Express Inc (EXPR) 2014 Q1 法說會逐字稿

Greetings and welcome to the Express, Incorporated First-Quarter 2014 Earnings conference call.

(Operator Instructions)

In the interest of time, we ask that you please ask your question and then re-queue for any follow-up questions.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Marisa Jacobs, the Vice President of Investor Relations.

Thank you, please begin.

Thank you. Good afternoon and welcome to our call.

I would like to open by reminding you of the Company's Safe Harbor provisions. Any statements made during this 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.

Express retains no obligation to update any forward-looking statements or information which speak only as of the date given.

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, who will be followed by David and Paul. We will then turn to Q&A before concluding the call.

Thank you, Marisa.

Good afternoon, everyone, and thank you for joining us today.

Our first-quarter results were disappointing to all of us. Our comps, set at negative 11%, were in line with our guidance. But our EPS of $0.06 was below the guidance we issued in March. While not apparent in our first-quarter results, we are making progress on several initiatives that position us with the same profitable growth. Our outlet store launch is off to a strong start. We are taking costs out of the business and we plan to utilize our strong balance sheet for the benefit of our shareholders with a new $100 million share repurchase program.

When we issued our outlook in March, we stated that it was predicated on the business improving substantially as the quarter progressed and especially during April. We anticipated that traffic and sales trends would improve, given the Easter shift and more seasonable weather. We also expected that re-ordered merchandise would be back in the stores to further help draw sales.

The business did turn, and our April comp was up high single digits. It did not however, reach our internal projections. The macro environment continued to impact us just as these headwinds impacted most retailers.

We cannot however, attribute our performance exclusively to external issues. We are laser focused on improving our sales and our margin trend and have initiatives underway to achieve this result. David will address product and promotional issues in his remarks.

I want to spend a moment on steps we have taken to increase our efficiency and streamline costs. We have been in the growth mode for several years and believe we are running our business efficiently. Even so, we are always evaluating ways to drive greater efficiencies and improve operating performance.

After careful assessment, we are taking steps to reduce corporate expenses and eliminate certain discretionary items. In total, these actions represent approximately $18 million of annualized savings, with the impact in 2014 expected to be approximately $15 million. At the same time, we continue to invest in our business, directing our resources to the areas we believe will deliver the highest returns.

E-commerce is a great example, and outlets are showing great promise. We believe in malls as a place that offers shoppers an experience that can't be replicated online. They aren't going away, but some malls are getting stronger while others are quickly weakening.

With that in mind, we have completed an evaluation of our store fleet focused on how to best optimize our retail stores. While the vast majority of our locations are profitable, we identified 50 stores that we now plan to close over the next three years as their leases expire. The selection process focused on the size of their four-wall contribution, their comp store performance over the past three years, and an algorithmic assessment of our ability to migrate sales online or to nearby locations. Based on our findings, we believe we can generate $5 million to $8 million annually of incremental profit once all 50 stores have been closed.

It's been my practice to update you on our growth initiatives. Let's begin with North American real estate, outlets first. We have now opened a total of 17 Express Factory Outlet Stores. The first one opened in April at National Harbor outside Washington DC. Since then, we have converted 14 other locations and opened two new stores: one in West Palm Beach, the other in Grapevine, Texas.

We are very encouraged by the customer response, with sales significantly exceeding our initial estimates. In fact, we are moving up our opening timetable and now anticipate that by year end we can have approximately 35 outlet stores open, up from 30 mentioned in March. We also plan to accelerate the pace of outlet store opening beyond this year to more quickly take advantage of the opportunity, which we believe is larger than initially anticipated.

In terms of our US retail store base, during the first quarter we opened our New York City flagship store along with two other new full-priced stores. Turning to e-commerce, you may recall that in last year's first quarter, e-commerce grew by 48%. That rate was far above the norm and made the hurdle rate for the first quarter of 2014 unusually high. E-commerce sales this quarter declined 2% compared to the prior year.

In terms of the second quarter to date, the weeks leading up to Memorial Day holiday posted double-digit increases. Unfortunately, our Memorial Day event was not as strong as last year. Despite this, we are still expecting modest growth in e-commerce for 02. We continue to be very excited about the potential of this business long term. In fact, e-commerce is on track to account for 16% of our total business this year. And we believe this business can potentially exceed 20% of our total sales over time as we continue to invest in this growth pillar.

During the first quarter, we did successfully drive online conversion higher as improvements we made to the site continued to make it easier for our customers to shop. This was particularly true at the fastest-growing subset of this business, which is on mobile applications.

On the international front, we opened one new franchise store in Mexico, ending the quarter with 26 franchise stores. We also announced that we entered into a new franchise agreement. It covers South Africa and encompasses both standalone Express stores and shop-in-shop locations in select Edgars department stores. The developing work is underway, and two to four locations within department stores should be open by year-end.

Over time, we anticipate this type of location in approximately ten of Edgars A-level stores. These locations will give us important information that will help us evaluate the potential of shop-in-shop locations in other regions, such as Asia and Europe. As we've laid for our capital structure, we know we have a strong balance sheet. Given this, along with management's and the Board's belief that our shares represent a strong value, we have announced a new share repurchase program in the amount of $100 million. We expect to execute this plan over the next 18 months for the benefit of our shareholders.

Additionally, we have been finalizing plans relating to the refinancing of our senior notes, which we expect to redeem by the end of June using proceeds from new term loans. After careful review we have decided to increase our proposed refinancing to $300 million versus the $200 million previously indicated to take advantage of the favorable rate environment. This will further enhance our financial flexibility.

We believe in the value and future of our brand and further believe that share repurchases are an effective means of enhancing shareholder value, especially at a time when we believe our shares are undervalued.

With that, I will turn call over to David.

Thank you, Michael.

Good afternoon, everyone.

The first quarter proved to be challenging, and we're all disappointed by our performance. While external factors intensified the challenges of the quarter, we did not execute as successfully as we are capable of doing. Our women's business delivered weaker results than men's, which we attribute to the lack of differentiation and newness in certain key areas, such as women's mid-tops, sweaters and woven bottoms.

We also saw the need for additional inventory in several of our women's woven tops and bottoms. In mid-tops, we are seeing steady demand for lace trim in tanks and tees, Aztec prints, and tops with embellishment or novelty fabrics. However, a great percentage of the items in this key category did not perform to our expectations.

We have placed orders to revive the selection and new receipts have started to arrive. We are anticipating nice sales from several items, introducing new styles that tested well and continuing to focus on driving improvement in this important category. Sweaters make up a smaller piece of our spring assortment as their first quarter performance was below plan. Some new directive styles have been doing much better, and units will continue to flow in. The information we are gathering on our sweater assortment will be key to informing our fall sweater buying.

In March, we mentioned that as we moved away from colored bottoms, we overcorrected and went too neutral. With the Editor and Columnist in particular, where our customers love the consistency of the quality and fit, we need to keep the assortment fresh by offering variety in color and pattern. We also needed to deepen our inventory levels to provide the stores with a full-size offering of our new burly bootlegged shape in both the Editor and Columnist fit. That new product is now flowing in, and business has been improving since the start of Q2.

While we had some challenges, I want to be sure that we don't lose sight of the women's product that is working well. We successfully identified new trends and then tested them well, delivering items that our customers wanted. High-waisted bottoms, crop and leg tops are a few examples. We also have some great items in women's tops and anticipate stronger sales in this category than in Q1.

We continue to make real gains in skirts and casual jackets. Casual shorts were also ahead of last year. We said going into this season, that we thought there was real opportunity in women's shoes, and we have seen significant growth there. As we position ourselves for the full season, we are continuing to optimize our mix of mid-rise and high-rise denim. We are also setting a more exciting presentation of Dot watches, which are tested and proven.

Let me now turn to men's, where our performance was better than women's.

In its entirety, while the men's business showed a decline for the quarter, business fell less deeply than traffic. Shirts continued to do well and jackets continued to grow at a rapid pace. Casual looks, including graphic tees, color block tees and stripes did well. Casual pants also grew nicely, with chinos and fleece the key drivers there. Conversely, we didn't comp sales in short sleeves knit tops; however sales have rebounded in Q2 with the warmer weather.

To summarize, if we look across both genders in what was a challenging and disappointing quarter, we had success in certain categories and styles. We raised ticket prices on specific, top-earning men's and women's items, helping to generate more margin dollars on them within the promotional environment. As I look across both genders, we are continuing to examine alternative approaches to the way we flow into and exit out of products. A portion of our assortment will always highlight the latest trends, but we know that their staying power can be short.

Fashion items, however, can potentially last far longer. The men's wide necks and the women's Portofino shirts illustrate this perfectly. From what we have learned from outlet selling, I believe we have more opportunity to let fashion items run their course while simultaneously ensuring that we also provide our customers with the newness which they demand.

Michael mentioned that I would touch on marketing. The Express brand has built up strong recognition and goodwill over the past 34 years. We have a large, loyal base of customers and engagement through Express Next, social media, influential bloggers and enhanced media coverage keeps growing. That's great, but it's not enough.

We have two large opportunities here. One is to drive traffic in general. The second is really a subset of that. It's about driving traffic and cultivating new customers at the lower end of customer (inaudible) to introduce them to our brand. We've always targeted customers in their 20s and 30s, and that has worked well for us.

To advance this objective, we signed Kate Upton to be our brand ambassador given her great appeal to millennial audience, both male and female. We just wrapped up our first photo shoot with her, and you will begin to see her appearing in our marketing and advertising material this summer.

Our demographic is quickly gravitating to mobile commerce. To capitalize more fully on this trend, we are redesigning our mobile apps to simplify the shopping process. We are also shifting more of our marketing dollars to an encore presence on top millennial online entertainment destinations. Our goal is to connect more closely with this important demographic.

Separately, we've allocated more of our marketing spend to new customer acquisition activities, as well as to campaigns focused on winning back occasional or lapsed customers. We also need to introduce more impactful promotions, and related tests are proceeding.

At this time, I am going to turn the call over to Paul to give us more details about our financial performance.

Thank you, David.

Good afternoon, everyone.

Our first quarter sales fell 10% to $461 million due to a decline in traffic, AUR and transactions. Our guidance took into account the impact of pulling some of our first-quarter business into last year's fourth quarter. However, we also anticipated a stronger April than we delivered.

Our gross margin came in at 29.8%, declining 370 basis points. Merchandise margins declined by 30 basis points. In March, we indicated that a modest improvement in our merchandise margin was expected. But as the quarter progressed and we kept the base of promotions high, we were selling through units at lower prices than anticipated.

This offset the additional dollars generated from increasing ticket prices on select items, as well is the aggregate savings resulting from better management of freight, shrink and fabric cancellations. Our ability to quickly cut buying and occupancy and SG&A expenses was limited, which in turn limited our ability to preserve our bottom line. As a percentage of net sales, buying and occupancy expenses deleveraged by 340 basis points, more than anticipated in March. The greater-than-expected deleverage is tied directly to poor sales comps.

SG&A as a percent of sales came in at 26.6%. The dollars spent were actually a bit below our March plans. The deleverage of 450 basis points versus the 350-basis-point deleverage referenced in March is due to our lower sales.

Our effective tax rate was 44.3% versus 39.6% in last year's first quarter. This rate increase is due to the impact of certain non-deductible stock option based compensation expenses. In combination, this all translated into lower operating income, net income and EPS. Our capital expenditures during the quarter were $27 million, compared to $17 million last year.

The increase was primarily due to investments in information technology and real estate. In terms of inventories, as you know, we began the quarter with our inventories down 1%. We ended the quarter with inventories of $235 million, an increase of approximately $9 million, or 4%. We're essentially flat on a square foot basis. The entire increase relates to the inventory build associated with our outlet stores.

I will now go ahead and turn to our guidance for the second quarter and full-year 2014. Second-quarter comparable sales are expected to decline in the mid- to high-single-digit range. Merchandise margins are expected to decline as we've anticipated the continuation of the heightened promotional environment, as well as the impact of clearing certain merchandise that did not perform well in Q1. As well, our buying and occupancy and SG&A will delever as a result of our expected lower comp sales.

We expect our tax rate to be approximately 42%. For the second quarter, we are guiding to a net loss of $2.5 million to a net profit of $2.5 million. In terms of diluted earnings per share, this ranges from a loss of $0.03 to a profit of $0.03 per diluted share, assuming a share count of 84.4 million diluted weighted average shares outstanding.

In the second half of the year, we continue to anticipate sequential improvements in our comps as we deliver improved product and our marketing initiatives begin to take effect. This will translate into full-year negative mid-single-digit comps based on our projections, which call for negative comp sales in the third quarter and a flat fourth quarter. We are leaving our full year interest expense guidance unchanged until we complete the refinancing and can provide exact numbers regarding the magnitude of the ongoing interest benefits and the one-time costs associated with the refinancing. We expect our tax rate to be approximately 40%.

We anticipate 2014 net income ranging from $63 million to $76 million in diluted earnings per share within a range of $0.74 to $0.90. The EPS calculation assumes a share count of 84.6 million diluted weighted average shares outstanding.

Capital expenditures are currently expected to range between $110 million and $115 million, compared to the $105 million spent in 2013.

As Michael mentioned, we are taking steps to remove certain non-essential costs from our operating environment. Those savings of approximately $15 million from this year and $18 million on an annualized basis have been included in our guidance. So have any costs associated with executing those changes.

We have also completed a review of our store fleet and decided to close approximately 50 stores over the next 36 months, coinciding with natural lease expiration so that we mitigate any extraordinary closing costs. Once all those closures have been implemented, we expect to generate an incremental profit of $5 million to $8 million annually. Because these closures are expected to start at the end of this fiscal year or the beginning of next, no associated cost or savings have been incorporated into this year's guidance.

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

Thank you, Paul.

We have a strong brand presided over by a talented and passionate team. We are reacting strategically to changes in the marketplace and evolving the way we execute against our growth pillars. This flexible approach ensures that we are directing our resources to those areas offering the highest returns. Specifically, that is why we are rationalizing our bricks and mortar fleet.

I believe strongly in many US malls and want to focus on those locations and our outlets, two key areas where shoppers are increasingly gravitating. At the same time, we are continuing to invest in the technology needed to support future growth in our e-commerce business and complete our transformation to an omni-channel brand. On future calls, I look forward to sharing with you the progress we're making on our strategic objectives with the goal of delivering more consistent financial results and improving long-term performance.

Operator, please open the lines so that we can turn to the question and answer portion of our call. Thank you.

Thank you.

(Operator Instructions)

Our first question comes from the line of Simeon Siegel with Nomura Securities. Please proceed with your question.

Thank you. Can you talk about your comfort in the guidance in light of expectations for sequential improvement? Any color that would help contextualize that? And Michael, do the store trends follow the e-commerce trends that you guys pick up? And then Paul, just quickly you noted the savings and the one-time costs from the cost savings initiatives were incorporated into guidance. Can you quantify what those one-time costs are?

Simeon, we have to stop this at one question per person and then we can certainly come back.

We look at the marketing initiatives that we put in place, we look at the product that is coming in for the fall season and the things that have been turning fast as we move into Q2. We believe that those are things that will definitely help us turn the comps around as we enter into the back end of the year. We also are reallocating some of our marketing dollars to really try to help drive traffic not just into the stores, but also into our e-commerce sites. So more dollars are being allocated to social and digital media.

We have more dollars going into affiliate marketing and search optimization and are trying to move the dollars around so that they will give us more immediately measurable activity that will help bring people into the stores. We have been testing some new marketing activity throughout different regions over the last quarter. I think the biggest thing is for us to get the product right. We feel as we are going into the back end of the year that you will see improvements in that regard. David, I don't know if you want to comment on the product and what we think about that?

I think the most important thing is having a vast improvement on tested products. In terms of what we have coming in in terms of Q2 and what we have looked at for Q3, so far we feel very good about it. You look at some of the trends in terms of high-rise and mid-rise denim, lace, prints, jump suits, dress suits. We feel very good in terms of the inventory that we have put behind them.

I'm going to answer the one you asked me even though we're supposed to only take one question. What you asked me was whether the trends in stores would be similar to the trends of e-commerce? The only way I can answer you is that I think trends count and e-commerce trend despite Q1 has been consistently very, very good, much, much better than store trend.

I do believe we have opportunities in the stores based on what is coming in and based on what we have learned, essentially believe it or not, from outlet, in terms of assortments, in terms of mix and in terms of really what the customers are indeed looking for. We have to however, stick with the trends when we do our guidance so we can't build any of this into what we really think going forward. But I would repeat the fact that we have much stronger trends in e-commerce than we do in stores.

Thank you. Our next question comes from the line of Betty Chen from Mizuho Securities. Please proceed with your question.

Good afternoon, everyone. I was wondering, Paul if you could address what we should expect in terms of inventory position at the end of the second quarter and what are the key buys or inventory plans for the back half as well and any comments on AUC pressure related to those buys. Thanks.

Betty, we don't, as you know, give formal guidance on inventory looking ahead, but I will tell you that we are managing inventory tighter as we get into the back end of the year. David has talked a lot about us keeping more open to buy available for us to chase into those things that are selling well. We didn't do a good job of managing our inventory in the third and fourth quarters of last year. I think we talked about that on our last call. So our intent is to go into the second half of the year with a more tightly managed inventory. In terms of AUCs, I would say we're expecting our AUCs in the back end of the year to be flattish to maybe actually a little slight favorability so it could potentially work in our favor.

If I can add, as we sit here today, Betty, we have more open inventory for Q3 and Q4 than we had at this time last year.

So those inventories are carryover inventory, David?

We have more open to buy dollars available as we sit here today than we did at this time last year for Q3 and Q4.

Great, thank you so much. Best of luck.

Thank you Betty.

Thank you. Our next question comes from the line of John Morris with BMO Capital. Please proceed with your question.

Thanks. Good afternoon, everybody. From stepping back and looking at it from a big picture perspective, you really weren't that far off of the revised comp guidance for Q1 and the merch margin was actually not that far off. Inventory was flat, so we are just having trouble understanding the reason for the delta of the shortfall relative to that guidance. If you can explain that a little bit? I don't know if it was because of SG&A being up 9% or so, but I think you said that was not as much as you thought it would be.

John, when I take a look at a comparison of how we were modeling our business at the time we provided guidance compared to where we actually came in, we actually were off in our top line. While we gave a range, we actually were expecting to be more in the middle end of that range so our sales number is actually off by a bit compared to how we had modeled when we gave our guidance. As well, our merchandise margin is actually down some from how we modeled. We had expected to see a modest increase year-over-year in merch margin. We were down a little bit, we were down even a little bit further compared to where we had thought we might come in more in the middle part of our guidance at the time.

So that put some pressure clearly on B&O. B&O in terms of actual dollars was actually pretty close, as were our SG&A expenses. We actually saw a slight favorability compared to where we modeled. So it really wasn't as we were modeling. We were thinking we would be a little more in the mid-range of that guidance than where we actually ended up. Remember what we had said in the last call was that we were tracking in the first month or so toward the worst end of that guidance, but that we had built in a pretty significant change in trends, so that didn't happen which is what put the pressure on margin dollars and overall gross margin rate compared to where we thought we would be.

Got it, thanks.

Does that help?

Yes. Thank you very much.

Okay. Thank you.

Thank you. Our next question comes from the line of Neely Tamminga from Piper Jaffray. Please proceed with your question.

Good afternoon this is Kayla Berg on for Neely. Just wondering what are some of the underlying assumptions of the merchandise margin implied in the full year guidance in the back half versus Q2? And how much does that guidance contemplate unplanned mark-downs following the spring's under-performance versus what you're anticipating as the stepped-up promotional environment?

So we are projecting right now that we will see some compression compared to prior year in merch margin in Q2. What we said in the script is that we've we have taken into account those items that we would have to flush through in Q2 that maybe didn't sell well in Q1. So that merch margin decrease will be at a level that is higher than in Q1. As we get into Q3 and Q4, we are expecting at this point to potentially see a very modest improvement in merchandise margin getting some benefit from the AUCs that I referenced a while ago, as well as better inventory management which David and I just spoke about.

Thank you. Our next question comes from the line of Lorraine Hutchinson with Bank of America. Please proceed with your question.

Thank you. Good afternoon. Can you talk a little bit more about your pricing strategies going forward? It sounds like you are able to take prices up on certain items. I'm assuming that given the competitive environment you will have to take prices down on others whether it's initials or through promotions. So how do you think about your pricing structure and changes you need to make over the next year or so?

I can answer that for you Lorraine. I think in terms of the price ups that we've taken and the price ups that we're looking at going forward, it's really being very opportunistic based on the idea that we're going to have to promote more, which we have. There will be more things that are coming through for the balance of the year in Q2, Q3 and Q4, which yes, there will be price increases on. But by and large, our prices overall, it's a very small percent of the inventory. Our prices overall have remained pretty flat in terms of what they've been in the market.

Thank you.

Next question comes from the line of Brian Tunick from JPMorgan. Please proceed with your question.

Hi. This is Kate Fitzsimmons on for Brian. Thanks for taking my question. You just spoke to the Memorial Day promotion falling short of plan. Last call you spoke to consumer fatigue to the 40% to 50% off all store promotions. Do you think that was at play there or was it more of an execution issue just in terms of product? Should we expect any adjustments to your messaging go-forward in 2014? Thank you.

I think it was more promotional affecting than it was the execution in terms of the Memorial Day weekend. As we look at the trends that we've seen over the last few weeks, we have seen improving trends as Michael spoke to earlier. And it was really that weekend that we got hit. We have seen things recover since. So as we look at Memorial Day weekend, also based on the amount that we promoted prior to that, people have been able to buy it on promotion on previous weekends, especially on Mother's Day. So I think that affected us to a certain extent. As I look at the product and I look at the trend that we have coming through, it looks promising.

Great. Thanks.

Thank you.

Thank you. Our next question comes from the line of Richard Jaffe with Stifel. Please proceed with your question.

Thanks very much, guys. Given the relative strength of e-commerce and the opportunity that presents, is there an opportunity to carry more online, to do more in advance of season testing or to have a greater range, depth or breadth of product that could give you more intelligent buys going forward for the bricks and mortar stores? How are you using that e-commerce business and is there a way to use it even more effectively?

Absolutely Richard. I think what's really key in terms of our e-commerce assortment, is the breadth of assortment. It's testing, it's looking at ideas that we can potentially flow into the bricks and mortar go forward into the future and we are very pleased in terms of what we've seen from that approach in terms of the items that we have tested by that route. I only see us doing that more and more as we go forward.

How much more do you offer online than is in stores, on a rough percentage basis?

It really depends on the department that you are talking about. There are certain departments where we do offer more than others.

We have a department or two where we don't even offer it in the stores, like swim wear, which is another perk, that we can offer products on the web that we don't offer in the store, not just product extension.

Just to be clear, on the swim wear, we've tested it in five stores in the warm weather climate, but the biggest part of that test was really what we got online, so very effective what we sold from that. Also, when you look at our active wear, our performance active is in 30 stores but we're doing a very good business with it online as well.

Great. Thank you.

Thank you.

Thank you. Our next question comes from the line of Susan Anderson with FBR Capital Markets. Please proceed with your question.

Hi. Thanks for taking my question. I was wondering if just taking a step back and looking at the bigger picture, if you are seeing anything new with your core customer, any new macro pressure, or are you seeing additional competitive pressure via the fast fashion players that are online? If you can talk about that a little bit.

Sure. We are working in a climate where mall traffic is declining. But the fact is, in terms of what we have seen over a sustained period of time in terms of the growth of e-commerce and in terms of what we're seeing from our outlet business, it gives us great optimism in terms of what we can achieve going forward. So we are very pleased with what we're seeing in the outlet business, which is really based on everything that has been proven in the past and all our bestsellers from the previous year.

So I think that what we are seeing is a real radical shift in terms of the growth of online. We said we wanted to get to 15% of total. We're now operating at 17% of total. Somewhere in the future we believe we can get to a position of 25% of our total business online. When we look at our outlet business, we've talked in the past about the potential for a hundred stores. Based on what we've seen in the first five weeks of selling on the 17 stores that we have, we believe that there is a potential to take our outlets into 150 stores. So I think that the opportunity that we are seeing is presenting itself as we go and we are accelerating our rates and pace of change in terms of adapting to that new reality. I think we will do very well from that.

Great. Thank you. Good luck the rest of the quarter.

Thank you very much.

Thank you. Our next question comes from the line of Jay Sole with Morgan Stanley. Please proceed with your question.

Hi, good afternoon.

Hi, Jay.

A question about the 50 store closures. Are you committed to just 50 or is it possible this number could decrease or are there also some stores on your watch list that you might consider closing in addition to the 50? Then Paul, if you could talk about store opening plans for 2015, just generally speaking if you can comment on that, that would be very helpful.

Sure. We did a pretty comprehensive review of our store fleet and believe that 50 is the right number for us right now. With the trends that are changing, as Dave indicated, certainly that is something that we will continue to look at and evaluate on an ongoing basis. As the trends change, then we need to be willing and able to change with them. Right now we feel like 50 is the appropriate number for us.

This is Matt. We have taken a look at the stores we have closed over the past couple of years and developed a pretty good algorithm around looking very specifically at which customers in the stores we will be close, how many transition to another Express store, how many move to online for sales as well. So we have a pretty good feel for how much sales will transfer to other stores or other channels as we close them. We are being somewhat conservative as we look at the first 50 stores. Once we get those closed and verify where the numbers are, there might be opportunities for more.

In terms of CapEx, we guided $110 to $115 million. We've maintained that guidance for the full year. As you know, about 70% of our CapEx goes to real estate.

Okay, thank you so much.

Thank you. Our next question comes from the line of Janet Kloppenburg from JJK Research. Please proceed with your question.

Hi, everybody.

Hi, Janet.

I was wondering if you could talk a little bit about tests for the fall season, particularly in sweaters and denim and if there are any encouraging leads there and if you could talk a little bit about the expectation on re-orders, perhaps if you resolved the issue there with getting back in stock when you need to. Lastly, Paul, are we to expect that the interest expense forecast could change once you complete the refinancing at the end of 2Q or is this the way it looks for now.

Janet, I think my comments reflect the interest expense at a rate assuming that we have not completed, because we haven't refinanced. We will communicate that when we finish it. It will be in the second quarter that we finish that. We would expect it to be less.

Okay. Thank you.

Hi, Janet. It's David.

Hi David.

In terms of your previous two questions, in terms of the sweaters and the denim, our big test of the full season, which really drives what we see on holiday, is just this week at the end of May and the beginning of June. What we do with that is based off of the results we see from that. The styles that we bought into for the third quarter we feel very good about based on the test results that we've seen. In terms of denim, it's been about re-assorting the line to ensure that we've got great penetration of dark washes, having blacks and grays and ensuring that we've got the right mix of mid-rise and high-rise and that is what we've done.

Okay, great. Thank you and hello, Michael.

How are you, Janet?

Thank you. Our next question comes from the line of Roxanne Meyer with UBS. Please proceed with your question.

Good afternoon.

Hello.

I'm just wondering what areas you are focusing on in your cost reduction plans, how much is going to occur at the store level versus corporate in some of those areas? Thanks a lot.

A pretty significant portion of it is spread across the entire organization. We have our largest bucket of expenses, obviously, in the stores so there would be a percentage that is related to how we manage labor hours and other expenses. I think the most important thing is where we're reducing costs is not as much customer facing, making sure that we keep the right amount of investment behind not only the pillars of growth and the things that we are ever expanding, but also within the areas that matter with respect to product development and merchandising. Given the question on cost, I will take the opportunity to just let you know that the cost to implement the actions that we have taken is less than $1 million and we have included that in our guidance.

Okay, great. Thanks a lot.

Thank you. Our next question comes from the line of Rebecca Duval with BlueFin Research. Please proceed with your question.

Hi, guys. Thanks for taking my call. David, you can speak to this or Michael.

I'm sorry we can't hear you, could you speak up?

Sure. Can you hear me now?

No.

So you talked about the fact that there wasn't a lot of newness coming in to the first quarter. What went wrong in Q1 and you talked about you have this test for Q3? Where did it go wrong in Q1 and going into Q2? If you have a test and react strategy in place, how did you fail to see some of this lack of newness coming into the stores? Is there a way to correct that towards the end of Q2 or will it just be more of a chase and re-order of styles that are working?

I think that's a very good question, Rebecca. It's impossible to really take all the risk out of fashion, clearly and we have stated that repeatedly. It's always part of and it's always part art and part science. I think the way in which we indexed the test was hampered by the sharp decline in traffic that we saw in Q1. I think that that had an overwhelming effect on it. I think that the most important thing for you to know is that our biggest and our best key items are all tested, they're proven and they're built into the items that they are today.

A lot of the items that we got into, we didn't have the right depth of them in Q1, but we've really revamped the assortment for Q2 and we believe that we have them in the right level of inventory on some of our best items. So we know that it is a strategy that works and has worked very well for us in the past and has prevented us from ordering too heavily into product that the customers didn't like on many, many occasions. The fact is, the way in which we index the test was hampered by a sharp decline in traffic that we saw in the first quarter.

Got it, thank you. That's very helpful.

Thank you.

Thank you. Our next question comes from the line of Danielle McCoy with Brean Capital. Please proceed with your question.

Hi. I was wondering if you can give us a little bit more color on some of the trends that you are seeing in international?

When you say trends, do you mean fashion trends or --

Fashion trends, just trends overall in Mexico and I guess anything differentiated of what we're seeing here as far as traffic and sell-through.

We see there's a lot of cases that the brands have a place overseas, internationally in a way that sells here in the US, in terms of the mix, in terms of the assortment. What we do see in the Middle East, there is a greater preponderance for louder product. They love the line, the brand and in Central and South America, also in Mexico we sell a lot of our party. That sells very well, indeed. Clearly what is a strength for us is color and fit and that is something that appeals very much to the Mexican, Central American and South American markets.

Okay, thank you.

Thank you. Our next question comes from the line Steve Marotta with CL King. Please proceed with your question.

Good evening, everybody. Can you please comment on the aggregate marketing spend in 2014 versus 2013? Take me, perhaps, through the quarter as it falls in different buckets. Did the $10 million increase in SG&A cost on a year-over-year basis in the first quarter -- was any of that accounted for in a marketing differential? Thank you.

So marketing we talked about on the last call, saying that we expected to increase our marketing spend as a percent of sales by about 70 basis points. We had been running at about 4% of sales on an annual basis. And yes, in the first quarter there was an increase in the marketing spend by about two percentage points year-over-year.

Terrific, thank you.

Thank you. Our next question comes from the line of Barbara Wyckoff with CLSA. Please proceed with your next question.

Hello.

Hi.

Can you hear me. Hi, everyone. Sorry about that. In the outlets, what percentage of the businesses, the merchandise made for outlet versus clearance, do you test here? Do you have a separate team for outlets? And is it more of a following business, or is it -- how do you view it versus the regular price stores?

It's 100% made for outlet as opposed to what we were doing in the five clearance stores which never had anything good, never had size runs, it could not have been in business. This is 100% made for outlet. The outlet team is totally separate, separate stores team, separate merchant, separate everything. It is being run as a wholly separate business. The only overlap is production is the same production department, but there are people dedicated in that production department to outlets. The good news with outlet is that every single thing that is in there, whether it is in depth or just in moderate quantities is a known, good style from Express.

So it is a following business, that's great.

Yes.

Okay great. Thank you.

Thank you.

Thanks Barbara.

Thank you. I would now like to turn the floor back over to Michael Weiss for closing comments.

That concludes our call for today. Thank you for joining us this afternoon and for your ongoing interest in Express. We look forward to speaking with you more.

This concludes today's teleconference.