Express Inc (EXPR) 2010 Q2 法說會逐字稿

Greetings and welcome to the Express, Inc. second-quarter 2010 earnings conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ms. Allison Malkin of ICR. Thank you, Ms. Malkin, you may now begin.

Thank you. Good morning, everyone. 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 results may differ materially from those suggested in such statements due to a number of risks and uncertainties, all of which are described in the Company's filings with the SEC, which includes today's press release.

During this call, we will make reference to adjusted net income and adjusted earnings per diluted share, which are non-GAAP measures. Reconciliations of these non-GAAP measures to reported net income and earnings per diluted share have been 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. Good morning, everyone. I am joined here today by Matt Moellering, our Chief Administrative Officer and Chief Financial Officer. I will begin our call today with an overview of our second-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 pleased to continue our favorable momentum from the first quarter and report better than expected second-quarter results. Our fashion leadership combined with the ongoing success of our go-to-market strategy is fueling consistent growth in sales at increasing margins, which is driving our positive earnings performance.

Extensive testing gives us great visibility to plan a winning season. Combining that with our data-driven approach to design and merchandising and our rigorous weekly reassessment of merchandise performance, and it is no surprise that our growth strategy continued to generate intended results. We are delighted by our achievements this quarter and expect to continue our favorable performance in the second half of the year.

Highlights for the second quarter include a 9% increase in net sales to $407.3 million; a 6% increase in comparable store sales and adjusted net income of $0.08 per diluted share. During the quarter, we continue to advance each of our four growth pillars, which include increasing sales productivity and profitability within our existing store base, growing our e-commerce channel, expanding our store base and international expansion to our partnership with Alshaya Trading Company in the Middle East.

As it relates to our first strategy, our comparable store sales increase of 6% was driven primarily by increases in transactions, and to a lesser extent, growth in average dollar sale. We also continue to benefit from our initiatives to recapture historical share through a more balanced assortment across merchandise categories.

Our women's business was led by strength in dresses, skirts, pants, jackets, accessories, woven tops, and cotton sweaters, which is a category we were not in last year.

While denim was soft in July and early August, consumers are responding to the newness in denim we have in our stores currently at higher price points, validating our strength across this category.

In men's, we saw particular strength in wovens and knit tops, shorts, jackets, and accessories. Combined, this drove a 7% increase in sales per square foot during the quarter with less promotions, a 190 basis point increase in our merchandise margin.

As expected, we increased our marketing investment in the quarter to showcase our great assortment and heightened awareness of our brand. During the quarter, we tested various forms of advertising in print, billboards, and mail. We expect this added investment to broaden our customer reach and appeal and strengthened loyalty among our existing customer base.

As it relates to our second growth pillar, e-commerce, merchandise sales rose by 60% in the quarter, which slightly exceeded our 57% growth in the first quarter and represented 6.7% of total sales, up from 6.4% in the first quarter.

Our customers continue to respond enthusiastically to our assortment online, which is a relatively new channel of distribution for our Company. In August, we successfully completed the transition of our third-party fulfillment center from Pennsylvania to Columbus, Ohio.

We continue to believe the e-commerce channel represents a substantial top- and bottom-line opportunity for us and are focused on our long-term opportunity to have e-commerce sales represent 10% to 15% of our total business.

We also continue to increase our real estate portfolio and are very pleased with the performance of our new stores, which are meeting our expectations. During the quarter, we opened two new stores and closed one existing location. Quarter end, we operated 577 locations. 532 of them or 92% of which are in our dual-gender format.

Our international expansion continued in the quarter with royalties earned from the Express stores that are operated through a development agreement in the Middle East.

We maintained a strong balance sheet at quarter end, including $87 million in cash and $368 million in debt. Total debt is down $55 million from the end of the second quarter last year, driven primarily by the first-quarter refinancing and second-quarter payoffs of debt using IPO proceeds.

We also possess a very strong and diversified sourcing base with our products manufactured in more than 25 countries. As a result, we are not overly dependent on any one country, with China representing approximately one-third of our production.

Given our scale, we have been able to manage cost pressures as it relates to labor, raw materials, and freight and do not expect a significant impact from cost pressures this year. We feel very good about our opportunities as we begin the fall season.

As you may have heard me say before, our customers are fashion conscious and spend a higher percentage of their incomes on apparel. We continue to represent our customers with great fashion across our lifestyle assortment of wear-to-work, casual apparel, jeanswear, and going out styles. We also expect to delight our customers with our planned promotional strategies that are in line with those offered during the fall season last year.

We remain confident that our continued emphasis on testing, along with the considerable opportunities that exist to regain our historical sales volumes in key categories, such as casual tops and bottoms, and wear-to-work will lead to comp store growth at retail and continue strong momentum in our e-commerce channel in the third and fourth quarters this year.

In addition, our store expansion for 2010 remains on track to deliver a total of 22 new stores while closing six existing locations. We continue to expect to end the year operating 5.1 million gross square feet.

Now I will turn the call over to Matt to review our financials and outlook in more detail. Matt?

Thank you, Michael. Good morning, everyone. As Michael stated, we are pleased to continue our positive performance and report better than expected second-quarter results. The second quarter included solid sales and comp growth and a significant improvement in gross margin, which more than offset planned increases in GA&O expense. During the quarter, we also utilized the proceeds from our IPO to reduce our debt.

Beginning with a review of the income statement, for the second quarter, net sales increased 9% to $407.3 million compared to $373.8 million for the second quarter of 2009. Comparable store sales increased 6% for the quarter following a 12% decline last year.

Gross profit was $130 million or 31.9% of net sales as compared to $102.8 million or 27.5% of net sales in last year's second quarter. The 440 basis point improvement in gross profit margin was driven by 190 basis point increase in merchandise margin, which reflected higher pull ticket selling and lower promotional activity, fueled by the ongoing benefits from our revised go-to-market strategy. And 250 basis points of buying and occupancy cost leverage.

General, administrative and store operating expenses, or GA&O, totaled $110.9 million or 27.2% of net sales during the second quarter compared to GA&O expenses of $94.7 million or 25.3% of net sales during last year's second quarter.

The increase in GA&O expenses as compared to last year's second quarter were primarily driven by investments in marketing to heighten awareness and maximize the strength of our brand and increases in headcount, reflecting our investments in IT and to support the expansion of our e-commerce business.

Other operating expense net was $14 million or 3.4% of net sales and included a $13.3 million (technical difficulty) one-time termination fee paid to Golden Gate Capital and Limited Brands related to the advisory arrangements with them in connection with the initial public offering. This compares to other operating expense net of $1.8 million or 0.5% of net sales in the second quarter of 2009.

Operating income was $5.1 million or 1.2% of net sales compared to $6.3 million or 1.7% of net sales in the second quarter of fiscal 2009. Interest expense was $23.3 million compared to $13.2 million in the second quarter of 2009, primarily driven by a loss on extinguishment of debt, partially offset by lower interest rates and a reduction in debt as compared to last year.

Our estimated effective tax rate in the quarter and for the remainder of 2010 is 41.4%.

On a GAAP basis, net income increased to $22.1 million or $0.25 per diluted share on 88.7 million weighted average shares outstanding and included the following one-time items related to the initial public offering -- transaction costs related to our IPO of $549,000 after-tax or $0.01 per diluted share; a one-time termination fee paid to Golden Gate Capital and Limited Brands related to the advisory arrangements with them in connection with our IPO totaling $8 million after tax or $0.09 per diluted share; and interest expense of $8.2 million after-tax or $0.09 per diluted share associated with the loss on extinguishment of debt.

These costs were more than offset by a non-cash tax benefit in connection with the Company's conversion to a corporation of $31.8 million or $0.36 per diluted share.

Net income, adjusted for the one-time items just mentioned, was $7.1 million or $0.08 per diluted share on 88.7 million weighted average shares outstanding as compared 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 of 2009.

Moving to our balance sheet at quarter end, cash and cash equivalents were $86.9 million compared to $124 million at the end of the second quarter of fiscal 2009.

Inventories were $184.3 million compared to $166.5 million at quarter end last year. Inventory per square foot, excluding e-commerce merchandise, increased approximately 7.6% compared to the second quarter of fiscal 2009. This compares to a decrease in inventory per square foot of 9.7% in the same period last year.

We increased inventory to support our never-out strategy on key styles and sizes for top-selling season-less basics, particularly in the men's area and delivered more fall season merchandise early to continue to optimize our test and chase strategy. We remain pleased with the level and composition of our inventory as we begin the third quarter.

Also at quarter end, total debt declined by $55.4 million to $367.9 million at the end of the second quarter of 2010 as a result of the refinancing in the first quarter of 2010 and the payoff of debt with the IPO proceeds in the second quarter of this year.

Year-to-date capital expenditures for 2010 were $28.2 million compared to capital expenditures of $16.7 million for the same period last year. The increase in capital expenditures was primarily driven by our store expansion and IT investments.

Finally, our store expansion program included the opening of two new stores and the closure of one existing location during the quarter. We ended the period with 577 stores and approximately 5 million gross square feet in operation.

Moving to our outlook, for the third quarter, we currently expect comparable store sales to increase in the low single digit range, which compares to a comparable store sales decline of 1% in the third quarter last year. Interest expense of approximately $7 million and net income in the range of $23 million to $26 million or $0.26 to $0.29 per diluted share on 88.7 million weighted average shares outstanding.

This compares to net income of $28.5 million or $0.37 per diluted share on 77 million weighted average shares outstanding in the third quarter last year. Note that the weighted average share count year over year increased by 11.7 million shares, driven primarily by the IPO.

It should also be noted that net income in the third quarter will be materially impacted by being subject to federal taxation as a result of our conversion to a corporation whereas, in the prior year, we were treated as a partnership for tax purposes and subject to taxation by only state and local jurisdictions.

Before I review our full-year outlook, I would like to remind you of the one-time items that impacted our GAAP results for the first half of 2010. These one-time items include costs related to the senior notes offering completed on March 5, 2010, and the initial public offering completed on May 18, 2010 of $2.3 million after tax or $0.03 per diluted share.

A one-time termination fee of $8 million after tax or $0.09 per diluted share paid to Golden Gate Capital and Limited Brands related to the advisory arrangements with them, and interest expense of $15.3 million after tax or $0.18 per diluted share related to the loss on extinguishment of debt. These one-time expenses were offset by a one-time non-cash tax benefit of approximately $31.8 million or $0.37 per diluted share in connection with the Company's conversion to a corporation. In total, we expect one-time items to approximate $6.2 million of income or $0.07 per diluted share, all impacting the first half of the year.

On an adjusted basis for the 2010 year, we continue to expect comparable store sales to increase mid-single digits as compared to a comparable store sales decrease of 6% in the full year of 2009, and net income in the range of $109 million to $114 million or $1.27 to $1.33 per diluted share on 86.1 million weighted average shares outstanding, which is consistent with our previously provided guidance. 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 10.5 million shares, driven primarily by the IPO and that net income will be materially impacted by being subject to federal taxation as a result of our conversion to a corporation.

Our store expansion plans for the remainder of the year include opening 13 additional stores and closing one existing location. We expect to end the year with approximately 589 stores and 5.1 million gross square feet in operation. Finally, we expect to generate positive cash flow.

And with that, I will turn it back to Michael for some closing remarks.

In summary, we are pleased with our solid start to the year. We remain confident in our strategies, and as our guidance indicates, we expect a strong year. Operator, we are now ready for questions.

(Operator Instructions). Lorraine Hutchinson, Bank of America.

Thank you. Good morning. Could you talk a little bit about how same-store sales progressed through the quarter and then what you are seeing so far in August?

Yes, so we do not provide guidance on same-store sales or results by month. We were pleased with the results for the entire quarter, and our guidance does reflect the current trend of the business, which we are pleased with.

Okay. And then you mentioned that you saw denim start to pick up as August progressed. Any color there on what's changed, aside from maybe a more fashion-forward offering?

Well, actually, what essentially happened was last year, we decided that we had to sort of abandon the low-priced denim business, all of which was reflected in the first half of the year because we marked down our entire inventory as we came into a new fabric, a much higher quality fabric, better make, better everything, and put our product more in the range of premium than it has been. So that was off market, but our own strategy, and we expected to take a bit of a hit on that.

Denim in the month of July was not good and the beginning of the month of August was not good. In the past couple of weeks, it has become much better. Actually last week, we exceeded last year. This week, we're exceeding last year, and we really feel we've turned the corner on denim.

Great. And then just finally, can you talk a little bit about SG&A and how we should expect that to trend through the rest of the year with the increased marketing push?

Yes, so Lorraine, you mentioned -- one of the things we've been discussing is that we continue to invest in brand-building marketing activities with the business, which we have been increasing over the last several quarters. And we've been spending additional money primarily on print advertising and local marketing in key markets, such as New York, Chicago, and LA.

While it's somewhat difficult to measure the results of this marketing activity, we do believe we are seeing a benefit in these markets with the activity to date, and we are going to continue to invest additional marketing dollars in these markets and some other markets in the months ahead. All of that is included in our guidance for the remainder of the year.

Thank you very much.

Roxanne Meyer, UBS.

Great, thanks, and congrats on a terrific quarter. I'm just wondering if you could talk about some of the things that had tested well that you believe in for fall?

Well, I think -- sure, Roxanne. If you look in our stores right now, you can basically see what tested early and what we got back into for fall. You can see a lot of shears. You can see a lot of military. You can see new pant shapes, and you can see more dresses and more skirts than we've had for fall in a long time. So the current inventory that you see in terms of impact [see] is what tested well.

Okay, great. And then wondering if you would be able to share how inventories would have looked if you exclude some of that pull-forward merchandise.

You know, that's very, very -- the size of the inventory?

Yes, I'll take that, Michael. So basically there were two things on the inventory. As we talked about, our inventory was up over 7% versus last year. And there were really two key drivers. The big driver really was our never-out strategy. So what we identified in the first half of the year is that on some key season-less basic items, and particularly in certain sizes, we were out of stock in some of these areas.

And the things I'm talking about are items that we carry in our store throughout the year, such as 1MX shirts, PK polos, our men's underwear, black editor pants. And what we did was we took a look at the size curves that we were buying to and the overall amount of inventory that we were buying to and looked at this as -- for the most part, riskless inventory and felt that we should not ever lose a sale based on the fact that we're out of inventory. And we were losing, we believe, a significant amount of sales because of the spotty sizes we had in some of our stores in these key items.

So we did invest some additional inventory. Of the increase in inventory, about 330 basis points of the increase over last year was attributed to changing this never-out strategy -- going to this never-out strategy and investing in a little bit more inventory. Albeit that's, in our mind, very low-risk inventory that we are investing in with a very low probability of markdowns associated with the buy.

We also pulled some additional inventory forward from the fall season, which accounted for another percent or 2 increase versus last year, as we continue to try to optimize how much fall season inventory we are bringing in to get early reads to go back and chase against -- to make sure we are in stock during the heart of the selling season.

Great. Thanks for all the color and best of luck going forward.

Michelle Tan, Goldman Sachs.

Thanks, guys. I was wondering if you could talk a little bit about the promotional environment overall. It looks like in second quarter, you were promoting less than last year, but maybe had to be a little more aggressive than first quarter. Sounds like you are getting a little more competitive in second half and maintaining promotions for last year.

So maybe just give us some color there and how we should think about merchandise margins. And then also specifically, in the bottoms business, there's been some noise around another competitor being more aggressive in the space; Gap has talked about their [black band] initiative. I was wondering if you could address that and anything you are seeing.

You know, actually, our promotions were a bit down. The denim promotion, which is buy one get one 50% off, is a promotion we have run the identical promotion since '07 -- when I got back, that promotion was being run. I got back in July, it was being run. So we've run the same promotion for all of these years.

In terms of markdown promotions for the quarter, they were significantly lower and planned that way. We -- our DNA includes promotions, and we promote something every week. We do it this year; we're up against it from last year.

And as far as we can see, our promotions have not advanced. In terms of the balance of the year, we are up against huge promotions. The market is up against huge promotions, and we expect that that will reoccur.

Yes, you know, it's an important point that Michael made. The promotional activity in our business, we do have planned promotion on items every single week of the year. We have been getting some comments from individuals that looks like we are promoting and there's some concern about that, but I think part of that is due to the fact that some investors have not been following Express for a long period of time as we are a private company for a while. But we do have planned promotions every single week of the year.

And we think that's important for our specific customer to drive traffic into the store and also to increase UPTs within a transaction. And we use those effectively for both of those items within the business. And when we buy the merchandise upfront, it is with the plan that we are going to hold promotions throughout the season, and that is built into our margin structure. And you can see with the promotions we've had this year, our margins are still up significantly versus last year.

No, that's fair. I guess I was just thinking about the second half. I think you mentioned that your promotions were down to last year in second quarter, but you expect them to be in line with last year in the second half? Is that right? And then should we think about March margins being flattish in that?

You know, a lot will depend totally on business conditions. And we are prepared to do what we have to do. We built an awful lot into our pricing.

And Michelle, the other thing though is while promotions activities planned similar to last year, we do still expect to see merchandise margin improvement as we continue to optimize our go-to-market strategy. And if you take a look at the March margin improvement we saw in the first and second quarter, a lot of that wasn't necessarily driven by less promotional activity, although in the second quarter, a little bit of that was.

A lot of that was driven by the fact that we continue to execute against our testing -- our structured testing program and managing our inventory, so that we can chase into tested styles very quickly once the season progresses. And that would result in fewer markdowns, which is the big driver of our margin improvement year to date.

Okay, thanks. And then any comments on competitive pressure in the pant category, anything that's [out doing] that you are seeing, have an impact?

You know, I think people react to two things. They react to the general economy, but more than that, they react to the reaction of their customers to their own [buys]. And I think those are not the same everywhere, even though the economy is the same everywhere. Our history is that our customer buys new. We're a fashion company. And when we are right, we do business.

Okay, great. Thanks so much, guys, and good luck.

Janet Kloppenberg, JJK Research.

Good morning, everyone, and congratulations on a great quarter. Michael, there's a lot of talk out right now about denim taking a back seat to some non-denim looks, and perhaps a slowdown in the denim cycle. I would sure love your views on that. I also noticed in your recent mailer a significant focus on sweaters that looked great to me, but I didn't hear you talk about that as an important category go forward. So I wondered if you could just address that for us.

And for Matt, I was wondering if you could discuss the outlook for the inventory levels going forward. Should we expect this never-out strategy to continue to influence the level of inventory that you end the quarters with? Thanks so much.

Okay, Janet, you are absolutely right. I should have said sweaters, but sweaters were not a big piece of spring. They will be a tremendous piece of our fall. We've gotten very, very good reaction very early, remarkably, in the bulkier sweaters early than we have ever had, and we are very enthused about that.

In terms of the bottoms, yes, we have planned denim to be a small part of the pant to total bottoms business. But when we look at the last quarter, even with the decline in denim in the month of July, we do make bottoms because we made it up in the casual bottoms department.

So do you think we're going to go through a cycle where denim is less important or perhaps that bottoms are less important?

I don't think we're going to go through that cycle because our current selling is that denim, the denim dollars are up to last year in the past two weeks. Of course, the dollars are up based on higher prices on our denim, so you are right, units are down, but we are making the numbers currently. We do believe much more heavily in other casual pants being a bigger part of the business.

Okay. And the margins on sweaters are perhaps the highest in the business?

They have a history of being perhaps the highest in the business. We're hoping that will happen again.

Okay. And on the inventory, Matt?

We do not provide forward-looking guidance on inventory levels, but what I will tell you is that you are correct; with the never-out strategy, until we lap this for a full year, we're going to see a 3% to 4% increase over last year and inventory associated with that versus the remainder of the inventory levels that we have. So that is going to increase inventory levels. Again, this is -- over the next three quarters that we report as well. But again, this is on inventory that we deem to be very, very low risk inventory and should help our top-line sales.

Okay. And Matt, one other question. When will you anniversary the lift in marketing expense?

We will anniversary that Q1 of 2011.

Okay. Lots of luck for a great second half.

Great. Thank you very much, Janet.

Neely Tamminga, Piper Jaffray.

Neely Tamminga from Piper Jaffray. Michael, a question for you on this denim/non-denim. We remember when you guys really dominated with the editor in all of those sister fits; and just wondering where you guys are in terms of the percentage of the assortment and what it could be going back to past cycles when non-denim was in favor, on some of those nice wear-to-work pants -- and that's an opportunity for you guys. I just remember the many different color ways and when there was a lot of different excitement and injected verve in that assortment. I'm just wondering what that might look like. Is that a holiday or a spring opportunity? And then I have a follow-up for Matt.

Okay. Actually, if you look in our stores right now, you will see an outstanding go-to-work pant assortment. And we start to push that for September. So our September floor set is going into effect this week, and you will see pants. We don't comment on percentages of our business, but what I would tell you is that our wear-to-work pant business is still quite good, although it is a smaller percentage to total because we are doing other businesses. So we are maintaining our wear-to-work pants and we are adding businesses, which is our intended goal, to balance that with other pants and other bottoms that our customer wears. So we are enthusiastic about bottoms.

Excellent. Thanks, Michael. And we were in stores last night and saw that fashion denim. It looked absolutely fabulous, so.

And then Matt, a follow-up for you on the comp driver for the low single digit that you are indicating for current trends as well as for the quarter. Is that translating through higher number of transactions or average unit retail? It would be helpful.

Yes, transactions -- we just give a little bit of color on that, but transactions are certainly up to last year. And [ADS] is also up as well, but to a lesser extent.

Great, thanks. And good luck, you guys.

Tom Filandro, Susquehanna Financial Group.

Thank you very much, and my congratulations as well, gentlemen. Quick question on the AUR. Can you be more specific, Matt, on the performance in AUR for the second quarter? And if I'm hearing you correctly, given the promotional cadence for the balance of the second half, should we think about AUR contraction? And then I have a question for Mike regarding the denim again.

So Tom, we don't give specific information out below the ADS line. So ADS was up to a slighter extent, but you can draw your conclusions from that with AUR. But, with the strategy that we have put in place, we're not going to see -- we don't believe we're going to see AURs decrease in Q3. We're looking at promotional activity similar to last year, not an increase to last year.

Fair enough. And just so we can have a little more comfort in the denim category, if I hear you correctly, obviously, it was running on a dollar basis negative below plan. And then units are still down. And we are in the midst of the peak selling season for denim, I would guess, given your history. Should we anticipate a higher level of promotional cadence in the category post peak? And how can you guys just give us a little more confidence that you are not in over inventory position in that classification?

Our inventory is way down in units in denim. The average price point is up. In terms of promotion, after this peak price point, I don't think so. Can I absolutely say absolutely not? What I can say is I don't think so, and the reason is pretty clear.

In August, we depend on denim, and we don't depend on it until the week after Christmas again. So, we accent other merchandise categories; like starting in September, we really, really put the pedal to the metal on pants and wear-to-work. And those categories have not been problematic. So I do believe that the categories that we depend on between August and December will perform.

But that is a good point. As we plan the increased dollars ticket on the denim, we did plan inventory units down substantially, anticipating that there is some price elasticity in the category.

Thank you. Best of luck.

Travis Williams, Stephens Inc.

Thanks, guys. Nice quarter. I guess, for me, the e-commerce growth really stood out. Could you just comment maybe what you are attributing that growth to? It seems very, very high.

And then secondly, on that, I guess just going forward, what is the strategy? What are some of the direct marketing initiatives you can do to continue to sustain that growth towards your long-term target there?

So from e-commerce, as you alluded to, e-commerce sales in Q1 were up 57% over last year. Q2, we were up 60% to last year. So, this is a nascent business for us. We're only a year and a half or two years into the launch of the site and already doing a significant amount of volume and still ramping up on the e-commerce platform very aggressively.

Part of what's driving the result is that we are still on a fairly large learning curve with the business. So, because the business is only two years old, this platform was started two years ago with four employees, so we are still hiring people. We're looking at how do we optimize where we put product on the pages, our search engine process. We have [the Czar voice]. We have a lot of the bells and whistles associated with our platform that really connect with the customers, and we continue to look for improving the overall customer experience online.

And I think we've done a good job on the marketing side, really tying in cross channel shopping and ensuring that we are getting a comparable level of customer experience in store as well as online.

The search engine has also helped us out quite a bit because it helps us understand very quickly what the customer wants from us that we are not currently providing, and we've been able to run some tests on things such as shoes and swimwear online to determine if those are potential go-forward items for us, both online or potentially even in-store. So that has also contributed somewhat to our increase in e-commerce. And we continue to expect strong double-digit growth for the remainder of the year.

Okay, thanks. And then I have one for Michael. Just in terms of the recapture strategy part of the growth plan, we've talked a lot about denim. Could you comment a little bit more about your progress on some of the other categories that you identified and the road show, in terms of knit tops, sweaters, things like that, and where you're at in that strategy for recapturing?

Well, in terms of sweaters, we are well on our way. I think this season will really, really add to that progress.

In terms of the knit tops, in the past spring, the casual end of the business was not great. Basic knit tops were down to last year.

However, the other end of the business, the fashion end of the business, the less basic end of the business, is growing. So that I expect that this year in the aggregate, we will have an increase in knit tops.

As I mentioned before, a big area for us to recapture was casual pants. And as I said earlier in this conversation, we are starting to recapture casual pants, both in wovens with all of these very new, skinny cargoes and in knits, with the legging approach to pants. So I think that will be a big plus.

The other place we are starting to recapture nicely is in non-pant bottoms, namely skirts which is a business we had totally given up, and which is a business that gave us a big increase this past spring, and I expect a big increase this fall. So in the aggregate, what I'm saying to you is there are still miles and miles and miles to go, but we have not nearly abandoned that thought, and we are pursuing many categories. We are most vibrantly pursuing the ones that the customer tells us they are interested in, in a given season, but we're looking at everything because we know that we have to increase across the board.

That's great. Thanks. And then one last follow-up for Matt. I know that you guys break this out in the 10-Q coming out here in a couple of days. But it would be really helpful if you could break out revenues between stores, e-com and other, for modeling purposes.

Sure. For Q2 of 2010, total sales were $407 million. Stores were $376 million. E-com was $27 million. And other revenue was $4 million.

Thanks. Thanks, guys.

(Operator Instructions). William [Rooter], Bank of America.

One question on the denim that I guess sounds like it was weaker in July and early August, but recently has bounced back -- I'm wondering if you think that that change in performance is solely based upon the change in the premium nature of your product offering, or if this is some bigger changes that are happening in the category?

I think it's probably bigger changes. You know, we keep looking at our history. This is specifically Express now. I'm not talking about the industry; I'm talking about us because I can't speak for anybody else. But we had a much, much younger customer than we currently have. And basically, when I really think about it, that customer buys much more heavily in August.

Our customer today, as you all know, we are directed towards the twenty-somethings, and they work. And they start coming in later than the back-to-school customer, and we believe that they buy a lot of denim, which is why we are in that business. And we believe that they are going to be buying it -- they started to buy it last week in depth, in the last week of August. They're buying it now, and we believe they will buy it in September. So for us, we're looking at a customer that is becoming much more solidified.

Having said that, we still pursue that younger customer in August because that's the entry point to our brand. Our denim actually is the best interest entry point to the Express brand, so that we do pursue a younger customer for denim.

Okay, and do you break out what -- I'm sorry, you are continuing on?

The only thing I was going to add to that is the fact that one of the things that really provides a competitive advantage for us as well is that we participate in all four lifestyles of the customer spectrum with wear-to-work, denim, casual and going out and provide all buying occasions within the customer's closet. We believe that's a differentiator. And as trends come and go, that insulates us more than some of the other competition that we may have that may be focused specifically on casual or specifically on wear-to-work. So we think that's an advantage for our Company as well.

Right. Do you guys break out what percentage of your sales on an annual basis are from the denim category?

We do not.

Okay. And, in terms of the gross margins, obviously, you guys, in the first half of the year, had some pretty significant increases. I guess if you can give us some qualitative way to think about how to think about those increases potentially going forward?

We don't provide any specific guidance go forward on gross margin. But what we will say at a high level is that as we said after the first-quarter conference call, as we progress throughout the year, the comparisons on our gross margin will continue to get tougher. With that said, we do anticipate to increase gross margin rate for both the third and fourth quarter.

Okay. And then just lastly, by my model, I think you guys are going to do some pretty strong free cash flow this year. How should we think about your uses of that free cash flow?

Right. So the uses of free cash flow for us -- the number one priority we have is reinvesting back into the business for initiatives that are generating a significant return on investment. And then, we want to make sure we have enough cash on the balance sheet. But as discussed, during the IPO, we're also looking at paying down debt as well at this point in time.

For the near term at least, we are not looking at instituting a dividend policy. But, as you mentioned, this business does generate a significant amount of free cash flow, and that may be something we look at down the road.

In terms of paying down debt, would that be your term loan or I can't remember whether that allows you to repurchase some of your senior notes?

It is our term loan, is the first thing we're going to focus on. 120-- (multiple speakers).

Great. That's it for me. Thanks, guys.

Andrew Berg, Post Advisory Group.

My question was asked and answered. Thank you.

There are no further questions at this time. I would now like to turn the conference back to your host for closing comments.

Thank you for joining us today. We look forward to speaking with you when we report third-quarter results in December.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.