Express Inc (EXPR) 2012 Q3 法說會逐字稿

Greetings, and welcome to the Express Incorporated third quarter fiscal 2012 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 am sure you're all familiar with. The statements contained in this conference call which are not historical facts may be deemed to constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual future results may differ materially from those suggested in such statements due to a number of risks and uncertainties, all of which are described in the Company's filings with the SEC, which includes today's press release.

In addition, during the call we will make reference to adjusted net income and adjusted earnings per diluted share, which are non-GAAP measures. Reconciliations of these non-GAAP measures to 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 and CEO of Express.

Thank you, Allison, and good morning, everyone. Let me start by expressing how pleased I am to introduce two newcomers to our call today -- David Kornberg, who we promoted to President in October, and Marisa Jacobs, who joined us recently as Vice President of Investor Relations. David and Marisa are with me today in Columbus, along with Matt Moellering, our EVP and Chief Operating Officer, and Paul Dascoli, our SVP and Chief Financial Officer.

Many of you met David during our Investor Day in March. Prior to being promoted to President, David held the position of Executive Vice President of Men's Merchandise and Design. During his tenure, the business experienced strong and sustained growth, which we attribute to his deep understanding of our customer, his strong vision and leadership, as well as his disciplined and effective execution of our go-to-market strategy. This is best evidenced by the long-term growth of our men's sales and margin dollars, which rose 56% and 92%, respectively, from 2005 to 2011. I am very excited to have all merchandising and design functions led by David. I believe this move will make us a stronger Company.

With David, I will remain deeply involved in the development, design, and merchandising of our product. The marketing, store operations, and human resource functions of our business will continue to report directly to me, along with David, Matt, Paul, and the rest of the Express executive team. I remain very excited about our future.

Marisa Jacobs will join efforts with Allison Malkin and our partners at ICR. Marisa joins Express following a 16-year career in investor relations, most recently with Covanta Energy, a leader in the waste energy space. Marisa also led investor relations and corporate communications for Claire's Stores, an international accessory and fashion jewelry retailer. I know she is looking forward to working with each of you as we further develop our IR function.

I will begin our call today with an overview of our third quarter, discussing the challenges we faced, and the steps we have taken to improve our performance. Then David will share some thoughts and initial impressions after his first few days in his new role. Following David, Paul will review our financial results and outlook in more detail. After my closing remarks, we will conduct a question-and-answer session.

While our third-quarter performance was in line with our revised guidance, no matter how we look at it, it was disappointing. Sales fell 4%, comps turned negative, and margins were compressed. In times like these, the important thing is to step back and evaluate performance under a harshly objective and critical light. This has been the focus of our entire executive team in recent months. As we discussed with you in early October, we achieved our expectation in the month of August, as we began the third quarter. As we entered September, we saw a dramatic drop in traffic, driven by the underperformance of our direct marketing piece, and this drop in traffic continued throughout the balance of the quarter. Decreased traffic, in conjunction with an increased promotional environment, led to our first quarter of negative comps following 12 consecutive quarters of positive comps.

Despite the challenges, there were several positives in the quarter. First, we successfully re-assorted our fourth-quarter women's sweater receipts based on early reads and testing. Our men's business remains solid. Our e-commerce business rose double digits. Our new stores performed well. We made exciting progress on the international side of our business, and we maintained a strong balance sheet.

Let me share with you the product, pricing, and marketing strategies that we believe position our women's business for positive long-term growth. First, product -- it all starts with product. We are bringing back the consistent performance of our product offerings by improving execution of our go-to-market strategy, which has been the cornerstone of our growth over the last five years. I am confident that in this new role, David will carry out this important objective successfully. Key to this effort is reading and reacting to our tests accurately, and identifying new and relative trends early, so that we can capitalize on them.

At the same time, we see opportunity to drive incremental sales by introducing a deeper assortment of fashion essentials at sharp prices. This strategy will allow us to recapture consumer reach, which we had given up in increased shopping visits by existing customers. Our customers are seeing the initial impact of this strategy in our holiday assortment, and we'll see a greater impact this spring. We will continue to offer compelling fashion across our four end uses of wear to work, dressy, casual, and jeans wear. This allows us to meet most of our customers' lifestyle needs, and gives us flexibility to emphasize up-trending categories as warranted. We will also continue to differentiate from mall peers with newness ahead of season, using our testing strategy to both gain insight into the coming season and to help offset sales of lower-margin goods and season clearance merchandise with full-margin goods.

Second, would be pricing. We're ensuring our value pricing message is clear to our customers. Our view of recent customer feedback indicates we have not effectively communicated our value proposition. We realized this with our September and October direct mailers, which delivered significantly fewer sales than last year, as we did not effectively show the out-the-door prices on many key items included in our promotions. Contrast this with the performance of the same items on our website, where the final price was clear, and sales were better.

In addition, our move away from some opening price points as we exited commodity items caused a void, which we have addressed with opening price point fashion essentials. It is important to remember that we're delivering product of a quality that is substantially higher than some of our cheaper competition, and this has to be communicated.

Going forward, we have simplified our pricing message with clearer, key price points and promotions that are easier to understand, and don't always require multiple purchases in one category. An example of this is a very successful $49.90 denim promotion that we ran in August, and are currently repeating. In August, as you recall, we offered this price when mall peers were selling denim at dramatically lower prices. And our strength with this promotion demonstrates what I have said many times before -- we don't have to be the least expensive, and that is not our business model. The value we provide comes from offering compelling fashion and quality at an appropriate price point. Let me stress that our price clarification does not mean we are planning for lower margins. Out-the-door pricing is factored in when calculating margins for these products.

Third, marketing. Our marketing plays a key role in communicating our image as a top fashion destination. It also has to clearly communicate our value proposition to our customers. Our December direct-mail catalog shows out-the-door prices on many key items included in our promotions. We believe this generates a call to action that, when combined with our fashion shows, TV advertising, outreach to our Express NEXT customers, and other marketing efforts, will allow us to drive home the message that Express is the key destination for fashion and value, and allow us to improve customer traffic.

As I previously mentioned, there were several positives in the quarter. Even though it was impacted by the overall decline in traffic, our men's business remains strong and achieved balanced growth across our assortment, with notable strength in casual pants, jeans, shirts, and suits. In addition, our men's accessories businesses were all significantly up. In our women's businesses, we saw strength in some categories, including woven tops, dresses, and casual pants. As a result, we have funded each of these categories with incremental inventory during the fourth quarter.

Looking at some other aspects of the business, our e-commerce sales roles 21% in the quarter, following a 41% increase in the third quarter last year. This continues to remain a great opportunity for growth for our Company. We were very excited about sales over Thanksgiving weekend, including Cyber Monday, when we saw strong double-digit increases in sales.

In regard to our stores, during the quarter we opened eight stores constructed in our new design format, while closing one existing location. Turning to our international expansion, during the quarter we opened four new stores with our franchisee, Alshaya, in the Middle East. Existing stores there continue to show positive momentum with year-to-date double-digit comp-store increases. We are very excited that our new franchisees in Latin America plan to open three stores during the fourth quarter, one each in Mexico City, Panama City, and Lima, Peru. In fact, the store in Mexico City is already open, and is greatly surpassing our original expectations. As a reminder, these geographies were selected given our strength with the Hispanic demographic in the US, and the proven track record of our franchisees.

Franchise opportunities represent a great way for us to meaningfully grow our brand presence with lower risk, and with trusted and experienced partners. We are ahead of our original timeline for franchise operations, and are aggressively pursuing additional opportunities. We continue to believe our brand, which targets the 20- to 30-year-old demographic across our four end uses, makes us uniquely suited for international expansion. As we pursue international growth, we will maintain that disciplined approach, working together with experienced and proven operators. We remain optimistic about opening Company-owned locations outside the US over time that fit our demographic and fashion profile. We have focused on securing high-profile, high-traffic locations to give us the greatest chance of success.

Our two flagship stores in New York's Times Square and on Union Square San Francisco remained on target to open ahead of holiday 2013. As I have mentioned previously, the two flagship locations are perfectly situated in premier tourist areas, which we believe will serve as a gateway for international expansion. We have entered into both leases applying the same investment discipline that is required for any other new store.

The holiday season is already underway, and we are pleased with our initial results that included record sales and record gross profit dollars over Black Friday week and Cyber Monday. We were delighted to see the biggest of the 10 most important days of the quarter begin so positively. That said, we will remain cautious with our guidance, given that it's still early in the holiday season.

In summary, we believe we have taken appropriate actions to drive positive change in both our top- and bottom-line results. We have revitalized our merchandising and marketing assortment, and expect to make progress sequentially by quarter as our product, pricing, and marketing efforts get further underway.

Now, let me turn over the call to David, who will highlight our merchandising initiatives in more detail.

Thank you, Michael. Good morning, everyone. I am delighted to speak to you on my first call as President. As Michael noted, I have been with Express for more than a decade, leading the men's merchandising and design teams for more than five years. Prior to joining Express, I worked in business development for Disney Stores, and also spent 10 years with Marks & Spencer in both stores and merchandising in men's and women's roles.

I am excited to be President of Express, and see a tremendous amount of potential both on the women's and men's sides of the business. Michael has discussed our third-quarter performance, so I won't repeat what he said, except to note that we are keenly focused on returning our business to a state of growth, and delivering the return to shareholders that you expect and deserve.

I will share some of my initial thoughts, particularly about the women's business, from the first few weeks in my new role. Firstly, we have a talented team in both the merchandising and design sides of our women's business. My time and effort will be spent ensuring a refocus of energy, and reinforcing disciplines across the Company. In the short term, my goal is to optimize sales and margins. Our assortment is in place, and we will balance promotional strategy and inventory levels to ensure that we maximize both sales and margins.

As well, we are reading our spring test results, and chasing into the categories that will make a difference for us as we enter the spring season such as knits and woven shirts. One of the things that has worked so well for us on the men's side of the business is a strict adherence to the go-to-market strategy, and the successful indexing of our test results. One of my first objectives is to consistently execute our strategy, and share relevant learnings across both sides of the business.

In the longer term, my goal for the women's business is to drive the idea of a balanced assortment further into the merchandising strategy, ensuring that we are clear about our good, better, and best price points, while also maintaining an open-to-buy flexibility that enables us to seize opportunities quickly. We will offer the fashion essentials that keep her coming back in the door because she can count on the right price value equation, and she knows she will find the right assortment, color, and quality. We will focus on developing bigger volume key items at the same time as we are developing a breadth of fashion interest within the assortment. And we will also focus on an earlier recognition of trends, and understanding of where items are on the fashion lifecycle curve.

The fundamentals for a strong and renewed women's business are in place. Our go-to-market strategy is the right strategy. My focus will be to reinforce the discipline that is needed to make the process work most successfully. I look forward to updating you along the way. When we speak three, six, and nine months from now, I expect we will have real progress to report.

Before I turn the call over to Paul, let me comment briefly on the men's business. We had a strong quarter in the men's business. We saw particular strength in our casual pants and jeans categories, where he responded very well to our color assortment, as well as new washes in indigo.

Suits were another area where we continue to grow dramatically. We have worked very hard in this area to offer a high-quality, tailored product in quality fabric that he knows he looks good in, and feels good in. It's paying off for us. Along with the suits, he continues to come back for the (inaudible) shirt and ties. We have aggressive growth plans for this side of the business, and we are excited about what lies ahead for us.

I appreciate being here with you today, and hope you can tell how excited I am to be leading both sides of our business. We believe that we have real opportunities here, and I assure you that we can and will strengthen the disciplines that have made our Company so successful.

I would now like to turn the call over to Paul to discuss our financial results for the quarter, and our outlook for the balance of the year. Thank you.

Thank you, David. Good morning, everyone. I will begin by reviewing the details of our third-quarter results, and our updated outlook for the fourth quarter and full-year 2012. For the third quarter, net sales decreased approximately $18.3 million or 4% to $468.5 million, as compared to $486.8 million for the third quarter of 2011. Comparable sales decreased 5% for the quarter, following a 5% increase last year. Our e-commerce sales grew 21%, and represented 11.8% of our business, compared to 9.4% in 2011.

Gross margin was 32.3% of net sales, compared to the prior year rate of 36.2%. This decline was primarily driven by 240 basis points of buying and occupancy cost deleverage given the decline in our sales, as well as $3.1 million in incremental pre-opening rent expense associated with our two planned US flagship stores. In addition, merchandise margin declined 150 basis points, as we incurred higher promotional activity to maintain our inventory discipline.

We continue to be diligent in managing our overall expense structure. Selling, general, and administrative expenses totaled $117.7 million, or 25.1% of net sales. This compares to $115.1 million or 23.6% of net sales in last year's third quarter. This increase as a percent of sales mainly reflects the deleverage of fixed costs due to the lower sales in the quarter, and a shift in marketing expense into the third quarter from the second quarter last year.

Operating income of $34.4 million or 7.3% of net sales was down 43% from $60.9 million or 12.5% of net sales in the third quarter last year. Interest expense totaled $4.8 million, which compares to interest expense of $6.3 million in the third quarter of 2011. Income tax expense was $12.3 million, representing an effective tax rate of 41.4%, compared to $22 million at an effective tax rate of 40.3% in the third quarter of 2011.

Net income for the third quarter was $17.4 million or $0.20 per diluted share on 86.2 million diluted weighted average shares outstanding. This compares to net income for the third quarter of 2011 of $32.7 million or $0.37 per diluted share on 88.9 million diluted weighted average shares outstanding.

Turning to the balance sheet, we continue to maintain a strong financial position. We ended the third quarter with cash and cash equivalents of $102.4 million, compared to $145 million at the end of the third quarter last year. During the quarter, we invested $15 million to repurchase 1.3 million shares of our common stock, bringing our total investment to $65.1 million for approximately 44 million shares repurchased since we began our share repurchase program in May. At quarter end, we had approximately $35 million available under our $100 million share repurchase authorization.

We maintained strict discipline over inventory management during the quarter. Inventory per square foot decreased approximately 1.3% compared to the third quarter of fiscal 2011. Overall inventory rose 3% to $286.9 million, compared to $278.5 million at the end of the third quarter last year. This increase was in line with our expectations.

Total debt declined by $119.4 million, to $198.8 million from $318.2 million at the end of the third quarter last year. At quarter end, no borrowings were outstanding under our revolving credit facility. Year to date, capital expenditures were $73.4 million, compared to $55.9 million for the same period last year.

Now I'd like to turn to our guidance. Our outlook for the balance of the year factors in consumer sentiment, the current trends we have seen in our business, our Black Friday and Cyber Monday results, and the overall macroeconomic environment. For the fourth quarter, we expect comparable sales to decrease low-single digits, which compares to a comparable sales increase of 5% in the fourth quarter of last year.

We expect our effective tax rate to be approximately 40% in the fourth quarter of 2012. Net income is expected to be in the range of $53 million to $58 million, or $0.62 to $0.68 per diluted share on 85.2 million weighted average shares outstanding. This compares to net income of $60.4 million or $0.68 per diluted share for the fourth quarter of last year. Net income for the fourth-quarter 2011 adjusted for non-core operating costs was $62.1 million or $0.70 per diluted share.

For the full-year 2012, we currently expect comparable sales to decrease low-single digits. This compares to a comparable sales increase of 6% in 2011. We expect our effective tax rate to be between 39.9% and 40.2%. Net income is currently estimated at a range of approximately $128 million to $133 million, or $1.47 to $1.53 per diluted share on 87.2 million weighted average shares outstanding. This compares to adjusted net income of $147.1 million or $1.66 per diluted share last year.

Turning to our store expansion plans, for the fourth quarter we expect to open eight stores, including five stores in the United States and three in Canada. We also expect to close one location in the United States during the quarter. For the full year, we expect to open approximately 28 stores, including 23 in the United States and 5 in Canada. We plan to close 12 existing locations, and expect to end the year with 625 stores, and approximately 5.4 million gross square feet in operation.

Year to date, we have invested $1.9 million on our international expansion. The majority of this investment reflects our investment in people, systems, and infrastructure to launch this business. For 2012, this net investment is expected to be in the range of $2 million to $3 million versus our original expectation of $5 million. For 2012, we now expect capital expenditures to be in the range of $95 million to $100 million. This compares to our previous expectation in the range of $100 million to $105 million.

And with that, I'd like to turn the call back over to Michael for some closing remarks.

In conclusion, we have identified and are taking the actions necessary to return to consistent sales and earnings growth. We possess a strong brand, a talented team, a flexible business model, and strong balance sheet and cash flow that provide us with the tools to achieve our goals.

With that, I would like to turn the call over to the operator to conduct the question-and-answer portion of the call. Thank you.

(Operator Instructions)

Lorraine Hutchinson, Bank of America-Merrill Lynch.

Michael, it seems that in order to continue to charge slightly higher prices than other fashion competitors in the mall, you really have to communicate your quality message to the consumer. I know you've revamped the way you communicate pricing, but what are your plans for trying to get the message out there about the quality of your product?

I think we just have to be very, very consistent about shipping a great product, and when they talk about it and they see it, that reaffirms it. I think that's a long-term kind of a thing. But I do believe that customers -- and they tell us, Lorraine -- the customers that flee to buy a very inexpensive cotton knit top, come back to buy pants, jackets, good sweaters -- they come back to buy those things because they really understand the difference between a value price and a cheap price. They know what cheap clothes look like and we have to depend on that. We have to depend on the customer not wanting to look cheap.

If I could add to that, the price value equation is so, so important here. You look at our suit business, our men's suit business, the quality message is really, really coming across to our customer here. And it is, in terms of the price, it's not an opening price product, it's a higher-priced product, the suit product, and it is growing significantly.

Great. And then, given what a big part of December your spring sales are, can you give us some early reads on the product that you set so far?

We are quite happy with our early reads, but quite obviously I can't tell you what they are. We're not positioned yet and we've got to be ahead of the curve on our own information.

Thank you.

Betty Chen, Wedbush Securities.

Congratulations on great progress. My question is for David. I was wondering, I know you're still early in the position, but I was wondering if you can speak to a little bit in terms of the women's business and how you plan to employ the go-to-market strategy with more discipline? What had happened before? What can we expect to happen going forward and how you plan to leverage that with the clearer pricing strategy to really continue to rejuvenate traffic? Thank you.

Thanks, Betty, that's a good question. I think, obviously, it's early days. I've been in the job for about four weeks now -- five weeks. I think that, as I said, we've got a very, very talented team here in place, and I think that the greatest opportunity for us is reinforcing the execution of the go-to-market strategy. And that is what has worked extremely well on the men's side of the business. And I think we're starting to see some results from that. I think what we're doing early on is we're looking at some of the spring reads that we're getting. We've delivered quite a bit of the spring already and we're reacting to it, and obviously reassorting and putting our dollars into the right places of where we believe those opportunities lie. But the adherence to the go-to-market strategy, I think, is by far and away the biggest opportunity that lies in the women's business for us.

Just as a follow-up, David, in terms of the spring deliveries in the stores now, is it relatively with the same mix as we saw a year ago? Is it any deeper or shallower? Just curious on that.

Is it deeper or shallower? You're talking about in terms of what, depth of inventory?

Yes, exactly, for spring.

What item are you asking?

For spring.

(multiple speakers) Yes, the depth of inventory.

We have more spring out there than we had at this time last year. I think it's important to say that we're seeing some very, very good early reads, particularly in woven tops and also in some of the nets that we're responding to very, very quickly, and looking at the assortment and trying to build key items that can drive volume into the late first and second quarters.

I think it's interesting that some of the knits that are checking the best are those products that we would categorize as opening price point fashion. And it's something that we're not up against from last year and it's been really quite good.

Great. Thank you, and best of luck.

Neely Tamminga, Piper Jaffray.

Congratulations to David on his elevation.

Thank you.

So, David, just digging a little bit further into the opportunity on refining some of the go-to-market strategy on the women's side, kind of following up a little bit from Betty's question. If I were to think about the go-to-market strategy, which is, I'm sure, complex, but there's two key components -- there's the ideation and design side and then there's just the execution on the business intelligence. So, is it opportunity greater on that ideation and design side, the inputs that go into even putting something into the go-to-market strategy or is it executing on the business intelligence?

Honestly, Neely, I'm really happy with everything that I've seen in terms of the design teams that we have in place. And I think that the opportunity really lies in the discipline and the execution of the go-to-market strategy, and ensuring that we are really indexing the testing results to drive the volumes that we need as we get into the season.

Neely, we don't mean to imply that we're never going to take a shot at something. If we've not -- if we have to, if we've not identified it to the front. But, what we are implying is, we're not going to place make it or break it bets on things that we don't know about. And I think that's the way we've succeeded in the past, and that's the way we will succeed in the future.

That's helpful to have that clarity, gentlemen. And then, just one other big overarching question for Michael or for David. Are you seeing a shift broadly in terms of the overall look that's out there? And can Express migrate into whatever that next generation of look and feel is from a fashion perspective?

Yes -- I'm sorry, did you finish your question?

Yes, I'm good. Go ahead.

Okay. I think we are seeing a big change in the look. I think that we can migrate into it very fast. We already have placed big reorders on very new silhouettes that we think will be big, especially in dresses and skirts. I think that this is our meat -- the changing fashion is what we look forward to. This has always been the place where we have really, really excelled, where we really know how to build items, and we're excited about the change in the look.

And I think it's very important to say, when we have the fashion and we have the value, she responds.

Thank you, gentlemen. Good luck.

Janet Kloppenburg, JJK Research.

Hi, everybody, and congratulations. Welcome, David. I wondered if you could talk a little bit about the success of the Black Friday weekend with the new product, the new spring product that is now in the stores, and if you're seeing better reads there than you had earlier in May on some of your fall selections? And I also was wondering if Paul could talk a little bit about inventory content right now in terms of clearance levels versus last year? Are you still higher than you'd like to be, Paul? Thank you.

Let me start with the first part of your question. What you asked about the new receipts, the new merchandise --

Yes, just some color -- (multiple speakers) any color -- and the dresses.

What I would say to you, Janet, and I know you're in the stores all the time so you do see the new receipts and you do see the new look of the store. And what I would say to you is that our offering, our floor set, the great majority of -- a great majority of our merchandise on the floor for Black Friday was new goods. Goods received in the past I want to say --

What about the v-neck sweaters, Michael, with the cami, the front table of the basics, how did that perform?

It performed wildly well. Thank you.

So, Janet, with respect to inventories, we said inventory came in where we expected it would come in. We decreased on a per square foot basis. As Michael indicated, a lot of the inventory that we've got right now is inventory that's been received in the last six weeks or so, six to eight weeks. So we feel pretty good about the composition of the inventory. As David had indicated, a lot of it is spring merchandise that -- I think that reinforces the quality of the composition. And during Q3, part of our merch margin decrease was associated with us getting a little more promotional, trying to ensure that we ended the quarter in a decent inventory position.

Janet, I didn't totally answer your last question about that front table. The item performed wildly well. But more important than that, what we got out of that was a very, very high percentage of related selling to the matching cami, which provided more volume on the item than we ordinarily would have gotten on it.

And, Michael, on the jean sale that's in place right now, if you could just clarify, I think you had built this in as a planned promotion, maybe with stronger margins than the jean promotion that you had done in August and September? Is that right?

Yes, that's right because all of the new receipts for this promotion were purchased after the August promotion.

Right, so the margin there should be healthier?

Yes, we would hope.

Thanks so much. Good luck.

Simeon Siegel, JPMorgan.

So, DTC showed an acceleration over the quarter with the stores I think comping down high single, if my math is right. So, do you think that was driven entirely by that weaker mailer in September, Michael, and the weakness should effectively come back -- or I'm sorry, the weakness should go away, the strength should come back in Q4 just from that alone? Or do you see a growing shift maybe in how the consumers are actually shopping? I think e-comm is now like 12% of sales over this quarter. So have you quantified how much of that growth is maybe coming from incremental sales? Thanks.

It's a really, really interesting question. At the beginning, as we went to the e-commerce business, as we have said, we saw that the multi-channel customer was worth quite a bit more, two, three times, sometimes a bit more than the single-channel customer. So, we felt that there was not a cannibalization. That's why we quote total comps. The fact remains is I think there is a difference in shopping patterns. I think they shop much more easily for certain things on the web, but that's not the big difference to me. The big difference to me, as I look at it, is the shopping patterns are following the pattern of what happened to mall, where the weaker malls became weaker and the stronger malls became stronger.

What I'm trying to say is, the big days are becoming bigger and the little days are becoming much less significant than they used to be. And I think that's something that we have to accommodate ourselves to. When they're supposed to come out, they come out like crazy. And they get bored a lot of the time for the rest of the day. So I think a significant statistic when I look at the future is the percentage that Black Friday has grown to the total season. It continues to grow bigger and bigger and bigger to the total season, which says to me that the last Saturday in December will grow as a percentage. All of the top 10 days will grow as a percentage, and maybe some of the other days will decline. They would have to.

And just to add onto that, David and Michael both talked about this earlier, but there are a few things that we're really focusing on from a business perspective. Yes, the mailers in September and October were soft. Really, we are looking to get back to making sure we're communicating clearly the customer value proposition, getting back to a balanced good, better, and best pricing strategy. And I think that over time will certainly help out the business to continue to improve. And also, depth in some key fashion trends -- we want to make sure we really support some of the key fashion trends, get the right depth in there by indexing test results appropriately as David mentioned earlier, that's important. And then we're also focusing more effort on prospecting and attracting new customers to the business as well. So those will be some of the focus areas over the next several months.

Great. Thanks a lot guys, good luck for the rest of holiday.

Jay Sole, Morgan Stanley.

I just want to ask about the discount level on Black Friday. What kind of impact is going from 40% off last year to 50% off this year have on gross margin? And how did you do that? Was there a benefit from lower cotton? Can you talk about that some?

As we spoke about, we had a record Black Friday from both a sales and a gross margin perspective. So we were really focused on ensuring that we could grow the gross margin dollars during the promotional period. So, it was definitely a success for us over those few days.

I think the other big difference, which was very transparent to the consumer but was very important to us, was last year we were 40% off, this year we were 50% off, but last year we were 40% off along with CRM (inaudible). So the actual margins achieved last year were lower than it would have sounded like at 40% off, where this year at 50% off there was virtually no wash.

Associated with CRM.

Associated with CRM.

Clearly, the margin rates were down, but margin dollars were significantly up. So with that tradeoff for that Black Friday period is something we would definitely take.

Yes, and the margin dollars were up a significantly higher percentage than the margin rate was down, significantly higher.

So that's interesting. It sounds like, from the press release, part of the strategy going forward is to get more promotional. A, is that accurate? B, do you think you can continue the trend of getting more gross margin dollars and leveraging some of those fixed costs to make the tradeoff a positive in the future?

Just to be clear, it is not about being more promotional going forward, it's about having it more balanced in terms of our price points and ensuring that we have good, better, and best price points. And that the entry price point into the brand is clear to the customer. That's what it's really about as we look at it going forward, and ensuring that we have the fashion essentials that she wants at the opening price points, as opposed to being more promotional.

And having said that, when you get into a holiday season, you really do have to watch competition very, very carefully. Because a great amount of the traffic, not all of the traffic, but a big amount of the traffic is not our own customers, it's gift customers and it's customers that are looking for the deal. So, we're prepared to be competitive where we have to be.

If I could squeeze one more in on SG&A, it sounds like you did a good job on controlling SG&A in the quarter. It sounds like maybe reducing some of the international investment was one area, but was there another area you were able to control SG&A? And what does that tell us about your ability in coming quarters to be able to flex SG&A if necessary?

Obviously, there was some change in incentive comp year over year, based upon the performance of the business. Honestly, we've just really tried to tie down expenses this year, and we've gotten very tight on headcount and just overall expenses -- travel, everything, really. So, we do continue to have flexibility as we look ahead, and we just continue to manage tightly.

Okay, great. Thanks so much.

Richard Jaffe, Stifel Nicolaus.

Richard Jaffe from Stifel. Well done, guys. And I guess a follow-up to both Mike and Dave, it sounds like you may be broadening the assortments for consumers, a little bit shallower and a little bit broader. Is that a fair assessment that there will be more customer choices as we go forward into spring?

No, it's less choices, actually, and much deeper. I think that's revealed on the floor right now. This is not just going into spring. I think right now you're seeing much greater depth in fewer choices, and I think it's working for us in the new receipts which basically is what spring is about.

So it's bigger bets on the key items that you've tested and have conviction on? And a little less of the fringe product that maybe you're less convinced about?

Probably, that's a very fair statement.

And inventory, as a result, do you see inventory and turnover maintaining the same pace despite the more focused assortments?

Yes, we do.

Okay. That's great. Thanks and, look forward to spring.

Eric Beder, Brean Capital.

Congratulations. Could you talk a little bit about, now that you've got about six months of the Express NEXT program, how is that impacting what you're doing and how is that going to impact you going forward? And could you give us a little update on the watches? I see you've expanded that into women's, how has that been going?

I'll start with the watches, Eric. We're very happy with the performance that we have on watches. It's proving to be totally incremental in terms of the sales that we're seeing, and we're looking forward to growing that business as we go forward.

And we also are, by the way, very proud of the product. We think it's a great product, a quality product, and right fashion.

So, in terms of the NEXT program, Eric, what we have been saying is that we really felt like the biggest impact is going to come from the fourth quarter and as we get into next year, and as people continue to build up points and start the redemption. We had talked about the conversion of people from the private label credit card was approximately 1.4 million people. We actually have signed up over 4 million people through October on the new program. So, we expect, as we look ahead, it will be a real benefit to us. What we've talked about before, too, that one of the biggest benefits is that just being able to analyze buying patterns and be able to do some more surgical promotions to people. So, we're looking forward, as we get into Q4, where people have really been able to build some points, and starting to see some of the benefit of that.

Great. Congratulations. Good luck on holiday season.

Marni Shapiro, The Retail Tracker.

Congratulations. I loved some of the new items, they're great. I don't mean to harp on the Black Friday and the events, but if I'm hearing you right it sounds like these event driven sales like a Black Friday sort of push her almost into a frenzy of shopping, which was -- I witnessed on the weekend and participated in. But I'm curious, if that's the case, as you guys think about the rest of this year and really as you think about 2013, are you able to strategically promote into things like Columbus Day or Back-to-School, and then on a random Tuesday in the mall leave things a lot less promotional because the shopper coming in on that day is there to shop and not for the sport of the promotions?

I think, Marni, that's a very good question. And if there's one thing I'm sure of is that you were out in the malls on Friday. So, you saw what they looked like.

Oh my god, fire hazard.

We kind of love that.

So do I.

In terms of frenzy, I love frenzy. I think that when you say we're pushing her to frenzy, we want to push her to frenzy. I think that's a good thing to be able to do, and it's a good feeling for the consumer. As I said earlier, and I think you're asking the same question that I addressed in terms of the shopping patterns changing. I think that the shopping patterns are changing. I think that the big days, as I said, are getting bigger and bigger and bigger, and we have to learn how to make the big days bigger and bigger and bigger. I think on an off Tuesday in the mall, if they're there, they're there, and you're right, we could get a bit more margin on the items, regular price on the items, but I don't know what percentage of the total that will be. That's my very first response to that. I think we have to start tracking that and assume a very new reality, not assume that it's going to go back to anything that it ever was. Because I think that's a bad assumption.

Is there a thought -- when I think about the mall in the middle of the week, the shopper coming there on Black Friday is a specific type of shopper, in it for the sport and the game. And the shopper coming on Tuesday, she might still want a discount, but 20% might trip her to purchase whatever she wants, because she's coming there to buy something she wants and needs.

I agree with you, but I think the Black Friday shopper is partly the person that you just said. And we see people in those stores on Black Friday that we never see all year long, and that's true. But we also see an awful lot of people -- and we had a big conversation about this Saturday morning. We see an awful lot of people out there that seem to have pre-shopped what we have, and seem to take advantage of the fact that they can buy things that maybe they thought was a little too much for them the week before. So, I think it's both. I think we really have to reevaluate shopping patterns. We have to really reevaluate what wakes them up. We already know that bad stuff at any price is not the answer. So that percentage off is really not the answer. It's percentage off on stuff that -- if we're up --I'm only talking about us now, I'm not (inaudible). Percentage off on bad stuff doesn't work, it really, really doesn't. But promotion on the best is -- there's no better formula.

Yes, I agree. Best of luck with the rest of the holiday season.

Thanks, Marni, you, too.

Janice Ong, UBS.

Hi, it's actually Roxanne Meyer from UBS. Two questions, I'm just wondering, now that you've had another quarter under your belt, if you could provide us any additional hindsight from your testing process and where it may have broken down a bit after years of really being able to nail it? And, as a result of the misses that you have had, is there anything that you're revising in your testing methods? Thanks.

No, there's nothing that we're revising, Roxanne. What we're doing is reinforcing the way we always did it. We have, unknowingly -- and you can't check everybody's work. Unknowingly, people were taking tested goods and changing the fabric, changing the yarn -- that's what a test is. So, in some cases, the purchase was really a new test. We're not doing that anymore. We're not allowing that. Now, that's not to say that we're not going to buy anything that's not been tested. As I said, we will continue to do that, but not major bets, not ever.

Great.

And the other thing, Roxanne, was we've talked about getting back to the good, better, best balanced pricing approach. There were certain items in our assortment I think when you look back at the testing results, if you recall, back on the 2Q call, we talked about sweaters where, first time ever, we didn't have any sweaters test well. Part of that I believe is the fact that our pricing got somewhat out of whack in certain categories, not all categories, but that was one of them where we didn't have really a key item opening price point sweater out there. And as we were testing some of these sweaters, if the price is too high and you're testing silhouette, you're not going to get good reads on any of those items. So, as we're moving back to good, better, best balanced approach on the pricing, with good key opening price points that's clearly communicated to the customer, I think that will help with the testing process as well.

Okay, thanks, that's helpful. And then just second, I know that you called out items such as wovens which have been a strength for you, but when you think about big picture, the top cycle versus the bottom cycle, it certainly seems like this has been a year of a bottom cycle. How do you think about that as being part of the issue? And when you look into spring, how do you think about, from a fashion perspective, the relevance and the strength of bottoms and colored bottoms, the newness there versus tops taking a bigger position? Thanks.

I think that you're right in terms of bottoms having been much stronger. But I think the strength in bottoms have been the fact of color, not the fact of new silhouette. So, that's a very, very different thing, because the best silhouette this season was the best silhouette last year, which is clearly the jegging -- clearly the skinny jean was the best, except the thing did it in news was color. I think what we ran into with the bottoms against the tops was a lot of the customers were not quite sure of what to put on the top with the color. They had three options -- they could match it, they could color block it, or they could put neutrals with it. I think that uncertainty has kind of gone out of it, which is I think why they decided what they want to do, which is why I think the top business is starting to get a bit stronger. That, coupled with the fact -- our top is getting a bit stronger. That, coupled with the fact that we have shipped the opening price point in knits that we talked about, we've shipped opening price point of sweaters that we talked about. And by the way, our very, very best top -- very, very best top in inventory, and I'm not going to tell you which it is, not yet. It's not an inexpensive top. It's the top with a high ticket price on it, best turning top.

Okay, great. Thanks for all that color. And best of luck for holiday.

Thanks, Roxanne, and thanks for being in the stores on Friday. At least you saw.

And since there are no further questions at this time, I would like to turn the floor back over to Michael Weiss for closing comments.

Thank you for joining us. We wish all of you a happy and healthy holiday and new year, and look forward to speaking with you when we report Q4 results in March 2013. Thanks.

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