Express Inc (EXPR) 2013 Q3 法說會逐字稿

Greetings and welcome to the Express third-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. Thank you. Ms. Jacobs, you may begin.

Thank you. Good morning, everyone, and welcome to our call. I'd like to open by reminding you of the Company's Safe Harbor provision.

Any statements made during 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, 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 third-quarter financial performance as well as our fourth-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 hope each of you enjoyed the Thanksgiving holiday and I want to thank you for being here with us this morning.

We are pleased to deliver third-quarter results in line with our guidance. The promotional environment heightened as the quarter progressed, which we responded to by intensifying our marketing offers to remain competitive. Even with that, comps were up, margins expanded and earnings rose.

Compared to last year's third quarter we've made real strides in terms of our offering and our presentation. Growth in the women's business outpaced the men's in Q3. This was good to see since last year's challenges came out of that part of the organization.

After David assumed responsibility for the women's business just a little more than a year ago, he heightened the distinction between the casual and dressy segment by eliminating overlapping offerings. Inventory dollars and floor space have been successfully redeployed to expand the selection being offered to our girls.

The third quarter included progress across our growth pillars. As most of you know, they consist of four areas of concentration -- mainly increasing our existing store productivity and margins; capitalizing on our e-commerce opportunity; expanding our store base; and international expansion.

Store productivity is impacted by many things but we've always viewed product as the key driver. I was in Europe after our second-quarter call with David and some of our designers and merchants. It was great to see that we had really captured the key trends as well as those that we felt were emerging. The trip reinforced our view that there absolutely is new fashion out there, that the stage is set for trends to build and that we are on top of them. This is one of the factors that led to continued gains in conversion during the quarter.

We are continuing to remodel stores. I hope that you have seen the reopened Madison Avenue and Flatiron stores; they look fantastic and are doing very well. In terms of hub stores, our new location at Fashion Show in Las Vegas is definitely resonating with our customers and the new Dadeland store has really elevated the presence of the brand in this important mall.

Our expansion into new merchandise categories is continuing with loungewear, active and yoga being the latest additions to our collection. Each offering can be found online and in a limited number of stores.

E-commerce continues to expand rapidly. During the third quarter it grew by 29% on top of the 21% in last year's third quarter. On a full-year basis we expect e-commerce to represent approximately 15% of our total sales, a level reached far more quickly than we had originally anticipated.

We are continuing to enhance our e-commerce experience for our customer. For example, next year's rollout of a new web design will incorporate an updated look, easier navigation, a faster checkout process and other enhancements. We're also setting the stage for greater personalization.

Given the speed that mobile is growing at, we are adding enhancements there as well. EXPRESS NEXT credit card holders can now link their card with an Express app that enables them to make payments using their mobile device.

By the way, we are also pleased to note that our EXPRESS NEXT program now has 9 million members. With only 6 million members at the end of 2012, that represents dramatic growth. EXPRESS NEXT customers spend more, shop more often and access our brand through a variety of vehicles, not just the stores. They are the essence of omni-channel consumers and we're thrilled that their engagement with us continues to grow.

When we think about the future of Express, all of our operational and financial planning is being undertaken with an omni-channel perspective. Our objective is to provide our customers with a seamless, uniform experience, giving them what they want, when they want it and where they want it.

Turning to our store expansion plans, at the beginning of the year we referenced 16 locations for new stores, with closures set at nine and this should be exactly how the year ends up. During the third quarter we opened seven stores, two of which were in Canada. We had no closures during the quarter. Additional store details can be found on schedule 4 of our press release.

Our Union Square flagship in San Francisco opened on October 17 and we couldn't have been happier with the launch. We had an opening day party that packed the store. That was followed by some outstanding media and blogger coverage including spots on primetime entertainment and lifestyle shows such as Access Hollywood and E-News.

Work is progressing on our Times Square store and we are on target for a spring opening. The large LED screen at that location is in place and we hope to be projecting some great Express imagery by the end of the year for the New Year's Eve celebration that takes place in Times Square and is broadcast around the world.

The outlet team is making good progress. Store conversion plans are in place and lease negotiations for new locations are proceeding. We are on schedule to open the first outlets next year in Q2 and remain confident that these stores will add incrementally to our top- and bottom-line results.

Please remember when doing your 2014 modeling, however, that approximately 15 of the early openings will come from converting stores in our existing fleet. We will share more details about our expectations for outlet stores when we introduce guidance for 2014 in March.

On the international front, during Q3 we opened three new franchise locations, one each in Mexico and Costa Rica where we already have stores, and then our first store in Colombia. Our international business is on track to break even this year. We also remain on target to open a total of 12 new franchise locations this year and to sign one franchise agreement in a new region of the world before year-end.

Let me make a final comment about the fourth quarter and then I will turn the call over to David for his observations. Sales over the Thanksgiving week were higher than last year but, based upon the way we look, we expected it would have been even better. This along with the intense promotional environment has tempered our outlook, which Paul will review with you shortly.

We continue to believe we are positioned with appealing and trend right product. A greater percentage of our goods represent spring go-forward merchandise than at the same time last year. We'll keep flowing in new spring merchandise throughout the balance of the quarter to keep the store looking fresh and exciting and to maximize our performance during the balance of the holiday season. At the same time we are continuing to invest in our business and advance the growth pillars that will generate long-term shareholder value. With that I'm going to turn the call over to David.

Thank you, Michael. Good morning, everyone. We all talk about time flying and it's hard for me to believe that a year has passed since I stepped into the role of President and assumed responsibility for the women's division in addition to men's. It has been a productive and fascinating year and I can't thank the team enough for all the support that they have given me. I am honored to work with such talented and committed individuals.

I've given a lot of thought to some of the changes put in place during the past year which have generated some very positive results along the way. Execution of our go to market strategy has improved significantly as we test more appropriately and, just as importantly, have the restraint not to test when it is unnecessary. We've been managing our open to buy more aggressively. This allows us to keep more dollars open to chase into items that are performing well.

We are also doing a better job of maximizing opportunities when we see good sell-through on key items. It has resulted in some higher inventories to support higher sales, but the builds have been warranted. The women's assortment has been reworked to deliver a cleaner delineation between the casual and dressy looks and our accessory offerings are much better. And the men's and women's teams are doing a better job of sharing key learnings and applying best practices.

At the same time, we can always get better and I know there is more work to be done. Sharing knowledge is critical as is extracting key learnings from all of that knowledge and institutionalizing that learning. Better inventory management is another area of opportunity and I know we have even more opportunity when it comes to managing our open to buy.

The best part is that the list doesn't end there. But we will spend more time on 2014 initiatives next time we talk. I want to use the balance of my time to update you on key themes in the women's and men's businesses during the third quarter and looking forward.

Our third-quarter results speak to the fact that the business is performing better this year than last. As you know, most of our challenges last year were in the women's business, so it's especially important to us to see better performance there this year. Sales were up, margins were up.

And we drove increases in most of our categories, including most of the really meaningful ones. This is very important. We have learned that there is no point in building one category by starving another; all you get in the end are flat results.

So let's delve into women's a little more deeply. As Michael said to you a minute ago, there is new fashion out there and we are selling it.

When paired with tucked in or shorter tops, the high-waisted look is continuing to gain traction and drive related selling. I know you are always interested in our sweater assortment at this time of the year and we are well positioned. Casual sweaters are doing extremely well and dressy is doing just fine. Right now we're very pleased with our fitted v-necks and crew necks, the shaker stitch, cozier sweaters and some of the finer gauge styles such as our cover ups.

Studded sweaters, animal prints and our early spring sweaters are all blowing out the door. And when we think about what great gift items sweaters make, we know that we have given customers a tempting range of choices. This was one of our best performing categories during the Thanksgiving week.

In terms of the Portofino shirt, we are continuing to introduce new colors and print variations and our girl keeps coming back for more. It is also important to note that this isn't the only item performing well in the dressy woven category. Soft shirting in general is doing very well for us.

In terms of knit tops the focus is on crop tops, layering T's, lace and graphics. In casual, animal prints continue to do really well with the imagery getting bigger and bolder. It has also been a season of sport inspired looks with lots of baseball tees and sweaters. And of course this plays into our new loungewear offerings.

In women's denim and casual pants with the toughest quarter of the year behind us, it is great to be able to report that we successfully comped last summer's colored bottoms. Our Q3 women's denim offering was on-target with the dark indigo washes, destructed finishes and new offerings in terms of silhouettes. And our expansive assortment of black knit leggings was very right for the moment and continues to do well.

Fit and flair dresses have been reinterpreted with more structure and the silhouette will continue into spring.

We've mentioned in the past that we thought we had room for improvement in our shoes and we delivered that in Q3. We saw significant gains in sales, margin dollars and margin rate.

We still have the opportunity to grow our Personal Care business and have launched a new fixture to help showcase our fragrances. The re-launch of GLAM is underway; we have a wonderful selection of gift offerings available for the holidays. So looking at the third quarter in total, we made real advances on the women's side of the business.

In terms of the fourth quarter, we have a strong assortment and well executed floor sets. Our inventories are also well-balanced in terms of an optimal mix of cold weather and spring offerings. Let me shift gears now and focus on the men's business.

We had another quarter of solid growth in men's. Areas where we saw the best third-quarter growth included knits, graphics, suits and jackets along with furnishings. Our suit business continues to be the stand-out category along with jackets and dress pants as we continue to strengthen our dominant position in tailored clothing for young men.

In terms of knits, we spoke previously about seeing opportunities in the men's tee business and we're currently driving double digit comps there. Specifically, we are having success with key fashion items being sold at competitive price points. We've done a good job of increasing our speed to market by chasing into tested items in graphics.

We are also seeing significant growth in our core long sleeve waffle tees and solid Henley's. As soon as temperatures dipped we saw fleece take off. We expect knits to be a very good category for holiday.

In shirts, the 1MX is continuing to perform well and we have seen progress in our wear to work patterns. Turning to sweaters, the early part of Q3 got off to a slower start than we would have liked. That may simply be a function of how warm it was throughout the fall.

We have also seen a pattern emerge over the past few years with the men's sweater business being driven in a much greater way during Q4. We are currently doing very well with our novelty sweaters all across the pricing spectrum which ranges from $79 to $148. Merino and cotton V's continue to be our big volume drivers.

In men's denim, the dark indigo and clean washes are doing really well as is the straight leg jean. We went into the season too heavy in lighter washes and the boot cut and we didn't fully comp colored denim in August and September. We have rebalanced our inventory and for Q4 we are better positioned with the right fits and washes, so we expect men's denim to perform well during the holidays.

I hope you have seen some of the men's gift items which we have been flowing in, with an expanded selection of socks, fragrance sets and watches, all intended to complement our on-trend apparel.

We approach the holidays by focusing on those things within our control. Our holiday and early spring product is compelling and our floor sets call attention to the accessories and personal care items that make wonderful gifts. Newness will be more evident this year than last and our sales associates are energized and ready to assist our customers so that they have a wonderful experience in our stores.

To paraphrase something Michael has said on different occasions, our goal is to ensure that Express is perceived as a fashion authority for consumers in our demographic range and we intend to use holiday 2013 to reinforce this. At this time I would like to turn the call over to Paul.

Thank you, David. Good morning, everyone. I will begin by reviewing our results from the third quarter and then turn to our outlook for Q4 and the balance of the year.

As you have already heard from Michael and David, we were pleased that in a highly promotional environment we turned in results in line with our guidance and which were led by initiatives intended to drive comps, control expenses and start rebuilding merchandise margins.

Net sales for the third quarter grew 7% over last year's third quarter to $503 million. E-commerce sales grew by 29% to $71 million on top of last year's 21% increase.

On a comparable sales basis, the business grew at 5%, representing a significant about face compared to the third quarter of last year, when our comp sales declined by 5%. Our gross margin came in at 32.9%, which is 60 basis points better than last year. 40 basis points of this improvement came from increased merchandise margins.

While we are pleased to deliver some recovery the actual improvement is certainly less than what we had been projecting when we formulated guidance for our August call. As you already know, August was very strong and throughout much of September, we expected merchandise margins to improve quite a bit more than 40 basis points. As the quarter progressed, however, we did respond to the intense discounting we were seeing in the mall by increasing our own promotions.

As a percent of net sales, buying and occupancy expenses improved by 20 basis points. We realized a benefit associated with the return to mid-single-digit comps. This benefit was partially offset by the remaining $1.1 million of incremental non-cash preopening rent expenses for our flagship locations.

SG&A as a percent of sales came in at 25.5%. In last year's third quarter, it represented 25.1% of net sales. This increase on a rate basis is in line with our commentary in August. The increases reflect additional spending to establish the infrastructure for the outlet business, spending on IT initiatives and marketing expenses associated with the flagship store in Times Square along with some higher payroll costs.

Operating income was $37 million compared to $34 million in last year's third quarter. In each case this represented 7% of net sales.

Our effective tax rate was 39.2% versus 41.4% in last year's quarter, largely due to discrete items that impacted last year's rate.

Net income for the third quarter was $19 million, or $0.23 per diluted share. This compares to net income for the third quarter of 2012 of $17 million or $0.20 per diluted share.

Our balance sheet remains very healthy. Our cash and cash equivalents were $182 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.

Early in the quarter we completed the remaining $21 million portion of our $100 million share repurchase program. In total, we repurchased approximately 5.6 million shares at an average cost per share of $17.82. Our capital expenditures during the quarter were $33 million compared to $28 million last year.

During the quarter, we built inventory to create the presence needed for certain key categories. We ended the third quarter with $343 million of inventory, up 18% from the same time last year. The calendar shift relating to last year's 53rd week accounted for approximately 7 percentage points of this increase. We also arranged for some Holiday goods to be delivered earlier than last year to improve inventory flow in the distribution center during the holiday period, which added about 3 percentage points to the total increase.

On a per square foot basis, inventory on hand was 10% higher than last year. As Michael and David have both said, we feel good about our product heading into the holiday. Coming out of the Thanksgiving week, a larger percentage of our inventory consisted of spring receipts than at the same time last year. And we'll manage receipts during the quarter to offset the early receipts that hit in Q3.

I'm going to turn now to our guidance for the fourth quarter and full year. Our expectations are for fourth-quarter comparable sales to grow in the low-single-digit range. We expect net income to be in the range of $56 million to $60 million, or $0.66 to $0.71 per diluted share on 84.8 million diluted weighted average shares outstanding.

This guidance does include a small expense associated with the build out of our outlet business. We were hoping to deliver additional gross margin gains in the quarter. Given our current thinking about the promotional strategy we'll employee to compete effectively, we expect that to now be unlikely.

Merchandise margins are now expected to be relatively flat compared to last year's fourth quarter and buying and occupancy expenses are expected to de-lever.

SG&A as a percent of sales is expected to increase during the quarter in line with the de-leverage that occurred in Q3. Yet on a full-year basis as a percent of sales, we still expect SG&A to remain relatively flat to last year.

Based on our latest thinking about the promotional cadence during the holidays and what we've said about Q4, we are resetting our full-year guidance. We now expect comparable sales to increase in the low-single-digits. This compares to the flat comps delivered in 2012. We now anticipate net income ranging between $124 million to $128 million and diluted earnings per share within a range of $1.46 to $1.51.

These estimates include approximately $9 million of incremental preopening flagship rent expense which translates into approximately $0.065 per share and also includes $1.5 million or $0.01 per share associated with the new outlet business. The EPS calculation is based on an estimate of 85.1 million diluted weighted average shares outstanding. And as you probably recall, the 53rd week last year accounted for approximately $27 million of revenue, $3 million of net income and an earnings per share of $0.04.

Capital expenditures are now expected to range between $108 million and $113 million for the full year. The increase over 2012 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'd like to turn the call back over to Michael for some closing remarks.

Thank you, Paul. We have improved our execution and product offering significantly since this time last year. Because we expect the entire holiday season to be highly promotional, we are proceeding with what we believe is appropriate caution. This is reflected in our guidance.

I want to end by stressing that even in this challenging environment, our focus remains forward looking. We are working on an exciting summer assortment and, when our customers come to us for those warm weather looks, we will be ready.

I know it is early, but let me wish each of you a very Happy Holiday season and a healthy and happy New Year. We will either see you at ICR in January or speak to you again in March.

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

(Operator Instructions). Simeon Siegel, Nomura Securities.

Michael or David, I believe you are now anniversarying the change in price messaging and it looks like the mall met you at last year's 50% off. Given your commentary around the promotional environment, can you just talk about your thoughts around driving traffic in this promotional environment that really doesn't look like it is going away?

And then, Paul, just as it relates to the gross margin, I was surprised you didn't get more B&O leverage on the 5% comp. It looks like the flagship may have had 20 basis points of pressure. Was there anything else? Was there e-commerce pressure you can quantify?

And then, just taking a step back, this is going to be the second year of gross margin pressure. Can you talk about where you would expect gross margins to normalize longer-term? Thanks.

I think in terms of driving traffic these days we, at Express, have to do two things. We have to look very, very forward in front of the store, we have to look forward in the windows, we have to look like the fashion store that we are.

At the same time, the signage has to inform the customers that we are offering the same terrific discounts on things that other people are -- that competitors are. So that we need to indeed compete on two levels -- clearly the price level but very importantly on the fashion level.

Along with that, Simeon, while traffic has been an issue, you have a tactical response in the short-term during the holiday period, but longer-term we are certainly looking at ways to improve traffic as well. The good news is conversion is up significantly, UPTs are up as well, so when the customer comes to the store they really like what they see.

And we are aggressively looking at improving traffic longer-term. Our loyalty program has increased from about 6 million customers to 9 million customers. And we are looking for new ways to leverage this increase in membership.

We also have a new head of marketing. We are working on marketing mix optimization as we speak to make sure we have our dollars placed in the right areas to drive as much traffic as possible. We are also working on a more personalized customer marketing experience with more customized offers to the customer, continuing to leverage social media with a heavier focus on influencing the influencers. That's really critical these days when people are more influenced by peer recommendations versus a lot of the marketing done by companies in particular.

So we're looking for ways with a heavier focus on that. And also prospecting of new customers needs to clearly be a large focus for us as well.

So in summary, yes, traffic in the third quarter was challenging and we don't see that changing. And we are controlling what we can control and we are going out there in terms of looking at new ideas and new ways of driving traffic that we haven't necessarily optimized in the past. And we are trying to optimize them going forward.

So, Simeon, in terms of the buying and occupancy leverage, we did see some increases in our fulfillment, which has variable costs associated with the growth in the e-commerce business. As well we did have increases in rent in our base store business.

Over time we still believe that from a margin standpoint we have opportunities to continue to recapture some of that margin that we have lost, but it becomes a little bit more difficult in environments clearly like we are in. But we have opportunities in terms of how we manage our inventory, as David talked about, in terms of our open to buy and leaving more open and chasing into those items that are working well.

We also believe we have opportunities in our air/ocean mix and just making sure that we are very considerate and thoughtful in terms of how we bring product into our warehouse to maximize the air/ocean mix.

Great, thanks a lot, guys. Good luck with the holidays.

(Operator Instructions). Thomas Filandro, Susquehanna.

Happy Holidays to all of you as well. David, thanks for that comprehensive merchandising overview on the holiday season. Could you look past holiday for us and maybe discuss what you see as your greatest opportunities on the merchandising front for the spring?

And I seem to recall last year that denim selling outpaced supply, so do you have an opportunity in that classification? And finally, on the knit missteps of two years ago, have you fully recovered or course corrected that category or is there opportunity there for spring as well? Thank you.

Okay, Tom. I think I'll start with the first question, there are a number there. I think the first one I would like to go with is in terms of the way we are looking forward in the spring. As we stand today, we have more spring inventory than we had last year. And spring is a bigger part of our mix as we look at it today.

In terms of what is working, I'm very excited by what we are seeing in terms of spring sweaters. Woven shirts continue to be strong and are actually getting stronger. And I think in terms of, as we look at trends, texture continues to be important, open stitches, to high contrast, to crochet and lace; all are very important in particular in knits.

1990s trends are back and I think it's very, very important that we look at that. So we are aggressively going after that trend with high waisted and mid-rise denim and shorts. We have got a lot of cropped and abbreviated tops, coordinated sets, we're looking at slip dresses and camis. We are seeing business coming back in overalls and also in jumpsuits, which did very well over the Thanksgiving weekend.

Casual bottoms continue to be strong with leggings and casual sweaters very, very strong. And then, as I mentioned in terms of new proportions and the change in shape, we see that continuing very, very well into spring.

In terms of knits, have we regained all the ground. No, we haven't regained all the ground in knits, particularly in casual knits. I think dressy knits are making a very big comeback and doing significantly better. Where we are doing well in casual knits, as I said, is with lace. We are also doing very well where we have texture, marls, but in total, knits are not back to the level that they were and I see that as an opportunity for us going forward. I hope I've answered all your questions there.

Just the one on denim, David.

Denim - I see that in terms of what we have delivered, the go-forward high waisted is doing very, very well. Ankles are not delivering what we would have liked them to have delivered. But in terms of the position that we are in in denim, yes, we have more inventory. Would I like to see more sales coming from it? Yes, I would like to see more sales coming from it. But as we go into spring I think we are positioned very well in terms of what the key trends are.

Thank you very much. Best of luck.

Tiffany Hagge, Goldman Sachs.

So just to clarify, when you look at merchandise margins this quarter, it was just the promotional environment that prevented the business from clawing back more versus last year? Or did you feel like you had any issues with the assortment or anything else going on there?

And then one quick one on full-year guidance. You are implying SG&A deleverage and gross margin compression, you said flat merch margins and deleveraged on B&O on a positive comp. What kind of comp would you need to see to see leverage on buying and occupancy? And then on the SG&A front, can you help us understand the big areas of spend?

Sure. So on the merch margin in the third quarter, it was primarily the competitive environment that drove our inability to recapture more of the merch margin. As I said when we provided guidance in August for Q3, we had clearly expected higher merchandise margin.

I think David and Michael have commented on the assortment. And while in any season you have some things that don't work absolutely as well as you would want them to or expect them to, I would say there was nothing that stood out that really contributed that significantly to our inability to recapture margins.

On the B&O front for Q4, we'd need a mid-single-digit comp to leverage B&O right now. And from an SG&A perspective, again, we feel like our SG&A is generally well-controlled. We should end the year at a percent to sales consistent or very close to where we ended last year.

Some of the things that we are investing in during the fourth quarter are the same as I mentioned in the script for the third quarter. We have investments in outlets, we continue to invest in our IT infrastructure, and then we have just naturally some increased payroll expenses.

Okay, thanks.

Betty Chen, Mizuho Securities.

Good morning, everyone, and Happy Holidays as well. It sounded like last Friday was strong, although maybe a little bit lower than your plan. Are we assuming that the guidance is looking for a specific direction for the balance of the season? Are you looking for perhaps some late strength in the holiday season and acceleration in top-line to get to the low-single-digit comps? Some color around that would be helpful.

And then, in terms of the outlet business, we've seen a little bit of an impact in the back half of this year. Should we expect that to continue until the initial conversions happen in the second quarter of next year? Thanks.

Yes, so, in terms of the holiday, in terms of Thanksgiving, like we said in our comments, we actually did better than we did last year. But frankly, and I think a number of you said the same thing, considering how we look out in the stores and how trend right we think we are, we felt like we should have done better than we did for the Thanksgiving week.

As we look ahead, we expect that we will be very, very competitive, more competitive than we had originally thought. We continue to see more of a polarization -- the closer you get to Christmas there seems to be more of a lag now in between Thanksgiving and the closer you get to the holiday. So we would expect to see the same thing we did last year, where you have seen more sales generated as you get closer to the holiday.

From an outlet perspective, yes, we will continue to have the infrastructure costs up until the time we start generating incremental revenue from any new outlets that are open. Keep in mind again that the first 15 or so outlets that we open will actually be conversions. So we will be giving up volume on one side of the business and gaining volume on the other side of the business.

But Paul, I think in terms of the outlet contribution it should be higher, right? When you take it from retail sales into outlet sales should we expect that to be slightly higher margin?

From an operating margin perspective that is correct. We would expect operating margins to be higher as we get going with the outlet business.

Okay, great, thank you and best of luck for the holiday.

Janet Kloppenburg, JJK Research.

Happy Holidays. First of all, I want you to know the stores just look terrific. Really nice job on the holiday assortments. A couple of questions. The inventory levels, I wonder if you are comfortable with them in light of your comp guidance. And if you think this is where they will be at year end or how we should be thinking about that?

And, Paul, I was wondering about the marketing spend year over year in the fourth quarter, how that is trending? Is it up on the year?

And on the fashion side of the business a couple of things for David. I didn't hear much about the dress business and I'm wondering how that is trending? And also the career side of the business, I think there's been more competition in that category for the fall. And I'm thinking about the comparison to the fit and flare dress business for next spring and how you are feeling about the go-forward look in the dress category? Thank you.

So, Janet, good morning, I will start with the inventory piece. As we said, the thing about our inventory right now is we have less fall merchandise in our inventory mix than spring merchandise. While we were up 18% at the end of the quarter, we will be able to manage our receipts throughout the fourth quarter to somewhat offset those increases that fell into Q3.

And our goal is by the end of the fourth quarter to be up single digits in inventory. So that obviously assumes that we're able to hit our sales projections. But that would be our expectation, to try to manage that inventory throughout the fourth quarter.

Marketing spend for the fourth quarter is relatively flat to last year. That's inclusive of some spending to prep or get ready for the opening of Times Square. And on a full-year basis as a percent of sales, marketing will remain relatively flat on a year-over-year basis.

Thank you.

Hi, Janet. In response to your question about the dress business. We had a very, very solid quarter in Q3 and I was very pleased with the business that we had over the Thanksgiving weekend in dresses. I think in terms of what we are seeing, lace continues to be strong, party dresses continue to be strong. Sweater dresses are doing very, very nicely indeed.

And I think in terms of looking forward, yes, we are up against a very big business in fit and flair, but fit and flair continues to be very good. And we're seeing a lot of newness happening in terms of structured fit and flair. And I think that as we go into next spring, I know it is not dresses, but we buy it within that department -- we are seeing very, very nice business happening in terms of jumpsuits and also in rompers.

Okay, great. And just one last question for Michael and for David. When you think about the promotional environment in October and November, and you think of remedies there, what maybe could you have done better? Have you come up with a plan to meet these challenges as we go forward?

I will tell you, Janet, I continue to say that we don't see an end to the promotional environment. And I continue to say that that is the reality and we have to learn to deal with it. And basically, we built in promotions to all of our merchandise. But the fact remains that you can't build in promotions to the level that it has gotten to. So that we have to figure out because you can't build in enormous, enormous unit sales at prices that are really cheap. You just can't build that in.

Right, okay. Thanks so much, and lots of luck.

Brian Tunick, JPMorgan Chase & Company.

One question first on the e-commerce front. Just hoping to get some understanding. I think you have mentioned before about an omni-channel approach. So just curious about your view of shipping from stores; anything you can tell us about the demographics of the customer shopping online versus in the stores? And how you think about the margins of this business and how high you think e-commerce can go as a percentage of sales?

Then the question for Paul on a capital structure perspective. You obviously have exhausted your buyback program. Your debt has your make whole next year. So just thinking about the offsets from a capital structure perspective, what's the current view?

And then lastly for Michael, it feels like the department stores called out some improvement in this millennial customer with your 23 and 27 age edit point for your customers. Are you seeing more specialty retailers also starting to reach a little older and try to compete better with you today? Thanks very much.

Great, so this is Matt. I will start with the e-commerce question. Certainly, omni-channel is going to be critically important to address, and we are in the process of addressing that. We are laying the foundation for omni-channel retail as we speak. We are upgrading our retail management system and our enterprise planning systems to help with that, along with helping with being able to run outlets, international and other channels as well.

Ship from store is on our radar and is slotted probably for late next year or early 2015. It is a little late, but we had some foundational issues we needed to address before being able to execute that. We think that will provide large opportunities not only for higher sales given some out of stocks, but also from a margin perspective as you have a more effective way to liquidate merchandise in stores, that are trapped in stores over time.

The demographic is very similar between our store and online customer. We are in a sweet spot from an e-comm perspective. The customer in our demographic certainly does a lot of business online and that is reflected in the fact that we very quickly have gotten our e-commerce up to about 15% of our total sales. That was an original target we had. We certainly think 20% or more over time will -- is certainly possible and is what we are targeting for sure.

Margins -- merchandise margins are lower online than in-store because we do more liquidation online. But if you look at operating margins, those tend to be higher online than in stores. So that should help us over time as well. And I think that answers all the questions on e-commerce. With that I will -- go ahead, Michael.

Brian, you asked about department stores and specialty stores and I have a little bit of a different answer on each of those.

In terms of department stores I would say, yes, we are looking at them again because, in fact, they have returned to a strong, for want of a better word, young contemporary customer. They're trying to get that customer. As we try to get a younger customer as the entry point to our brand, they're trying to get a young contemporary customer as an entry point to the department store. And I think they are succeeding. And again they are becoming part of our competition.

In terms of the specialty store, you asked whether I think they are reaching older and I have a very different perspective on that. The answer is that I don't believe they are reaching older. I think that customer is getting a bit more sophisticated, which is sort of ordinarily associated with older, but I think not necessarily.

I think if you look at some of the brands in the teen space that have become very hot, they are not really young looking and they are very hot. Very contemporary looking sweaters -- and you know the people we are talking about, I just don't like to give advertisements to competitors. But they are becoming very good. They are becoming very good and I think that's what the teen customer is looking for, not that those stores are reaching older.

Okay, that is very helpful. And just finally on the capital structure question?

Yes, Brian, we continue to talk to the Board about the use of cash. Obviously we ended the quarter in a very, very strong cash position. We have finished the buyback. We review with the Board on a pretty regular basis the appropriate uses of cash from a capital structure standpoint. But we are not in a position to really announce anything or talk about anything today.

Okay, great. Thanks. And good luck for holiday, guys.

Richard Jaffe, Stifel.

I guess a follow-up to some of your thoughts about the cautious outlook and wondering -- knowing what you have in your pipeline and seeing what has been decelerating traffic, increased promotions, is the product that is in the pipeline trend right? Is there -- to put it another way, is there ugly stuff in the warehouse that we're going to have to deal with at the end of 4Q or into spring? How good is your visibility today?

No ugly stuff in the warehouse that would be defined as ugly as the stuff that is on the floor and not selling. So in those terms, we have zero ugly stuff in the warehouse.

And we feel very good about what we have coming in.

Basically when you look at what is currently selling that is new, we are doing quite well with longer skirts and short tops, as David mentioned. And by shorter it could be a little bit of midriff baring or tuck-in, either of the two, but they are shorter.

And when you think about spring go-forward, I think we have that look and that proportion well covered. And I think we are going to look very strongly that way within a couple of weeks, certainly before Christmas and increasingly stronger going forward. But I think that what we have coming in is certainly nothing that we wish would disappear.

And, Richard, I think it is important to again acknowledge that we, from a composition standpoint as we sit today after the Thanksgiving week, that we are actually sitting with less fall inventory on hand this year than last year. So we would have more spring forward goods to sell at this point.

Great, thank you.

Jay Sole, Morgan Stanley.

So you guys have done a great job making the store more efficient. It seems like you have been able to do more with accessories and loungewear and fragrance and other items in the store without taking away from other categories. Can you talk about how much of a contribution this has made to comps this year and what strategies you have to do this again next year?

In terms of the contribution, looking at accessories, accessories has always been around the 11% to 12% market and we see that continuing. In terms of the loungewear, the loungewear has been in stores for about five weeks in 100 stores. And with the lounge business that we were in in the past, and it was a very, very big business, we are absolutely behind it. And we see that going to be a bigger part of the mix as we go forward.

Maybe we can talk about UPTs. You mentioned UPT is up and conversion is up and being in the stores we can see the great service the store associates are providing, helping people put together outfits and driving those multiple unit purchases. Can you give us an idea of how effective you are in terms of in-store execution? Do you measure it? And I guess more importantly, is there upside to the conversion numbers that you are seeing now?

Well, our conversion, Jay, our conversion, as has been told by a number of us today, is up and we are very excited by what that has delivered.

And it has been increasing all year.

Yes, and has been increasing all year. And then also UPTs are up; UPTs were up for the quarter. So I think really we are very focused in terms of driving related selling and it's one of the things that we look at very, very closely.

And we do measure it, Jay, we take customer satisfaction surveys that take points in time during the buying experience and ask the customer to give us feedback on those different points in time. So we understand how the customer feels when they come into the store, we get feedback on how they feel when they are at the fitting room. So it gives us an opportunity to really zero in on where we can make improvements and we do those year round.

Interesting, thank you so much. And good luck.

Lorraine Hutchinson, Bank of America-Merrill Lynch.

I wanted to follow up on the inventory discussion. I know a lot has been said about the content. But as you look to the spring, if we can assume that this promotional cadence continues throughout the industry, how do you think about receipts -- both the quality of receipts, the content of receipts and then the level of inventories that you need to plan in order to promote effectively?

Well, overall, Lorraine, we would like to see our inventory on a percent basis closer to our sales growth that we are projecting obviously. This year we have taken the opportunity to invest in some categories that we have mentioned in the past in woven tops and denim as well as a couple of others. But over time our goal is to have inventory more in line with our overall sales forecast.

We are trying to manage our open to buy more tightly, as we have talked about, and keep more open to chase into toward the back -- more toward the back end of the season, which we think will allow us to better manage our markdowns. And that is one of the areas that we think will certainly help us improve from a gross margin standpoint.

Thank you.

John Morris, BMO Capital Markets.

We have heard a little bit about conversion and UPT, you've told us that. Can you give us a little bit more of a breakdown on the metrics at the store level in terms of what is happening with AUR and transactions?

And then a quick follow-up to that would be regarding the promotions, the higher sort of action that you have taken with promotions and markdowns in the stores that we have seen thus far, what has the nature of that been? Where have those unplanned promotions been?

Has it mostly been in clearance or have you gone a little bit deeper on some of the sale events than you had intended to? And thoughts about how that might look to us in the fourth quarter for those of us that watch those promotions pretty carefully just so we know what to expect? Thanks.

So, John, we mentioned before that AUR has seen pressure throughout the year and the third quarter was no different. We saw a little bit of pressure in AUR, but we were able to see a nice uptick in conversion that helped us drive our transactions during the quarter. I will let David handle the promotional question. But it has not just been the red line merchandise that we've been having to promote -- or choosing to promote a little bit more.

Yes, I think, John, we are very focused in terms of bringing down the amount of clearance that we have and in terms of ensuring that we are keeping more open to buy much closer in so that we are driving our volume with proven winners. And I think that is very important.

In terms of the planned nature of the promotions versus the unplanned, we have always maintained that we are a promotional business. We plan promotions in advance. Yes, it is more aggressive in terms of what we are seeing. You saw from last week that we went 50% off on Tuesday and last year we did it on Wednesday.

So we are reacting to the environment that we are operating with. And it is very important that we're there and we are doing what is necessary at the right time.

So, John, as you asked, we added a couple of promotions that we hadn't originally planned when we originally gave guidance on the quarter, which circles back to my comment about having expected to gain more merch margin, and in some cases we did have to go a little bit deeper.

And were those in October?

Those were actually toward the back end of the quarter, so as we got later into September and October. So as we kind of worked through mid-September we were feeling a little bit better about where we were.

And actually November started off very strong until we got up to the Black Friday week.

Okay, great. All right, thanks, guys.

Susan Anderson, FBR Capital Markets.

Happy holidays. So you gave a little bit of color on fourth-quarter to date trends and it sounds like you feel pretty good about the merchandise in the stores. So do you think that this sales deceleration is more industry wide? And do you think you are still taking share and did you do so over Black Friday? And then also I was wondering if you can give some color on just the performance of your San Francisco flagship store.

In terms of taking share, you look at NPD data, which we do, in terms of the 18 to 34 age group and, yes, we have increased market share in the last data that we were given, which was the last 12 months ending in July. So we are seeing that.

In terms of the San Francisco flagship, we are very happy with how it is doing. You know, it opened October 17 I think it was -- October 18. And we are pleased with the response that we have seen.

Okay, great, thanks. And then just one last question on the inventory again. I think you said that you have more year over year that you order for spring. So with the lower sales environment do you think that these promotions are going to continue then into spring?

I don't see that the promotional environment is going to change as we go forward. I don't see any signs that lead us to believe that it is going to change. I think that the important thing is as we look at our inventory composition where we stand today we said we have more spring than we had this time last year. And based on the projections that we have given, we are looking at starting the first quarter or ending the fourth quarter with a single-digit increase to last year in terms of the amount of inventory that we have.

Can I just add one thing? I think it sounds like it should be self-evident, but I don't think it really is. Not only do we have more spring, but we have less fall which is very, very important because there is less merchandise at risk for markdowns by the end of the season.

When you look at our inventory and you see a percentage like 18% up, it could be all spring and we would have then more spring than last year. But the point of it is that in addition to that it is more than that in spring and significantly less in fall. So we are looking at the transition from intense clearance markdown goods to spring to be much smoother and much more evident than last year.

Okay, great, that is helpful. Thank you.

Marni Shapiro, Retail Tracker.

Best of luck for the holidays if I forget at the end, your stores look beautiful. I have a silly question and it might be a logistical question for you. But you have some obviously very strong sellers, some very right items in the store. So when you run these blanket promotions is it possible or is there a way to exclude parts of the assortment from these blanket promotions?

And maybe Black Friday is a bad example because the mall is a different animal on Black Friday. But in general is it possible to exclude some of the better selling items so that you move through what you have to? Or is that not the issue; it's just a matter of she is not even walking in the store unless there is this kind of promotion?

Maybe we have different opinions at this table. But what I would say to you is yes, it is possible, but I will tell you what happens when we try it. When we try it the way we try it is by specifically targeted promotions, and they don't draw the kind of traffic that the across the board promotion draws, they just don't.

The second thing is that when we do it across the board we can disallow certain CRM, so that we don't get the double dip. And you are right they do cherry pick us like crazy. But when we have item specific promotions, they not only buy those items but they use the CRM, which takes those items down way below what they would be at a percentage off without it.

So at the end of day it is more profitable to do the blanket promotion than try and execute it the other way?

That is what we have found.

Okay, fantastic. Best of luck, guys, with the rest of the holiday season.

Roxanne Meyer, UBS.

I'm wondering if you can review your hub store opportunity in terms of how many you think you can have and how much more productive are those stores? And then second, when you talked about applying your learnings from the men's business and improving women's, what do you see as the biggest opportunity in 2014 to transfer best practices? Thanks.

Okay, in terms of applying the best practice, we have taken a lot of the ideas. I think it really is very much in terms of the way we work, in terms of the way we test, it is in terms of the way that we chase after opportunity and it is about how we keep our open to buy dollars open. That is really it.

The business -- the women's business is obviously very different than the men's business in terms of the speed in which it operates, and I've maintained that for a while. But I think that a number of things that we have done have been very successful -- building key items, ensuring greater balance across the departments, ensuring greater clarity across the zones of the store.

And those have really driven the progress and the improvement on the women's side of the business. So I am excited about those things. It is about engraining them and institutionalizing them, as I said in my opening words.

And in terms of the hub stores, Roxanne, I think it is a very interesting question. We think that what happens is suddenly malls get much better than they were before, not a lot of them -- -- really not a lot of them. But in the general mall world, the good ones are getting better and better and the rest of them are not.

Okay, so when we look at the best of the malls around the country where we would want to have what we are calling a hub store, there are about 25 to 30. So if we say 25, the opportunity there is way, way in excess of $100 million, it really, really is based on what we have seen so far in the few that we have opened.

And we have a few others on the board for next year that we have not announced because the deals are not quite completed. But we are excited about it because what essentially happens is we become much, much more competitive with people that are new to the arena.

Great, thanks so much. And best of luck.

Pamela Quintiliano, SunTrust.

Happy holidays, guys, and thanks for taking my question. So if I understand correctly, it seems like stress in a promotional environment is the issues rather than fashion. Even though you thought it would be challenging out there, it is much more so than you anticipated.

So with inventory up single-digits at year-end, that guidance you provided, does that reflect a downward revision with what you have seen out there? Were you able to adjust or cancel deliverables at all? And then how do we think about that for next year also with adjustments for inventories? And how do you counter that with the excitement you have for the new product that is out there -- or coming out there?

The inventory number that we mentioned is reflective of our current guidance and we will do our best to manage receipts throughout the quarter to get us to that level.We look all the time to see if we need to cancel things and if we can cancel things.

But we brought some things in early to manage the flow for the holiday which propped up the number at the end of the quarter as well as the shift. But we will manage that throughout the quarter to get to where we need to be. From a go-forward perspective in terms of inventory, again our goal is to try to have inventory more in line with our comp store sales increases to be able to support that.

But now I guess what I'm struggling with is you have these initiatives in place for a while now to manage the inventory. But yet the environment is just much more heightened than we had planned -- or than you thought it would be. So what additional levers are there that you have been potentially pulling or is there a way for us to think about that?

I think in terms of additional levers -- what we do is we constantly look at our inventory and our levels of inventory and either pull forward or push out or promote or do what is necessary. So we do what is necessary as and when we see fit.

We report for the quarter, but in truth we look at ending inventories every single month. And when we see something backing up we address that in terms of the receipts down the road. We are never backed up for the next five months.

So we do that every other week actually at the highest level in this organization with myself and Michael and Matt and David along with our planning and allocation folks and our merchants. So every couple of weeks we are moving inventory between categories and releasing what has been open to buy, or not releasing it, based on our projection for the business.

It is important to add that it is a two week process; we are looking at it every two weeks.

And then if I could just ask one follow up. Do you think there has been so much talk about what is [the fiscal] holiday period? It has been anticipated that it is going to be very difficult because all of the headwinds out there. And then you have had the commentary that for the consumer, the promotional landscape has seemed to change more permanently in terms of how they are shopping.

So how fluid -- how often do you think -- or how much has the consumer changed I guess over the last few months and how much more emphasis do they have on price points given the product looks great but obviously the price points are the issue in the marketplace over all - is there a way to think about that?

I think that it continues the way that it has always been. You have to ensure that your product is the best and it is absolutely fashion right, that it is differentiated from the competition. But price is also very, very important to the customer today in terms of the environment we are living in, it is very, very important. So we have to take all of that into account.

I think the only thing that has changed and I can't blame the consumer for this, the only thing that has changed in our consumers' lives in terms of money is most of them -- you've got to know that the 20-something is the invulnerable person. Most of them have never paid anything for health insurance. And all of a sudden they must because it is a rule and they don't know how much yet. Now, I can't blame this on that, but certainly it's a consideration that they have not had before.

That is a great point. Thank you, thank you very much. Best of luck.

Thank you. We have reached the end of our question-and-answer session. I would like to turn the floor back over to management for closing comments.

That concludes our call for today. Thank you for joining us this morning and for your ongoing interest in Express. We'll speak to you in a couple of months. Thank you.

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