Express Inc (EXPR) 2013 Q2 法說會逐字稿

Greetings and welcome to the Express, Inc., second-quarter 2013 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, Marisa Jacobs, Vice President of Investor Relations for Express. Thank you, Ms. Jacobs. You may now begin.

Thank you. Good morning, everyone, and welcome to our call.

I would like to open by reminding you of the Company's Safe Harbor provisions. Any statements made during the 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 forward-looking statements due to a number of risks and uncertainties, all of which are described in the Company's filings with the SEC, including today's 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 CFO.

I'm going to turn the call over to Michael now to speak with you about our recently completed quarter and our priorities for the balance of 2013. When he completes his remarks, David will focus on some of our product initiatives and Paul will cover our second-quarter financial performance, as well as our third-quarter and full-year 2013 outlook. We will then turn to Q&A before concluding the call.

Thank you, Marisa, and good morning, everyone. I am delighted to be with you this morning.

Our second quarter was a strong one, characterized by continued progress across multiple initiatives. Growth was nicely balanced, with women's showing marked improvement over last year and the men's business continuing to deliver higher sales.

From a financial perspective, sales were up, comps were strong, and we once again grew our EPS by a double-digit percentage. Specifically, net sales grew 7% to $486 million. Our consolidated comp came in at plus 6%, and our diluted EPS of $0.20 increased by 11% and was near the upper end of our guidance.

We attribute our strong performance to the improved execution of our go-to-market strategy and the progress made against our long-term growth initiatives. Clearly, our customers are reacting positively to our brand, to our assortments, and to our marketing, which combine to lay a solid foundation for further progress in the second half of the year.

Taking a big picture view of our fashion, I continue to believe that we are firmly on target with our key looks and big ideas, and while traffic continues to be a challenge, I am encouraged by the fact that we have continued to see a very healthy uptick in our conversion rate. This forward-looking indicator, as well as current trends both in our business and in the overall marketplace, were taken into account as we developed our third-quarter guidance.

We're expecting our third-quarter comps to increase in the mid single-digit range and our diluted EPS to come in between $0.21 and $0.26 per share. Paul will cover the specifics of our guidance in more detail shortly. As many of you are aware, the most important weeks of the third quarter still lie ahead of us, given that back to school is not as big a driver for us as for some other specialty retailers.

Having said that, it is still good to note that the quarter has gotten off to a strong start.

Our recent denim promotion capitalizes on the natural uptick in traffic that comes from back-to-school shoppers. As they come into Express to check out our jeans, they purchase other items as well. This boosts sales in other departments and positively impacts the overall margin dollars on the transaction. The denim promotion also furthers one of our merchandising strategies, which is to provide younger customers with a bridge into the brand.

One of the things I like to do on our quarterly calls is to update you on our growth pillars. In case anyone joining us is new to Express, you should know that when we think of driving growth, we have four primary areas of concentration. They are increasing our existing store productivity and margins, capitalizing on our e-commerce opportunity, expanding our store base, and international expansion.

I will start with existing store productivity and margin improvement. While David will discuss our product in detail, I want to stress emphatically that the merchandise in our store now is dramatically better than our offering at this time last year. I'm equally excited about the receipts planned to reach our stores over the next few weeks.

From an operational standpoint, we are driving productivity in a variety of ways, including marking down slow selling products earlier in the cycle to free up inventory dollars, expanding merchandise categories to capture a larger share of our customers' apparel and accessories spend, and improving our customer service to boost conversion, UPT, and ADS.

Our efforts in Canada are showing continued improvement as the trend of strong, double-digit comps continues. We recently hired a new country manager for Canada who is herself Canadian and who has significant experience in that market. She has completed her on boarding and is now on the ground there, which bodes well for even more growth in that region.

E-commerce is continuing to grow rapidly. During the second quarter, it grew by 27%, an increase over the 24% growth in last year's second quarter. We still expect our e-commerce sales to approach 15% of our total sales on a full-year basis.

In terms of our store expansion, we're on track with our initial 2013 plan. At the beginning of the year, we referenced 16 locations for new stores, with closures set at nine. During the second quarter, we opened two stores and closed one store in the United States. Additional store-related details can be found on Schedule 4 of our press release.

I'm delighted to report that during the quarter, we took possession of the site in Times Square that will be the future home of our New York City flagship store. Now that we control both the San Francisco and Times Square locations, I am reaffirming that the opening dates of holiday time for San Francisco and next spring for Times Square remain realistic.

We have had a lot of interest in the outlet strategy we began discussing earlier this year, and we're continuing to make progress on that front. Our new Vice President of Outlet Stores is on board and has put much of his team in place. The focus now is on executing the operating plan. More details will be provided on a later call, but our assumption is that the first outlet stores will be conversions from existing Express locations and will open during next year's second quarter.

On the international front, our latest plans call for us to open 12 to 13 new franchise locations this year. During the second quarter, we added three Latin American locations, while closing one Mideast store.

Before wrapping up, I just wanted to note that we received some nice news a few months ago, which I don't believe we shared with you. We were added to the Interbrand list of the 50 best retail brands in 2013. It is our debut on the list and we're delighted to be included.

Overall, I am pleased that our financial results came in near the upper end of our guidance and that we improved the trend of the business. We're also well positioned for a healthy Q3. I would like to thank everyone at Express for their contribution. We couldn't have done it without their hard work and dedication.

Our product is resonating with our customers. Our marketing message is clear and we are intently focused on the operational metrics that drive our top and bottom lines. We're following our test and react strategy and managing our open to buy carefully to maximize flexibility.

What remains to be seen now is how promotional the mall becomes, which, of course, is the wild card we can't control. We are, however, prepared for a highly promotional environment, and under any set of circumstances, we will remain focused on delivering the high-quality, fashion right product that is the essence of the Express brand.

At this time, I'm going to turn the call over to David.

Thank you, Michael. Good morning, everyone.

Summer is coming to a close, and we're heading into the Labor Day weekend and the start of fall. It is an exciting time of the year since it represents a major shift in seasonal fashion, and we're feeling great about our product.

Michael has provided an overview of the business and Paul will speak to you about our financial results. I want to use my time to focus on our products, with a bit of hindsighting with respect to Q2 and our vision heading into fall and the third quarter.

Our performance during the second quarter was in line with expectations. Decisions we made about key items and investment of our open to buy dollars were on target. We cleared through the desired amount of our spring and summer merchandise, and our inventories are well positioned for the balance of the third quarter.

In terms of product, I will begin with the women's side of the business. As we moved through spring, we saw continued improvement in our knit category, with the second quarter generating the strongest results we have seen in well over a year. Based on the early reads generated by our go-to-market strategy, we reordered for the second quarter many of Q1's best-performing items, and they all did well.

Crop tops, peplum, tanks, and bra camis are all examples of strong casual knit sellers, and on the dressy side of the business, our party and studio knit tops performed well.

Our relaxed tanks and entry price point tees offered at $19.90 and $24.90 are good examples of successful opening price point items.

At the upper end of the pricing spectrum, women's shirts delivered strong growth with the dressy category driven by the Portofino. This shirt shows just what we can do at the higher end of our pricing continuum. We've also taken this soft fabric and incorporated it into the Portofino dress, another successful item.

We're seeing a good response to our casual and dressy sweaters. Our casual, relaxed pullovers have had particularly good sellthroughs.

We had another good quarter with dresses, especially our Fit & Flare styles, across casual and dressy. We're adapting them for fall as we expect this shape to remain important for a while.

In terms of bottoms, demand for women's denim outstripped supply during the first quarter, which led us to leave a little money on the table during the second quarter. We have continued to build our denim inventory and are back in a solid position. It is also worth noting that the response to our 40% off denim promotion exceeded our expectation.

Our indigo denim is in demand and sales have more than offset color's role last year.

While denim is always important in August and September, in September we also see a pickup in demand for our suiting separates. We have rolled out two new leg shapes in Editor, the baggy boot and slim, and a new Columnist shape, the slim fit, and we are seeing good results in all of them.

We have developed related marketing materials to highlight the pieces that are suiting components, which is calling attention to them and improving the navigation of the fit.

We are seeing a great response to our below-the-knee looks. Our pencil skirt is one example as fashion shifts in that direction.

Having said that, the newer shorter looks, including our flippy party skirt, are also doing well. They create a really fresh pairing with either crop tops or chunky sweaters. I am optimistic that this assortment will bring some progress to a category where we haven't been at our best over the last few quarters. We're certainly seeing some positive signs.

The footwear category is also gaining ground. And we have increased the real estate being allocated to footwear in approximately 50 of our larger stores.

Last quarter, we mentioned that we were developing some new categories for women. We have introduced a handful of yoga pieces online and in a very small number of stores. While it is too early to report on their progress, we are very excited about this new initiative.

Love Express, the casual lounge and yogawear concepts, and Express Core, the authentic activewear items, will each officially be launched in October with online debuts. The casual lounge product will also be delivered to our top 100 stores, while Express Core will initially appear in six stores.

So as I hope you can tell, I think the women's team has done a great job setting us up for a strong second half.

Turning to men's for Q2, I am pleased to report that we continued our growth trajectory in terms of a comparison to last year's second quarter. The response to several of our key summer items was great. Cotton linen and short-sleeved solid chambray in woven shirts and short-sleeved tees, Henleys, baseball tees, and solid polos in knits all deserve mention.

Our key item, belted short, drove significant volume. However, we were disappointed with the response to our shorter-length shorts.

The dress shirt business was driven by 1MX, as well as simple stripes, prints, and bigger plaids. In terms of an early look at fall styles, we're seeing good response to our casual woven shirts, driven by a great assortment of color blocking and chambray.

Last year, July was the biggest month for men's colored bottoms. Given that tough hurdle, we did a good job going up against those sales. It gets easier going forward since we are up against low-volume numbers on color during the balance of the quarter.

And he is responding positively to our indigo denim, especially dark and clean washes and fabrics that have been destructed and mended. The slim-fit Rocco and the skinny Alec are performing really well, and we have a much better balance across all of our fits and a total denim assortment that I am very pleased with.

Suits and separate jackets continue to show outstanding growth. And I think the quality of our product at the price remains extraordinary. Black and gray remains strong, and we're also seeing a big shift into navy and shades of blue.

Our men's furnishing and accessory businesses are continuing to deliver year-over-year growth, with socks and underwear driving significant comps. We're also very pleased with the development of our watch business across both genders.

Great fashion is obviously at the core of the Express brand. We are also actively driving enhanced recognition of our brand through various marketing and public relations initiatives. Back in May, we sponsored a series of events surrounding the grand opening of our First Canadian Place store in Toronto. In July, we invited bloggers and editors from media and broadcast outlets to a Fall 2013 collection preview in Hollywood. And in early August, we sponsored a fantastic event in Times Square, a fashion show featuring our holiday 2013 collection. Times Square was packed for the event.

This quarter, we will be hosting pop-up shops in six key college campuses, and this week, our Madison Avenue store in New York will reopen after a total renovation. We are very excited about reopening at that important location.

So last quarter was extremely productive and we expect no less of the third quarter. August has gotten off to a strong start, and of course, additional fall and holiday merchandise will be flowing into the stores over the coming weeks. The reads we get from those receipts will provide us with critical information that will be taken into account as we place early spring orders, much of which will consist of goods that are tested and proven.

Of course, we will update you on that progress when we review our third-quarter results. At this time, I would like to turn the call over to Paul.

Thank you, David. Good morning, everyone. Let me begin by reviewing our second-quarter performance, then I will turn to our third-quarter and full-year 2013 guidance.

In terms of the second quarter, we were very pleased with our performance. We navigated through a highly promotional season to deliver results in line with our guidance and saw continued progress across a variety of metrics.

In terms of specifics, I will begin with the income statement. Our net sales for the second quarter grew 7% over last year's second quarter to $486 million. E-commerce sales grew by 27%, which was an increase from growth of 24% in last year's second quarter, amounting to $60 million in sales. On a comparable sales basis, business grew at 6%, which follows a 1% increase in last year's second quarter.

Our gross margin came in at 31.4%, 80 basis points below last year. Half of the decline relates to lower second-quarter merchandise margins compared to the same period last year. This change in our merchandise margin is slightly more than the "relatively flat" performance I guided to on the last call. It's due to the fact that we layered on some additional promotional activity in July, as competition in the mall heated up.

Buying and occupancy expense increased by 40 basis points, which was in line with our discussion in May, as we incurred our last full quarter of the incremental non-cash pre-opening rent expense of approximately $4 million associated with our Times Square and San Francisco flagship locations. This equates to roughly $0.03 on a per-share basis.

We took a disciplined approach to our SG&A during the quarter, which enabled us to realize an 80 basis-point improvement. As a percent of sales, SG&A dropped to 24.5% versus 25.3% during the comparable period last year.

Operating income was $33 million, compared to $31 million in last year's second quarter, and in each year this represents 6.9% of net sales.

Our effective tax rate was 39.7% versus 39.6% in last year's second quarter. Net income for the second quarter was $17 million, or $0.20 per diluted share. This compares to net income for the second quarter of 2012 of $16 million, or $0.18 per diluted share.

Our balance sheet remains strong. Our cash and cash equivalents were $234 million at the end of the quarter and our revolving credit facility remains untapped. Our long-term debt was $199 million, virtually unchanged from last year.

We continued executing against our share buyback program, as well. During the quarter, we purchased approximately 600,000 shares at a cost of approximately $14 million. We ended the second quarter with $21 million of our $100 million repurchase authorization still outstanding. Since then, we continued repurchasing shares, and at this point we have utilized the entire $100 million authorization.

Our capital expenditures during the quarter were $29 million, virtually identical to last year.

In terms of our inventory, we are continuing to build inventory to support our higher sales plan. We ended the second quarter with $242 million of inventory, up 13% from the same time last year. The calendar shift relating to last year's 53rd week accounted for approximately 4% of that increase. On a per square foot basis, inventory on hand was 8.8% higher than last year.

We are continuing to invest in those key items that are delivering strong sales growth -- denim and dressy woven tops, for example -- without taking significant dollars away from other categories. This ensures that all departments are positioned for growth and can contribute to the expansion of our total Company performance. We feel good about our inventory heading into the back half of the year.

I would now like to turn to our guidance for the third quarter and the balance of the year. Our expectations are for third-quarter comparable sales to grow in the mid single-digit range. We expect net income to be in the range of $18 million to $22 million, or $0.21 to $0.26 per diluted share on 85.1 million diluted weighted average shares outstanding. This guidance does include a small expense associated with the buildout of our outlet business.

We are currently projecting an improvement in our third-quarter gross margin. This is the final quarter that our buying and occupancy expense will include an incremental non-cash rent expense associated with the flagship locations. However, because we're anniversarying this expense for a portion of the third quarter, that incremental expense will fall to $1.2 million. This, in combination with leverage associated with positive comps, will result in modest improvement in our B&O expense as a percent of sales.

SG&A as a percent of sales is expected to increase during the quarter. We will be accruing incentive compensation this quarter, and of course, we had no IC expenses in last year's third and fourth quarters. And we will have some incremental IT-related expenses, as well as some incremental payroll. Lastly, we will be incurring some marketing costs as we prepare for our grand opening in Times Square.

In terms of full-year 2013, we now expect comparable sales to increase in the low to mid single-digit range, an improvement over the flat comps delivered in 2012. Reflective of our performance to date and our guidance for the third quarter, we have taken our full-year net income guidance up to $130 million to $137 million, or diluted earnings per share of $1.52 to $1.60.

These estimates include $9 million of incremental pre-opening flagship rent expense, which translates into approximately $0.065 per share, and $1.5 million, or $0.01 per share, associated with the new outlet business. The EPS calculation is based on an estimate of 85.4 million diluted weighted average shares outstanding.

In terms of our real estate portfolio, please refer to Schedule 4 in the press release, which details our domestic and Canadian plans for Q3 and the full year. Capital expenditures during 2013 continue to be estimated at $110 million to $115 million. The increase over our 2012 spend is primarily driven by the incremental costs of preparing the flagship locations and investments in systems and technology.

That concludes my comments. At this time, I'm going to turn the call back over to Michael for his closing remarks.

Thank you, Paul. The third quarter is off to a good start and we are encouraged by the strength of our product offering, especially some of our key items, and by customer response in the form of increased conversion.

The second half represents a greater percentage of our year than the first, and we're determined to win. Everyone at Express is focused on delivering the right product and managing the business with a singular goal of driving a healthy bottom line. We look forward to updating you on our progress when we convene again shortly after the Thanksgiving holidays. Until then, enjoy your Labor Day holiday.

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

(Operator Instructions). Neely Tamminga, Piper Jaffray.

I just want to ask about guidance for Q3. It looks like you're not looking for any sort of improvement in merchandise margin outlook, that you have decided basically leverage on buying and occupancy. If memory serves, you guys lost about 150 bps last year in Q3 on merchandising margin. Do you think that there is an opportunity or do you have some conservatism in there, based on promotional activity?

And if I may, just a question here for David on the yoga product. How many stores do you have that in right now? And it sounds like it is doing really well. Do you think that it's an incremental purchase at this point when she is buying it or is she replacing something within her existing basket? That would be helpful to have some perspective. Thanks.

We do believe there is going to be some leverage off the B&O as we look for improvement in gross margin, but we also would expect in the third quarter that we would begin to start recapturing some of the merchandise margin that we lost last year.

As Michael said, the wild card really is what happens with the promotional environment as we look forward. But consistent with what we said last quarter, we would expect to start recapturing some of that merch margin. David?

In terms of the yoga, yes, we are doing it because we believe it is going to be incremental. It has only really been out there for a week.

We tested it in the spring. It looked really, really good. We did it online. And it had some of the highest conversion rates that we have seen per page. So we are very excited about what it is going to deliver for us going forward.

And David, how many doors do think you can put that in?

Ultimately, I would like to believe it is going to be an all-store thing, but we are really testing it at the moment in terms of yoga. Lounge is going to 100 stores.

Thank you so much, you guys. Good luck.

Lorraine Hutchinson, Bank of America.

Michael, I just wanted to follow up on the comment that you made about July. Obviously, the environment is very tough out there. How aggressive did you have to get with promotions above your plan? And did you see a marked change in the trajectory of the business that has continued into August, or were those promotions effective in keeping your run rate as it was in the beginning of the quarter?

I think the issue for us in July is that we don't push merchandise forward. No matter what we are left with, we get rid of it all so that our inventory is quite current by the end of the quarter.

As you know, we run a clearance sale once a quarter to relieve the inventory of anything that is clogging it up.

I think the July increased promotion, and you are right, was more of a result of June than it was of July, because we backed up a bit and we had to clear it, and we did. So going into August, we were quite current and we are quite current right now and we will be current going into fourth quarter because we will clear inventory in September, as we always do.

Does that answer your question at all? Oh, July did get better than June. The end of July got better and we are quite happy with August.

Thank you.

Eric Beder, Brean Murray.

Good morning; congratulations on a solid quarter. Could you talk a little bit about the changes you have been doing online? I noticed there have been more of these midnight sales. Now that you are in charge of the online business, what have you been doing to really drive that online conversion?

Yes, so we have had a couple more tick-tock sales out there. You know, the one thing with the online channel is that you can do things that you don't necessarily do in stores during off hours. Some of them are flash sales, things like that, we have been playing in that area. We have done a few of those.

They do look to be incremental to the overall volume, so we have been pleased with that and we will continue to do that going forward.

With the new platform that we have out there, as we said we have taken the old platform, replicated it, and you'll see more changes coming, particularly in the spring, which will enable us to have better content management, better search capabilities, better overall presentation of the product, and easier checkout as well.

So those are all still to come. We think there is still lots of upside, and as you can see, the growth in e-commerce continues in the high double digits and we don't see any reason that should slow going forward.

The other thing with e-commerce, Eric, is we have an opportunity to have expanded assortments on e-commerce in terms of style choices or color choices or, as you know, certain product categories, like swim. We also, as David was just discussing, have the opportunity to test items on e-commerce, such as we are doing with yoga right now and we will also do with our casual loungewear, which will be online and in 100 stores.

I think the other thing to add, Eric, is that it enables us to clear product really, really well. So there are certain things at the end of the season we can clear from stores, such as suits, and we sell them online and we are able to sell them online into the following season at very, very good margins.

Great, and could you talk about initial results you are seeing in outerwear? Is that an opportunity for you? I know you had it in some of the stores and were testing it in the beginning of August and July.

Obviously, it is very, very early in terms of the outerwear business. But we are seeing some very, very good responses, in particular to our Minus the Leather, and we have tested some of that in the Pacific Northwest and did very, very well with it. So we're excited about the opportunity that lies ahead in both genders on outerwear.

Great. Thank you.

Brian Tunick, JPMorgan.

Yes, hi. I was wondering if you could speak to SG&A in the quarter and just where you pulled back in order to come in a little bit better than expected. And how should we think -- be thinking about SG&A as we enter the back half? Thank you.

So from an SG&A perspective, we have really just been continuing to apply the discipline that we have had over the last year as we had challenges with the overall comp. We have been very tightly managing our headcount expenses for things like travel, and also in this quarter, obviously, we had no incentive compensation expense, where we had it last year. So some of those things in total contributed to our ability to leverage the SG&A as we did.

Our SG&A, as we have been indicating, on a full-year basis will be roughly flattish as a percent of sales. We had indicated that on the last call and that remains true. So with the leverage that we got in Q1 and Q2, that would suggest that we will have some deleverage on our SG&A in Q3 and Q4, a little bit more in deleverage in Q3 for the reasons that I discussed in the script.

Great, thanks.

Betty Chen, Wedbush.

Good morning and congratulations on a great set of numbers in a difficult environment. I was wondering if you can talk a little bit more about the outlet business. We are excited to see the outlet channel will be launching next year. Should we anticipate a made-for-outlet product kind of strategy and whether you can share with us at this point what the long-term opportunity is -- it could be the number of stores or revenues or productivity? Thank you.

This is Matt again. We haven't given a lot of details on the outlet business, but the headlines here are that in the spring we plan on converting approximately 15 stores, including the stores that are currently outlet stores today that are just taking existing store product and liquidating it, along with some of our full-price stores. We are converting those over to these outlet stores as well.

And then in the fall, we will start to open new outlet stores. We believe this opportunity is, over the longer term, at least a 100-store opportunity, if not more, worth about $500 million in revenue. So it is a large opportunity for us.

We are one of the few in the retail segment that have not taken advantage of this opportunity, and you take a look and benchmark where other companies have succeeded in the outlet business, we certainly think there is big upside, and this business seems to be, for most companies, largely incremental.

And there will be a made-for-outlet product, Betty.

Great, thank you so much, and the stores look great.

Jay Sole, Morgan Stanley.

It seems like the second quarter in-store comp improved significantly over 1Q. If my math is right, it looks like in-store comp was mid single-digit positive in 2Q versus kind of mid single-digit negative in 1Q. So my question is, if my math is generally right, what drove the improvement quarter over quarter?

First and foremost is the product. We feel like the product right now is some of the best product that we have had for quite a while. So we're really excited about that.

The other is the focus. We have really made sure with challenges in traffic that the sales associates in the store are very, very focused on the customer experience. As Michael talked about in his portion of the script, we did see an increase in conversion in the quarter, which certainly helped the comp.

So I would say those are two really key items that helped drive the store comp into that positive territory that you suggest.

Jay, what I would add to that is obviously, as I said in my script, is that we bought back into the things that were really working in Q1. We bought back into them in depth and they continued to work into Q2.

And I think that obviously what matters in product is that it's differentiated, it's desirable and it's innovative, along with providing a compelling value proposition. And we were able to deliver that well into the second quarter. So we're very excited about that.

I think the other thing is, as you remember, last year's same quarter we had significant problems with both sweaters and cut and sew knits. And those -- this is a very pragmatic answer, but those both came back strongly.

Okay. Thank you.

Richard Jaffe, Stifel.

Could you talk about inventory for the second half, your outlook and, I guess, opportunity to build certain categories, given the strength you have seen to date?

We feel good about the inventory position, Richard, coming into the third quarter, even though it is a slight bit higher than our sales rate.

We have taken the opportunity to invest in some very key categories, like I mentioned. We've invested in dressy woven tops. We have invested in denim. We have invested in pants, particularly on the women's side of the business. We're investing in accessories, which continue to be very, very strong for us, including watches, and we have invested in men's suiting.

So those are some of the key categories that we've invested in. We're making great efforts to have a good open to buy so that we can chase into those things that are selling well. So we are managing our inventory at the highest levels within the organization. We're approving and releasing dollars, as appropriate.

And as Michael alluded to, or very specifically actually said, we are trying to mark down things quicker that we know aren't working, so that we leave ourselves money to chase into those things that are working.

So we retain some good flexibility to chase into those things that are working well for us.

And I think that something significant, to me anyway, in terms of the balance of the business, if you listen to what we have reinvested in that Paul mentioned, you see important things on both sides of the business, the dressy as well as the casual, which leads me to believe that the future business will be a really balanced business in terms of what is good.

And in terms of dollars, or investment dollars, or dollars per square foot, how do you think that will change year over year?

Richard, we generally don't give guidance on inventory projections.

Okay, thank you.

Janet Kloppenburg, JJK Research.

Congratulations on a good quarter. I had a couple of questions for David and Michael, and then a couple for Paul.

I just wanted to talk a little bit about the denim promotion that was in place in the beginning of August. I just wanted to clarify that was something you had planned and perhaps that the merchandise margin there had been engineered to be favorable. I also just wanted you to talk a little bit about the denim category. We are hearing about a lot of softness there. I wonder if you could distinguish your success there versus what is going on in the industry?

And secondly, on sweaters, I think you said they are performing well. Is it too early to read through that trend or are you confident in a strong sweater performance this fall? Given how tough it was last year, I think that could be a real margin opportunity.

And then, on the balance sheet, Paul, I was wondering how you think about paying down the long-term debt. Are you comfortable with it or is that a discussion you may have at year-end? Or is it something that we think should be staying there? I'm not sure how you think about that. Thanks.

Let me start with the denim question. In terms of denim promotions, we have always looked at them in terms of margin dollars, not margin rate.

Clearly, you have to get a big incremental jump in the business so that the dollars exceed the rate. However, the other big piece of the denim promotion is that we really strategize the transaction. We have a history of what sells with what. We have reports on a weekly basis of related selling and we note what denim drags, so that the rate on the jean is lower than we would like to get, but the rate on the transaction is really quite good. The other things make up for that.

The other piece is that it is the only product, and we have talked about this and strategized this, that we use to bridge the younger customer into our brand. And we really can take advantage of that at the end of July, into August, and the very beginning of September. So we are delighted with the way that denim has performed.

Janet, in response to the differentiation and how we differentiate our denim from the competition, I think the most important thing is that we have a very compelling value proposition.

We are definitely not going out there to be the cheapest, but we do offer really, really great fashion at affordable prices. We have a broad selection of washes and fits, and I think that across all of our fits, we are doing particularly well at the moment in terms of what is authentic. And as I said, in dark washes we have done very well, but we're also doing well across all of our fits.

I think in terms of sweaters, I'm very excited about what we've seen so far over the first three weeks of the season. And I believe that going into, obviously, the balance of the third quarter and the fourth quarter, we have got a very, very strong assortment ready to go. And we placed a significant amount of our units for the fourth quarter a few weeks ago, and we believe that we put them into proven and tested items that can deliver a very strong fourth quarter.

Thank you.

Lastly, in terms of the debt, as we have spoken about before, we take the opportunity at each Board meeting to talk to the Board about our overall capital structure. Right now, as you know, that debt has a make-whole provision until March 2014. It would make it very, very expensive to retire it right now. So I think we will have further discussions with the Board about our appropriate actions as we get closer to that date.

Okay, and Paul, a question on the buying and occupancy. I think you said there would be a nonrecurring $1.2 million in the third quarter of this year. Can you remind us what it was last year in the third and the fourth quarter?

Yes, the third quarter was about $3 million in the third quarter of last year. Hold on a second, let me just find that.

Paul, will we have that nonrecurring in the fourth quarter of this year?

No. We had expensed it all in the fourth quarter of last year, so we are not projecting any incremental in the fourth quarter.

Okay, so last year in your third quarter, it was $3 million, and we just need the fourth-quarter number, but you can give it to me offline, if you want.

The fourth-quarter number last year was roughly $4 million.

Okay, great. Thanks, guys. Good luck.

Marni Shapiro, The Retail Tracker.

Congratulations. The stores look fantastic.

I was just curious. Obviously, the environment is very promotional out there, but it feels like a lot of the pressure is coming on the denim side, which is probably a little bit younger or more competitive in the mall. Are you seeing that kind of pressure on your pants business and your wear to work, whether it is the Editor pant or the shirts or some of the skirts, or has that business held up pretty well?

Interesting question. The dressy pant business has held up very well and we are getting very nice increases from it. And because of that, we are looking forward to a really good September in that category.

Additionally, we're finally getting a few skirts that are checking quite well. So the wear-to-work areas of our business are looking strong. They are not under the same pressure. You are absolutely right.

The other piece of the business that continues to increase, which we have categorized in the wear to work, is, of course, the Portofino shirt, which can be worn with anything. So it is not necessarily wear to work, but that's how we categorize it, and it continues to perform to expectation.

Great, and then just also on the sweater business, it has been a long time since we have had any real sweater business that has been successful, and you guys have had some outstanding sweaters this season. If this trend in the sweater business continues to accelerate, is there an opportunity to put some, not all, but some sweaters into the wear-to-work space? It has been a long time since we have seen a trend in wear to work where sweaters have checked?

I think we've started to, actually. We have gone back into much finer gauges in wear to work and we have seen a very good response to those. So you'll see more of those going into the third quarter.

Fantastic. And you guys feel good about the balance of wear now versus wear in the fall in the stores right now? I personally think the balance looks the best you have had in years, but you guys feel good about that as well?

Very much so. Very much so.

Fantastic. Congratulations, guys. The stores look great.

Jennifer Redding, BMO Capital Markets.

It's John Morris. Can you hear me okay? Let me add my congrats as well.

Could you talk to us a little bit more about international. You gave us some remarks in the script. First of all, did I hear that you closed one store in the Mideast? I'm wondering if so, why that is? I think more importantly, discuss the emphasis going forward by region and what kind of results you expect to see there? Thanks.

Yes, so, this is Matt. The international business continues to move forward for us. In the Middle East, we did close that one store. It was simply, as we were working with our franchise operator, there was another group that needed a larger space which included ours, and we are working on a different space in that location.

The Middle East, if you looked at it regionally, the Middle East has been a little tougher, and I think that is true for all brands. A lot of that is all of the activity going on there right now with the uncertainty. That certainly hits consumer sentiment. What we understand from our franchise operator is that it is a more across-the-board thing with the consumer versus a singular brand type of activity. But we feel good about where we are there.

And we continue to move forward with stores in Latin America and Mexico, as well, with those franchise operators. We obviously are in discussions for some additional deals that we are working on, that we're getting close to. We obviously don't announce those until we have signed deals, but we hopefully will have some news as we head into late third quarter or early fourth quarter.

And Matt, bigger picture strategically, if you were to look out over the next three years or so, regionally, would the emphasis be Latin America from here on, not talking about Canada, but regionally international?

Well, the emphasis is on a combination of things. Latin America, for sure, and we feel very good about the direction that is headed, particularly in Mexico, and then we are looking at Asia as well. There is a big opportunity, we believe, in Asia from a franchise perspective as well and, eventually, over time, some Company-owned stores, but that will be down the road a little bit.

Okay, thanks. Good luck for the fall.

Susan Anderson, FBR Capital Markets.

Good morning and congrats on a great quarter, you guys. I was wondering if you could maybe talk about product costs for the back half. I had heard from some retailers that they may be putting less quality into things like denim, just to offset the competitive environment. I'm just wondering if you are doing anything like that?

And then, also, I may have missed this, but if you can talk about the comp progression through the quarter.

I would start by saying absolutely not. There is no way in which we are putting less quality into our product. I think quality is a key differentiator at Express, and we continue to deliver a quality product and we will continue to do that.

We might see as we look ahead at the quarters on a rate basis, a very slight decrease in our AUCs, but nothing very significant compared to prior year. And that is all contemplated in the guidance that we provided.

Okay, great, thanks. And then, just the comp progression throughout the quarter?

We don't disclose comps by month, so we really just talk about comps by quarter.

Okay, great. Thanks and congrats again, you guys.

Ladies and gentlemen, we have reached the end of our allotted time for today's question-and-answer session. I would now like to turn the floor back to Michael Weiss for closing comments.

That concludes our call for today. Thank you for joining us this morning and for your ongoing interest in Express.

Thank you. You may disconnect your lines at this time. Thank you for your participation.