are non-GAAP measures used on this call. A reconciliation of GAAP to non-GAAP is provided in our press release.

And now I would like to turn the call over to Michael Weiss, President and CEO of Express.

Thank you Allison, and good afternoon everyone. I'm joined here today by Matt Moellering, our Chief Administrative Officer and Chief Financial Officer.

With today's call I will begin with an overview of our first-quarter performance and update you on the progress of our key growth strategies. Matt will then review our financial results and outlook in more detail. Following my closing remarks, we will conduct a question-and-answer session.

We are very excited to speak to you on our first call as a public company, and equally pleased with our first-quarter results. Our quarterly performance was driven by a favorable customer response to our product offerings across genders and categories, which led to strong sales and margins and drove a significant increase in profitability.

Our results provide further validation that the process change we have implemented, such as our go to market strategy that has us testing 75% of our merchandise prior to season, resulting in more winning styles and choices in our stores.

Our improved process has armed us with key data and quick response time, and provide us with a great foundation to execute our growth strategies and continue our favorable momentum this year and beyond.

In total for the first quarter net sales were $426.5 million, increasing 14% from $374.4 million in the first quarter of last year. And operating income more than doubled to $51.3 million or 12% of net sales.

During the quarter we advanced each of our four growth pillars. We increased sales and margins in existing stores, with comp stores sales up 12%, and gross margins rising nearly 700 basis points.

We saw significant increase in our e-commerce channel, with merchandise sales up 57%. We grew our store base with the opening of seven stores, and we continued our international expansion through our partnership with Alshaya Trading Company in the Middle East.

As it relates to store productivity and margin expansion, our comp stores sales growth was driven primarily by increases in transactions, and to a lesser extent growth in average dollar sale.

As I mentioned earlier, successful testing resulted in reorders. And we also continued our strategy to recapture historical share in core assortment of tops, casuals and bottoms.

Our women's business was led by strength in dresses, skirts, jackets and shorts, with wovens driving our performance in tops. In men's we saw particular strength in woven and knit tops, denim, shorts and in accessories. Combined, this drove a 13% increase in sales per square foot during the quarter, and with increased full-price selling, a 370 basis point increase in merchandise margin.

We increased e-commerce margin -- excuse me, e-commerce merchandise sales by 57% in the quarter. We are relatively new to the e-commerce channel, with July marking our second-year anniversary. And our core customers who are active online shoppers are responding to our great assortments.

Without the cost of opening -- of operating bricks and mortar stores the e-commerce channel presents us with a margin opportunity, in addition to a significant sales opportunity long-term.

New stores outperformed our expectations. During the quarter we opened seven new stores and closed four existing locations. Quarter-end we operated 576 locations, 530 of which, or 92% of which, are in our dual gender format.

With our dual gender conversion essentially complete we have focused on store expansion. We continued our international expansion with royalty contributions from the Express stores that are operated through a development agreement in the Middle East.

During the quarter Alshaya opened two new stores, one in Saudi Arabia and one in Dubai, and ended the quarter with six stores operating through this development agreement.

And finally, we ended the quarter with a solid balance sheet. And following quarter-end we enhanced our financial flexibility by using the majority of our IPO proceeds to pay down debt.

We believe we are in a terrific position as we begin the second quarter. We plan to continue the successful strategy from the first quarter that led to our positive performance.

First, we continue to benefit from the implementation of our improved process. Our testing allows us to have greater visibility as we benefit from selling information prior to the season. As previously mentioned, this allows us to provide customers with styles and choices that they want to buy from us. Our improved supply chain allows us to react quickly and maintain high-quality merchandise.

Taken together, this is expected to drive our comp sales growth and sales productivity towards our goal of $390 per square foot at higher margins over the next few years.

Longer-term we continued to see an $800 million sales opportunity from recapturing lost sales in peak selling years in two categories. By capturing 30% to 50% of this opportunity, we believe we can drive comp stores sales in the 3% to 5% range over the next few years.

Second, our e-commerce business is poised for continued growth. And our customers are very comfortable with and enjoy this channel of distribution. In Q4 of 2009 we began shipping merchandise to Canada through our e-commerce channel. During this year we continue to refine our operating capabilities in this area. And we continue to expect this channel to represent 10% to 15% of total sales long-term.

Third, our store expansion remains on track with new stores exceeding our expectations. This year we expect to open 22 new stores, while closing six existing locations, to the end of the year operating 5.1 million square feet. We see an opportunity to open 150 additional stores that fit our stringent criteria longer-term in the US and Canada.

We are confident in our strategies, and as our guidance suggests in our press release, equally optimistic about our upcoming performance. Now I will turn the call over to Matt to review our financials and outlook in more detail. Matt.

Thank you Michael, and good afternoon everyone. As Michael stated, we are pleased with our strong start to the year. Our first-quarter results includes double-digit sales growth and a significant improvement in gross margin, which more than also higher expenses, resulting in operating income more than doubling in the first quarter.

Beginning with a review of the income statement, for the first quarter net sales were $426.5 million as compared to $374.4 million for the first quarter of 2009. Comparable store sales increased 12% for the quarter, following a 15% decline last year. Gross profit was $157.2 million or 36.9% of net sales as compared to $112.1 million or 29.9% of net sales in last year's first quarter.

The nearly 700 basis point improvement in gross profit margin was driven by a 370 basis point expansion in merchandise margins resulting from our revised go to market strategy. This led to increased regular price sales and fewer markdowns, and 330 basis points of buying and occupancy cost leverage.

General administrative and store operating expenses, or GA&O, where $102.9 million or 24.1% of net sales during the first quarter of fiscal year 2010 compared to GA&O expenses of $89.5 million or 23.9% of net sales during last year's first quarter.

The increase in GA&O expenses as compared to last year's first quarter were primarily driven by $1.8 million in costs related to the senior notes offering completed on March 5, 2010, along with a portion of the cost related to our initial public offering completed on May 18, 2010, and planned investment in marketing to support our branding initiatives, as well as investments in IT and e-commerce to support our growth. In addition, GA&O increased due to higher incentive compensation, along with variable expenses related to our strong sales performance.

Operating income was $51.3 million or 12% of net sales compared to $20.9 million or 5.6% of net sales in the first quarter of fiscal 2009. Interest expense was $20.8 million, and included $7.2 million in costs associated with the loss on extinguishment of debt. This compares to interest expense of $13.6 million in the first quarter of 2009.

The tax rate of the partnership for the quarter was 1.2% compared to 2.7% in the first quarter last year.

On a GAAP basis net income increased to $30.6 million or $0.39 per diluted share on 78.1 million weighted average shares outstanding, and included the following one-time items. $7.2 million or $0.09 per diluted share in costs associated with the loss on extinguishment of debt, and $1.8 million or $0.02 per diluted share in costs related to the senior notes offering completed on March 5, 2010, and our initial public offering completed on May 18, 2010.

Net income, adjusted for the one-time items previously mentioned, was $39.4 million or $0.50 per diluted share as compared to net income of $7.6 million or $0.10 per diluted share on 74.0 million weighted average shares outstanding in the first quarter of 2009.

Moving to our balance sheet at quarter-end, cash and cash equivalents were $83.3 million compared to $106.1 million at the end of the first quarter of fiscal 2009. Inventories were $156.6 million compared to $148.1 million at quarter-end last year.

Inventory per square foot, excluding e-commerce merchandise, increased approximately 2.9% compared to the first quarter of fiscal 2009. We are comfortable with the balance and composition of our inventory as we begin the second quarter.

Also at quarter-end debt totaled $515.6 million, which included $147.5 million from our Term B loan which was paid off in full subsequent to the first quarter.

Subsequent to quarter-end on May 18, 2010 we completed our IPO, raising net proceeds of $166.9 million. Net proceeds were used to prepay the term B loan outstanding, including accrued and unpaid interest and a prepayment penalty. Cash from the balance sheet was used to pay fees of $10 million to Golden Gate Capital, and $3.3 million to Limited Brands to terminate the advisory agreement and limited liability company agreement, respectively. We move forward with a strengthened balance sheet and increased financial flexibility to execute our expansion strategies.

Capital expenditures for the first quarter were $13.2 million compared to capital expenditures of $5.7 million last year. The increase in capital expenditures were primarily driven by our store expansions and IT investments.

Finally, our store expansion program included the opening of seven new stores and the closing of four existing locations. We ended the period with 576 stores and approximately 5 million square feet in operation.

Now moving to our outlook, note that as we look at Q2 and beyond the impact of the new tax rate on our results of operations is significantly higher than our historical rate. With completion of the initial public offering, our effective tax rate increased from approximately 2% as a partnership to approximately 40.7% as a corporation.

Before I introduce our second-quarter and 2010 guidance, I would like to review the impact of certain costs. For the second quarter we expect to incur certain expenses related to our IPO, including approximately $3 million in pretax GA&O expenses related to transaction costs associated with the equity offering. $13.3 million in pretax other operating expenses related to terminating the Golden Gate Capital advisory agreement and Limited Brands' limited liability company agreement. $13.6 million in pretax interest expense related to the payoff of our Term B loan.

These one-time expenses will be fully offset by a one-time non-cash tax benefit of approximately $31.8 million in connection with the conversion of the company from a partnership to a corporation. On an after-tax basis these one-time items are estimated to be $14.0 million of income or $0.16 per diluted share.

For the full year 2010 one-time cost include approximately $4.8 million in pretax GA&O expenses related to transaction costs incurred for the senior notes offering completed on March 5, 2010, and our initial public offering completed on May 18, 2010.

$13 million of pretax other operating expenses related to terminating the Golden Gate Capital advisory agreement and Limited Brands LLC agreement. And $20.8 million in pretax interest expense related to the loss on extinguishment of debt related to the early payoff of the Term B and Term C loans.

These one-time expenses will be fully offset by a one-time non-cash tax benefit of approximately $31.8 million in connection with the conversion of the company from a partnership to a corporation.

On an after-tax basis these one-time items are estimated to be $5.2 million of income or $0.6 per diluted share, all impacting the first half of the year. A summary of these one-time items can be viewed in Schedule 4 of our press release.

Our guidance will be presented on an adjusted basis, excluding the one-time items I just mentioned. For the second quarter we currently expect comparable store sales to increase mid to high single digits compared to a decrease of 12% in the second quarter last year.

And net income, adjusted for one-time items, to be in a range of $4 million to $6 million or $0.05 to $0.07 per diluted share on 88.7 million weighted average shares outstanding. This compares to a net loss of $6.8 million or $0.09 per diluted share on 74.4 million weighted average shares outstanding in the second quarter last year. Note that the weighted average share count year over year increased by 14.3 million, driven primarily by the IPO.

As a reminder, on an after-tax basis the second-quarter adjusted net income this year excludes $14 million of income or $0.16 per share.

For the 2010 year we currently expect comp store sales to increase mid single digits as compared to a comparable store sales decrease of 6% in the full year 2009. And net income of, adjusted for one-time items, in a range of $109 million to $114 million, or $1.27 to $1.33 per diluted share, on 86.1 million weighted average shares outstanding. This compares to 2009 net income of $75.3 million or $1 per diluted share on 75.6 million weighted average shares outstanding. Again, note that the weighted average share count year over year increased by 11.5 million, driven primarily by the IPO.

As a reminder, our guidance for 2010 excludes the one-time items that are estimated to be $5.2 million of income on an after-tax basis, or $0.06 per diluted share.

Our store expansion plans for the remainder of the year include opening 15 additional stores and closing two additional locations. We expect to end the year with approximately 589 stores and 5.1 million square feet in operation.

Finally, we expect to generate positive cash flow. And with that, I will turn it back over to Michael for some closing remarks.

In summary, we believe we are well-positioned to continue our positive performance in 2010 and beyond. We operate in a large and growing market. Our demographic has high discretionary spending. In fact, 50% greater than the average female specialty retail shopper.

And we believe we are poised to gain marketshare with improved processes, strong assortments in store and e-commerce channels that assume increases in sales productivity and profitability.

Before I turn the call over to the operator, I want to take a moment to thank our 17,000 associates. Their hard work and dedication is integral to our ongoing success. Thank you. We are now ready for questions.

(Operator Instructions). Andrew Berg, Post Advisory Group.

One warehouse keeping question and one business question. Given the time with the IPO and the proceeds that were paid out, should we think of pro forma cash being $70 million? You have the $10 million in the Golden Gate and the Limited, and we adjust the cash for that?

As of what period are you talking about?

As of -- if we were to adjust the balance sheet pro forma for the IPO, you actually would have used $13 million of the $83 million in cash?

Correct.

Okay. And then you talked about inventory per square foot being up, I think you said 2.9%, and you are comfortable with that. Is that inventory growth concentrated in one particular category or area, or is that just spread out across a number of different categories, and it is just general growth in inventories, as you are seeing them improving the business and your confidence in what you can move?

With our change in go to market strategy we have been operating the business over the past couple of years on an open to buy system. And what that does for us, it allows us to manage our inventory on a weekly basis with reviews with the senior leaders of each of the men's and women's businesses. And we buy inventory based on what is sold.

So the inventory increase is spread across several different categories, but it is primarily spread across the categories that are selling well right now. And you will note that the comps were 12% with only a 3% increase in inventory. As we continue to sell more inventory with the open to buy process that we manage on a weekly basis, we will continue to replenish to ensure we have plenty of inventory to support the business in Q2 and beyond.

Well, it certainly was impressive. One last question, just what is available on the revolver?

As of the end of the quarter it was $124 million was remaining on the revolver, and nothing is tapped on the revolver. We have not used the revolver this fiscal year.

You had $124 million of availability?

Yes, correct.

Thank you very much.

(Operator Instructions). We have no further questions in the queue at this time. I will just turn it back to management for any closing comments.

Thanks again for joining us today. We look forward to speaking with you on our second-quarter call in September.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.