Express Inc (EXPR) 2011 Q1 法說會逐字稿

Greetings and welcome to the Express, Inc first quarter fiscal 2011 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) It is now my pleasure to introduce your host, Allison Malkin, of ICR. Thank you Ms Malkin, you may now 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 include today's press release. In addition, during this call, we will make reference to adjusted operating income, 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. Now, I would like to turn the call over to Michael Weiss, President and CEO of Express.

Thank you, Allison, and good afternoon, everyone. I 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 first quarter performance and update you on the progress of our key growth initiatives and growth expectations for the current year. 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 began the year positively reporting better than expected comp sales and earnings, continuing our favorable momentum from 2010. Our first quarter results included 10% sales growth, driven by an 8% increase in comparable sales which follows a strong 14% increase in comparable sales in the first quarter of last year. 130 basis points of expansion in gross margin and leverage in SG&A which fueled a 32% increase in adjusted operating income during the quarter and adjusted earnings per share of $0.42 which exceeded the high end of our guidance range.

We attribute our ongoing strength to the advantages of our evolving go-to-market strategy that includes data driven decision-making processes and our intense focus on our core demographic. Most importantly the strong execution by our team here in Columbus, our associates in New York City and of course in our stores. As our results suggest we believe our demographic is increasingly looking to Express as a fashion authority given our consistent ability to deliver strong selling assortments across our end uses of Wear-To-Work, Casual, Jeans-wear and Going Out. We expect to build upon our strength this year. During the quarter we advanced our four growth pillars and continue to optimize our go-to-market strategy. We also implemented additional engagement initiatives to further elevate our brand with consumers as we seek to maximize sales and increase profitability in this fiscal year and beyond. To this end, in the first quarter we drove top line growth while expanding margins in existing stores. Our comparable sales results were driven by an increase in average dollar sales with our 10% sales growth balanced across gender and categories. We continue to capitalize on sales opportunities across our end uses of Wear-To-Work, Casual, Jeans-wear and Going Out as we seek to recapture historical sales volumes by merchandising the category.

In Women's, our business was lead by growth in dresses, pants, knit tops, sweaters, and jewelry. In Men's we were particularly pleased with the strength of woven and knit tops, jackets, shorts and accessories. We believe our brand continues to have pricing power giving us yet another unique advantage and representing one of several strategies that we believe position us to mitigate product cost pressures. To this end we successfully raised prices in certain areas within our assortment, including two of our key items, the Editor pant in Women's and our 1MX shirt in Men's seeing no significant pushback from our customers. In addition we closely monitor weeks of supply and when it's too late in the season to execute a reorder we have taken pricing up to further optimize sales and margins. Examples of this include styles of shorts, Maxi skirts and certain party tops. We continue to capitalize on new product opportunities in our ongoing effort to meet more of our customer's wardrobe needs. During the quarter, we were very pleased with our ten store test of Women's Footwear which performed ahead of our expectations. We plan to introduce Women's Shoes to an additional 40 stores this fall.

We also continue to expand our Personal Care category, expanding our assortment to include body wash and seasonal gift items. We have found that our customers view these categories as add-ons to their existing purchase which is expected to lead to increases in units per transaction and average dollar sales, as these categories grow over time. We will also continue to take advantage of opportunities to retain historical sales volume in existing relevant categories while seeking new product opportunities that are consistent with our brand and the needs of our customers.

As it relates to our second growth pillar, we are pleased with our eCommerce merchandise sales which rose 38% in the quarter following a 57% increase in the first quarter last year. The growth was driven by strong results from both our Men's and Women's Dressy Business. Fashion items and extended sizes and colors in addition, we continue to see success in the testing of the Shoe and Swim categories online.

In April 2011, Express continued its evolution to a multi-channel brand with the launch of a store with the Facebook environment. Our mobile commerce efforts have also continued positively. We saw growth in both our app downloads and mobile commerce sales in the quarter and while not a significant sales driver in the short-term, our digital media efforts support our long term strategy of driving customer engagement, being a multi-channel brand and also they serve to break down barriers to drive sales. We also remain on track to expand Express.com to more than 60 international markets, including countries in Europe, South America and Asia with our first international site scheduled to launch in July of 2011.

In regards to our store expansion, during the quarter we opened four new stores while closing four existing locations, one of which was a Men's-only store that was converted as part of our Dual Gender conversion. We currently have 93% of our store base in our Dual Gender format. Looking ahead, we are very excited about our new store openings that will include our first stores in Canada and the continued expansion of Express stores in the US. Our new design store will also be unveiled in two stores, the first of which is scheduled to open in June at Kenwood Towne Center in Cincinnati, Ohio and the second in late June at the King of Prussia Mall in the Philadelphia market. We believe our new store design will serve to elevate our brand while also enhancing the presentation of our product by showcasing our end uses in an easier to shop format. We are also excited to introduce Express in Canada with our first store on track for a September opening. We continue to expect to open between five and seven locations in Canada by the end of this year. In total we expect to open 25 to 27 new stores in the United States and Canada this year in close to nine existing locations to end the year with 607 to 609 locations and approximately 5.3 million gross square feet in operation at year-end. Our investment in marketing continues to provide rewarding brand opportunities that increase awareness, introduce new products to existing customers and expand our customer base. In the first quarter, partnerships with MTV and the CW allowed us to continue with targeted television testing strategy. In addition, our Sidewalk Runway program is providing both strong brand exposure and the opportunity to interact with fans across the country, while developing fashion content that can be integrated through all channels. In Q1, the Sidewalk Runway Fashion Shows held events in New York and Miami with more events planned throughout the US in 2011.

Our efforts to increase customer loyalty continue with a redesign of our Customer Loyalty program. The program scheduled to pilot this fall will reward best customers and drive engagement with the brand. In addition, this program will allow all customers to participate compared to our current program which is limited to private label credit card holders. The Express credit card will remain a core component of our overall program but the new loyalty program will be tender agnostic.

Our fourth pillar for growth, international expansion, will see traction in the Middle East with plans to open an additional three to five stores through our partnership with Alshaya. We are also in the process of recruiting a new SVP of International Operations to expedite our international expansion efforts. We continue to monitor rising product costs as we head into the back half of the year and believe we are positioned to manage these costs effectively. As I mentioned, we believe our brand has pricing power driven by three factors. First, we compete on quality and fashion and not just price. Second, our increased marketing investment has elevated the intrinsic value of our brand. Third, given we are a fashion company, the majority of our products are new each season so our prices are not directly comparable as is the case with commodity type businesses. Most importantly, we are not seeing resistance to our pricing which we believe is a reflection of our ability to meet our customers desire for fashion and quality across end use categories.

In addition to our positioning we are also implementing initiatives to further mitigate sourcing cost pressures. To this point, we will strategically shift sourcing to manage costs. We will also lower the percentage of our products shipped by air while maintaining our stringent quality and on time delivery standards. As a result we expect to see modest increases in gross margin in the second through fourth quarters of this year even as we anniversary strong gains from last year.

In total, I am pleased with our performance in the first quarter and expect 2011 to represent another strong year of growth and significant progress towards our long term goals. As our guidance suggests we are expecting a very strong second quarter. Our operating income is expected to increase by 41% at the mid point of our guidance range as compared to adjusted operating income last year. Now I would like to turn the call over to Matt to review our financial results and guidance in more detail. Matt?

Thank you, Michael. Good morning, everyone. As Michael stated, we are very pleased to start the year on a strong note. I will begin by reviewing the details of our first quarter results and then I'll update you on our outlook for the second quarter in 2011 fiscal year. Beginning with the review of the income statement for the first quarter. Net sales increased $40.9 million or 10% to $467.4 million as compared to $426.5 million for the first quarter of 2010. Comparable sales increased 8% for the quarter following a 14% increase last year and our eCommerce sales rose 38%. Gross profit increased $21.1 million to $178.3 million or 38.2% of net sales as compared to $157.2 million or 36.9% of net sales in last year's first quarter. The 130 basis point increase in gross margin was driven by 90 basis points of buying and occupancy leverage and 40 basis points of merchandise margin improvement.

We are pleased to deliver expansion in merchandise margin reflecting the ongoing benefits from our evolving go-to-market strategy as well as our increased brand relevance and strength which enabled us to increase regular price selling and successfully offset product cost pressures. To this end, we saw no material pushback from the price increases we implemented during the quarter and in fact, generated higher dollar sales from this move. We continue to believe we are positioned to offset product cost pressures given our diversified Sourcing base and our brand strength.

Selling, general and administrative expenses or SG&A totaled $109.5 million or 23.4% of net sales and included approximately $600,000 in costs related to the secondary offering completed on April 6, 2011. This compares to SG&A expenses of $102.9 million or 24.1% of net sales in last year's first quarter which included $1.8 million in costs related to the Senior Notes offering completed on March 5, 2010, along with a portion of the costs related to the initial public offering completed on May 18, 2010. We are pleased to generate 70 basis points of expansion in SG&A despite increased expenses related to our continued brand building initiatives and investments in additional headcounts that support eCommerce and IT. Strong sales growth, expansion in gross margin and leverage in SG&A led to a 290 basis point increase in our operating margin to 14.9% of sales. Operating income grew $18.1 million or 35.4% to $69.4 million from $51.3 million or 12% of net sales in the first quarter last year.

Interest expense totaled $11 million and included a $3.5 million loss on extinguishment of debt associated with our repurchase of $25 million of our Senior Notes. As indicated on the Q4 call, our Q1 and full year guidance excludes the $3.5 million before tax expense of non-core costs related to this debt repurchase. This compares to $20.8 million in the first quarter of 2010 which included a $7.2 million loss on extinguishment of debt associated with the prepayment of our Term C loan.

Our income tax expense was $23.4 million representing an effective tax rate of 40.1% compared to a tax expense of $383,000 at an effective tax rate of 1.2% in the first quarter of 2010. As a reminder, the significant increase in tax rate results from our conversion to a Corporation in connection with our IPO last May.

Net income for the first quarter was $35 million or $0.39 per diluted share on 88.8 million shares outstanding and included 3 -- $100,000 or $0.01 per diluted share of non-core operating costs related to the secondary offering completed on April 6, 2011, and a $2.1 million after-tax loss or $0.02 per diluted share on extinguishment of debt related to the repurchase of $25 million of Senior Notes. This compares to net income of $30.6 million or $0.39 per diluted share on 78.1 million weighted average shares outstanding in the first quarter of 2010 which included the following non-core operating costs -- $1.8 million or $0.02 per diluted share of costs related to the Senior Notes offering completed on March 5, 2010 and the initial public offering completed on May 18, 2010 and a $7.1 million or $0.09 per diluted share loss on extinguishment of debt related to the Term C loan prepayment. Adjusting for the non-core operating items previously mentioned related to the completed secondary offering and early repurchase of debt, net income for the first quarter was $37.5 million or $0.42 per diluted share for the first quarter of 2011. This compares to net income adjusted for non-core operating costs related to the Senior Notes and initial public offerings and payment -- prepayment of debt of $39.4 million or $0.50 per diluted share for the first quarter of 2010.

Moving to our balance sheet at quarter end, we ended the first quarter in a position of strength. On May 1, 2011, cash and cash equivalents were $180.8 million compared to $83.3 million at the end of the first quarter last year. Also, quarter end inventory rose 11.1% to $172.8 million compared to $155.6 million at the end of the first quarter of last year. The increase in inventory supports our expected growth in the business including new stores. In addition, strategic inventory purchases related to our Never Out strategy and the purchase of fabric ahead of anticipated cost increases represented 3.8% and 3.1% respectively of the inventory increase as compared to the end of the first quarter last year. Inventory per square foot excluding eCommerce merchandise increased approximately 7% compared to the first quarter of fiscal 2010. We are very comfortable with the level and content of our inventory position as we begin the second quarter.

Total debt declined by $173.1 million to $342.5 million from $515.6 million at first quarter end 2010. This was primarily a result of the Term B loan prepayment in the second quarter of last year and the repurchase of $25 million of Senior Notes in the first quarter this year. Capital expenditures totaled $12.3 million compared to capital expenditures of $13.2 million in the first quarter of last year.

Now, on to our outlook. We are introducing guidance for the second quarter and raising our guidance for fiscal 2011. For the second quarter, we currently expect comparable sales to increase in the mid single digit range which compares to a comparable sales increase of 8% in the second quarter of last year. Operating income is expected to increase by 32% to 50% over adjusted operating income last year. We expect our effective tax rate to approximate 40.3% for the second quarter of 2011. Net income is expected in the range of $11 million to $13 million or $0.12 to $0.15 per diluted share on 88.8 million weighted average shares outstanding. This compares to adjusted net income of $7.1 million or $0.08 per diluted share on 88.7 million weighted average shares outstanding in the second quarter last year.

We are raising our annual earnings guidance for fiscal 2011. We continue to expect comparable sales to increase in the mid single digit range as compared to a comparable sales increase of 10% in 2010. We expect our effective tax rate to approximate 40.3%. Net income is currently estimated in a range of $135 million to $143 million or $1.52 to $1.61 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 18% to 24% over 2010.

Again, note that the net income is materially impacted given we are subject to federal taxation as a result of our conversion to a Corporation for the full year 2011 versus three quarters of the year for 2010. Our store expansion plans for the remaining three quarters of fiscal 2011 include the opening of 16 new stores in the United States, five to seven new stores in Canada and five store closings, two of which are Men's-only stores that will be converted to our Dual Gender store format. We expect to end the year with approximately 607 to 609 stores and 5.3 million gross square feet in operation. Our store expansion program has a higher percentage of new store openings in the third quarter and therefore, we will absorb increased pre-opening expenses and also increased investment as we introduce our brand in Canada. As such, operating margin expansion will be greater in Q4 than in Q3 this year. Capital expenditures for the year are expected in the range of $72 million to $76 million. Finally, we expect to generate positive cash flow. With that, I will turn it back over to Michael for some closing remarks.

Thanks, Matt. In closing, we believe in the significant advantages of our business model that includes data driven processes, a highly talented design and merchant team, an advantageous customer demographic that spends a higher percentage of their discretionary income on apparel and is also growing faster than other segments of the population. Additionally, our well defined proven strategies include new stores in the US and expansion into Canada, significant opportunities in a multitude of international markets, and maximizing the eCommerce channel, creates a platform for incremental sales and margin growth. Simply put, we believe we are poised to drive sales productivity and profitability in the current year and beyond. Now I would like to turn the call over to the operator to begin the question-and-answer portion of the call.

(Operator Instructions) Lorraine Hutchinson, Banc of America.

It sounds like you've had some great success in increasing prices in some of your more loyalty driven items. Are there any other examples that you can give us of fashion tops or some of your basic products that can give us some comfort around price increases for the entire assortment?

Sure. The second biggest thing we have in Men's is our Polo, our PK Polo, which we do the same Polo, but with different trends, probably five different styles and what we've done is re-balanced the inventory there to the more expensive styles where we have a heavier margin, and we're not losing any units, Lorraine, so we're happy with that. As we said, our biggest item in Women's has been the Editor pant which we raised in price and the biggest unit item in Women's has been -- and for years has been our Bra Cami, which we raised both the solid and the lace trim in price this season, so that all of really the key things that we repeat year after year, that we repeated this year that go forward have been raised in price to really no noise.

And also, Lorraine, from a fashion content perspective, there have been several items we've also been able to raise prices on opportunistically based on sell-throughs and Michael mentioned some of those in his discussion with -- there were several styles of shorts that turned very fast. We're able to raise prices on those with little to no resistance from the customers. The same with some Maxi skirts and a fair number of our party tops. One of the key things that we have remained focused on while costs have been increasing is that we want to make sure that we maintain the quality of our product, and Michael and I have been adamant that the quality stays in the garments, that we're not cutting corners to reduce cost through quality reduction, and we think, we have built a strong brand and we believe with the additional investment in marketing that we have made over the past couple of years and the quality of our assortment -- in our assortment, we do, have generated a significant amount of pricing power and that has been demonstrated in some of the price increases we've already taken.

The other big, big area is Women's Denim which we had discussed in the two previous calls, which finally is in full flower and doing extraordinarily well at a big average price increase, but there again, that's not the same product. That's a new and better product which we're getting much more money from.

And then just wanted to follow-up on the increase in inventory. I know you'd mentioned buying fabric ahead of time. Can you give us a little more detail on that and then just remind us when you will anniversary the Never Out initiative?

Yes, so the Never Out initiative will be anniversaried next quarter so this was the last quarter where we were not lapping the Never Out strategy. From the raw materials standpoint, given the pricing pressures that we have seen, we have gone out on a fair number of fabrics, bought them ahead of time to protect pricing, some of the raw material that we have bought, we went out far enough on that some of the manufactures had asked for payment and in those cases where they did ask for payment we thought it was appropriate. We had to take that into our own inventory and that contributed to the increases in our inventory levels as well, albeit not finished product inventory, it does show up in our total inventory.

Stacy Pak, Barclays Capital.

I guess first of all I was just hoping you could talk a little bit more on the guidance. It looks to me like you had the comp was above what I thought anyway for this quarter and a nice improvement in run rate. When your guiding to a mid-single digit for Q2, what are you looking at? Are you seeing something that's suggesting to you that the business should slowdown or is that just sort of how you're approaching it? And then also can you clarify what you said about or maybe dig more into the pre-opening and the store expense number for Q3 and the difference in operating income growth or margin that we should expect Q4 to Q3? And then last question, I heard what you said on pricing and that all sounds great. Wondering if your costs in the second half are maybe coming in a bit lower than you anticipated due to some of what you're doing, like air freight, et cetera.

Sure. Stacy, let me start with the first question relating to the mid-single digit comp guidance for Q2. Obviously there's a lot of things that go into our sales forecast including year-over-year comparison, historical splits, promotional activity, the economic environment, et cetera. There's lots of things we look at versus simply year-over-year comparison. When we do provide mid-single digit guidance, that implies to us something in the 4% to 6% range. Clearly, we gave mid-single digit guidance in Q1. We ended up generating an 8% comp. Q2, while we're guiding to a mid-single digit improvement, that certainly -- you would think we're probably closer to the top end of the range versus the bottom end of the range there as well. From an operating margin perspective for Q3 to Q4, basically, the business right now, we don't have a lot of historical data as a public Company and this is really the first time we've provided guidance for Q2 and I think there could be a little bit of a calendarization issue from an analyst perspective, Q2, Q3, and Q4.

We delivered very strong results in Q1, 35% operating income growth year-over-year. The guidance we provided for Q2 implies 32% to 50% operating income growth for the quarter which we are certainly not ashamed of. We think that is very good growth year-over-year and the business certainly has significant momentum. We have confidence in the business. That's reflected in the fact that we've flowed through our Q1 earnings beat to full year guidance and while our guidance is our guidance, I think when you take a look at it that's what we believe we can do but our Management team is not necessarily satisfied with the guidance we're providing with The Street. We're obviously always looking to beat the guidance and I think for -- when you look at Q3 and Q4 right now, we just want to put out there that when you look at those two quarters as well, Q3 because we are entering Canada, we do have a marketing push into Canada. There might be a little bit more expense in Q3 than current analyst's estimates and a little bit less in Q4 given the leverage on the higher sales that are generated in Q4 versus Q3. So that's where -- that's the genesis of that comment.

And will you quantify that, Matt, or is that just sort of getting us thinking about it?

It's more of getting you thinking about it. The important thing is, we've raised our full year guidance with the beat in Q1 so we have a lot of confidence in the business and just -- you may just want to think about the calendarization of the quarters out there right now.

Okay, and then how about the Sourcing?

Yes, I'm sorry, could you repeat that question one more time?

Are your second half Sourcing costs coming in, in line with where you thought previously or have you been able to reduce some sort of more than you thought with what you're doing in terms of reducing air freight, et cetera.

Yes, I think there's a lot of companies out there that have talked about high double digit cost increases for the back half of the year. Our production and Sourcing team have done a tremendous job to get on top of this early. That's part of the reason for the inventory increases that we're seeing and we're looking right now at low double digit cost increases for the back half of the year, and so we feel good about where we are. That coupled with the fact that our -- we are seeing prices flow through to the customer and acceptance from the customer on the pricing side along with the work we're doing to continue to optimize our go-to-market strategy, we do feel good. As Michael mentioned that our gross margin should improve in each of the back three quarters.

Kimberly Greenberger, Morgan Stanley.

Very nice start to the year here. I'm wondering, Michael, if you can talk about your pricing strategy. Stepping back from what happened this quarter, how are you architecting the pricing structure at Express? Are you going through category by category and asking where you have an opportunity to take price or are you just looking at the various categories and following the cost increases higher, and then are you on top of that then going back and opportunistically taking price where you feel you've got room to do that based on customer demand?

Sure, Kimberly. It's both opportunistically and strategically. By strategically, what I mean is we are still very much in a good, better, best business and that gets defined by the individual categories. Luckily, or unluckily for some, luckily for us, the place that the business has been the weakest is in the good categories because that's where I can say the most basic T-shirts exist, which is a business that we are diminishing in and the better and best categories is a business that we are increasing in, so this is strategically a way that we can both follow the customer and meet our own pricing needs as well. So what is basically happening is and we've spoken about this before, with the more rounded end use strategy, we're able to capitalize on the better end of the business, for argument sake and we didn't mention jackets because it's not a tremendous piece of the first quarter, but our jacket business at very good prices is dramatically ahead of last year and we expect that to continue going into the rest of the year. Our Dressy business in general is dramatically ahead but we believe that, that's a secular trend, not just our store, so we believe that if we were not in the kind of business we were in and we were still in a very casual kind of business, we would be having problems in both top and bottom line in terms of pricing.

Okay, that's helpful. And then Matt? Could you take us through the comp metrics here, underscoring the 8% comp in Q1, how much of that was an increase in transaction count versus average dollar sale. I know you paid down $25 million in debt here in Q1 but your cash balance didn't really go down from last quarter to this quarter, I'm guessing because the cash flow generation. Any thoughts on accelerating further debt purchases? Thanks.

Yes, so from a debt standpoint, the $25 million, we did pay that down in Q1. We continue to look at our capital structure on a regular basis, as we've talked in the past, this business does generate a significant amount of free cash flow on a regular basis, and we are certainly slightly ahead of plan from where we were. We continue to look at our capital structure. The primary changes will occur at year-end but we do obviously reserve the right to look at that on an interim basis as well. And I'm sorry, the second piece of that was?

Comp metrics, if you can --

Oh, yes. ADF was the primary driver of the comp improvement this quarter, and as you know we don't break down the AUR and UPT components of that but ADF was very strong.

And I think Michael said earlier that, that was helped a little bit by AUR?

Yes, he did.

Okay, thanks so much and good luck, the second quarter.

Janet Kloppenburg, JJK Research.

Congratulations on a really (inaudible) quarter, nice job. Michael, I was hoping you could talk a little bit about the momentum of the business for the first quarter. Some of the companies that have reported over the last week have talked about disappointing trends in April, perhaps relating to weather and I think Matt said something about the momentum of the business continuing but perhaps you could comment on that and the strength of your Summer line versus your very successful Spring product lines. I'm wondering also if you could talk a little bit about the testing that's going on. I'd like to know, or if you could share with us how much of the product has been tested for the second quarter versus last. I think you might have been or accelerated some of your testing for the second quarter versus last year, and lastly, if you could discuss your marketing budget this year versus last for the first quarter and how it looks for the remainder of the year. Thank you.

Okay, Janet. In terms of all of the questions that apply to momentum, what I would say to you is that we believe our momentum is very good right now. We believe that our go-to-market strategy is really, really coming to fruition and we still believe it's got a long way to go. In terms of second quarter, I would have to say that all, absolutely all of the new receipts for second quarter that are Spring coded have been tested. So that's very good news, but what I would also say is that a good part of second quarter will be new Fall coded goods which were we're already receiving. Our June floor-set will be heavily new goods, even though we will still have current season goods, will be heavily new goods, more so than last year and we believe that, that will add to the momentum. We believe that July will be -- as a matter of fact I just reviewed the July floor-set upstairs and it looks really, really fabulous. I think the thing that's driving our momentum right now is the trends in the business where fashion is really, really selling because it's really, really changing and we've always been pretty good at that, so that we welcome change where other people really don't. In terms of weather, Janet, I could talk about it but you'd get a better report from The Weather Channel. So you don't --

So you didn't see it affect your business, Michael?

You know something? Sure, it affects business temporarily but where it's bad, it's bad and to tell you the truth, the whole first quarter, bad weather in Florida was very good for business, because they couldn't go to the beach they went to the mall, so one thing cancels out another.

So it doesn't really matter. Is, what you're saying is we shouldn't really be talking about the weather.

Well no, it exists and clearly there are weeks where it really, really does matter, but push comes to shove by the end of the season, it balances out. Clearly, the Northeast and the Mid Atlantic were affected in the quarter. Clearly, the upper Midwest was affected. They were sending me pictures of snow at Easter time but this too passes. That's not what the business is really comprised of by the end of the season.

And Michael, without giving away any competitive secrets and before talking about your marketing budget, could you share with us what you mean by the fact that fashion is really changing and perhaps why that's advantageous to the Express brand?

Sure, I think real change in fashion is not just what is perceived by retailers. It's what's perceived by customers so that if pants shapes change, customers see that as a change. If skirt lengths change, customers perceive that as a change. If tops shapes change, if the shapes of sweaters, the shapes of tops change, that is perceived by the customer as a change, whereas a lot of times, we in the business call much more minor things changes. I'm talking about understandable, perceivable changes that the customer really acknowledges and then turns around and buys because she likes them and that's kind of what we're experiencing right now.

Okay, great and on the marketing front?

Yes, on the marketing front we're spending Q1, we spent a comparable amount from a percent of sales perspective this year to last year in Q1 and we're also looking at as we've talked in the past targeting right around the 4% of sales and marketing for the year similar to last year on a percentage of sales basis.

So it wasn't up meaningfully in the first quarter, Matt?

It was not, no. Dollars were up a little bit because net sales were up but percentage wise, the same.

Many thanks. Lots of luck.

Michelle Tan, Goldman Sachs.

I was wondering if you could maybe help us understand also how much your costs were up in Q1 relative to that number that you gave for the back half of the year?

Yes, so Q1, we talked about a low to mid-single digit increase in cost in the first half of the year and that's what we saw from a cost perspective.

Okay, great, thanks. Then, Matt maybe on the pre-opening spend is there a way to think about pre-opening per store or something that can help us do a better job on understanding the calendar effects of the Q3 versus Q4 issue?

Yes, usually, our sales are spread out -- our store openings are spread out a little more evenly across the year. It just so happens that this year, we have with the launch of Canada, we have a lot of stores opening in Canada and specific to that we're spending a little bit of extra money in Canada to get the brand recognition up there, so we're certainly planning a pre-opening this year in Canada, so on a go-forward basis, we could talk about that at the beginning of the year but it would probably, I would imagine be more evenly spread out than it is this year, it just happens that the debut in Canada is in the back half of the year and we're opening five to seven stores in the last, in September or I'm sorry, in Q3 and then opening a few in Q4 as well.

Okay, and can you give us what you typically spend in pre-opening per store, recognizing that the Canada spend is maybe a little higher than that?

Yes, we don't disclose that but obviously, there is three months of rent that we have to pay and expense prior to opening as we're building out the stores.

Great, and then maybe Michael or Matt, can you give us a little more details on your plans for the new store design, what you're hoping to see in terms of lift from a productivity perspective, what the big advantage is from the shopability perspective and then how quickly you could see yourself rolling them out over the next several years?

Sure. It's funny that you ask that question because I was in the Cincinnati store this morning. I drove down early this morning, was back in the office by 11 and I have to tell you, I mean, I hate to say this, it looks so good, but here's the thing. It is a test Michelle, so the point of it is, we're not committing any kind of major capital to this rollout. We will see how it performs and if it performs as well as I feel that it looks, it's conceivably a real, real game changer, but as I said, the proof in the pudding is in the eating, so we will really have a much better view of what this means to us by -- I want to say the mid to end July. In terms of how fast it can rollout, we have leases that come due every year. We have new stores every year. We have renovations every year, so it could go, it could turn out pretty fast. It really could, and I really wish there was a store closer so that you could see it because I think it's going to be very exciting. Very exciting.

Great. Thanks so much guys. Good luck.

Roxanne Meyer, UBS.

Pretty impressive gross margin gain in 1Q, especially in light of the competitive environment out there, but I'm just wondering, did you feel that the promotional environment had an impact on you? Do you think that -- did you have to pull incremental promotions to react to the environment? I guess just how do you feel relative to what's going on out there?

I'll tell you, Roxanne, my answer is the same as it was in December. Anybody that approaches fashion retail in this day without planning in unplanned promotions is not paying attention. We expected promotions. We did a couple of unplanned promotions. The results are that our gross margin was higher than last year. Our product margin is higher than last year. I would tell you that I've not seen this early in the summer some of the depth of promotions that I'm seeing right now, but when we really view it in a very cold way, we're continuing with our strategy to bring in forward merchandise earlier. The Summer goods that we will have in the month of June is what it is. We expect it to be down and dirty in June, and we have not yet had to, we have not yet had to buy business, as you could tell from our margin, and we don't really expect to have to buy business going forward. We think that we're positioned in terms of forward inventory and forward fashion appropriately to what we are as a brand.

Okay, great, thanks. And then just wondering if at this point if you're able to share any of the results of your really early testing for back-to-school.

We're not going to tell you what we did, but we're going to tell you that we have things that are very good. We've already placed sweater reorders.

Wow. Okay, great. Well thanks and best of luck.

Alex Fuhrman, Piper Jaffrey.

I just want to talk a little bit about your eCommerce business, it showed very impressive growth again in Q1. I'm curious to how big a chunk of that is from mobile commerce and if you can talk a little bit about the growth you're seeing through that channel and then also, about the Facebook site, are you seeing a significant number of customers actually converting purchases within the Facebook site at this point in time?

So for mobile and Facebook, it's not a big piece of our total eCom business at this point in time. As we've talked in the past, look, we understand we were late to market from an eCommerce perspective, not by our own devices but that's the way it happened. As a private Company in July of 2008, we launched our eCommerce platform and we have made a commitment, we want to be toward the front end of all new types of media, social media, mobile commerce, anything that impacts the customer given we have a 20 to 30 year old demographic, it only makes sense for us. So while it doesn't have a large contribution to eCommerce today, we want to be on the forefront, learn how to operate these applications in these types of environments because we do believe over time, this will become a bigger and bigger piece of the business.

Great.

I think an important thing here is the fact that really gets our attention in both our experience and experience we've heard from other retailers, the multi-channel customers worth three to five times what the single channel customer is. So we're not looking to forecast what the new channels and the better channels will be. What we're saying is that we are and will be a multi-channel brand, as best as we can do that, so we will be on the leading edge of certain things that we really don't expect to get big volume from today but we expect will evolve into big volume eventually.

Great, thanks. That's helpful and then excited to hear that you guys are going to be piloting a new Loyalty program in the fall. Was wondering if we could get a few -- a little bit of information on that, specifically I'm wondering is this going to be a points based program or a dollars based program and then is the end goal with this to convert your private label credit card customers over to this loyalty program or just have two programs running simultaneously?

No, we will definitely convert this over. We are launching a new program relative to what we have today. We've been working with Brierley, which is one of the leaders in the Loyalty space. So those customers will be converted over, as we've said we're piloting in the fall. We're going to roll the program nationwide in the spring and this is going to be a points based program and it will be targeted toward our existing customers to generate additional purchases and more Loyalty, more loyal customers within the brand, along with attracting new prospects as well, but primarily, increasing transaction size as well as frequency of transactions with our existing customer base. The exciting thing here is, as we've talked in the past, our current Loyalty program with the private label credit card only touches a little less than 25% of our customer base. This will be available to our entire customer base because it is tender agnostic.

Great. That's what I like to hear. Thanks guys and good luck this year.

Richard Jaffe, Stifel Nicolaus.

Congratulations on a strong quarter. Just a follow-up on the direct business, are you seeing any difference in your shoppers or the content, what the consuming online or versus in the stores. Is it the same customer buying the same kinds of things or are there different best sellers online versus in store?

There are some differences online versus in store. For example, outerwear does extremely well online. We also mine the online network to find out what individuals are searching for and that's how we launched our Shoe business because customers were looking for the entire outfit from Express, and that was one of the things that we did not offer. But what's interesting -- one of the things we did not expect when we launched our eCommerce platform was that when you have significant number of size runs for customers to choose from, particularly in areas like our pants business, we thought that the sales would be more skewed toward tops and toward items with small, medium, large type of size ranges because that's a little more forgiving than a pants size. One of the things we figured out very quickly is our pants sell extremely well online and that's because we have very consistent quality and very consistent fit that our customers can trust and that has enabled our customers to purchase a lot of those items online as well knowing that we have the quality and consistency they're looking for.

But in answer to the other part of your question which was are there different best sellers, the answer is absolutely no. What's good is good, in the stores and online and what's bad, is bad. What's unbelievable to me, really unbelievable is because I had never been in this kind of a business before, is the kind of fashion we can sell that they haven't even tried on, that they buy online. It's, as Matt said, the outerwear, the high ticket items are very, very good online and at the other end, online is a great, great, great vehicle for Sale. We have tremendous Sale business online which is a good thing, because we can get rid of more online and have less in the stores so we're happy with it so far.

Marni Shapiro, The Retail Tracker.

I think you know that I thought the stores looked phenomenal in the first quarter. So a couple of very quick kind of housekeeping type of questions. The first was I was curious, you've been running these boxed sales at the end of seasons and the store continues to look more and more -- I don't want to say upscale because it's not like you're changing the core philosophy of the brand but the store looks cleaner and more pulled together. Are those boxed sales not brand appropriate anymore and what's your thought around it?

I love the question, Marni.

It's my nice way of saying, can you stop doing them? They cheapen the store and the brands.

Yes, you know something? And when you see the new store because, I mean -- I don't even know. The fact remains is that we keep trying not to do that. We keep trying to do it in a different way, but the sell-through is so different when they're going through those boxes that I can't even fight anymore. I think what's going to happen is as we transition earlier, I think the box sales are going to go from four a year, this is what it smells like to me, from four a year to two a year because I think the middle of the season, the middle of the season sale will not have that much to clear at those kind of cheap prices, and who knows? You're right. The store is looking much more upscale than it ever did with selling that kind of goods but it seems like there's a customer that likes that trophy search, I don't know, but I could not agree with you more. I think it does bring it down a bit, but it works, so far, you can come and join our mud wrestling on the Executive Committee over this issue.

We're trying to keep Michael out of the stores when the sales are going on.

If it makes money I'm not fighting it. And my two quick other questions were, I was curious about if the new tags on the dresses have helped in your return situation and if you can just touch on fragrance, because I felt like at times during the first quarter, it had pretty prominent placement, more so than at other times I've seen during the year.

Yes, well it has more prominent placement in the times of year when the history shows us it has the biggest selling. Clearly, clearly, at holiday. Clearly at Valentine's Day, clearly at Mother's Day so we do move it around, that's true. We're still learning that business. We're still very new at that business but we're quite happy with our results. The other part of the question was, I'm sorry?

Tags on dresses.

Oh, dresses. The dress tags. I'll tell you, we really don't know yet, but we will know for New Years Eve, because we have historically run a business at New Years Eve where we lend dresses to a lot of ladies.

Actually maybe that can be a side business.

Yes, but no, a side business would be renting them. We don't rent them, we lend them. So after holiday, I'll let you know whether that has diminished.

Great guys, good luck. The stores look outstanding.

William Reuter, Banc of America.

Just a couple quick ones. If you could speak towards the same-store sales trend throughout the quarter, whether you saw a trend that was either getting stronger throughout or getting weaker, was there any noticeable change from month to month?

We don't talk about the monthly comps but we're pleased with the quarter.

Okay. And the second one is around I guess, it's a two part question. In terms of how you guys are prioritizing your use of free cash flow at this point, you guys obviously chose to repurchase the Senior Notes and I guess in the event you were going to use some capital to repay debt whether you would be thinking about the Senior Notes or more likely to repay some bank debt.

Yes, so the first quarter we chose to repurchase some of the high yield bonds and it really is a function of the pricing and what the return of the different options are. Our term loan is at a very low rate, LIBOR plus 4%, Senior Notes are at 0.875%, and so we took a look at a breakeven analysis on that and at the time decided to repurchase some high yield notes.

In terms of your general perspective on the uses of free cash flow, would you entertain acquisitions? Maybe share repurchases, dividends, how would you think about that?

Yes, certainly the first thing obviously is re-investing back in the business where we feel it's appropriate, as we've talked in the past we really don't have, we have a good problem here. We're generating a lot of free cash flow. We have very robust growth opportunities in front of us but there's very modest capital needs associated with these growth opportunities and so after that, we have no acquisitions we're looking at, at this time. It's really revolving around either share repurchase, debt pay down or dividend and it really depends on the economic and business conditions at the time. Last year we obviously took a balanced approach, we're obviously committed to returning capital to shareholders in one form or another and we took a balanced approach with the dividend and debt repayment and at the end of this year we'll take another look at that.

Thank you, I'd like to turn the call back to the speakers for closing comments.

We would like to thank you for joining us and I look forward to speaking with you when we report second quarter results in August. Thanks again.

Thank you.

Bye.

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