Express Inc (EXPR) 2010 Q3 法說會逐字稿

Greetings and welcome to the Express Inc. third quarter fiscal 2010 earnings conference call. At this time, all participants are in a listen-only mode.

A 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, Allison Malkin of ICR. Thank you. Ms. Melton, you may begin.

Thank you. Good afternoon, everyone.

Before we get started, I would like to remind you of the Company's Safe Harbor language which I'm sure you're 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. On November 9, 2010, the Company filed a registration statement with the SEC to register the sale of 11.5 million shares of our common stock held by Golden Gate and Limited Brands through a secondary offering.

As you know, we are not legally allowed to discuss this on today's call and therefore, we will only be able to take questions related to the Company's business performance today. In addition, 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 afternoon, 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 third-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. Continued focus on advancing our four pillars of growth and optimizing our go-to-market strategy fueled another positive quarter at Express.

The third quarter included a 6% increase in total sales, positive comp store sales, a 240 basis point increase in gross profit margin, a 27% rise in operating income with diluted earnings per share of $0.30, $0.01 above the high end of our guidance range of $0.26 to $0.29 per diluted share. At quarter end, our balance sheet remains strong and we generated positive operating cash flow. We are certainly pleased with our performance during the quarter and year-to-date and equally optimistic about our ability to continue our favorable momentum in the fourth quarter.

Our expansion strategies continue to focus on the advancement of our four growth pillars which include increasing sales productivity and profitability within our existing store base, growing our e-commerce channel, opening new stores and lastly, international expansion through our partnerships such as with Alshaya Trading Company in the Middle East.

As it relates to our first strategy, our comp store sales increase of 2% was driven by an increase in transactions and growth in average dollar sale. We attribute our sustained positive comp store sales in this sluggish economy to our consistent application of our go-to-market strategy whereby we aggressively [chase into] winning trends through data-driven decision-making.

We believe our customers view Express as a fashion authority which is a great reflection of our talented team and these data-driven processes. We continue to evolve our go-to-market strategy which includes testing 75% of our merchandise. We continue to expand margin along with topline sales.

We are also intently focused on gaining a greater share of our customers' spending dollars. We believe we are in a great position to accomplish this goal given the multiple lifestyles presented in our stores that include wear-to-work, casual, jeanswear and going out.

We are also able to emphasize categories based on seasonal needs and importantly, as trends dictate, to optimize their performance. During the quarter, our women's business was led by strength in dresses, skirts, jackets, accessories, woven tops and cotton sweaters.

This fall we also introduced our first women's scent, Love Express, with a terrific response. We're finding our fragrance is a great add-on to an existing purchase and is expected to lead to increased units per transaction and increased average ticket over time.

As we mentioned last quarter, denim saw sales strengthen during the peak weeks of back-to-school following softness in July and August. In October, we made a big statement in wear-to-work and as we enter the holiday season, we are all about gifting ideas with an emphasis on sweaters and on going out with dresses selling strongly in our stores.

Our men's business continued its strong performance with particular strength in wovens, sweaters, and knit tops, shorts, jackets, outerwear and accessories. Combined, this drove a 3% increase in sales per square foot during the quarter.

Consistent with the previous two quarters, we stepped up our marketing spend this quarter as we recognized we were underinvested for a brand of our size. In the quarter, our increased marketing investment resulted in a significant increase in impressions during the quarter versus last year.

To broaden our awareness and gain new loyal customers, we have focused our marketing campaigns on brand-building initiatives including national print advertising and continued testing of local advertising in key markets such as New York, Chicago and LA. Over time we expect this increased investment to result in higher traffic and transactions at our stores and online.

As it relates to our second growth pillar, e-commerce merchandise sales rose by 57% in the quarter, continuing its strong growth trajectory for the year. This growth was driven by increases across our assortment and the addition of new categories with encouraging results from our initial test of shoes and swimwear.

During the quarter, we introduced m.express.com, Express's first mobile commerce site. In addition, we continued to enhance the iPhone and Android applications that were rolled out earlier this quarter and introduced a new BlackBerry app.

These enhancements include the integration of mobile shopping and barcode scanning into these applications which allow customers to see product reviews and information in store. We believe e-commerce continues to have significant runway ahead.

We recognize that we were really late to this party but going forward, we expect to lead the pack. Sales from this channel represented 7% of our total sales in the quarter and we expect to continue to see this channel expanding to 10 to 15% longer term.

In regards to our store expansion, the quarter included the opening of five new Express stores which are meeting our new store expectations. At quarter end, we operated 582 locations, 539 of which or 93% 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. During the quarter, we opened one new store in the Kingdom of Saudi Arabia under our agreement with Alshaya.

We continue to be pleased with our performance of our international stores and continue to be optimistic about our strategy to grow internationally. In summary, we laid out a growth strategy during our IPO and we believe we are meeting or exceeding all of our objectives.

We believe there are significant growth opportunities in front of us as we continue to execute our strategies over the next five years. Even with the capital investment required to support our growth, our business still generates excess cash flow and as a part of our ongoing commitment to return value to our shareholders, we announced today that the Board approved a $0.56 per share special dividend for a total dividend payment of $50 million.

This special one-time dividend will be paid on December 23, 2010 to shareholders of record at the close of business on December 16, 2010. In conjunction with the dividend approval, the Board also authorized the reduction of up to $25 million of long-term debt.

We remain committed to initiatives for the benefit of the Express stakeholders. And Matt will discuss this in more detail during his remarks.

Onto a topic that many of you are interested in, sourcing. While we recognize that costs across the industry have risen versus historical levels, and particularly in areas of cotton, labor out of China and freight; we continue to expect to mitigate a significant amount of this impact in our fourth-quarter business due to our very strong and diversified sourcing base with our products manufactured in more than 25 countries.

Given our scale, we have been able to manage cost pressures and do not expect a significant impact this year. As we look forward to 2011, we're working diligently to offset rising costs given flexibility in our strong vendor and factory base as well as taking proactive measures including positioning a portion of our raw materials early at more favorable pricing.

We've seen reports that the Chinese government has stepped in to control cotton pricing which should hopefully help moderate cotton price pressures. We will also optimize the mix of our products to continue to provide our customers with the quality and the value they expect and generate freight cost efficiencies as we make slight adjustments to the quantities of our goods shipped by air versus Ocean. Also positive is that we expect to continue to see some margin tailwind from our go-to-market strategy.

We are excited about our potential as we begin the all-important holiday season. We attribute our optimism to three key factors. First, our sales trends have accelerated as we begin the fourth quarter, reflecting a favorable response to our holiday offerings across categories and genders.

Last week we recorded our largest sales volume on Black Friday in the history of the brand. We expect to continue to delight our customers as the holiday season gets further underway with great gift-giving items and going-out outfits to satisfy both self purchase and gift giving needs.

We expect to drive the business with sweaters, dresses and accessories in women's. And in men's, we expect cotton and merino wool sweaters and shirts including our 1MX and MK2 styles to lead the way.

Dresses will serve as a lead category for going out in women's and for men, we are particularly pleased with the sales of sweaters and woven shirts which are selling at a brisk pace in our stores. Second, we believe our marketing programs will be even more effective this season as we continue to invest in new brand-building initiatives.

Currently, we are testing national TV advertising on channels including the CW, MTV and E! which is exciting as it marks our first time going with brand-building TV advertising and we continue to spend incremental dollars in print media in key markets and our advertising investments in national magazines. Third, e-commerce continues on a very strong trend with the Black Friday weekend including Cyber Monday delivering a record number of visitors and sales to Express.com.

In addition, our store expansion for 2010 remains on track to deliver a total of 23 new stores while closing six existing locations. This includes nine new store opening slated for the fourth quarter.

We continue to expect to end the year operating 5.1 million gross square feet. Also we have already received commitments for all 20 of our store openings in the US and have two of the five commitments for our planned new store entry into Canada in 2011.

Our results have been very encouraging and we are currently exploring a faster expansion internationally. 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 with the continuation of our strong performance, reflecting the ongoing success of our key growth initiatives. Our third-quarter results include solid sales, comp growth and a significant improvement in operating margin.

In addition, as Michael mentioned, we announced a special dividend of $50 million or $0.56 per share and the Board has also authorized the reduction of long-term debt of up to $25 million. Beginning with a review the income statement, for the third quarter, net sales increased 6% to $450.6 million as compared to $426 million for the third quarter of 2009.

Comparable store sales increased 2% for the quarter following a 1% decline last year. Gross profit was $164.3 million or 36.5% of net sales as compared to $145.3 million or 34.1% of net sales in last year's third quarter.

The 240 basis point improvement in gross margin was driven by a 140 basis point increase in merchandise margin which reflected higher full-price selling and fewer markdowns fueled by the ongoing benefits from our evolving go-to-market strategy and 100 basis points of buying and occupancy leverage. General, administrative and store operating expenses or GA&O totaled $111.3 million or 24.7% of net sales during the third quarter compared to GA&O expenses of $101 million or 23.7% of net sales in last year's third quarter.

The increase in GA&O expenses as compared to last year's third quarter were primarily driven by investments in marketing to heighten awareness and maximize the strength of our brand, increases in headcount reflecting investments in IT and e-commerce to support the expansion of our business as well as new public company costs. Other operating expense net was $800,000 or 0.2% of net sales. This compares to other operating expense net of $3.1 million or 0.7% of net sales in the third quarter of 2009.

Increased sales and expansion in gross margin more than offset the investment in GA&O expense and led to operating income growth of 26.6% to $52.2 million or 11.6% of net sales. This compares to $41.3 million or 9.7% of net sales in the third quarter of last year.

Interest expense was $7.6 million compared to $13.4 million in the third quarter of 2009 reflecting lower interest rates and a reduction in debt. Our tax expense for the third quarter was $18.4 million, representing an effective tax rate of 41.2% compared to an expense of only $330,000 or an effective tax rate of 1.1% in the third quarter of 2009.

As a reminder, the significant increase in tax rate results from the Company's conversion to a Corporation in connection with our IPO. On a GAAP basis, net income was $26.3 million or $0.30 per diluted share on 88.7 million weighted average shares outstanding.

This compares to net income of $28.5 million or $0.37 per share in the third quarter last year. It is important to note that the pro forma impact of the change in tax at the statutory rate is $0.14 per diluted share. Adjusting for the one-time items related to the anticipated secondary public offering, net income was $26.4 million or $0.30 per diluted share for the third quarter of 2010.

Moving to our balance sheet, at quarter end, cash and cash equivalents were $81.8 million compared to $158.4 million at the end of the third quarter of fiscal 2009. Inventories were $240.3 million compared to $225.7 million at quarter end last year.

Inventory per square foot excluding e-commerce merchandise increased approximately 4% compared to the third quarter of fiscal 2009, in line with expectations. We remain pleased with the level and composition of our inventory as we continue in the holiday season.

As a reminder, we continue to increase inventory to support our never-out strategy on key styles and sizes for top-selling seasonless basics particularly in the men's area. This change represented approximately 350 basis points of the total 6.5% increase in inventory at the end of our third quarter.

Total debt at quarter end declined by $49.3 million to $367.6 million as compared to $416.9 million at quarter end 2009. This was a result of the refinancing in the first quarter of 2007 and debt payoff with the IPO proceeds in the second quarter of this year.

Year-to-date capital expenditures for 2010 were $42 million compared to capital expenditures of $22.9 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 five new stores to end the quarter with 582 stores and approximately 5.1 million gross square feet in operation. Before providing guidance for the balance of the year, I wanted to take some time to discuss our return of capital plan announced today, including a one-time special dividend and authorized debt reduction.

This business has generated significant free cash flow in 2010. After the dividend and debt reduction, we expect to finish the year with more than $95 million of cash on the balance sheet in addition to our unfunded revolver.

While we have articulated robust growth strategies and are executing these strategies across the business through existing store growth, rapid e-commerce growth, new store openings, and international expansion, these growth opportunities have modest capital requirements and we expect to continue to generate excess free cash flow. To demonstrate our continued commitment to returning value to our investors, we plan to return $75 million through a one-time $50 million special dividend and retire debt up to $25 million, all funded with excess cash on the balance sheet.

Moving to our outlook. For the fourth quarter, we currently expect comp store sales to increase in the low to mid-single-digit range which compares to a comp store sales increase of 4% in the fourth quarter last year. Interest expense of approximately $8 million and net income adjusted for costs associated with the anticipated secondary offering in a range of $40 million to $45 million or $0.45 to $0.51 per diluted share on 88.7 million weighted average shares outstanding.

This compares to net income of $46 million or $0.60 per diluted share on 77.1 million weighted average shares outstanding in the fourth quarter last year. Note that the weighted average share count year over year increased by 11.6 million shares driven primarily by the IPO. This guidance does not include any incremental expense related to the anticipated debt reduction.

As we have previously noted, net income in the fourth quarter will be materially impacted as we are now subject to federal taxation as a result of our conversion to a Corporation whereas in the prior years, we were treated as a partnership for tax purposes and subject to taxation by only certain state and local jurisdictions. For the fourth quarter, we expect our tax rate to be approximately 40.9% as compared to approximately 0.7% in the fourth quarter last year.

The negative impact to earnings per share from the higher tax rate is expected to approximate $0.31 per diluted share at the midpoint of our guidance range. Before I review our full-year outlook, I would like to remind you again of certain items that impacted our GAAP results for the first nine months of 2010.

These items include costs related to the senior notes offering completed on March 5, 2010; the initial public offering completed on May 18, 2010; and the anticipated secondary offering of $2.4 million after-tax or $0.03 per diluted share; a one-time termination fee of $8 million after-tax or $0.09 per diluted paid to Golden Gate Capital and Limited Brands related to the advisory agreements 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 and secondary offering costs 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, one-time items and secondary offering costs approximated $6.1 million of income or $0.07 per diluted share in the first nine months of 2010.

In addition, we expect to incur approximately $600,000 or $0.01 per diluted share on an after-tax basis related to our anticipated secondary offering in the fourth quarter. As a reminder, a detailed schedule of these items has been provided in Schedule IV of our press release.

On an adjusted basis for the 2010 year, we continue to expect comp store sales to increase mid-single digits as compared to a comp store sales decrease of 6% in the full year 2009. And net income is currently expected to be in the range of $113 million to $118 million or $1.31 to $1.37 per diluted share on 86.1 million shares outstanding.

This represents an increase from our previous guidance for full-year 2010 net income of $109 million to $114 million or $1.27 to $1.33 per diluted share and compares to net income of $75.3 million or $1.00 per diluted share on 75.6 million weighted average shares outstanding in 2009. This guidance represents a net income dollar increase of more than 50% over 2009.

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 fourth quarter include opening nine additional stores, seven of which have opened since the start of the quarter. We also expect to close one existing location and end the year with approximately 590 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 closing, we are very pleased with our performance over the past few quarters as a public company and equally excited about the future. Our fashion leadership is resonating with consumers, our Express brand has a very talented team and strategies in place to build upon our success as we begin the holiday season, the fourth quarter and beyond. Operator, we are now ready for questions.

(Operator Instructions) Michelle Tan, Goldman Sachs.

Great, thanks. Congratulations on the gross margin.

I guess on the comp side of things, it seems like you guys are guiding to a little bit of re-acceleration potentially in Q4. I was wondering if you could give us some added color on what slowed down a bit in Q3 from the six to the plus two and then what you might be seeing or planning for Q4 to maybe get that acceleration.

Sure, Michelle. SO for Q3 as Michael mentioned on the last earnings call, the denim that we had in our stores were soft in July and early August. And as we mentioned on the call, that certainly accelerated in the back half of August and into September.

So with that, we had guided to a low-single-digit comp for the third quarter and that's where we came in. We have a month under our belt at this point for the fourth quarter.

Results to date are included in that guidance. Certainly we picked up momentum September, October and into November and we are very comfortable with the guidance that we provided on comps.

Great, and then, Michael, just on that front with the denim weakness that you maybe experienced in the early part of back-to-school, is there more of a shift towards other categories that are trending stronger as we move into holiday? How do we think -- has the denim business itself started to more consistently pick up? What are you seeing from a category perspective?

I think both of the above. I think, yes, there are categories that are historically very important for holiday such as sweaters. We're very optimistic about sweaters for the holiday season.

In addition to that, the denim is -- if you remember our last conversation about denim is we have positioned our entire denim assortment to a much higher-quality denim so that early on, we did not know whether they were resisting our new price points or it was a secular trend. We are now finding that they were not resisting our price point, that it was a secular trend and indeed the business is significantly better as we land more wider leg styles actually and flare leg styles because as good as skinnies were and continue to be, they're not the only thing. So both are helping in the cause.

Tom Filandro, Susquehanna International Group.

Thanks for taking my questions and congratulations as well on a good quarter. I did notice that you have been pricing up or seem to be pricing up some of your sweaters.

So I was wondering, are you guys running low on inventory in sweaters? And what can you tell us about the AUR trend year over year in sweaters? And then I have a follow-up, please.

You are very observant. You have seen that. And what has happened is we have a finite supply of everything and sometimes having a finite supply means you have to take markdowns to be done with it at the end.

And sometimes it means that you can -- if you want it to last to the end, you have to maybe do the opposite on certain things. And we did have certain sweaters that were turning significantly faster than we anticipated and that was the good news. I'm sorry, what was the second part of the question?

The second part was just what the AUR, Michael, how the AUR in the sweater category is looking year over year.

Tom, I'd like to be able to answer that question, but that is not something that we discuss. I'm sorry.

That's okay. Second question is there has been some concern out there that an aggressive push by a competitor may have pressured pricing and performance within the [editor pant] assortment. Can you give us some color on how the [editor pant] has performed and what's happening in terms of pricing as well?

It is significantly ahead of last year and last year, the lowest price of an Editor pant was $49 ad this year it's $59. So I don't -- and it's way ahead of last year. So I don't really understand the question in total.

I thank you very much and best of luck this holiday season.

Thanks, Tom, you too.

Janet Kloppenburg, JJK Research.

Michael, congratulations on a really great quarter. It was really outstanding.

Thank you, Janet.

I did want to talk a little bit about the comp guidance. I think Michelle touched on it, but it looks like you're projecting some acceleration.

Do you feel like the environment is better, Michael? Do think like you're more on trend? Perhaps you could just elaborate elaborate a little bit on that, because you do have a tougher compare here in this quarter.

Yes, I think the environment is better. I think we have been seeing that.

And the truth of it is is when you really look at our go-to-market strategy, the second half of the season is the half of the season when it really comes to full fruition because it's when you've received the big amounts of reorders on the stuff that you've tested. So with what we are receiving and with the reactions we have gotten and to be quite frank with you with the [first shoe that has fallen] on Black Friday, we are comfortable with our guidance.

Okay, great. And then with respect to the marketing program, I'm sorry, but I was trying to handle a couple calls at once, did you say you'd be doing national TV this quarter or it's something that we can look forward to in the future?

It's this quarter. We started right before Black Friday. We did not do it that week and we're doing it this quarter.

So we're testing some national advertising on a few different stations that our customer would typically watch such as the CW, MTV and E!.

I'm sorry, I haven't seen them. I apologize for that. But are you mentioning that the discounting and the couponing and (multiple speakers)

No, no, no. It is all very brand-intensive advertising.

Okay, great. Can you give us a hint on the initial sort of lead on that investment?

Hard to know, Janet, really hard to know. The only TV advertising that we've ever done in our history was sale advertising. So that --

And that was several years ago.

And that was several years ago. That's very much of a call to action, so it's measurable. This will only be measurable in kind of a long term.

And, Michael, just one last thing. When you and I have talked, and Matt as well, you talked about sort of lost productivity in some of the key product categories like knit tops and sweaters. Are you starting to feel like you can get back to historical levels over the next 12 months or so?

Maybe not historical levels, but get back, yes. Some of the categories we do feel we will get back to historical levels with two categories that we have surpassed historical levels which is very interesting. But, yes, the answer is yes. We're starting to feel more and more confident about taking back the night on a lot of those categories that we really did have to take.

And, Janet, what we're really looking at is there is still a pretty large gap between where we were historically. Now it's about an $800 million gap. And even if we only get 30 to 50% of that back over the next five years, that's worth a 3 to 5 comp per year for us. So we are aggressively going back after those categories and we are seeing a lot of traction.

Bill Reuter, Bank of America Merrill Lynch.

Good afternoon, guys. When I try and back into an adjusted EBITDA based upon your EPS guidance, I am coming up with a fourth quarter EBITDA in the range of 91 to about 100. Does that seem about right?

Yes, it would be in that range for sure, maybe the range is a little higher than that.

Okay and as we think about the uses of free cash flow going forward, we saw both debt reduction and returning money to shareholders here. How should we think about priorities in future years as you guys generate free cash flow?

Certainly we look at several things in making a proposal to the Board on what we should do with excess cash flow. The first thing we obviously look at is investment internally in the business.

And we have outlined very strong growth opportunities for the business over the next several years which include the existing store sales growth with margin expansion, e-commerce growth, new store openings which we have a lot of opportunities in and international expansion. But with those, the good news about all these growth opportunities is that it really requires modest capital investment to fund all four of these growth opportunities. So with the free cash flow that the Company generates, you are correct in that we should continue to generate significant positive free cash flow on a go-forward basis.

So we certainly looked at the stock repurchase and given the comments we have heard about the small size of our float and the fact that we just did an IPO, we did not think it was appropriate to do a stock buyback at this time. We are paying down some debt as we mentioned albeit the fact that the debt is fairly cheap at this point in time on an after-tax basis.

So then, we certainly look at returning additional capital to shareholders through a special dividend. And given the uncertain tax environment, we thought that was a prudent thing to do before the end of the year.

Then just lastly, can you remind me or tell me what the RP basket and the 8 3/4 senior notes is after the payment of the $50 million dividend?

We will have to get back with you on that.

Neely Tamminga, Piper Jaffray.

Congratulations. I just wanted to give you guys -- or ask a question about direct mail. Like Janet, I haven't seen the TV ads but I have seen the direct mail pieces which I think look very much upgraded from last year.

Just wondering how do the images -- or how are you coordinating them relative to the stores, TV, direct mail piece? You kind of have a full-on coordination there with what is going on?

It's a full-on coordination. Many of the same images are in the direct mail, in the point-of-sale and in the TV. Clearly we did not produce separate TV images because this was a decision that was made in advance of the season by a very, very little bit.

But we use the images in a collage way in the commercials. If you see one, you will see what I mean. We're very, very much sticking to the [last of] coordinating the imagery of the brand so that the imagery stands for the brand.

Michael, thanks, that's helpful. I have just one follow-up.

As we look ahead around to the day after Christmas, just wondering how Express 2010 looks versus Express 2005 in terms of the product flow. Do you guys do [resort sort of esque] sort of thing or how do you stay wear-now but transition her to purchasing some of those fresh dollars in her pocket?

Actually, we don't try this stay wear-now, we try to stay ahead of the game. As a matter of fact, if you look in our stores right now -- and so much of the product that we run is basically twelve-month product in every way other than the color, so it's not a question of wool versus cotton. But what used to be called resort is currently in our stores in big depth and it's selling currently in big depth.

Yes, so we have talked about our go-to-market strategy in the past where we are bringing the next season goods in a fair amount of quantity and early. And so you look at our assortment today, a significant portion of our assortment is in spring side goods at this point in time which we will use these reeds in order to go back and aggressively chase into the winners so that we have them in stock in February, March, April time period to sell in bulk.

Janice Ong, UBS.

Hi, it's Janice for Roxanne. Congratulations on a great quarter.

Just wanted to get some more detail on what category opportunities you see for Q4 and if there was anything that was particularly strong last year that we are anniversarying.

For Q4, as I said, we see tremendous opportunity in sweaters. We see tremendous opportunity -- I'm talking about first women's -- tremendous opportunity in dressy dresses which was a very big deal last fourth quarter and which we are anniversarying in a plus way.

We see a big deal in accessories and increases in accessories. And if you look at our jewelry assortment and our accessory assortment in general, you see that it's very gifty and much more upscale than it was last year.

The truth of it is based on the strategy -- the strategies that we have articulated in the past, we have not abdicated any categories in the business because we do not want to give back to a zero sum gain in any categories what we gain in the categories that we are pursuing have heavily. So we are optimistic about that strategy really, really working.

In men's, we also are very optimistic about sweaters. We are tremendously optimistic about shirts and about and knit tops. And in both areas, we believe that denim is going to contribute a bit more than we had anticipated in the earlier part of the season.

Marni Schapiro, Retail Tracker.

Hey, guys, congratulations.

Thanks, Marni.

Thank you.

I did see your ads because I'm really a teenager and I watch Gossip Girl and I thought they were fabulous.

Thank you.

So I was just curious about a couple of things. If you could talk a little bit about the intimates business as well as the accessories, I thought it looked great in the store. The dresses were outstanding.

But the intimates seemed to be very busy and shopped as did the handbags, seemed to be very busy and shopped. So I'm curious what your thoughts are on those two areas and if you're seeing that business do well online additionally. And any update on renovations of the stores?

Sure. Two questions, first intimates and handbags. And handbags have been quite good this season as have intimates been and it's not yet a big major part of our business, either one of those categories. But we continue to play with those categories so that we can refine them and then go after them in a big way if they rate that.

The second question was -- ?

Renovation.

Renovations, okay. What is happening, yes, is we are renovating and you know something? It's a wonderful thing to do.

We did a renovation in North Park in Dallas which you know how important that mall is, and we not only renovated, but we changed the location which to be very frank with you I was not happy about changing our location. And I can't tell you what the increase in volume has been. But suffice it to say that with just renovating and moving and freshening up, it's been fabulous.

What is happening is as our leases terminate and as we sign new leases, we are renovating stores on a very regular basis. So that, we have very few stores left in the chain that are basically old stores.

The other thing that's important for you to know is that we have designed a brand-new very, very, very new store and we're going to be experimenting building that store right after the holiday season. Our first two will be in Kenwood in Cincinnati and King of Prussia in Philadelphia. So, yes, we are very, very, very much on freshening and renewing the stores.

Excellent. Good luck for holiday.

Thanks, Marni.

Travis Williams, Stephens Inc.

Thanks for taking my question, guys. I guess my first question I have for you guys is just when you look at your expansion plans, could you comment on what you're real estate team is seeing out there in terms of both opportunities in the US, looking at the types of malls you're getting into? And that if you could comment on what you're seeing out there in terms of lease rates and then I have a follow-up after that.

Sure, so from a store standpoint, we have talked about in the United States specifically, we have identified 190 opportunities for new stores and of that, we're going to go after 100 new store openings in the next five years, including the current year where we've opened up 23 stores. Now part of the reason why we have such a large opportunity for store growth is the fact that we had been focused -- the business had been focused on a dual gender conversion strategy for the past 10 years and have been focusing on taking the men's and women's stores in each center and combining them into a single dual gender store.

And with that focus, there was limited capital available for new store opportunities. So that has -- now that that project is complete, that certainly has opened up significant opportunity as we look forward and focus on where the opportunities are.

We are looking primarily at B and B plus malls with a sprinkling of A centers and some lifestyle centers sprinkled in there as well. But for the most part, they're very good mall locations that we think we can do very good business in.

And the lease rates?

Lease rates have been holding fairly well. Certainly for the renewals that we have on ten-year lease renewals, you know, it depends on the market.

But those have been somewhat favorable relative to the trends a few years back. But we still see some increases there.

One of the things we have been seeing though certainly is landlord allowances coming in where we're getting a fair amount of landlord allowances given that we are a large apparel retailer that is -- the landlords are certainly important to us, but we are important to the landlords as well.

Okay and then my follow-up is just on your opening comments, you'd mentioned potentially looking at at even ramping some of the expansion, particularly in the international side. Could you comment on that? Is that looking into ramping up the Canada growth or is that something overseas?

Certainly on the Canadian side, we're opening up five stores in 2011 and then 10 stores in 2012 and the plan is for 15 and then 20 stores over the next two years. We are also with the performance we've seen with Alshaya in the Middle East, we are certainly exploring what other international growth opportunities are available to us because we think our brand can play well in other geographies as well such as Eastern Europe, Russia, potentially Asia and potentially Latin America.

So we are in the process right now of exploring what opportunities are out there. Right now with the Middle East, we have a franchise agreement that has little to no risk associated with it.

We don't pay anything in capital, we don't have any inventory risk. We don't have any operating risk. And we control the brand 100% and simply receive a royalty from them.

So, we're going to look at other opportunities internationally as well and see what is available to us.

Okay, great, thanks.

(Operator Instructions) Ed Yruma, KeyBanc.

This is actually Barry Lieberman. I'm a private shareholder. You talked a lot about e-commerce on the call today. What is your main vision for e-commerce going forward and where do you see everything headed in the next couple of years?

Well, we think it's much more than e-commerce. We think it's m-commerce and stuff that we have not yet heard of.

So we want to really be ahead of that curve. But the point of it is that we see that piece of our business as a very integrated part of the Express brand, not as a separate piece. That is our current vision and we see no reason for changing that vision.

And we see it as being 10 to 15% of the total and that's the way we called it out when we started and we're feeling much more secure in that projection today.

Okay and a follow-up to that. How are you guys actually going out and getting more customers, driving more traffic to the site?

Because you have a great site, a lot of people are coming to your site. How are you really going out and making sure people have a very comfortable buying experience with Express (inaudible) whether they are new to the Company or existing customers?

So certainly we believe we have put together a world-class website. One silver lining up being late to the party from an e-commerce perspective is that we did have the opportunity to really step back and look at all of the different applications available to us and pick the very best ones for our website.

And we certainly look at where -- what type of marketing we want to do and we hone that marketing. And we also look at testing new items online.

But right now, the key focus for the e-commerce website to date has been that we want this to be complementary to ensure we have a multi-channel selling experience in both online and in the stores. So we have an approach where the brand message is the same for both.

And what we're finding is while e-commerce has been expanding dramatically, we also see a halo effect in the stores as well. And the e-commerce -- the customer that shops both in-store and on e-commerce is a very valuable customer to us and we have done some research on that and found that to be the case too.

So the fact that we have now been able to have an e-commerce website up and running for a couple years certainly is very beneficial to the brand. It has been and will be even more effective going forward.

Thank you. Good luck in your second year as a publicly traded company.

Thank you.

Thank you.

There are no further questions in the queue at this time. I'd like to hand the call back over to management for closing comments.

Thank you again for joining us today. We wish all of you a happy and healthy holiday season.

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