Express Inc (EXPR) 2010 Q4 法說會逐字稿

Greetings, and welcome to the Express, Incorporated fourth-quarter and fiscal-year 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, Allison Malkin of ICR. Thank you, Ms. Malkin, you may 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, based on 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.

It is important to note, earlier this morning the Company filed a registration statement with the SEC regarding the sales of certain shares by selling shareholders. As you know, we're 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 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 fourth-quarter and fiscal-year performance, and update you on our growth strategies as we begin fiscal 2011. 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 pleased to report better than expected fourth-quarter sales and earnings, marking a strong finish to an outstanding year. We attribute our ongoing strength to the success of our go-to-market strategy, and the disciplined execution of our growth pillars by our team. I want to thank our 16,000 associates for their dedication in making 2010 a terrific year.

Highlights of the fourth quarter include double-digit sales growth with net sales rising 14% to $621.5 million, a 12% increase in comparable sales, inclusive of eCommerce sales following an 8% increase in comp sales in the fourth quarter last year. Breaking our comp performance down further, comp store sales, excluding eCommerce sales, increased 8%, up from an increase of 4% in the fourth quarter last year. And eCommerce sales rose 63% following a robust performance last year.

Beginning in the fourth quarter, we changed our method for calculating comp sales to include both store and eCommerce sales, and will now refer to this metric as comparable sales. We believe this is a more appropriate gauge of our performance. This presentation is consistent with the way we view our business, and is also consistent with the customer's preference to shop across channels. In addition, we generated gross margin expansion of 250 basis points to 36.5% of net sales. Operating income grew 55%, with operating margin rising to 14.6% from 10.7% last year. And diluted earnings per share rose to $0.55, surpassing our guidance of $0.45 to $0.51 per share.

During the quarter, we continued to focus on advancing our four pillars of growth, and optimizing our go-to-market strategy. We made significant progress in our first pillar of growth, driving top line growth while expanding margins in existing stores. As we began the quarter, we strategically invested in brand marketing to capitalize on the significant opportunity we knew existed to expand awareness, engage more customers within our core demographic, and further increase customer loyalty and sales during the holiday period and in future years. As we mentioned on our third-quarter call, we had record sales over the Black Friday weekend, and carried that momentum through the holiday season.

Our sales strength continued favorably during the remainder of the fourth quarter and into 2011. As our results suggest, our efforts, we believe, were successful in expanding Express's leadership as a fashion authority in the quarter. Our store sales were driven by gains in transactions and in average dollar sales, and included balanced growth across genders and categories. We saw particularly strong performance in key holiday categories such as sweaters for both men and women, and dresses for women. As many of you are aware, we were optimistic about the test results in both categories entering the quarter, and we maximized this quite successfully. We also capitalized on the increasing pricing power we have with consumers by strategically raising price points in certain categories, which were accepted very favorably.

In addition to significant growth in sweaters and dresses, our women's business saw strength across most categories, led by pants, and in particular, our [etta] styles which offer a fabulous and famous fit. Accessories were also driven by scarves, shoes, hair, fragrance, and jewelry.

In men's, our business saw increases across-the-board with particularly strong results in sweaters, woven shirts, and knit tops, dress pants, denim outerwear, and accessories. Men's denim and outerwear represented two of the areas where we strategically raised price points heading into the quarter; and as I mentioned, we saw no resistance.

As it relates to our second growth pillar, eCommerce merchandise sales rose by 63% in the quarter, continuing its strong growth trajectory. This growth was driven by increases across our assortment, and addition of new categories including encouraging results from our tests of shoes and of swim wear. We were also pleased with our initial foray into mobile commerce, m.Express.com. The integration of mobile shopping is giving consumers greater access to our brand, and has provided us with another avenue of growth. In March, Express was awarded the Racie award, the retail award for creativity, innovation, and excellence, for our mobile apps that can be used on iPhones, Androids, and BlackBerries.

In regards to our store expansion, the quarter included the opening of nine new Express stores, which are meeting our new store expectation. It is important to note that this will mark the first time since 1997 that Express store base has increased year-over-year. Our international expansion continued in the quarter with royalties earned from the Express stores that are operated through the [development] agreement in the Middle East. During the quarter, we opened one new store in the Kingdom of Saudi Arabia. We continue to be pleased with our performance of our international stores, and are increasingly optimistic about furthering our international expansion through partnerships in other geographies. To this end, we are beginning to explore opportunities to expand in such geographies as Central and South America, Asia, Western Europe, as well as Eastern Europe and Russia.

The year was equally successful, and included several accomplishments. The year included double-digit sales growth, with net sales up 10.7%, approaching the $2 billion mark at $1.9 billion. Comparable sales increased 10%, including eCommerce sales. Sales productivity rose 8%, with sales per square foot increasing to $346 from $321 last year. Our go-to-market strategy led to a 390 basis point expansion in gross margin. eCommerce sales increased 60%. We opened 23 new stores while closing five existing locations, to end the year with 591 stores, 93% of which are represented by our dual gender format. And through our partnership with Alshaya, we opened three Express stores in the Middle East.

Operating income rose 57%. And net income per diluted share adjusted for certain costs rose 42% to $1.42, up from $1 last year. Notably, the year included the 30th anniversary of our brand, and the completion of our IPO. The increased financial flexibility as a result of our initial public offering, and the disciplined approach with which we manage our business, enabled us to end the year with a strengthened balance sheet and positive cash flow. Our strong cash flow led to the approval of a one-time special dividend of $0.56 per share, which was paid on December 23, 2010. We will continue to manage our business with the goal of increasing value for our stakeholders.

As we begin fiscal 2011, we will continue to refine the strategies that led to our success this year. We expect to remain a fashion authority for our Express customers, and we continue to rigorously test 75% of our product, optimize opportunities to regain historical sales volumes in all categories, continue to expand our store base, grow our eCommerce sales, and continue our international expansion. We remain on track to open 20 new stores in the United States in 2011. The year will also include the closing of nine existing stores, four of which are men's-only stores that will convert as part of our dual-gender strategy. We expect increased sales productivity from the conversion of these stores in the year. In addition to optimizing core strategies, we also see opportunities to introduce new categories represented in our stores. In 2010, we successfully tested shoes in 10 stores, with plans to expand the category to 50 stores in fall 2011.

We are also excited about the introduction of our new store design. We are scheduled to open our first two stores in the new design this July in King of Prussia and in Kenwood. We believe the new store design enhances the presentation of our product, and elevates the overall shopping experience by allowing us to clearly showcase our four end uses -- casual, wear-to-work, jeans wear, and going out. The new design increases our ability to segment these end uses, allowing us to tell clearer stories, and giving us more space to optimize the growth of our men's and accessories category. Finally, the new design allows for stronger integration of our branding elements related to social and electronic media.

Outside of the US, we are on track to open our first stores in Canada. We expect to open between five and seven stores in 2011, the first of which is scheduled for September. We expect another year of strong eCommerce growth as we continue to develop this opportunity. This year, we plan to expand shipment outside the US to over 60 international markets. We will also capitalize on social commerce to grow engagement and sales. To this end, we will introduce a shopping channel on Facebook in April, so that customers will not need to leave the Facebook environment to complete their purchase.

Finally, we will pilot a new loyalty program, which will debut in July. Our current loyalty program only allows customers to participate if they use our private label card. The new program will be tender agnostic, and will be designed to increase engagement and retention across our customer base by rewarding customer purchase and engagement behaviors. The Express credit program will have an elevated stature in the program to ensure continued credit growth.

In the Middle East, our plans include the opening of three to five stores through our partnership with Alshaya.We are also laying the groundwork to further our international presence in the future, as I mentioned, seeing opportunities in Central and South America, Eastern Europe, and in Asia.

We believe we are positioned to manage rising product costs, given the ongoing benefits of our go-to-market strategy, which is expected to continue to result in increases in average unit retail and reduced markdowns. We also believe we have increased price elasticity and flexibility, given that the majority of our assortment is new each season. We have selectively raised prices on categories where our sell-through rates surpass our expectations. And as I mentioned, in the fourth quarter we saw no material resistance from consumers. We believe this is a reflection of our ability to meet our customer's desire for fashion across categories.

We will also strategically shift sourcing to manage costs, and expect to lower the percentage of our product shipped by air while maintaining our stringent quality and on-time delivery standards. As such, we expect to see modest increases in gross margin, and continued expansion in operating margin this year. As our guidance suggests, our first quarter is continuing favorably, and we believe our strategies have us poised to deliver a strong year of growth in 2011.

In total, I am very pleased with our performance in 2010. I am equally confident and optimistic in our ability to continue our strong growth in 2011 and over the next several seasons. We have a significant opportunity to increase our sales productivity and profitability, as we optimize our go-to-market strategy and continue to execute the initiatives to advance our four growth pillars. We believe the continued execution of our strategies provides us with a sustained platform for growth, and serve to further separate Express from our peers.

And now I would like to turn this call over to Matt to review our financials and guidance in more detail.

Thank you, Michael. Good morning, everyone. As Michael stated, we are very pleased with our strong fourth-quarter and fiscal-year results, which included double digit increases in net sales, and significant expansion in operating margin, with our performance exceeding our guidance for both sales and earnings. I will begin by reviewing the details of our fourth quarter and full year, and then I will update you on our outlook for the first-quarter and fiscal-year 2011.

Beginning with a review of the income statement for the fourth quarter, net sales increased 14% to $621.5 million as compared to $546.8 million for the fourth quarter of 2009. Comparable sales, which include our store and eCommerce sales, increased 12% for the quarter, following an 8% increase last year. Excluding eCommerce, comparable store sales increased 8%, with this performance ahead of our low- to mid-single digit comp sales guidance. eCommerce sales rose 63%, continuing its pace for the first three quarters of the year. As Michael mentioned, we are beginning to report comparable sales inclusive of both stores and our eCommerce channel in the fourth quarter. We have provided a two-year historical comparable sales table that outlines the difference between historical reported comparable store sales and comparable sales including eCommerce.

Gross profit increased 22% to $226.8 million or 36.5% of net sales, as compared to $185.7 million or 34% of net sales in last year's fourth quarter. The 250 basis point improvement in gross profit margin was driven by a 60 basis point increase in merchandise margin, which reflected increased full price selling and fewer markdowns fueled by the ongoing benefits from our evolving go-to-market strategy, and a 190 basis points of buying and occupancy leverage.

Selling, general, and administrative expenses, or SG&A, rose 10% to $135.9 million or 21.9% of net sales, compared to SG&A expenses of $123.9 million or 22.7% of net sales in last year's fourth quarter. We achieved 80 basis points of leverage on our SG&A as compared to the fourth quarter last year, while incurring public company costs and making investments in marketing, new stores, eCommerce, and IT, to support the expansion of our business. Operating income grew 55.4% to $90.7 million, or 14.6% of net sales, compared to $58.4 million or 10.7% of net sales in the fourth quarter last year. This performance was driven by strong double-digit sales growth, and expansion in gross margin along with leverage in SG&A expense.

Interest expense was $8 million compared to $13 million in the fourth quarter of 2009, reflecting lower interest rates and a reduction in debt. Our tax expense was $34.5 million, representing an effective tax rate of 41.6% compared to a tax expense of $313,000 for an effective tax rate of 0.07% in the fourth 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.

Net income was $48.4 million or $0.55 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 of 2009. Net income adjusted for costs related to the secondary offering completed on December 15, 2010, the impact of the true-up of our statutory tax rate, and for non-core operating costs related to the senior notes offering completed on March 5, 2010, and initial public offering completed on May 18, 2010, was $48.9 million or $0.55 per diluted share for the fourth quarter of 2010. It is important to note that the impact from the increase in the tax rate year-over-year related to our change to a corporation is $0.38 in the fourth quarter of this year.

Now to review our full-year results. For the 2010 year, net sales increased 11% to $1.9 billion, with comparable sales including eCommerce rising 10%. Excluding eCommerce, comparable sales rose 7%. Operating income increased 57.1% to $199.3 million or 10.5% of net sales compared to operating income of $126.8 million or 7.4% of net sales in 2009. Our effective tax rate was 10.1% compared to an effective tax rate of 1.6% in 2009.

On a GAAP basis, net income was $127.4 million or $1.48 per diluted share on 86.1 million weighted average shares outstanding, and included a number of non-core operating costs including -- $2.7 million or $0.03 per diluted share related to the senior notes offering, initial public offering, and 2010 secondary offering; $8.1 million or $0.10 per diluted share of fees paid to Golden Gate Capital Limited brands related to the termination of advisory arrangements in connection with our initial public offering; and $15.4 million or $0.18 per diluted share of interest expense associated with the loss on extinguishment of debt. These non-core operating costs were entirely offset by a one-time tax benefit of $31.8 million, or $0.37 per diluted share, recognized in connection with our conversion to a corporation.

Net income adjusted to exclude these items totaled $121.8 million or $1.42 per diluted share on 86.1 million weighted average shares outstanding. This compared to net income of $75.3 million or $1 per diluted share on 75.6 million weighted average shares outstanding in fiscal 2009. Again, note that the weighted average share count year-over-year increased by 10.4 million shares, driven by the IPO, and that net income was materially impacted by being subject to federal taxation as a result of our conversion to a corporation.

Moving to our balance sheet at quarter end, we ended the year with a strong balance sheet. At January 29, 2011, cash and cash equivalents were $187.8 million after paying a special dividend to our stockholders of approximately $50 million in December 2010. Inventories rose 7.9% to $158.2 million, with growth well below our sales increase. Inventory per square foot, excluding eCommerce merchandise, increased approximately 3.1% compared to the fourth quarter of fiscal 2009. We remain pleased with the level and composition of our inventory as we begin the spring season.

Total debt at quarter end declined by $49.4 million to $367.4 million compared to $416.8 million at quarter-end 2009. This was a result of the refinancing in the first quarter of 2010, and debt pay-off with the IPO proceeds in the second quarter of this year. In December 2010, the Board authorized $25 million in debt reduction. This reduction is expected to be completed at the end of the first quarter.

In 2010, capital expenditures totaled $54.8 million compared to capital expenditures of $26.9 million for the same period last year. The increase in capital expenditures was primarily driven by our store expansion and IT investments.

Moving to our outlook, we are introducing guidance for the first quarter and fiscal 2011 year. For the first quarter of fiscal 2011, we currently expect comparable sales including eCommerce to increase in the mid-single digit range, which compares to a comparable sales increase of 14% in the first quarter of last year. Again, as a reminder, on a go-forward basis, we will report comparable sales inclusive of our eCommerce channel. We expect our effective tax rate to approximate 40.3%, which compares to an effective tax rate of 1.2% in the first quarter of 2010. In addition, as previously announced, we plan to pay down $25 million in debt in the quarter.

Net income adjusted for costs associated with the anticipated secondary offering is expected in the range of $34 million to $36 million, or $0.38 to $0.41 per diluted share on 88.7 million weighted average shares outstanding. This compares to adjusted net income of $39.4 million or $0.50 per diluted share on 78.1 million weighted average shares outstanding in the first quarter last year.

To eliminate the comparability issues related to the tax rate and share count, I would like to point out that this guidance implies adjusted operating income growth of 20% to 26% over the first quarter of 2010. It is important to note that this guidance does not include any incremental expense related to the planned debt reduction. The negative impact to earnings per share from the higher tax rate is expected to approximate $0.27 per diluted share at the midpoint of our guidance range.

For fiscal 2011, we expect comparable sales including eCommerce to increase in the mid-single digit range, as compared to a comparable sales increase of 10% in 2010. While we will not be reporting actual comparable store sales going forward, we expect this metric to be positive in each quarter for 2011. We expect our effective tax rate to approximate 40.3%. Net income is currently estimated in a range of $132 million to $142 million, or $1.48 to $1.60 per diluted share on 88.9 million shares outstanding. This compares to an adjusted net income of $121.8 million or $1.42 per diluted share on 86.1 million weighted average shares outstanding in fiscal 2010.

To eliminate the comparability issues related to the tax rate and share count, I would again like to point out that this guidance implies adjusted operating income growth of 16% to 24% over 2010. Again, note that the net income will be materially impacted, given we are subject to federal taxation as a result of our conversion to a corporation.

Our store expansion plans for fiscal-year 2011 include opening 20 new stores in the United States, and five to seven new stores in Canada. We also expect to close nine existing locations, to end the year with approximately 607 to 609 stores, and 5.3 million gross square feet in operation. Capital expenditures for the year are expected in the range of $72 million to $76 million. Finally, we expect to generate positive cash flow.

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

In conclusion, 2010 was a terrific year, one that was marked with many accomplishments. We reported consistent increases in sales, margins, and earnings. Our growth was balanced across categories, genders, and channels, and we maintained a strong balance sheet, and reported positive cash flow. Our consistency and strength demonstrates the ongoing success of both our growth strategies and the data-driven approach to our business. We believe this provides us with a strong platform to continue to generate sustained sales and earnings growth in both the near and the long term.

We remain committed to our strategies, which have us poised to open 100 stores domestically, and 50 stores in Canada, expand internationally through partnerships outside of North America, and continue to maximize our eCommerce sales while delivering double-digit earnings growth annually, with expansion in operating margins to 14% over the next five years.

With that, I would like to turn the call over to the operator to begin the question and answer portion of our call.

Thank you. (Operator Instructions)Thank you. Our first question is coming from Lorraine Hutchinson of Merrill Lynch & Company.

Thank you, good morning. I just wanted to follow-up on the gross margin commentary that you gave. Can you just elaborate a little bit on how you're planning initial markups for the back half, what types of cost increases you're seeing and what we should expect in terms of overall price increases across the assortment?

Yes, so obviously, the cost pressures are well documented in the industry. There's been a lot of discussion about that. For the back half of the year, we're looking at mid to high single digit increases in costs but there are several things we are doing to offset this cost and we certainly believe our gross margins both in Q1 and our guidance for the year will be up relative to last year. Now, we don't provide, obviously, specific guidance on gross margin, but let me take you through a few things that we are doing to address the cost pressures in the market.

First, we create value for our customers through quality and fashion in our product offering, and our business is not a commodity driven business. So a significant portion of our assortment is new each year and that allows us to evaluate our value equation and take higher prices selectively where appropriate. And as Michael mentioned in his remarks, we've been doing this over the past few months and have seen very little price resistance. Secondly, inventory management is extremely important in this environment. And as we've discussed in the past, we have a very disciplined inventory management process. And unit inventory management is extremely important in an inflationary cycles, and as we are taking selective price increases, certainly we will monitor our unit inventory, as well, to make sure that is in line.

And most importantly, we are also undertaking several initiatives in our supply chain. So first off, we've talked about this in the past but we have a very diversified supply chain. We have longstanding relationships with suppliers which we believe benefits us. And a little over a third, only about a third of our sourcing comes from China. So we are less exposed to China than some of the other specialty retailers out there, but we are still looking to move into lower cost geographies such as Vietnam and Indonesia. Also, using many of the existing relationships we have with vendors, we are also moving production into areas with duty free status such as Guatemala and AGOA countries such as Mauritius. And we're also moving into areas with better pricing and predictable access to cotton such as India. And finally we're also optimizing our air/ocean mix. We've talked about that in the past, as well, but we're continuing to look at that, where air is certainly very important for our business, and so we acknowledge that. We've probably swung the pendulum a little far from an air perspective and we'll look to optimize the air/ocean mix to help alleviate some of the cost pressures as well.

So with that, our prices, our cost will still be up in the back half of 2010, but I think it will be to a lesser extent than some of the other specialty retailers are anticipating. And on top of that, we also have a tail wind going, as well, because as we continue to evolve our go-to-market strategy, we still believe there is margin opportunity there as well which was also demonstrated in Q4 with the results that we just discussed. And finally, B&O, we also leverage at a very low single digit comp so there's also tail winds there, as well. So that there's a lot of things going in our favor from a gross margin perspective despite the cost increases.

Great. Thank you. And then I also wanted to follow-up on some of the regional marketing initiatives you put in place last year. How successful were they and what should we expect from your marketing this year?

I think that what you should expect is more of what you've been seeing which is a distribution of our dollars across many, many marketing channels. We had some good success in regional marketing and I think that what we're seeing is, and what you're seeing, is that the success in regional marketing is being moved around because we're trying new locations to see how much we can move in specific areas. But more importantly, what we're seeing is that concentrated marketing is a very good thing for us, and so more and more of our dollars are going to national marketing, without stopping the regional marketing.

Yes, and there's a couple things that, with the local marketing, has worked well. But also we did test what we call a mega log which was a 48 page circular that was sent out to a small sampling of customers, which performed extremely well during the holiday season. And we're looking at expanding that program into 2011. As well as we dabbled in TV advertising, as well, which we believe provided a very positive benefit for the business. And we're continuing to explore that side, as well. As a matter of fact, we are currently on certain situations like the CW, E, and MTV right now.

Thank you.

Thank you. Our next question is coming from Kim Greenberger of Morgan Stanley.

Great. Thank you. I wanted to ask about your ultimate operating margin goals. You exceeded the goals, I think, that you set out for 2010. And how are you thinking about where your operating margin could get longer term given the better progress you're seeing? Thanks.

Yes, so over the next few years we're still looking at a 14% operating margin goal which is our stated goal over the past year or so. Certainly, since the IPO, every single quarter we have exceeded our original going in estimates for the progress that we would make against those margins, and continue to believe that there is opportunity out there. And what we have talked about in the past is that, versus where we are today, we still believe there's 100 to 150 basis points of gross margin improvement over the next few years. Now, this year with sourcing pressure, we believe, as I stated, both for the quarter and for the year, gross margins will continue to expand. And that is built into our guidance. But we might see some more. Of the 100 to 150 basis points of gross margin improvement, some of that will come in the latter years, as well. Buying and occupancy we believe there's 50 to 100 basis points of opportunity there. SG&A we think there's 50 to 100 basis points of opportunity through top line sales leverage. And then eCommerce, as it becomes a bigger piece of our business, we believe there's another 50 basis points of margin opportunity in eCommerce, as well. So with that, we can certainly get to 14%. If we can achieve all of those on the upper end of the range, we certainly could be at 15% to 16%, as well. But our goal in the next couple of years is certainly to get to 14% at a minimum.

Great. Thank you, Matt.

Thank you. Our next question is coming from Janet Kloppenburg of JJK Research.

Good morning, everyone. And congratulations.I had a couple of questions. First for Michael. When you look back on fiscal '10, Michael, and you think about how well you did, I think you might also consider some opportunities that you didn't take advantage of. And I'm wondering if you could tell us about those and how they might affect fiscal '11.

And also we've noticed some price increases on some of your core product, as well. I think, perhaps, in the woven dress shirt area for guys and some of the underpinnings for women. I'm wondering if you can talk to us a little bit about the acceptance of those price increases and if we should look for similar increases going forward. And then I'll give Matt my questions after that. Thank you.

Okay, sure. In terms of last year, as we have stated, Janet, we had a delta of over $800 million between our high point by each category and what we went into the IPO with. Our opportunity remains in all of those categories. I think the biggest opportunity is in '10, we were still very, very cautious about inventory, which you saw straight through the year. So there was never real pedal to the medal on anything. We maintained that balance. We really did not want to drop too much anywhere because we were picking up big someplace. So we didn't try to finance important categories by really decimating others. And that remains an opportunity going forward. Even though we're still being very cautious about inventory, we feel a little bit better about investment.

To your second question, I think it's a very important question because clearly you saw the rise in price of the T-shirt, which is a huge, huge piece of our business. We did test that increase in price and then we rolled it out about two weeks ago. And the rollout is showing us very much what the test showed us which is the following. Units go down slightly, dollars go up, and margin goes way up. So that's good news. And that has happened in the few places where we have very strong positions in what might be construed as commodities. In truth, what's happening to the business in general, in terms of price points, is not that the price points are going up but the bottom price points are disappearing because we're just giving them up, not because we have to give them up but because we seem to not be terrific at them anymore in this segment of the business. I think very basic T-shirts, things like that, low price things have really gone to really low price people. Our strength is in fashion, and it always has been, and it's increasing in that area. So I think when we talk about AUR going up, it's going up because of mix, not because of raising prices generally.

Great. Thank you. And then, Matt, could you talk a little bit about the outlook on the tax rate? Should we be using 23% every quarter? And also on the interest expense line, can you give us an idea of where we should be on that? I think you've lowered some debt here, or are planning to. Thanks so much. And if your guidance included that expectation for the lower interest expense.

Yes, so starting with the tax rate for 2011, our effective tax rate projection right now is 40.3%, so it's lower. Part of the increase in Q4 was related to a true-up of the short period before the IPO in the fourth quarter. And then from an interest perspective, after the pay off of debt, interest expense should be in the 7.2% to 7.3% range depending on what type of debt we pay off per quarter. And that currently is included in our guidance.

And the 40.3% tax rate, should we use for the first quarter, as well?

Yes, that's our effective tax rate for the year and each quarter, correct.

Thanks so much.

Thank you. Our next question is coming from Neely Tamminga of Piper Jaffrey.

Congratulations on the end of a great year. Just wondering how we should be thinking about the inventory levels in terms of dollars and units as we progress through the next couple quarters. Clearly, it appears that you're in a lean/chase, maybe you're always in a chase mode with your go-to-market strategy but how should we be thinking about these numbers over the next couple quarters, particularly in view of the rising costs? Thanks. I have a follow-up too.

Yes, so the one thing I will tell you is our inventory, we are where we want to be from an inventory perspective. On a per square foot basis at the end of the quarter we were only up 3% to last year. And we're going to continue to manage inventory appropriately. The one thing I will mention, though, is if you recall last year, at the end of the first quarter last year, we had 14% comparable sales, and our inventory was only up, I believe, about 2%. So we were overly lean last year at the end of Q1, and so we're going to manage that but we still expect to manage our inventories very well every single quarter of this year. The one thing we're certainly staying focused on, as Michael mentioned, is our unit inventory. During these types of inflationary periods where selective price increases can take hold with little impact to the brand and the business, certainly you need to watch your units because, while you may sell more total dollars, total units, most likely will go down slightly. So we're very aware of that and managing that on a regular basis.

Great. That's helpful. And, Michael, we were in the stores last night and we noticed for the first time you were using the QR codes on the windows. I'm assuming that's tied to some of the mobile apps and applications that you guys have. Just wondering, because we know very little about this technology, can you enlighten us as to can you monitor the usage of that? Does that gain you access to people's mobile phones? Just maybe a little bit more on the mobile, that would be helpful.

Yes, and it enables us to contact people that are very close to our stores. The modern technology is just mind blowing. And I'm not the one to enlighten you on it because I don't really know about it. But what I do know is that as slow as we were getting into eCommerce, we are going to be in front of the pack on every other new way to get next to our consumer. We're very excited about what has happened to us on the mobile commerce and we think it's going to be a big piece of the business.

That's great. Thanks and congratulations and good luck.

Thank you. The next question is coming from Tom Filandro of SIG.

Hi, thanks very much and congratulations, as well. Good quarter.

Mike, can you talk a little bit about denim performance specifically during the fourth quarter? And I'd love to hear your thoughts on the category, and any specific view of fashion changes on the way for 2011. And then if I can ask either one or both of you, can you give us a little more detail possibly on the new store format, maybe size, cost per square foot, and ability to house more SKUs, and some of the elements you think will drive productivity in those stores. Thank you.

Sure, let's start with the denim. That was the first question, right? As we had said on the last call, we totally reformulated our denim last year. And by reformulated, the prices went up but they weren't raised prices on the same product. The product was significantly changed. We made a very strategic decision not to fight it out in the teen market any longer. We did not want to compete with $30 jeans. We wanted to compete with the top of the market, and not be higher than the bottom of the market but be lower than the top of the market. And when we opened up the season in July, in June actually, and then July, our denim business was very bad and we did not know whether that was a reflection of denim business or our strategy. But, as we got more and more information, we saw that denim business was not good.

By fourth quarter, our denim business had significantly turned. As a matter of fact, our denim business turned against the previous year the second week in September, actually, and it remained fine through the whole fourth quarter and it remains fine right now. In terms of going forward fashion, I think that one of the reasons denim business got bad is because the women's end of the market went too heavily into very skinny legs and they were very good but not as good as the proportion of inventory. By fourth quarter we had rebalanced the inventory to wider legs, to boots which are still the significant piece of the business. And we had already shipped all the news, which are the flare bottoms, the wider legs, and we will continue to do that. In men's, the news is strictly in washes, which that is in women's too, but in men's it's not so much silhouette as it is in women's. So we are confident about our denim position and we are confident about the go forward performance of denim.

Second question you asked was about new stores. And as we mentioned, the new stores will make it easier for us to differentiate the end use products within our store. In terms of cost, we're just building two prototypes right now in our history. We've done lots of new stores in our 30 year history. Our history is that we build a prototype the way we think it should look and then we engineer it thereafter if it performs. So we have a lot of experience in cost engineering prototypes. And the significant thing right now about the new store is will it add volume, and that's our first consideration. And if it does, we rollout and we will cost engineer it properly.

Yes, and these first two stores will be open in King of Prussia and Kenwood in July.

Thank you, gentlemen. Best of luck to you.

Thank you. Our next question is coming from Michelle Tan of Goldman Sachs.

Good morning. It's actually Nicole filling in for Michelle. My question was on your TV marketing. Can you talk about how much of a lift you saw to comps once you started running the ads?

Yes, it's difficult to say exactly how much was driven specifically by TV, as you can imagine, because there's a lot of things that go into comps during the holiday season. We definitely think we got a positive lift out of that and are testing another round of TV right now. We're not committed to doing this long term yet but we certainly believe it is an important component of our overall intrinsic brand building activity that we're executing right now.

Okay. And then do you have any sense of how long of an impact you typically see the comps from the different brand marketing initiatives that you do? Any color there, thanks.

Yes, so again, there's a lot of things that go into the comps and a lot of the marketing is local market advertising. We certainly believe we are getting a lift from the comps. We don't have an absolute exact number for you on how much that's contributing to the overall comp. But certainly, one of the platforms we have talked about is back, when we were back before 2007, we spent less than 3% of sales on advertising. We've now increased that to 4% of sales last year and we'll continue to invest at 4% of sales on a go forward basis. Because, we talked about this in the past, is that Express historically has been a big business, but not necessarily a big brand. And we are working to increase the number of impressions, favorable impressions, to the customer and working it different ways to introduce the brand to new customers, as well, and it seems to be working for us.

Thanks for taking my questions.

Thank you. Our next question is coming from Travis Williams of Stephens.

Hi. Thanks for taking my question. Congrats on a very solid quarter. Now that you're going to report same-store sales inclusive of the eCom business, how should we be thinking about the way you are managing inventory on the back side? Are you actually pooling inventory? Is it viewed from you as one pool of inventory? And if so, and maybe a follow on to that is, with massive growth in this eCom business, where are you at from a capacity standpoint with fulfillment?

It's an interesting question because at the beginning of our foray into eCommerce, we did use store inventory when we needed it. But as eCommerce accounted for more and more and more number of average stores, we found out that we could not rob Peter to pay Paul because we do want the stores to have the inventory that they need to have. So that we're currently buying it separately but we do view inventory in total. We view the business in total and we view the business against the inventory in total. We are just trying to be a bit smarter about where it's located in terms of not really sacrificing store volume because we want to fill eCommerce. In terms of fulfillment, we're in a facility that can accommodate much, much, much more than we're currently doing so that we're really not even thinking about maxing it out. And the most we could anticipate doing it's possible to do where we're doing it.

As you know we use the third party fulfillment partner, Trilogy, to do our eCommerce fulfillment. The next three to five years we're fine.

Okay.And one follow-up here. If I heard you correctly, it sounds like you are going to be expanding shipments outside the US, I'm assuming from an eCommerce standpoint. Can you comment on, I think I heard you say you're going to expand that to 60 different areas, something like that. But can you give us a little more color on where that's been in the past, how much of an expansion is this, and then how you're going to market that?

Yes, so frankly, we have not put a lot of dollars into our guidance associated with this but we are able to get the number of unique visitors from different countries. We can track that today. And so we've targeted 60 countries we want to offer eCommerce shipments to where we have regular customers visiting our website. And for 2011, we don't anticipate this being a huge number but it's something we're going to offer and then we will work to optimize that over the next year or two, and figure out the best way to market to those customers and those new geographies. And you are correct, at this point in time, that expansion is just on the eCommerce platform.

Okay, great. Thanks guys.

Thank you. The next question is coming from William Reuter from Banc of America Merrill Lynch.

Good morning. I appreciate the detail. Most of mine have been answered. Just one or two quick ones. Your inventory levels are up a lot less than the sales that we saw in the quarter. And I'm wondering if you can talk to how this might trend relative to your sales levels in 2011, whether it's going to continue to lag or whether we should see that catching up a bit.

I think when you look at inventory, and you look at inventory in comparison to margin, everybody is looking basically at cost. What we are looking to do is work on the margin not only in terms of cost and IMU, but in terms of markdowns. We are very, very, very focused on right sizing orders so that we don't devalue the retail price of big, big items, which we used to do on a very regular basis. So we are looking at unit inventories vis-a-vis dollar inventories vis-a-vis markdown rates, and we really do believe that a big piece of what we can further achieve in terms of increased margins is on decreasing markdowns so that the inventory control becomes very significant to us.

Okay. Maybe asked another way, it would seem that with the increases that you have touched upon, and everyone has talked about, that we should see our inventory dollars still going up probably in 2011. If you can give me any guidance there at all in terms of those inventory dollars?

Yes, we typically like to see inventory dollars go in line with comps for the most part or slightly less.

Okay. And then in terms of your CapEx is a little more than you spent last year. I'm sure a little bit of this is on the 25 to 27 new stores. Are there any IT initiatives that you are working on that I should be thinking about?

From an IT perspective, at this time we have some dollars built in primarily related to Canada and upgrading some of our platforms. Nothing major, just new versions of existing software. The one thing we are taking a look at is our planning and allocation system but don't have any solid plans right now. Don't think that's going to be a major item either but we are taking a look at that. All of it is built into the capital plan that we've laid out.

Okay. And then just lastly, given your strong guidance for 2011, you should do a lot of free cash flow. I'm wondering, you've earmarked $25 million for debt reduction at this point. I'm wondering what we should think about for the remaining free cash flow and how you will put it to use.

Yes, so that $25 million earmarked for debt reduction right now is really a carryover from fiscal year 2010. Because of the trend of the business, in the back half of December, it was decided that it was not appropriate to go back and try to do anything in the market. And so we wanted to wait for an open trading window before executing that. So that's really a carryover from last year and you can see we ended the year with a significant amount of cash on the balance sheet. For 2011, we will wait towards the end of the year to take a look at our capital structure again. To your point, this business does generate a significant amount of free cash flow, and based on economic conditions, business conditions, as well as market conditions, we will determine at that time what to do with the excess free cash flow.

Okay, I'll leave it at that, thank you.

Thank you. Our next question is coming from Marni Shapiro of the Retail Tracker.

Hi, congratulations. The stores look outstanding. So I had two very quick questions. I was just thinking about, you talked about markdowns. It sounds like markdowns hurt the margin a lot more than cotton costs ever could. So as you're looking to better balance how much you put in the air versus on the boat, could you talk a little bit how you balance that just to be careful with fashion, obviously, being close is important to mitigate markdowns. Could you talk about that a little bit?

Sure, I'll start.It's mostly about writing more than one order. In other words, what you do is you write an order for air and then you write an order for sea for three weeks later. You get enough in as fast as you can and you don't get it all in when you don't need it all. You split it and the more we can do that the better off we'll be.

Marni, you're absolutely right. And we recognize air is a very important part of our business strategy and our go-to-market strategy. What we did the last couple of years is we really deliberately swung the pendulum to airing goods into our DC because for the past several years, airing goods in was not seen as a good thing and we wanted to eliminate that mentality in the business. So we swung the pendulum to airing almost everything in and it was fine at the time. At this point, what we found was that some of the goods we were airing in, we had sitting in the DC in backfill for two or three weeks, where we could have simply boated some of those goods in. So it's simply optimizing the air/ocean mix. So for those goods that would be sitting in the DC anyway, let's put those on a boat, to Michael's point with shipment, and get the goods we need in the store immediately.

That makes it sound so simple. Perfect. And then your shoes have looked really, really outstanding, and I've noticed they are selling out pretty quickly in the stores that I see them. Could you talk about inventory plans there? And are you doing these shoes or is it a third party? And then I just wanted one comment. I have to say, I thought you seem to be coordinating the splash page of your website with the splash of your store, as I like to call it, the lead, and I think that looks great, by the way.

Thank you. In terms of the shoes, no, we're not designing shoes, not yet anyway. Clearly, when you look at our assortment, it's not the assortment of somebody that's doing a huge shoe business because our shoes are largely fashion shoes. And as we continue into the shoe business, we're certainly going to continue being a fashion company in shoes but we might incorporate some things that are a bit more ubiquitous in terms of styling. In terms of the website and the store, we're working as hard as we can, absolutely as hard as we can, to make the fashion experience identical to make the product experience identical.

It looks great. Good luck with the rest of spring.

Thank you. Our last question is coming from Jeff Kobylarz of Stone Harbor Investments.

Good morning. Congrats on a really good quarter. I was curious about your mail list. Can you comment about how much that's grown over this past year?

We don't provide specific information about that but it's certainly grown and it is a very large list. We certainly focus the store associates on capturing e-mail in store. And certainly with our launch of the eCommerce business back in 2008, that has also contributed significantly to growing that file, as well.

Okay. And I know that you generate a good amount of sales increase from these postcard mailings that have discounts offered on them. Can you comment at all about the drivers for the 12% comps and how much of that was due to recurring customers versus, say, new customers?

We don't break that out specifically but what I will tell you is circulation on our CRM activity year-over-year was relatively flat. So there wasn't anything where we increased the circulation significantly on that.

Okay, fine. And then just lastly, you said you're still going to decide later about the application of the $25 million of cash to debt reduction. What are the factors you're thinking about there?

So after the $25 million of debt reduction, at the end of the year, we typically, certainly the first thing we look at from a Company perspective is what can we invest in ourselves and generate a significant return on investment. The good news about our four pillars of growth is that we have very low capital requirements associated with each of our four pillars of growth in our existing stores, the eCommerce growth on the web, the new stores that we're building, as well as the international expansion. So we first turn to what we can invest to internally. Then we also look at what other type of investments are out there such as strategic acquisitions, we have nothing on the radar right now, but we're looking at from that perspective. And then it's a combination of looking at return to shareholders either through share buyback, debt reduction, or a dividend.

Okay, but about the $25 million, will that be, as far as whether you're going to use it to apply it to the banks or the bonds, how are you thinking about that?

It's still TBD. It all depends on market conditions.

Okay, thank you.

Thank you. At this time I'd like to hand the floor back over to management for any closing comments.

We look forward to speaking with you when we report our first quarter results in June and thank you very much for tuning in.

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