Express Inc (EXPR) 2012 Q4 法說會逐字稿

Good morning and welcome to the Express fourth-quarter 2012 earnings 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, Marisa Jacobs, Vice President of Investor Relations at Express. Ms. Jacobs, you may begin.

Thank you. Welcome to our call. I'd like to open this call by reminding you of the Company's safe harbor provisions. Any statements contained in this conference call except those containing 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 these forward-looking 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.

During this call, we will refer to two non-GAAP measures, adjusted net income and adjusted earnings per diluted share. Reconciliation of those non-GAAP measures to net income and earnings per diluted share are in our press release.

With me today are Michael Weiss, Chairman and CEO; David Kornberg, President; Matt Moellering, Executive Vice President and COO; and Paul Dascoli, Senior Vice President and Chief Financial Officer. Now I would like to turn the call over to Michael to speak about the fourth quarter and our priorities for 2013. When he completes his remarks, David will focus on some of our product initiatives and Paul will cover our fourth-quarter financial performance and 2013 outlook. We will then turn to Q&A before concluding the call.

Thank you, Marisa. Good morning. I am happy to be speaking with you this morning. The fourth-quarter results we are reporting today demonstrate in a measurable way -- the tremendous progress we made in the final quarter of the year.

When problems emerged during last year's second and third quarters, we quickly recognized them and tackled them head-on. Our data-driven process and our insistence on detailed hind-sighting enabled us to identify our mis-steps. In response, we put in place corrective actions that resulted in sequential gains in the final quarter of the year.

The change in trend from Q3 to Q4 was significant, and a shift we find encouraging. Comp sales rose from negative 5% in Q3 to plus 1.5% in Q4, and our diluted EPS came in just above the high end of our revised guidance. Paul will review additional financial details with you in a few minutes. I want to focus on how we moved the needle in Q4 and where we are concentrating our efforts in 2013.

Let me begin with the product, which is our first priority. We largely fixed the women's sweater business for holiday with four key silhouettes that performed very well and this trend is continuing into spring. It is also an important data point for what will follow. We have repeatedly seen that strength in new spring sweater styles is predictive of a strong fall and holiday sweater season.

Secondly, we layered in opening price point items in key categories, especially our cut-and-sew knit tops. Spring merchandise, in general, was very well-received during the holiday and continues to perform well. In fact, we've seen the best woven top performance in years.

A third priority is ensuring that we clearly communicate our value proposition. We've clarified our promotional messaging by limiting our buy one get one offers and communicating a simpler message of either a specified percent off or precise price points. You saw this with our 50% off the whole store offer, which led to a record Black Friday in terms of both sales and gross margin dollars.

With holiday behind us, I know that you are interested in what is ahead of us for 2013. I have already mentioned that early spring reads have been very good. At the same time, traffic is down noticeably compared to last year. Consumers appear cautious due to the macro economic environment and uncertainty around budget cuts, and also the impact of higher payroll taxes.

So in spite of the opportunities we will be discussing during the remainder of this call, we know it is prudent to take a cautious approach to 2013 guidance. Our first-quarter guidance also reflects the fact that we are up against a tough comp from last year, which was our strongest quarter in 2012. With that as a backdrop for this year's first quarter, we expect negative low single digit to flat comps. Diluted earnings-per-share are anticipated in the range of $0.34 to $0.38, which includes some incremental expenses versus last year. Paul will review our guidance in more detail shortly.

In terms of our priorities for driving the business, we remain very focused on our four pillars of growth.

David will talk with you in a minute about product-related initiatives to drive sales at our existing stores. Our marketing initiatives also play a key role in driving sales and allowing us to touch our existing customers and attract new ones to the brand. We continue to leverage our large database of customers to communicate brand stories and offers, sometimes customized to their individual buying patterns. This drives sales, both in stores and online.

We have committed to an expanded television presence in addition to our advertising on cable shows appealing directly to our demographic. We're testing the impact of allocating some of our advertising dollars to major network programming by airing commercials in a couple of important cities. We have also mixed in some high-profile events to more broadly showcase Express and what we are all about.

Our pop-up shop at the Super Bowl was a big hit. I'm guessing that quite a few of you would have enjoyed the opportunity to shop along with players from the Ravens and the 49ers.

We're also very excited about our participation in NBC's Fashion Star, which had its season premiere last Friday. One of our team members is buying designs for Express, and viewers can order product immediately following the show on our website and, later in the season, in select stores. We were thrilled to see that 90% of the people clicking on the Fashion Star product right after the show were new visitors, and almost everyone buying the item was making their first purchase on our site.

It's initiatives like these that will extend our brand reach and drive the traffic that inevitably leads to productivity gains.

Our e-commerce business continues to grow at an exciting pace. E-commerce sales reached $272 million last year, grew 32%, and represented better than 12.5% of our business. We have been saying that e-commerce sales should reach 15% of our business. We now believe it should be even higher.

There are two other pieces of exciting news regarding our e-commerce business I want to mention. First, we have completed the process of bringing our platform hosting in-house. This will enable us to begin executing against the strategic initiative discussed previously and we recently announced direct free shipping to customers who purchase $125 or more on our website.

We are excited about the expected impact of both of these items on the continued growth of our e-commerce business.

New store openings will continue during 2013 in both the US and Canada. 16 locations have been identified.

There is something even more important I want to talk about in terms of our real estate discussion. When you look across the landscape of existing malls, it's clear that some are becoming much more important and generating much more business, while others are stagnating. The first group are becoming key social hubs, where people are congregating with increased frequency to socialize and to shop. As we think about our growth pillar tied to adding new square footage, it's not just about getting into a new mall. We're moving quickly to enhance our presence at these winning hub locations. It is an important way for us to build sales, promote the brand, and introduce Express to new customers.

For example, at the San Francisco Center, we have added a second level to our store, and it's just about doubling our square footage there. Later this spring at the Las Vegas Fashion Show Mall, we are going to vacate our current location and move into a new space that is more prominent, significantly larger, and that will really boost our presence within that mall.

In June, we are doing the same thing in Dadeland. The point I really want to emphasize is that it's not just about adding square footage, it's about doing it where it counts and really makes a difference.

On the Canadian front, our business is still relatively new and we are continuing to support its growth. We're adding a country manager and we've been expanding the training we give our staff there to enable them to better convey our brand story. We are also stepping up our local marketing activities, including television in certain markets and our efforts to increase our database will continue.

Since we began to anniversary stores in Canada, we are generating positive comps.

Regarding our Times Square flagship store, unfortunately, the opening date is going to slip into Spring 2014. Our landlord recently informed us that he will be late in turning the property over to us.

International expansion remains a key focus, and our 2013 plans call for our existing franchisees to open between 13 and 16 new stores. The stores opened last year in Latin America and the Middle East as well as previously existing stores are performing well, and those results mirror our belief that Express is a brand that translates extremely well around the world. Right now, we are exploring the possibility of partnering with new franchisees that will bring Express to additional markets, and our 2013 plans call for us to sign two new deals this year.

I also want to talk about an initiative I am personally very excited about, since it will ultimately drive significant new growth. We are working on an outlet store strategy to attract new customers interested in the Express brand, but at different price points than our regular stores. Many of our competitors already operate outlet stores, as do quite a few very high-end retailers, and it's been a highly successful approach for them. More important is the fact that our studies indicate that it's a real opportunity for us.

One of our first priorities, which is fairly well along, is to hire a dedicated general manager to spearhead this initiative so the senior management team remains focused on our core business. And some of you may not know this, but we already operate five outlet locations used now to sell distressed merchandise. These could easily be converted into factory outlet stores with little effort. The same is true of another five regularly priced stores we currently operate in outlet malls.

Let me be very clear about one thing. Because this is an early-stage initiative, we haven't included anything relating to the impact of this in our guidance, and will provide an update on a future call.

As I look at 2013 as a whole, we are applying the lessons learned in 2012. We have a brand that serves our core customers across multiple wearing occasions. For spring, we are delivering fresh, on-target fashion to them. We are also focused on improving and adapting to earn their continued loyalty.

Operationally, we do best when we properly execute our go-to-market strategy. We need to continue to clearly communicate our incredible value proposition to our girl and guy. Beyond that, we are focused on retaining our existing customers and attracting new ones.

We'll use new marketing campaigns and introduce Web and mobile upgrades that continue to enhance the shopping experience and, we'll upgrade our real estate portfolio to enhance our presence where our customers are congregating, whether in a hub mall or a busy outlet center. The challenge of delivering a year better than the one we just ended is a motivating force for each of us. With that, I will turn the call over to David.

Thank you, Michael. Good morning, everyone. It is great to be here with you again. By now, I am fully immersed in my new role and enjoying the opportunity to oversee both the men's and women's businesses. It's enabling me to cross-pollinate best practices and good ideas, and I believe that we are forging a stronger team as a result.

Let me jump right into a discussion of what we are doing from a product perspective. Mid-year in 2012, we identified some important initiatives and have made real progress executing against them. First is improving the discipline around the execution of our go-to-market strategy. I have worked extensively with the women's merchants to ensure that the entire team has a deep understanding of the strategy and how it should be used to gain knowledge that is actionable and that can drive the business. The efforts are paying off. I think you would agree that the change in trends from Q3 to Q4 is evidence of that.

As an example, the go-to-market strategy has helped us to recognize the potential of the Portofino Shirt. Don't get me wrong; it's just one of many tools we use and retail will always be part art as well as part science. But this tool helps shift the balance a bit in favor of the science part. So, we will continue to focus on its proper execution.

Second is price points. We have a few initiatives in place to capitalize on our opportunities here. We introduced relevant opening price point fashion items in certain key categories that our customers come to us for year-round. We have ensured that these products have been value-engineered to protect margins. Our pricing profile compared to other specialty retailers is always top of mind. We are paying particular attention to the price-value equation to ensure we offer an attractive price while not sacrificing quality. Our goal is not to be the cheapest, but to offer the right value.

Third is a heightened focus on maximizing the overall potential of our women's business. This represents approximately 60% of our sales, so improvements here can really move the needle. We are very pleased with some of the new spring styles and silhouettes we have delivered that are generating strong reads since we began flowing them into stores late last year.

The Portofino Shirt is working across all our lifestyles. It looks as great with a suit as with jeans or shorts, and our customers are buying it in multiple colors and prints. It's also being delivered in sleeveless and short-sleeved silhouettes.

I also want to note that with a $49.90 ticket, this is not an opening price point item.

Our skater and fit-and-flare dresses are performing very well, as are peplum tops, as well as anything with lace or studded trim.

Michael mentioned the importance of colored bottoms last year, and I want to touch on that as well. When we brought them in, they represented the kind of newness that lures customers into the store and they are still selling well. This year, in addition, we are seeing a renewed interest in indigo jeans, including crops and ankles. We're using a number of interesting new washes and also featuring more vintage and destroyed looks.

Black is also definitely back, and black and white stories are working very well for us.

The men's business turned in a strong performance last year, and I'm expecting great things for 2013 as well, since we will continue to deliver terrific quality and value to our guy. We are particularly proud of our suits and jackets, which have become two of our fastest-growing categories in terms of both dollar and percentage increases.

All of us were excited last year when we got a callout from Esquire describing our men's suits as providing extraordinary value at great prices. And with jackets being mixed and matched in new ways, they're working on a bigger cross-spectrum of casual and dressy looks and appealing to a broader population.

Our 1MX shirt continues to be strong, and we are also seeing ongoing demand for short-sleeve woven shirts and updated versions of our branded logo polo. Ties and other accessories are building nicely and we expect them to boost productivity going forward.

Lastly, we have an opportunity to improve our customer experience, and that is our fourth area of focus. After all, it's one of the keys to driving conversion. We spend a lot of time working with our store-based employees to make sure they understand the crucial role they play as brand ambassadors. They are particularly instrumental in introducing our customers to the Express NEXT loyalty program, with focus on driving membership, because our Express NEXT customers are more highly engaged and generate higher sales than the balance of our shoppers.

So, we have a busy and exciting year ahead as we continue to drive improvements throughout the chain. It's an environment characterized by cautious shoppers, however. We know that to succeed, we have to continue to deliver product in which the value proposition is clear, in terms of design, quality, and price. We are up to the challenge and I'm very encouraged by the selling I am seeing across key items and key categories of business.

With that, I would like to turn the call over to Paul.

Thank you, David. Good morning, everyone. Let me begin with a brief recap of our fourth-quarter 2012 results, before turning to our 2013 guidance. After a difficult second and third quarter, we had a stronger fourth quarter, which benefited from great momentum over the Black Friday week and the last two weeks before Christmas. As you've already heard, we began to see positive results from the corrective measures put in place during the back half of the year.

Net sales for the quarter totaled $729 million, an 8% increase over last year's Q4 sales of $673 million, or a 4% increase if you back out the 53rd week. Our e-commerce sales, inclusive of the 53rd week, grew 44% to $121 million and represented 16.7% of the business, or grew at 40% if you back out the 53rd week.

Comparable sales increased 1.5% following a 5% increase in the fourth quarter of 2011. As a reminder, this is comparing the 14 weeks ended February 2, 2013 to the 14 weeks ending February 4, 2012.

Gross margin was 35.1%, down 210 basis points from the prior year's 37.2%. This reflects the expected sequential improvement from the third quarter that we discussed on our last call. As a point of reference, our third-quarter gross margin declined by 390 basis points.

Merchandise margin declined 170 basis points, reflecting the promotional competitiveness in the marketplace during the quarter. Our decision to go 50% off the entire store for Black Friday certainly impacted our merchandise margin rate. However, it drove significant traffic to our stores, and since we eliminated the use of CRM during those key sales days, we generated record gross margin dollars during the sales period, which helped boost our overall gross margin dollars for the quarter.

Buying and occupancy expense increased by 40 basis points, due in part to $4.3 million in incremental pre-opening rent expense associated with our Times Square and San Francisco flagship locations. Without that incremental expense, B&O as a percent of sales would have been about flat.

Selling, general and administrative expenses were tightly managed and we realized a benefit from greater leverage during the additional week in the fourth quarter. Overall SG&A expense increased to $144 million or 19.8% of sales, from $142 million or 21% of sales, in last year's fourth quarter, a 120 basis point improvement.

Operating income was $111 million, representing 15.3% of net sales. This compares to $109 million or 16.2% of net sales in the fourth quarter of last year.

Income tax expense was $42 million, representing an effective tax rate of 39.7% compared to $41 million at an effective tax rate of 40.3% in the prior year's comparable quarter.

Net income for the fourth quarter was $64 million, or $0.75 per diluted share on 85.3 million diluted weighted shares outstanding. The 53rd week of 2012 accounted for approximately $0.04 per share of this amount. This compares to net income for the fourth quarter of 2011 of $60 million, or $0.68 per diluted share on 89.1 million diluted weighted average shares outstanding. Adjusting for non-operating costs, last year's earnings per diluted share were $0.70.

Now let's turn to the balance sheet, which, as you can see, reflects our ongoing fiscal strength. Cash and cash equivalents rose 68% to $256 million at the end of 2012, even as we invested $65 million to purchase approximately 4 million shares of our common stock since the buyback program began last May. This cash balance reflects a benefit of approximately $45 million related to the timing of certain payables that will most likely reverse itself next year.

At year-end, we had approximately $35 million remaining under our $100 million repurchase authorization, which runs through November, 2013.

Capital expenditures during the quarter were $26 million. Total inventory increased 1% to end the year at $215 million. On a per-square-foot basis, inventory on hand was 6% lower than at the same time in 2011. As we enter the quarter, we believe the quality of the inventory to be in good order. However, there are some categories that could have benefited from some additional inventory at the end of the fiscal year and into February.

While we don't generally give inventory guidance, for purposes of constructing your models, we do want to let you know that we expect inventory to grow during the first and second quarters as we look to invest in some key categories heading into the summer months and fall. We are also investing in more inventory versus last year in core year-round denim so we can fill the denim walls in our stores to ensure we are in stock on all sizes, and the customer knows we are an authority in this category.

Our long-term debt at year-end was $199 million, flat with last year. And, at the end of the quarter, we didn't have any borrowing outstanding under our revolving credit facility.

Turning to our full-year results, net sales increased 4% to $2.15 billion, inclusive of a benefit of approximately $27 million from the 53rd week. Comp sales were flat versus last year's 6% gain. Remember, this is being reported on a 53 to 53 week basis.

Gross margin was 34.6%, down 180 basis points. SG&A totaled $491.6 million, or 22.9% of sales, compared to $483.8 million, or 23.3% of sales for 2011. And finally, EPS was $1.60 per diluted share and included approximately $0.04 per share from the 53rd week. This compares to last year's adjusted EPS of $1.66.

Total capital expenditures for 2012 were just under $100 million compared to $77 million for the same period last year. The increase year-to-year is primarily in real estate spending and information technology to support our pillars of growth.

Now, I'd like to turn to our 2013 guidance. As Michael already noted, it reflects two conflicting sentiments, one being the strength of our spring offering and the internal progress we've made since the middle of last year; and two, being the reality of a cautious customer creating a challenging retail environment.

Negative traffic trends are reflected in our Q1 expectations. With that in mind, our expectations for the first quarter are for comparable sales ranging from negative low-single digits to flat. This compares to a positive 4% comp in last year's first quarter.

Our effective tax rate is estimated at 39.5% for the first quarter of 2013 and interest expense is expected to be $5 million. Net income is expected to be in the range of $29.5 million to $32.5 million, or $0.34 to $0.38 per diluted share on 85.5 million weighted average shares outstanding.

Our first-quarter guidance includes approximately $12 million in incremental buying and occupancy costs. It's a significant number, so I wanted to lay out the main components. $4 million is for pre-opening rent expense for our planned flagship locations. $6 million is additional rent for new stores opened and certain leases renewed after the first quarter of last year. This is unrelated to the flagship stores. And, $2 million relates to incremental fulfillment costs we are incurring as our e-commerce business continues to grow. In total, this translates into about $0.09 per share.

For your modeling purposes, when thinking about the flagship stores, you should assume the same incremental expense amount for the second quarter. The incremental third-quarter amount is approximately $1.3 million, as it was the second month of the third quarter last year when we started to record this expense. And, with the delayed opening of Times Square, we won't get the revenue we had expected in Q4 of this year.

In terms of full-year 2013, we expect comparable sales to increase in the low-single-digit range, an improvement over the flat comps delivered in 2012. Our 2013 effective tax rate should range between 39.3% and 39.8%, and interest expense for 2013 is estimated to be approximately $20 million, spread relatively evenly over the quarters.

Net income is currently estimated in the range of $120 million to $132 million, translating into $1.40 to $1.54 per diluted share. This is based on an estimate of 85.9 million weighted average shares outstanding.

In terms of our real estate portfolio for 2013, our plans call for us to open two U.S. and one Canadian store in the first quarter, while closing eight stores. For the full year, we expect to open approximately 16 new stores, four of which will be in Canada, while closing nine U.S. stores. Based on this, we expect to end 2013 with 632 stores and approximately 5.5 million gross square feet in operation.

During the year, we plan on remodeling approximately 25 stores.

Capital expenditures for 2013 are expected to be in the range of $110 million to $115 million. The increase is primarily driven by the incremental costs of preparing the flagship locations. Approximately two thirds of our 2013 CAPEX budget relates to real estate initiatives, with the balance going to IT initiatives to support our growth pillars and a relatively small amount allocated to ongoing maintenance activities.

Regarding our international plans, as Michael noted, our 2013 focus will remain primarily on franchise operations. We expect to open between 13 and 16 locations during the year. As a result, we would expect our international business to generate a slight profit during the year.

Now let me turn the call back over to Michael for some closing remarks.

In conclusion, 2012 was a difficult year, but one that concluded on a relatively positive note when contrasted against the third quarter. We are approaching 2013 both cautiously and optimistically. Cautiously, because of traffic concerns and macro economic uncertainties. Optimistically, because I believe in our product and our customer is telling us that we have some winning items. I know without a doubt that the Express brand remains strong and relevant.

We will continue to deliver fashion-right product that is well-made and fairly priced to retain our core customers. At the same time, we are continuing to look for new offerings and for ways to introduce new customers into the Express brand. Armed with a flexible business model, a proven and successful team, adequate cash for reinvestment and strong cash flow, we know that our goals are attainable.

Operator, at this time please open the lines so that we can turn to the question-and-answer portion of the call.

(Operator Instructions) Due to time constraints today, we ask that all questioners limit themselves to one question and one follow-up. If you have additional questions, you may re-queue and those questions will be addressed, time permitting. (Operator Instructions) Lorraine Hutchinson, Bank of America Merrill Lynch.

It's Paul Alexander for Lorraine Hutchinson. Thanks for taking the question. Could you guys give us a little more color on first-quarter comp guidance? You mentioned seeing good conversion and being excited about some products. But other companies have told us that there has been stabilization since early February, have noticed some other factors, such as maybe normalizing weather or later tax returns that have really negatively impacted early February, that shouldn't be a drag going forward.

But I guess my question is, does your first-quarter comp guidance reflect any acceleration from February, or are you projecting February trends straight across first quarter, or have you seen any stabilization? Thank you.

Thanks. Our guidance takes into consideration what we have seen in February, which was a challenging month from a traffic standpoint. As we have gotten into March, we have seen somewhat of an improvement in traffic, and we have seen an improvement in conversions. So we've tried to take into consideration the improved trend coming out of February, but we do have the hindsight of having our February business behind us, so it reflects both of those things.

Thank you very much.

Simeon Siegel, JPMorgan.

I was just hoping we could drill into the margins implied in your guidance. Given the improved conversion and those positive spring reads, what's the right way to think about the merch margin decline for Q1, given that it sounds like you are experiencing strong sell-through as you work through that weaker traffic?

Then, Paul, I apologize. My math could very well be off, and I don't know if I got all the incremental B&O lines, but does that translate to roughly 220 to 250 basis points of buying and occupancy pressure in the first quarter? And you gave the flagship second and third quarter impacts. What's the right way to think about those going forward? Thanks.

There is some degradation in merch margin in the first quarter to consider. Part of the increased conversion is also related to some increased promotional activity that we have had in the first quarter. So you should be thinking about a slight degradation in margin.

Then in terms of B&O, you are in the zone in terms of that deleverage in the B&O. What was the third part of your question?

I guess just finishing, so you gave the flagship impact for the rest of the year, the other two pieces, I assume the e-comm should continue. Is it a similar degree for the next two quarters?

That is a variable expense, obviously, but as the e-commerce piece of the business continues to grow, that piece will grow in terms of absolute dollars. We would expect to see, as we are moving through a year, hopefully some improvement in overall margin sequentially from quarter to quarter, as we work our way through to the back end of the year.

All right, thanks. Then just last, it looks like -- you guys brought it up -- it looks like this is the first quarter I think since the IPO where you have a net cash position. You spoke to the roughly $35 million left on the buyback authorization. Can you just give us general guidelines of cash cushions you'd look to keep and the way we should be thinking about - the way you guys are thinking about returning cash?

Our thoughts on cash really haven't changed that much. We, first and foremost, look for opportunities to invest in the business. Michael has talked about one new opportunity today that we see to continue to invest in the business.

Secondly, we have talked about wanting to pay down debt at the appropriate time and return cash to shareholders through either share repurchase or other means. We actually continue to talk to the Board about the right things -- the appropriate things to do with cash, and at our upcoming Board meeting, we actually have planned a pretty comprehensive review of our capital structure with them.

Great. Thanks a lot, guys, and good luck.

Neely Tamminga, Piper Jaffray.

Michael, I was just wondering if you could weight in a little bit on what the earlier Easter means for you. We hear both sides of the debate out there. I'm just wondering with a seasoned veteran like you, how you are viewing Easter as it relates to your business. And then I have a follow-up.

So we have the Easter -- the buildup to Easter week a week earlier, basically. But by and large, we don't think that makes much of a difference. I think what does make a difference is what they feel like in that week.

Historically, we have not looked, for bookkeeping purposes, absolutely March and April are separate months. But historically, we have always thought about the nine weeks as being Marple, because Easter constantly does change. Historically, it doesn't really matter because the spring break traffic or the cruise traffic or the vacation traffic, whatever you want to call it, always is in March. When Easter falls in April, theoretically, you get two busy times. When it's in March, it's one busy time. But it generally adds up when it's supposed to, Neely.

Okay. Then just looking at your business, I know that you guys have been offering free shipping on orders over $125. I think the trends are about possibly going to free shipping 24/7 on all orders for much of retail over the next couple years. Just wondering where you guys are planning to adapt on that curve, if you've done some analysis around it. You are a data-driven company; just wondering whether or not you think that there is support for accelerating that.

Neely, I think right now, we continue to look at that and look at the competitive set on that. We studied hard the $125 threshold for free shipping, and it was a positive thing for us to do overall for the business.

Right now, we don't have any plans to move to free shipping all the time, but we will continue to look at the competitive set and look at what it will do -- could do for us from a business perspective.

Paul, are you willing to share what the shipping costs would have laid down on your P&L in Q4 then?

I couldn't hear your question, Neely.

Are you able to share with us what the shipping costs on the free shipping component would have meant on your gross margins?

It really wasn't that significant in Q4. I don't have that right in front of me. If you want, I can follow up with you on that.

Great, thanks. Good luck to you guys.

Richard Jaffe, Stifel Nicolaus.

Thanks very much, guys. Just following up on your outlet strategy and wondering about the timing and the strategy behind it. I know today you are consolidating clearance from better stores into the five clearance stores. I'm wondering if the outlets will be a continuation of that strategy or if you'll make products unique for that channel?

And then, if you could clarify, you mentioned the Black Friday initiative and the absence of the use of CRM improving the margin. Could you spend a little time to help us understand that?

Sure, let me start with the first one. The answer is no, it won't be a continuation of the same strategy. The strategy that we currently have leads to a very, very up-and-down business. We do quite well when we ship and we do next to nothing the weeks that we don't ship.

The other big issue is we do better in the current outlets when we've done more in the regular stores, because there are more ranges of size and color. So quite obviously, when we study competition in terms of the outlets, there is clearly, clearly merchandise that is made, and you can tell by the label, for the outlet. So they do 52-week business, which is what we really want to do.

I think that what we have done in our current outlets is we have used that opportunity to use up a fabric that we have too much of. And to tell you the truth, Richard, that has been very, very successful. We have not done enough of it.

So our new outlet strategy will be much more of a factory store kind of a strategy as opposed to just clearance.

To add on to that, when you look at the return on investment of our capital and you rank what the return on investments look like for the Company, international franchise, because there's no capital involved and very little overall investment, is typically the highest ROI, followed by e-comm.

Outlet would be the third highest return on investment, followed by Company-owned stores. We get very attractive investments on all of these activities, but outlet is above even Company-owned stores, given the economics associated with this channel.

And we have done a lot of work studying the channel. As we talked about, we are hiring a Head of Outlet to head up this channel for us. We have talked with some experts. We've done a lot of due diligence on our own to put together a model of what we think this channel can do. And what we want to do before we come out with specifics on timing of rolling this out, we want to get the Head of the Outlet channel on board and verify the assumptions that we have in place.

But we certainly are 100% in agreement that we're going to move forward with an outlet strategy and I think if you look at other retailers out there, there is significant opportunity across the board for all retailers.

Richard, your other question was about the percent off the whole store and the CRM and its effect on the margin. Is that correct?

Correct.

Okay. So here's how it works. When we did 50% off this year, it was up against 40% -- we did 50%, 40% after 1 o'clock or 12 o'clock, or whatever that was, against last year's 40/30, right? But last year, we allowed them to use all CRM. This year, we did not.

So effectively, the difference was not 10 points. It wasn't that it was 10 points down. It was single -- low single digits down, but it was percentagewise down.

The increase, however, in the top line was enormous; and as a result of that, the increase in margin dollars was enormous. We found that this worked in another promotion where we disallowed CRM, and it's a really good strategy, because they really do understand what they are paying and it sounds better. Does that answer your question?

Could you quantify -- is that possible, to put a percentage on the impact or --?

Just from a -- it really drove a record gross margin week for us.

And a record volume week.

And a record volume week, from a dollars standpoint. We haven't disclosed the actual dollar amount.

Okay, thank you.

Jay Sole, Morgan Stanley.

In the press release, you mentioned successful initiatives in the women's business, including introducing entry price point fashions in key items. So when I look in the store, I see $9.90 camis, dolman sleeve tops, that's a relatively small percentage of the overall mix in the store. My question is, are there more items fitting this entry price point group than maybe I am seeing and is it a big enough part of the assortment right now as it stands?

I think it's about putting in price points in the right places. And I think as I mentioned in the prepared remarks earlier, you've got an item like the Portofino Shirt, which is an excellent item, and it's ticketed at $49.90, so it's not an opening price point item.

I think it's about getting customers back into the brand in the departments where opening price points are important, and that's the way we are looking at it. I think the examples of that are knit tops in both dressy and casual. I think we have great opening price points within woven shirts, and we are looking at denim in a bigger way as well, in terms of the way that we approach opening price points go forward. So that's really it.

Okay. Maybe if I can just shift to SG&A. SG&A dollar growth was up only 6% in 4Q. What's the outlook for SG&A dollar growth in 2013 and what percent of SG&A would you say is earmarked for investments in future growth, like e-comm, for example and what part is essentially just ongoing operations?

Jay, let's start with the first portion of that question, it has three or four pieces to it. Just let me make sure I got it.

Sorry, I was noting that SG&A dollar growth seemed pretty well controlled in 4Q, up only 6% year-over-year. And I was wondering what is the outlook for SG&A dollar growth in 2013?

Then on top of that, if you could break it up into what part of the SG&A is earmarked for investments in future growth and what part is essentially ongoing operations?

Most of the SG&A is earmarked toward ongoing operations, honestly. I mean, there's a depreciation component in that related to the investments that we talked about from an IT perspective, from CapEx to support the four pillars of growth. But most of our SG&A, honestly, is directed toward ongoing operations. And our focus has been throughout this entire year, with the challenge that we have had to control SG&A. we will continue to have discipline over it and I think from a percentage basis, a percentage of sales basis, I think you should be thinking about us trying to not grow that on any significant basis.

Got it. Okay. Thanks so much.

As a percentage of sales. I'm sorry.

Okay.

Betty Chen, Wedbush.

Good morning and congratulations on a nice quarter, everyone. I was wondering if you can, Paul, talk little bit -- we heard about merchandise margin in the first quarter. How should we think about that in the balance of the year, especially as you lap some opportunity in Q2 and Q3? And what does that mean for gross margin as we progress through the year as well? Thank you.

So from a merch margin perspective, we would hope that the decrease in merch margin that we are seeing in the first quarter would be the worst throughout the year. That's how we would be looking at that, that we would start to see some progressive improvement as we go through Q2, Q3, and Q4.

Keep in mind again in Q2 that we will continue to remain pressured on our gross margin as a result of having the incremental flagship costs that we didn't have last year in that quarter, similar to Q1. And so as we get into Q3 and Q4, you would see some relief of pressure compared to the prior year because we will be lapping those incremental costs. So I guess the easiest way to put it is we would hope to see progressive improvement throughout the year in both our merch margin and gross margin.

Then, David, can you talk a little bit more about the planned investments in some key areas and around core denim? How should we expect that to flow through and would it continue to grow even beyond the end of Q1, as we heard from Paul? And how significant an increase should we expect that to continue? Thanks.

I can't give you details in terms of the percentage increase that we are going to look to increase it by, but we are looking to increase our investment in the core denim category as we go forward through the balance of the season.

I think there are a couple of areas. Obviously, we have a great position in the denim business. And as I look at it, I think that we shouldn't have come out of lengths in our core denim. and we are returning to a place where we have got lengths to go forward in our core denim as we deliver into fall. I'm very excited about what that will present for us.

But also we are seeing success in terms of the crops and the ankles within denim as well at the moment. So going forward, I believe that, yes, it is a big opportunity for us, and you will see increased depth in terms of our core denim.

The other piece of that is that what we are really trying to do here is ensure that we have the core denim wall filled throughout the year and make sure that we have an authoritative position in the store when the customer arrives.

What we've found is that we were out in sizes in some instances, based on size runs in the inventory we were holding, particularly in low portions of the volume year. And it is important to note that the core denim wall that we are talking about here handles year-round denim, so it's not the fashion denim we are talking about that has more markdown risk associated with it. It's the year-round denim that we are maintaining in the walls.

That's really helpful, Matt. I guess my last question if I could is what are we seeing in some of the more prominent locations like San Francisco? What's the initial reaction as it is a much more impressive presentation?

Also in some of those larger locations, we've noticed an enlarged presentation of accessories like shoes. Any early reads on that front would be really helpful, thanks.

In terms of the specifics of San Francisco, I can't speak to that as one store. But in terms of these new categories of business, I'm very excited about the opportunities it presents for us. I think when you look around the marketplace, obviously shoes is a very, very important business out there. And I think we are getting some very exciting reads in terms of what we are seeing going into spring with our shoe business, and I see upside, only upside in terms of the shoe business.

The other two new areas of business that we have gone into that I'm very excited about are personal care, which is predominantly fragrance, and then also the watch business which we went into in the fall season across all stores. And we saw a very, very good response to that and will continue to grow that going forward.

Thank you, and the stores look great. Thank you.

Janet Kloppenberg, JJK Research.

Congratulations on a great comeback. I have a couple of questions for David and Michael on the merchandising front. I just wanted to clarify whether or not you think inventory is constraining your comp performance right now, and also if your merchandise margin guidance leaves guidance with degradation, especially in consideration the fact that you got pretty promotional last April when the knit business softened up a bit? So I would like sequential guidance there on merchandise margin degradation.

Also for Paul, I am a little confused on your guidance. For the first quarter you called out $0.09 and I believe incremental or one-time occupancy expense pressure, and I am wondering if it is legitimate to add that back to your first-quarter guidance. Thanks.

Janet, I'll answer that. I'll take the last question first add it, you don't add it back into the guidance; it's existing expenses. I'm trying to call out some expenses that were incremental to what we experienced last year to try to help you reconcile where some of the guidance is -- some of your guidance is -- or, excuse me -- your estimates are right now compared to our guidance.

I understand that we can't back it out. But on an apples-to-apples basis, we could consider it $0.09 in incremental expense versus last year?

Yes, that's why I called it out.

And is that the same level that we should be thinking about for the full year as well?

It starts to level out, actually, as you get through the year. It's really related to the timing on some of the leases that we entered into after Q1 of last year, some of the larger leases we have entered into that Michael was referring to, like the extra floor in San Francisco and what we are doing in Las Vegas. It starts to even itself out throughout the year. And part of that was also the flagship costs, and as we've talked about, it is $4 million Q1, $4 million Q2 and $1.3 million in Q3.

Also, some lost revenue from that flagship opening shift from the fourth quarter to the first quarter of next year.

That's accurate. We took the revenue out of our full-year projections for the New York flagship location.

Okay, great. And on the merchandising front?

Let me start with your inventory question, because I've been thinking about it. The answer is no, we have not felt constraints in terms of purchasing goods that we need. Clearly, some of the items that we started to sell had not been funded to the extent that they needed to be funded, and we were not hampered in re-buying those things. So I would say that we have not experienced inventory constraints.

What I would say is that in certain categories, maybe we cut back a little too far on inventory, but in none of the major categories. We did put the dollars behind the major categories, where they needed to go. And when we went back to rebuy, especially for the really heavy time of the year, which as you well know is April-May-June. It's March clearly, but March is sometimes weather constrained, sometimes not. By the time April/May/June comes, it's Spring-Summer, and we need a lot of merchandise. And what we bought is what we felt we could sell and what we needed. We were not in any way constrained in terms of purchasing. David, do you want add anything?

I don't think there's anything to add, honestly. I think Michael is absolutely on the mark. We are not constrained in terms of the selling. As we said at ICR, we kept a significant amount of dollars open for the balance of spring, and we have been able to chase into very proven winners in terms of making the balance of spring go forward.

Janet, just to clarify as well, that we weren't constrained, inventory per square foot was down 6% and it's hard to generate a positive comp on that heading into February. What we have done is there are more receipts coming in starting in early March to mid-March, so we will be in a much better inventory position, and on the Q2 and the back half of the year call, you will see that the inventory levels will increase.

Okay. Also on the merchandise degradation question, David, if you could address the guidance with respect to the fact that I believe your merchandise margin has become much easier in April versus February and March of last year.

Janet, this is Paul. We obviously have February behind us so we've seen the impact of the promotional activity on our margins. We know, without talking about them, what our -- we know what our promotional cadence will be as we look through the balance of the quarter, and all that has been taken into consideration in our guidance.

Okay. And then on the categories, it sounds like almost everything is working. Is there any category of business where you are disappointed or where you are feeling greater than expected promotional pressure from competitors? Thank you.

In terms of opportunities for us, I think our skirt business leads us to a big opportunity going forward. We didn't come out of the gate in the way that I would've liked. But it's not a terribly significant overall part of our inventory or our position going forward. But in general, I'm very, very pleased in terms of where we stand today.

Eric Beder, Brean Murray.

Could you talk a little bit about some of the pieces of the men's business and how they are doing and how is suiting doing? -And, what are you seeing in terms of the wash business going forward?

I have to tell you, I am delighted with the men's business. It continues to grow. As we have said over a very long period of time, it has continued to grow. I think that we have a lot of new men's coming through, we have a lot of innovation. Looking at what we are delivering this month, we've got the 1MX coming in in an easy-care fabric, which I'm very excited about in terms of what that represents for us.

And as I said earlier on the call in the prepared remarks, suits and jackets have really given us the biggest dollar and also percentage increase that we have seen in the season to date. So in general, across all men's categories, I am delighted with what I am seeing.

Sorry, what was the second part of your question?

I know you have been rolling out watches. You've done it now for women's, too. How has that business been accepted? And are there other -- what is the biggest new accessory category you want to go into?

I want to consolidate the businesses that we have as it stands on accessories at the moment and continue to grow them. I am very pleased with what we've seen in watches. We've seen significant growth, obviously. We have had a very, very good reception to the business that we had. We delivered men's to the chain at the beginning of October. We delivered women's to the chain in the beginning of November. And when I look at it, the first 4, 5, 6 months that we have seen, I'm very excited about the potential that it presents us with.

Great, thank you.

Marni Shapiro, The Retail Tracker.

Congrats. The stores look really fantastic. Can we focus a little bit on your online business? There have been a lot of competitors coming into your space that are maybe half-baked, but are still competitors. And there are a few things I am seeing on your website that I'm wondering if you could talk about.

You have some footwear that you run free shipping and returns, but that's not on the apparel. The handbag assortment is much more extensive online and looks interesting to me. So if you could talk a little bit about how you feel about the landscape online competitively, what you are doing new and interesting online, and also how your customer is reacting. Are you seeing the same trends online that you are in stores, the way she reacts to promotions? Is it very different online?

Obviously, we're thrilled with what we have achieved over the past four years in our online -- business. As we said on the call, we've reached a number of about $270 million last year, within the space of time of four years.

Obviously, we have learned a lot over that time, and we continue to see significant growth in this channel. When I look at it by category, there are certain categories that he and she are both really, really responding to online, one of which is tailored. But really what we see is that the best items that we sell, we sell online. And the hottest fashion that we can sell, we sell online. And we literally look at it every single week in terms of our top sellers online versus our top sellers in the store channels, and we are seeing a really, really good response.

I think that the other thing to say is that we are doing other categories online. So for instance in men's, we have gone after swim this season in a much bigger way. We're going to be delivering swim next month in women's, which we're very excited about. And then when you look at certain categories, it gives us the opportunity to broaden the assortment that we can't do in the store channel. So whether it's dresses, dressy dresses and casual dresses, we offer a broader assortment. Or whether it's in tailored products, we offer a broader assortment.

Generally across the board, we are offering more choices online than we are offering in the store. So we continue to see it getting bigger and bigger. And as Michael said in the opening, it's about 13% of the business as we stand today, and we don't see why it shouldn't be significantly bigger going forward.

We are investing significantly in the e-comm front-end platform, as we talked about. So we made the investments this past year to bring that in-house versus having it outsourced and that will allow us to significantly enhance the shopping experience for the customer, everything from the aesthetic of the website, to check out, to search, over time, and we are working through that this year.

And along with that, omni-channel is obviously a big buzzword, and we are working on initiatives in that space as well to really stay at the forefront of the e-comm, the mobile/e-comm experience for the customer. We are working on ship from store, order online to ship from store, things of that nature as well, that will be out and available in the back half of the year.

Marni, the one thing I would like to echo in terms of what David said is that we are really, really surprised at the potential online for selling much broader assortments. We have been so tuned into a store that it took us a while to get to the fact that you don't have to edit as far down online as you do in a store, and the more you have there, the better off you are.

The other big surprise, which I have mentioned in the past, that I had online was that what we sell online is the best of what we have -- the highest price points, the tailored, the highest fashion, is what is best online. So I find that to be very, very, very encouraging in terms of looking at it in the future.

Fantastic. Best of luck, guys.

Mr. Weiss, we have reached the end of the question-and-answer session. I would now like to turn the floor back over to you for closing comments.

Yes, thank you for joining us this morning. We look forward to speaking with you again in May. Thanks again.

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