Express Inc (EXPR) 2011 Q4 法說會逐字稿

Greetings, and welcome to the Express Incorporated fourth-quarter and fiscal-year 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) 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 fact 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 not -- which are non-GAAP measures. Reconciliation of these non-GAAP measures to reported operating income, 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, Chairman, President, and CEO of Express.

Thank you, Allison, and good morning, everyone. I'm joined here today by Matt Moellering, our EVP and Chief Operating Officer, and Paul Dascoli, our SVP and Chief Financial Officer. I'll begin the call today with an overview of our fourth-quarter and fiscal-year 2011 performance and review the priorities we set for the business as we begin 2012. Then, Matt will provide an overview of our international expansion plans. Following this, Paul will review our financial results and outlook. After my closing remarks, we will conduct a question-and-answer session.

We ended the year positively reporting strong sales and earnings continuing the momentum in our business from the first nine months of the year. Our consistent performance improvement continues to validate the credibility and success of our data-driven strategies, which have led to Express becoming a fashion authority among our demographic. In total for the fourth quarter, net sales rose 8% with comp sales increasing 5%, including a 39% increase in e-commerce sales. Our comparable sales growth was balanced by gender and across categories. Gross margin increased 70 basis points. We were pleased to achieve expansion in merchandise margin, which resulted from the continued success of our go-to-market strategy. In fact, we sold more full-priced forward-season merchandise in the quarter, which offset the impact of increased product cost and the promotional holiday season. Our sales growth, along with gross margin expansion and SG&A leverage, drove a 27% increase in adjusted earnings per diluted share to $0.70 from $0.55 last year, achieving the high end of our guidance. The year was equally impressive and included a 9% increase in net sales, a 6% rise in comp sales, and operating income growth of 36% with operating margins expanding 260 basis points to 13.1% of net sales.

Our balance sheet remained strong. At the year-end, we had over $152 million in cash and cash equivalents, even after reducing debt by $159 million, and our inventory was in great shape. The year included several significant milestones that we believe elevated our brand with consumers and will lead to incremental growth opportunities in 2012, as well as the next several years. To this end, we introduced a new store design which makes a more powerful statement across our end users and truly showcases our product offerings. Our new and remodeled stores in 2012 will all be in this new format. We created a closer bond with our customers, piloting a new loyalty program, introducing expanded fall and holiday catalogs, and investing in new print and TV media to increase brand awareness.

We increased our geographic reach by opening our first stores in Canada and by expanding our e-commerce shipping capabilities to more than 60 countries internationally. We invested in talent and infrastructure to support further growth outside the United States. We increased sales productivity and profitability as we focused on regaining historical sales volumes in existing categories; increasing forward-selling merchandise, which serves to further differentiate our stores frontiers; and leads to improved full-priced selling and higher margins. And we expanded existing product categories, such as shoes and personal care, while entering new product categories, such as men's watches, to further increase store productivity. We reached a milestone in e-commerce sales, which grew 39% to $205 million in 2011. Also noteworthy was Express.com's inclusion in the Internet retailer rankings of the 2012 hot 100 America's best retail websites. We are on the cusp of celebrating our 2 millionth fan on Facebook. These are significant accomplishments, given we have only been in the e-commerce business for three years.

We are proud of our performance this year and see tremendous opportunity ahead to expand our fashion authority as we continue to optimize our go-to-market strategy and execute against our four pillars of growth. Highlighting our four growth pillars, beginning with existing store improvement, we continued to generate positive comps while increasing margins at the same time. This resulted in increased sales productivity for the full-year 2011. Sales per square foot increased from 346 in the prior-year to 355 in the current year. In women's, our business was led by increases in knit and woven tops, denim, skirts, jackets, and dresses. We were also very pleased with the performance of some of our new categories, such as personal care and women's footwear. Going forward, we expect to continue to expand both categories. We will launch a new women's fragrance before holiday and will expand our footwear offering the spring, with a larger assortment of sandals and wedges, as well as our first spring boot.

In men's, our business was led by increases in woven shirts, dress pants, denim, suits, accessories, and knits. I am also pleased to announce that Express sold more than 1 million ties in 2011, further solidifying our Company as a premier destination for men's suiting within our demographic. In addition, we generated excitement and saw strong increases in new categories within our men's business, such as our introduction of watches for the holiday season. Sales of men's watches, which were offered in 50 of our stores and at Express.com for holiday were really terrific and will be expanded in late fall to the majority of our stores to capitalize on the strong momentum in this category. And in personal care, we recently launched a new men's fragrance the spring called Loyalty, targeted to a casual lifestyle, marking the third fragrance in our men's portfolio. This was our most successful fragrance launch to date. Going forward, we will continue to take advantage of opportunities to regain historical sales volume and existing relevant categories, while seeking new product opportunities that are consistent with our brand and the needs of our customers.

Turning to marketing, in the fourth quarter, we saw a very strong response to our holiday marketing efforts, including our 48-page catalog that was mailed to approximately 9 million homes in the US. We continue to optimize our marketing strategies in both magazines and outdoor, while enhancing our television advertising through strategic placement on select networks and programs that appeal strongly to our key demographic. We were also encouraged by the debut of Express Next, our new customer loyalty program, which was piloted in 91 stores across the US. This program will launch in all stores this spring, and rewards members for all of their purchases, regardless of payment type. As relates to our second growth pillar, we saw robust growth in e-commerce sales, which rose 39% in the quarter, following a 63% increase in the fourth quarter last year. This was driven by a strong response to our holiday assortment and included daily record sales over the Thanksgiving weekend, including both Black Friday and Cyber Monday. In 2012, we are focused on optimizing our website capabilities to further drive sales and enhance interaction with our customers. Our plans include the replatform of our site, which will give us more creative control, enhance our site performance, and allow us to provide increased customization over time. We also expect to create a more seamless experience between our stores and e-commerce site, with improvements that support online sales from our stores point-of-sale systems.

We advanced our third pillar by expanding our store base. During the fourth quarter, we continued our expansion in Canada with the opening of 4 new stores, 1 in Toronto and 3 in Calgary. At year-end, we operated a total of 6 stores in the Canadian market. During December, we launched our first marketing campaign into the Canadian market, which assisted us by introducing our brand to consumers and driving a successful holiday season. For the year, we opened a total of 27 new stores in the US and Canada, and closed 9 existing locations to end the year with 609 locations and approximately 5.3 million gross square feet in operation. For 2012, our plans include the opening of approximately 30 new stores, including 20 to 23 in the United States and 7 to 10 in Canada. As I mentioned, all of the new stores will open in our new store design format. Also, I am pleased to announce that 2 of the new stores will be flagship locations. One will be located in San Francisco, and 1 will be in New York City. These locations will allow us to showcase our brand in two important tourist destinations, which will set the stage for our international expansion efforts, as well as continue to build the intrinsic value of our brand domestically.

Moving to our fourth pillar of growth, international expansion. As many of you are aware, in 2011 we focused on developing our international strategy to capitalize on what we have identified as at least $600 million long-term revenue opportunity for our Company. Given the fashion content in our brand and the success we have seen to date, we believe this is an enormous growth opportunity for Express. Matt will share some details of our plans momentarily.

In summary, I am very pleased with all that we accomplished in 2011 and equally optimistic as we enter the new fiscal year. As we begin 2012, our business is performing well. Our testing strategy has increased the predictability of our operating results, and we once again expect to benefit from the selling of more forward merchandise versus 2011. Our priorities in the year ahead will keep us focused on our four pillars of growth and will be complemented by the excitement of our new store design and enhanced customer engagement, with the spring rollout of our new customer loyalty program. We remain confident in our strategies and expect another year of strong growth and accomplishments in 2012 towards our long-term objectives. Now, I would like to turn the call over to Matt to review our international strategy in more detail.

Thanks, Michael. I will provide a brief summary of our international expansion plans, which will be reviewed in greater detail at our Investor Day this Friday, March 9, in New York. As Michael shared with you, we are very excited to accelerate our growth outside of the US and Canada. While all four of our growth pillars have significant potential, this growth pillar, which we are really just starting to focus on, could have the most long-term potential. Let me first highlight why we believe Express is poised for growth internationally. First, fashion has no boundaries for the 20 to 30-year-old demographic. Express is a fashion brand that serves this demographic across all end uses, making us uniquely suited for international expansion. Our assortments have always been influenced and inspired by the international fashion aesthetic. We also have a diverse merchandising and design team that hails from all over the world, as well as an extensive travel agenda associated with our go-to-market strategy. We serve a diverse customer base in our US stores and as evidenced by our tourist and mortar stores, we are already serving international customers very successfully.

Second, we have seen strong performance in the international countries where we currently offer our brand. In fact, Express sales have been very strong in growing in the Middle East, where we operate 7 locations through our development agreement with Alshaya. We have also experienced a strong response to our brand in Canada and have seen a positive response from international customers who can now purchase our merchandise on Express.com. Third, we have studied the international marketplace extensively and believe our three-pronged approach that includes Company-owned stores, joint venture relationships, and franchise agreements will allow us to penetrate key markets while successfully managing country risk.

As many of you are aware, we have spent a great deal of time attracting talent, evaluating the international marketplace, and building the infrastructure to support our plans. Over the past four months, we have completed our detailed international expansion plans and believe there is at least a $600 million revenue opportunity for our brand long-term, and also believe we can generate approximately $260 million of revenue and $35 million of operating income annually by 2016. We believe there are opportunities across the globe with a particular focus on Latin America, Asia, and Europe. As stated earlier, our plans call for a mix of Company-owned stores, joint ventures, and franchising arrangements. Unlike our current development agreement with Alshaya, all franchise deals will be structured so that we can take credit for merchandise revenue in our financial statements. We also intend to have buyout provisions and franchise arrangements to give us the option to convert franchise deals to joint ventures or Company-owned stores at a later date if we desire.

Now that we have a detailed plan to execute against, the international priorities for 2012 will be to finish building out the base international team, continue to focus on compelling -- on completing the remaining infrastructure work required for aggressive international expansion, and complete two franchise agreements covering multiple countries by the end of the year. We also would like to have a Company-owned flagship store opened in a major market outside of North America by late 2013 to provide a base for expansion in that region.

Of course, aggressively going after this large, very profitable, international opportunity will require some upfront investments. We anticipate investing approximately $5 million in 2012 and an incremental $4 million, or approximately $9 million in total in 2013, to get this growth pillar up and running. We believe we will break even by 2014, and then start to generate significant income. For 2012, the $5 million investment will be primarily related to building the international team and required infrastructure. Our guidance already includes this required investment, and Paul will break down the impact for you by quarter when he reviews the guidance in more detail. We are very excited about this new growth opportunity for our brand, and believe it is the logical next step in the progression of our business. As I mentioned earlier, we will be providing more details about our international expansion plans on Friday at our Investor Day in New York. With that, I would now like to turn the call over to Paul to review our fourth-quarter and fiscal-year results and outlook in more detail.

Thank you, Matt. Good morning, everyone. As Michael stated, our business continued the positive momentum over the first nine months of the year, as solid sales growth, gross margin expansion, and SG&A leverage grow at double-digit increase in fourth-quarter and full-year earnings. I'll begin by reviewing the details of our fourth-quarter and full-year results and then provide our outlook for the first-quarter and full-year 2012. For the fourth quarter, net sales increased to approximately $51.7 million, or 8%, to $673.2 million, as compared to $621.5 million for the fourth quarter of 2010. Comparable sales increased 5% for the quarter, following a 12% increase last year, and our e-commerce sales grew 39%. Despite higher product costs, gross margin increased $23.6 million to $250.3 million, or approximately 37.2% of net sales, as compared to $226.8 million, or 36.5% of net sales in last year's fourth quarter. This represents a gross margin increase of 70 basis point, which included 10 basis points of merchandise margin expansion and 60 basis points of buying and occupancy leverage.

Selling, general, and administrative expenses totaled $141.6 million, or 21% of net sales, and included $400,000 in non-core operating costs related to the secondary offering completed in December of 2011. This compares to $135.9 million, or 21.9% of net sales in last year's fourth quarter, which also included $400,000 of nonoperating costs related to the secondary offering completed in December 2010. We achieved a 90 basis point reduction in SG&A, even as we continued to invest in our business. Solid sales growth, expansion in gross margin, and leverage in SG&A fueled a 160 basis point expansion in our operating margin. Operating income increased 20.1% to $108.9 million, or 16.2% of net sales, from $90.7 million, or 14.6% of net sales, in the fourth quarter last year. Interest expense totaled $8 million and included $2.4 million loss on extinguishment of debt related to the $119.7 million prepayment of the OpCo term loan. This compares to interest expense of $7.8 million in the fourth quarter of 2010.

Our income tax expense was $40.8 million, representing an effective tax rate of 40.3%, compared to a tax expense of $34.5 million in the fourth quarter of 2010. Net income for the fourth quarter was $60.4 million, or $0.68 per diluted share. As outlined in the press release we issued today, this included $1.8 million, or $0.02 per diluted share, of non-core operating costs related to our secondary offering in the prepayment of the OpCo term loan in the fourth quarter of this year. This compares to net income in the fourth quarter of 2010 of $48.4 million, or $0.55 per diluted share. On an adjusted basis, excluding the non-core operating costs I just mentioned, earnings per diluted share were $0.70, compared to adjusted EPS of $0.55 in the fourth quarter of 2010, a 27% increase. On a full-year basis for 2011, net sales increased 9% to $2.1 billion. Comparable sales grew 6% following a 10% increase in 2010. Operating income increased 36% to $270.9 million, or 13.1% of net sales, compared to $199.3 million, or 10.5% of net sales in 2010. Our effective tax rate was 40.3%, compared to an effective tax rate of 10.1% in 2010. This increase in our tax rate was due to our change to a Corporation as a result of our initial public offering completed in the second quarter of 2010.

On a GAAP basis, net income was $140.7 million, or $1.58 per diluted share that included $0.08 in non-core operating costs associated with the secondary offerings completed in April and December of this year, and a loss on extinguishment of debt related to the repurchases of senior notes, amendment of the OpCo revolving credit facility, and the prepayment of the OpCo term loan. Net income adjusted to exclude these items totaled $147.1 million, or $1.66 per diluted share. This compares to net income of $127.4 million, or $1.48 per diluted share in 2010, which included $0.31 of non-core operating expenses. These expenses were more than offset by a $0.37 per diluted share one-time tax benefit recognized in conjunction with our conversion to a Corporation. On an adjusted basis, net income in 2010 was $121.8 million, or $1.42 per diluted share.

Turning to the balance sheet, we are very pleased with the strength of our balance sheet as we come out of 2011. We ended the fourth quarter with cash and cash equivalents of $152.4 million, compared to $187.8 million at the end of the fourth quarter last year. This reflects the repurchase of $49.2 million in senior notes and the $119.7 million prepayment of the OpCo term loan. Total debt declined by $168.9 million to $198.5 million from $367.4 million at the end of the fourth quarter last year. At quarter end, no borrowings were outstanding under our revolving credit facility. For 2011, capital expenditures totaled $77.2 million, compared to $54.8 million for 2010. Quarter-end inventory rose 12.8% to $209 million, compared to $185.2 million at the end of the fourth quarter last year. This increase versus our sales growth rate is to fund new growth categories, such as shoes, watches, and personal care, as well as to ensure we provide proper funding for our rapidly growing e-commerce business. Inventory per square foot increased 7.4% compared to the fourth quarter of fiscal 2010. As you know, we have a very disciplined approach to inventory management. We are very comfortable with the composition and quality of our inventory and believe we are very well positioned with new and exciting product for the spring season. Now, I'd like to turn to our guidance.

We remain confident in our ability to achieve strong results in 2012, as reflected in our guidance. For the first quarter, we expect comparable sales to increase in the mid-single digit range, which compares to a comparable sales increase of 8% in the first quarter of last year. Our effective tax rate is expected to be approximately 40% for the first quarter of 2012. Net income is expected to be in the range of $41 million to $44 million, or $0.46 to $0.49 per diluted share on 89.2 million weighted average shares outstanding. This compares to an adjusted net income of $37.5 million, or $0.42 per diluted share, for the first quarter of last year. Our first-quarter guidance includes incremental pretax costs of approximately $1 million related to our international expansion plans and an acceleration in stock-based compensation expense driven by our intended conversion to performance-based share grants for our senior leadership team.

As many of you are aware, the fiscal year ends February 2, 2013, contains a 53rd week. This 53rd week is included in our fourth quarter and reflected in our guidance. We estimate that the 53rd week will represent approximately $32 million to $35 million in incremental revenue and incremental diluted earnings per share of approximately $0.04 to $0.05. For the full-year 2012, we currently expect comparable sales to increase in the mid-single digit range. This compares to a comparable sales increase of 6% in 2011. We expect our effective tax rate to be between 39.9% and 40.1%. Net income is currently estimated in the range of approximately $164 million to $176 million, or $1.84 to $1.97 per diluted share on 89.5 million weighted average shares outstanding. This compares to adjusted net income of $147.1 million, or $1.66 per diluted share last year.

In addition, included in our guidance, all on a pre-tax basis, is approximately $5 million of incremental expenses associated with our international expansion; $8 million of incremental pre-opening expenses associated with the planned opening of 2 flagship locations; and $2.5 million related to an acceleration in stock-based compensation expense, driven by our intended conversion to performance-based share grants for our senior leadership team. For those of you doing your modeling, it's important to note that these investments will impact the calendarization of your EPS expectations for 2012. We expect investments related to our international expansion, flagship locations, and stock-based compensation to approximate $4 million in Q2, $8 million in Q3, and $2 million in Q4, all on a pretax basis.

In the second and third quarters, approximately two-thirds of these expenses impact gross margin with the rest impacting SG&A. In the fourth quarter, the impact from these investments should generate a nominal benefit in gross margin dollars, offset by an unfavorable impact to SG&A. And remember, in the third quarter of 2011, we experienced greater than expected SG&A leverage from a shift of marketing dollars into Q4. We expect this to normalize this Q3. We are pleased to provide guidance that includes earnings-per-share growth of approximately 14% on an adjusted basis at the midpoint of our range, even as we incur approximately $15 million in incremental expenses to support our long-term growth plans.

Turning to our store expansion plans, for the first quarter of fiscal 2012, we expect to open 5 stores in the United States and close 7 stores. For the full year, as Michael mentioned, we expect to open approximately 30 new stores, including 20 to 23 in the United States and 7 to 10 in Canada. We plan to close 12 existing locations, and we expect to end the year with 627 stores and approximately 5.5 million gross square feet in operation. Capital expenditures through the year are expected to be in the range of $120 million to $125 million, which is greater than last year. The additional capital is driven by more new store openings than last year, including 2 flagship locations; renovating more than 20 existing stores in our new design format; and IT costs related to a new platform for the front end of our e-commerce business, an upgraded allocation system; and a new general ledger system to support our international expansion. And finally, we expect to generate positive free cash flow. And with that, I will turn the call back over to Michael for some closing remarks.

Thanks, Paul. In conclusion, I want to thank our entire team for their hard work and contribution to our success this past year. We are very pleased to have shared with you our strong results from 2011, continuing our positive performance since we became a public Company in 2010. I'm equally excited about our business prospects and growth opportunities as we begin 2011. Now I'd like to turn the call over to the operator so that we can begin the Q&A portion of the call.

(Operator Instructions) Our first question comes from the line of Neely Tamminga from Piper Jaffray.

Congratulations on just a fantastic year. Michael, real quick on color, does it help or hurt when others catch up to this trend, and are there lags into summer and fall? And then for Matt, I would really love to know a little bit more about International. I'm sure we are going to get more later this week, but can you pretest in markets with international websites or precede some of the non-apparel categories like fragrance into travel retail? Just wondering a little bit more about the Express way of testing into new markets. Thanks.

Neely, when you ask about color, are you asking about color generally, or specifically colored jeans?

I'm speaking color, specifically, and then colored jeans. Thanks, Michael.

Okay. Express has always stood for color, so that when we get to fashion cycles like we're in right now, this really plays to our strength. Color has been important all over, always in tops, but now, suddenly, we are doing very well coloring bottoms.

Clearly, jeans are the big, big runner in the colored bottoms, but we are selling color in other bottoms as you see in the store, in our dressier bottoms, in Editor pants, et. cetera. But we don't believe that colored jeans are anyplace near their peak, and we also don't believe that they're exclusively a summer thing. We are very bullish about color.

Thank you, Michael.

Neely, on the testing question, yes. We obviously do have a rigorous testing process that we implement for the Business, which is key to our success. What I will tell you is that you look at the fashion content in our Business and the fit in our Business, we believe it plays very well to the international customer. At this point in time, we anticipate that we will continue the testing regime we have currently in the United States.

Because we get inspiration from several international sources, we certainly believe that we have the right fashion content. When you look at our stores in Dubai, for example, that has a huge international population, the things that test well in the United States also resonate very well with those customers, as well as with our stores [Aventur] which has a very large Latin America tourist population coming into those stores, and our Puerto Rico stores, as well. We think we are well positioned with our current testing strategy to expand that internationally, but we don't plan on doing additional testing in those markets.

Thank you. Our next question comes from the line of Michelle Tan of Goldman Sachs.

Hi, thanks. This is Tiffany on for Michelle this morning. Our first question, we were wondering if you could give us a sense of how cost should play out for this year, and particularly the magnitude of input cost to clients, if any, you're expecting to see in the back half of 2012?-

Could you repeat the first part of the question.

We are hoping to get a better sense of how costs should play out for this year, particularly the magnitude of input cost to clients that you guys are expecting to realize in the back half of '12?

In the first half of the year, we are expecting a mid-single digit increase in input cost. As we enter the back half of the year, we expect to see flat to maybe a modest decline in costs, in input costs. But obviously, right now we haven't really placed orders that far out, so it's a little too early to call. But that's what we are hoping for in the back half of the year.

Okay, thanks. And then just a follow-on. We are wondering if you could provide some color on how you guys are thinking about 2012 any differently with respect to building the brand, and particularly what opportunities you are looking to capitalize on to drive traffic?

Yes, so there are a couple of major initiatives we have out there to help continue to build the brand. Certainly, all of the marketing investments that we have been making we will continue to make most of those investments in 2012. For the 48-page catalog, we have certainly taken a look at that. We believe it is effective, but we are optimizing how that circulation works, mixing it with some 16-page and 3-page catalogs -- 3-page trifolds, as well, to optimize the marketing spend. Certain segments of the customer database react more positively to the 48-page catalog, but we are going to continue to use that tool.

But the two big things, new news, Express Next, which is our new loyalty program, which we piloted in 91 stores this past fall, we are rolling out for the entire chain at the end of Q1. And we think it's going to take a little bit of time for that to build momentum as we acquire new customers with this loyalty program. But because it can now capture 100% of the customer population versus just 25% of the population, we certainly believe that's a big opportunity.

And the other thing really is these two flagship stores that we are opening, one in San Francisco, one in New York. We think that can really elevate the brand significantly. And the final item I talked about is the new store design.

All of the new stores, as well as remodels that we are going to be doing this year will be in the new store design. And that really starts in mid spring because of the lead times on the ordering. But all those new stores after mid spring will be in our new store design. We certainly believe, as we've talked in the past, that that will help elevate our brand, as well.

Thank you. Our next question is from Richard Jaffe of Stifel Nicolaus.

Just a couple follow-on questions. If you could provide some more detail on the strength of the men's business versus women's, and then how you see the unfolding of the footwear business, the growth of the category, particularly on women's and is there a chance for men's?

So Richard, we obviously don't give out, as we've talked about in the past, specific details, men's and women's, but what I can tell you is both businesses are performing very well, and have been strong for us. Similar to the prior several quarters, we have actually seen increases in almost every category on both the men's and women's sides of the Business. We have been very pleased with a balanced performance across both genders.

From a shoe standpoint, we are continuing to invest behind shoes, and believe that is a big opportunity for us on the women's side of the business. We are playing with the men's side of the business, but don't think that's a big opportunity at this point in time.

However, one of the things on the accessory side that we really are focusing on is men's watches. We have rolled that out to 50 stores in the fall, and we are going to roll that out to the majority of the stores for fiscal 2012, starting in the back half of the year. And certainly that has a very high productivity and incremental margin dollars attached to it.

What I would add here, Richard, in both men's and women's, dressier clothing is really, really leading the way. So, that is a real commonality, and I think a secular trend in our industry and our Business.

Thank you. Our next question comes from the line of Kimberly Greenberger of Morgan Stanley.

This is Laura Ross filling in for Kimberly. Congratulations on another strong quarter. I was wondering if you could give us a little bit more color on how you are able to remain relatively unscathed with the super promotional environment in the mall that we saw in the fourth quarter? Could you elaborate a little but more on that? I know you said you sold a lot more spin merchandise.

It was hard to hear your question. I think your question was how did we remain relatively unscathed, given the heavy promotional environment in the fourth quarter.

Yes, exactly.

Depends on how you define unscathed, right? Our results certainly would indicate that we were unscathed, but at this point in time, we look at this environment as being the norm. We don't look forward to any light at the end of this tunnel. This is the tunnel that we are operating in. So, that we plan every season right now for this environment.

I keep saying it can't get more promotional. Maybe can't, maybe can. It doesn't really much matter in our planning at this point, Kimberly. What we are saying is that this is the environment in which we are operating, and these are the things we've got to do to remain profitable and to grow within this environment.

So, the promotional levels that you saw were not really beyond what you had expected.

Not beyond what we expected, not beyond what we expected, but beyond what we hoped. We did very fine in fourth quarter, but to tell you the truth, had it not been quite that promotional, we wouldn't -- we would have done better and we would have been prouder. But we planned for that level of promotion.

Thanks very much. I had one quick follow-up question. I was wondering if you could provide any color on how you have seen the first quarter so far?

We don't provide details on a monthly basis on the first quarter. What we can tell you is that, obviously the guidance that we provided today includes results-to- date for the quarter.

Thank you. Our next question is from Roxanne Meyer of UBS.

Couple of questions. One, I'm just wondering how many stores at this point are in the new format, and are you able to quantify the lifts that you are seeing from those?

We have two stores right now that are in the new format, and they are doing quite well. We don't disclose the lift that we get from them, but I think our decision, our early decision to put the stores for 2012 both new and remodeled in that new format, was an indication that we expect to see -- that we are seeing from them an expect to see from the new stores a very good return on our investment.

Roxanne, the reason we only have two stores to date is simply because of the lead times associated with the fixturing in the new store. That is why we will start to roll out this new store design with remodels in new stores beginning in mid spring.

Okay, great. And then you are opening your first two flagships inflation is in the US. What your thinking is the longer-term strategy there? Do think that these are going to be the only two, or do you look for a handful of these US flagships over the next few years?

We are not embarking on a large flagship strategy within the United States. What we want to do is have a couple of flagship stores in the US to really elevate the brand, and these are obviously in high tourist destinations from an international standpoint, both San Francisco and New York. In New York, particularly, that really anchors us from an international expansion perspective. What we would like to do as we go international in markets, large markets where we would like Company-owned stores, the plan is to have some of those markets anchored with a flagship store.

But we are not looking at a sole flagship opportunity. We're looking at one or two flagship stores in a market to anchor that market, and do mall-based stores, similar to what we do in the US.

Okay, great. And just last on accessories, obviously, it's been an area of growth between shoes and fragrance. What percent of sales are accessories now, and how big do you think that penetration can grow over time?

In terms of the total business, they're 9% right now, which is up from about 7% a couple of years ago, but not quite at the more than 10% that we expected to be.

Thank you. Our next question comes from the line of Janet Kloppenburg of JJK Research.

I got on little late. I know you talked about opening more stores in Canada next year. I'm wondering if you are happy with the productivity of those stores and if your pro forma on the stores is being met. I'm also wondering, Michael, if you could talk about the colored denim and whether or not -- I know it's highly successful, but I am wondering if there's any threat that that business could jeopardize the core Denim business.

And I'm also hearing a lot from competitors about a concentration on the wear-to-work category. Not so much suiting, but more of a relaxed, but fashionable wear-to-work outfitting. And I'm wondering if you are feeling any of that pressure in your Business? Thanks so much.

Janet, I will start with the Canadian question. So in case you missed it, we said in 2012 and we plan to open 7 to 10 additional stores in Canada. And we're actually very pleased with how the brand has been received in the Canadian marketplace and by the Canadian consumer.

The one thing that we continue to focus on is building our customer marketing database up there, which as you know, drives an awful lot of volume for us in the United States. It is really how we leverage all of our CRM activity. We think there is a really big upside up there as we continue to build the database. But we continue to be on the aggressive path of opening stores up there. As I said, we are planning 7 to 10 this year.

Now, in terms of the colored denim, your question is whether I think the colored denim is going to affect core Denim? Was that the question?

Yes that's the question.

Well, based on current selling, I would tell you absolutely not. I think that we are picking up dramatically in core denim, as well as doing the big business in colored denim. And the pickup in core is by and largely related to new fabrics in core denim, but still core blue denim.

In terms of colored denim, I don't think -- clearly they are jeans, clearly they are in the denim department, but what I see those as being is being really what casual pants used to be. We haven't had a drawstring pant in years. We haven't had -- except for three pieces of a tight cargo, we would haven't had a major Cargo business. We have not had a Casual Pant business, and I think that the colored denim could be feeding to that niche as well. However it comes, it comes, but we are very, very, very bullish about denim going forward.

Okay, and what about the wear-to-work category, Michael?

The wear-to-work category continues to advance largely on the parts of the Business that were not the strongest for us. We were very strong in pants. We are now becoming quite strong in skirts. And by the way, the important piece to me is that we are gaining credibility in jackets at a much higher price point.

So, between the jackets and the dresses, and now all of the bottoms as opposed to one bottom, I think that we are really, really getting that business, and we're bullish about it. In addition to that, our woven tops, our blouses have been -- which are wear-to-work, have been sensational. I think that's the part of the Business that is really moving us forward.

And that is what's driving the Men's business as well, the professional side? Or is it --

Oh yes, absolutely. Our Suit business is excellent. Our Dress Shirt business is excellent, and growing beyond what we had expected.

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

Congrats on a great quarter. Overall, inventory looked pretty healthy by the numbers. Could you comment a little bit on the quality of the inventory headed into the spring? And maybe particularly comment on any levels of clearance that you can highlight relative to last year, maybe as it pertains to cold weather -- colder weather apparel?

And then my follow-up question has to do with store closures. Just wanted to know if you could comment on the type of stores that you are closing? Are you still finding some of the dual gender stores to close, or are these just underperforming stores? And how do think that might impact margins going forward?

I will start with inventory first. And really, as I said in my prepared comments, we are really comfortable with the level in the -- the quality of the inventory that we have on hand right now. It's really driven by having some new stores and making sure that we are supporting the e-commerce business that has been so robust as I talked about, it improved 39% in 2011. As well, we are supporting our growth initiatives, which Michael talked about in terms of shoes and watches and personal care. So, we feel good about where we stand right now from an inventory perspective.

On the store closures, you hit on one thing, some of the store closures are being driven by our conversion to the dual gender store. And then we also have a chunk of our store closures that are being driven by dislocation by mall owners who are choosing to renovate their entire mall. That's also a chunk of the store closures during this coming year.

The good news, Travis, is we really don't have underperforming stores in the fleet right now. There's a handful -- less than a small handful of stores that are losing money right now, so that's really not a problem for us.

Thank you. Our next question comes the line of William Reuter, Banc of America Merrill Lynch.

Hello, this is Spencer in for Bill. I just had a couple quick ones. I was wondering if you can make any comments regarding how you're thinking about your capital structure, and also how you are thinking about uses of free cash flow in 2012?

As you know, we been pretty vocal in saying that our cash flow would be used to first pay down debt, and so we have done that. And as you saw in last year, we paid $49 million -- or bought back $49 million worth of senior notes. And then on top of that, at the year, we paid down close to $120 million of our term loans.

We will continue to opportunistically pay down debt when those opportunities arise. The other thing is we have this -- as we've talked about, plenty of opportunities to reinvest back in the business. So when you look ahead, that certainly is our top priority of ours to reinvest in the opportunities to grow our Business. And then I think lastly, when the time is appropriate, we work with the Board and think about policies or practices around share repurchase and dividends.

Our next question comes from the line of John Morris of BMO Capital Markets.

Two quick ones. One is, maybe it's a little bit early, but you guys are so good at testing ahead of time, I'm wondering, Michael, if you guys have been testing fall at this point and/or holiday? And what are your reads there? And my other question would be with respect to international, 2014 breakeven, do you feel like that is conservative? Or maybe I should ask is there a chance it could happen even sooner than that? Thanks.

Rather than sounding evasive, let me just say that yes, we do test, we are testing fall. And yes we are testing holiday, but until things become obvious on our floor, we certainly don't tip our hand.

Are you happy with what you have seen Michael?

Certainly.

Of course. How about on International guys?

Yes, on the international side, that's our best estimate that we have today that we are going to breakeven by 2014. There is obviously, as we go into market, particularly with Company-owned stores, there is pre-rent expense associated with some of those markets, particularly when we are putting in flagship stores.

But we do think relatively quickly with those investments, we will be able to breakeven and then start to generate significant profit after '14. We are really excited about this opportunity. We have a very detailed plan, and we'll talk a little but more about that on Friday.

John, I called you Todd. I know you're John.

Thank you. Our next question comes from the line of Marni Schapiro from The Retail Tracker.

Congratulations. As you all know, I think the stores look fantastic. So, I want to ask one big question for you. You have a lot going on in the stores, in a good way, between shoes and fragrance, active, watches, intimates.

And I think all of these segments are relevant to your customer, and I think they all look very good, especially some of the little bags right now that are in there. I guess, when I think about your box and as you renovate going forward, are you seeing in the renovations that any of these segments are really outperforming in the new box? And will you distort them? And over time how big, in the aggregate, should those Businesses be? Should they be 20% all together, or should they be bigger than that over time?

I will tell you the most increases in the new box are in the accessory categories, because we have intentionally built an accessory room, rather than just drop fixtures in the store. The other part of the new store that is really, really much better is the put-together piece. Because the new store allows us really to present looks in a much clearer way. Yes, both are better, but clearly, the big plus is in the accessories and the biggest plus excuse me, and that makes us happy because accessories, as they grow, are a much higher margin Business and will add appreciably to the profitability in our view.

How big could the businesses in the average (inaudible) become? Because you have a lots between even intimates and shoes. When I pull it all together, is this 20% of the store altogether over time, or could it even be bigger than that over time?

We don't have an exact number out their right now. 20% is probably a little heavy. The good news is that our base business is growing relatively rapidly, as well. When you look at the penetration, while growing, it's also competing with the rest of the store, which is also growing. Certainly, we would like to see that 13% to 15%, at least over the next few years.

Thank you. Our next question comes from the line of Daniel McCoy of Brean Murray.

I was just wondering, have you guys done any adjustments to the supply chain operation?

Any adjustments to the supply chain operation? For the North American business we have not made a lot of adjustments. Obviously, from an international perspective, we are preparing for some additional changes to the supply chain, as we did with Canada. We started off with Alshaya in the Middle East and understood what we needed to do to change the supply chain to accommodate that Business.

Going into Canada with Company-owned stores, that gave us a view of what we needed to adjust there. So we have a very good idea and a solid plan in place to that continue to evolve our supply chain to meet the needs of our international expansion opportunities.

Okay, great. And have you guys seen any resistance to AUR increases?

No, we really haven't. We don't get into specifics on the sales metrics other than directional views. Our Business -- we have not recently taken a lot of price increases. A lot of those were taken in the first half and in the back half of 2011. We are lapping some of those at this point. There are a few categories where we have taken some traditional pricing, but obviously with the positive comp, we have felt good about where we are positioned.

Thank you. There are no further questions at this time. I would like to turn the floor back over to management for closing comments.

Thanks again for joining us. We would like to see many of you at our investor day this Friday in New York. Thanks.