Express Inc (EXPR) 2014 Q2 法說會逐字稿

Greetings and welcome to the Express, Inc. second-quarter 2014 earnings conference call. (Operator Instructions) As a reminder, this conference call is being recorded.

It is now my pleasure to introduce your host, Marisa Jacobs, Vice President of Investor Relations. Thank you, you may begin.

Thank you. Good morning 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 conference call, except those containing historical facts, may be deemed to constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual future results may differ materially from those suggested in forward-looking statements due to a number of risks and uncertainties, all of which are described in the Company's filings with the SEC, including today's press release. Express assumes no obligation to update any forward-looking statements or information which speaks 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 morning, everyone, and thank you for joining us today. Our second-quarter results reflect the sequential improvement we guided to when we spoke with you in May.

Our comps were down 5%. While still not where we want them to be, those results reflect improvement from the negative 11% comp we reported for the first quarter, and our EPS, which came in at $0.08, exceeded the high end of our second-quarter guidance.

Our business performed better across the board than we initially anticipated and below the operating line we benefited from a one-time tax item. Paul will provide more details on our financial results in a few minutes.

Looking at the business as a whole, we entered the second quarter with three priorities: to successfully ramp up our new outlet business, to deliver improved assortments and a better product mix, and to invest in impactful marketing. We made good progress on all three initiatives. We also began to implement our cost savings program, which remains on track.

Outlets were the highlight of the quarter as they continued to exceed our expectations. Customer acceptance has been immediate and enthusiastic. Product consisting of items that were best-sellers at retail translates into faster-turning merchandise and fewer markdowns.

When combined with the lower rent structure than at our full-price retail stores, we expect outlets to generate higher operating margins. When we spoke about the 2014 contribution from outlets at the beginning of the year, we estimated it at $30 million of incremental revenue. Based on performance today, we believe the incremental revenue is now likely to range from $55 million to $60 million. This dramatic increase is possible because comps at converted stores are significantly exceeding our original expectations. Similarly, each newly-opened store is significantly exceeding our pre-opening sales forecasts.

We now anticipate that the year-end outlet store count will be 37, including the 19 conversions. We are aggressively searching for new locations that meet our criteria with the goal of having 70 outlets opened by the end of 2015. Given the opportunity, we will certainly open more.

E-commerce during the second quarter rose 3%. The third quarter has gotten off to a strong start and we are growing at a faster pace than in Q2. We are working on a number of e-commerce initiatives. In fact, we just recently rolled out several upgrades to our website. Improved product descriptions and product views help customers hone in on items they are looking for.

We also expanded content that deepens our customers' personal involvement with the brand. The addition of customers' selfies and new features that make it easier for customers to review and to share product with their friends are examples.

At the same time, we have improved the navigation and simplified checkout. In total, we expect these enhancements to improve our e-commerce conversion rates.

The migration to mobile is happening at a rapid pace, which is challenging because mobile conversion still lags behind desktop and tablets. We recently rolled out a responsive website that creates a consistent experience from mobile to tablet to desktop. This demonstrates our prioritization of mobile-first e-commerce design and supports our efforts to significantly improve mobile-related conversion.

We are also seeing encouraging results from our recently launched expedited mobile checkout feature. That said, e-commerce remains extremely important to our current business, to our omnichannel transformation, and to our future growth. On a full-year basis we expect e-commerce to represent approximately 16% of our total sales, compared to approximately 15% last year.

We are keenly aware of the ongoing changes in customer shopping preferences. We are continuing to adapt our business and there is no doubt that going forward a larger percentage of our total business will be derived from e-commerce and outlets. Stores, of course, will remain important, but we do see a bifurcation as some malls continue to thrive while others are declining and will continue to do so.

In terms of our international business, we are excited about the developing relationship with our newest franchisee, Edcon. Based in South Africa, Edcon owns Edgars department stores and is also the second-largest non-food retailer in South Africa, operating 1,300 stores across nine different formats. Edgars is rated the most recognized brand in South Africa and, as such, will provide us with a wonderful vehicle for introducing Express to consumers in that country.

We expect our first shop-in-shop store to open this fall with others to follow. Each of them will be situated in one of Edgars' premium locations. These shop-in-shops will provide us with important information that may enable us to open similar formats in markets such as Asia and Europe. In terms of freestanding stores in South Africa, the first one is scheduled to open next spring in Cape Town.

The last topic I want to touch on before turning the call over to David is my decision to retire. Last month we announced that I will retire from my role as Chief Executive Officer on January 30, the last business day of our current fiscal year. When the transition does occur, David will step into the role of CEO. I will continue to serve as our non-executive Chairman of the Board and David will join me on the Board as a new Director.

I was present at the launch of Express and, except for a brief hiatus, I have been deeply involved with this company from that point on. Express has been a labor of love. It has also been my life's work, involving a deep commitment on my part. I feel quite lucky to have found something I wanted to commit to so fully, but there is no part-time status when running this business, so I have decided to pass the baton.

I know David is the right person to succeed me. I have full confidence in him and also know that he is supported by a deep and talented team that will lead this business forward for a future I believe holds great promise with this brand. It has been a pleasure to get to know so many of you and I hope I will have the opportunity to say goodbye personally between now and January.

With that I will turn the call over to David.

Thank you, Michael. Good morning, everyone. I want to reiterate Michael's theme that we are making progress. The environment is still challenging and promotions during the back-to-school period remain intensely competitive.

Even with these headwinds, we saw improvement in a number of our women's and men's product categories during the second quarter. We cleared through a lot of our slow-moving spring product and did so with less impact to margins than we initially anticipated. More important is the fact that we feel better about our fall assortment, some of which you are already seeing in stores and online.

We have more work to do and are still dealing with underperformance in certain areas, including women's casual knit tops. This is a category that has seen weakness across the industry. In the second quarter, however, we saw a nice turn in our women's dressy knit top business and expect to build upon this improvement in Q3.

The more polished differentiated dressy knits that hit the stores in Q2 drove growth, both sequentially and when compared to last year's second quarter. And while casual knit tops remain challenging, we can partially offset this with growth in dressy knits and wovens.

Woven tops continue to be a source of tremendous strength for the business on top of a record year in 2013.

Sweaters in the second quarter were challenging, but we are seeing a change in the trends of the business with new fall deliveries. We received some very positive reads on our most recent sweater test and have reacted to them for the fourth quarter. We are anticipating that the second half of 2014 will deliver improved performance over the first half and that we will have a good holiday sweater season.

In our bottoms business, we saw improved performance, particularly as Columnist and Editor inventory improved throughout the second quarter. We are expecting further progress during the fall season and are well-positioned for September, an important wear-to-work selling period.

The denim business has been challenging. We've done a lot of work, however, to improve our denim AUC�s. This lets us run full denim promotions that keep us competitive without impacting margins as dramatically as would otherwise have been the case.

We are also not accepting CRM on these denim transactions, with no customer pushback. In fact, we�ve seen great results from our recent denim campaign and, on a side note, we have avoided adding incremental all-store discounts to the ones that we ran last year.

Furthermore, while conscious of price, we are staying true to our brand, delivering great washes, finishes, and quality that appeal to the Express customer. We have built out our core denim with great clarity to showcase our offering. Women's mid- and high-rise styles are continuing to increase as an overall percentage of the mix and we don't yet see that leveling off.

With the growing importance of skirts and leggings, we anticipate some trade-off with denim and planned accordingly. The strength in skirts we've been talking about for a while continued. The business is being driven by different looks including embellished minis, pencil skirts, maxis, and full skirts in short, mid, and below-the-knee lengths.

We have some promising new dresses arriving and expect fall results to outperform spring. Jumpsuits and rompers are selling well and we are continuing to make real progress with women's shoes.

Like women's, our overall men's business was down to last year, although less so. The men's side of the business had a stronger first quarter, so we took fewer men's items into our second-quarter sale and drove better AUR and margins.

In terms of specific categories, casual pants were a real standout, delivering strong gains. Our chinos continued to perform well and we are seeing great initial selling on our jogger. They will be a bigger message in Q3 since product is really hitting the stores this month. Shorts also comped positively for the quarter. Our men's denim business has been challenging, but the men's casual pant business is reflecting the shift.

Men's jackets continued to build during the second quarter. We expect to see suit sales accelerate when our guys leave summer behind and come to us in search of more formal looks. Our pattern dress shirt has been a real standout in terms of men's tops, and in shoes, we did well with sneakers during Q2.

So looking at the second quarter in its entirety, it was one in which we made progress. We tackled the weakest categories from the first quarter and our efforts led to sequential and, in some cases, quarter-over-quarter improvements. We are continuing to work on underperforming categories, while maximizing those delivering the best performance. In short, we believe we have positioned ourselves for a stronger back half of the year.

In terms of the fall season, we are focused on delivering compelling fashion with an appealing price/value proposition, maintaining high levels of discipline around our test-and-react strategy, improving our IMU so as to preserve merchandise margins in a highly promotional environment, and last, but certainly not least, we are focused on maintaining open-to-buy dollars so that we can chase into successful items as late in the season as possible.

Turning now to marketing, our fall campaign with Kate Upton is well underway and is driving impactful media and blogger coverage and also boosting the number of Express followers on social media. Our fall denim campaign is one of the most integrated we have run so far, successfully driving a consistent message across multiple channels of communication.

We saw a huge lift in August editorial coverage, which appeared in premier publications such as Elle, InStyle, and Teen Vogue. In addition, feature shots of Express product being worn by A-list celebrities such as Selena Gomez, Bella Thorne, and Shakira appeared in weeklies such as US Weekly and People.

In September we will see more editorial coverage in fashion and lifestyle magazines including People Style Watch, Elle, and GQ, with a focus on key wear-to-work, denim, and party pieces.

Before wrapping up, I want to take a minute to acknowledge my gratitude to Michael and the Board of Directors for the confidence that they have shown and continue to show in me. It will be an honor to serve as the next CEO of Express and I want to state clearly that my commitment to the brand is stronger than ever.

We will all be sad to see Michael retire. I'm very pleased, however, by his decision to stay on as our Chairman of the Board so that we can all continue to benefit from his wisdom and insight.

At this time, I'm going to turn the call over to Paul to go into more detail about our financial performance.

Thank you, David. Good morning, everyone. I am pleased to begin with the fact that our results, starting on the top line with revenues and comps and progressing down to our margins, were better than we anticipated back in May. Consequently, our diluted earnings per share exceeded our guidance.

Having said that, the macro environment remained difficult and we continued to address the need for more compelling fashion. Traffic and transactions were each down during the quarter and our net sales, at $481 million, were 2% below last year's second quarter, comparable sales were down 5%.

Our gross margin came in at 28.3%, declining 280 basis points, driven primarily by buying and occupancy deleverage. Merchandise margins declined 70 basis points, which was better than we had expected as we headed into the quarter. This drove some of the EPS upside.

We also made progress in our inventory-related initiatives. Specifically, we reduced our dependence on air, reduced shrink, and managed fabric commitments far more prudently, resulting in fewer cancellation charges. I will note that we don't anticipate the same transportation savings in the second half of the year as we shifted deliveries to ensure that product keeps flowing regardless of what happens with the West Coast labor negotiations. While we have diverted some shipments to East Coast ports, we have also increased our use of air shipments on a temporary basis.

As a percentage of net sales, buying and occupancy expenses deleveraged by 210 basis points compared to Q2 of 2013. With the actual comps coming in a bit better than modeled at the time we gave guidance, we experienced a bit less deleverage than initially contemplated. Having said that, the deleverage we did experience was primarily related to the combined impact of lower sales, higher rent, and higher depreciation and amortization expense when compared to last year.

SG&A as a percent of sales came in at 25.3%. The 100 basis points of deleverage reflects the impact of the negative comps as well as our increased investment in marketing.

On our last call we discussed certain actions being taken to reduce costs without materially impacting our operations. We estimated 2014 savings against the 2014 operating plan at $15 million with annual go-forward savings approximating $18 million. During the second quarter we realized just shy of $4 million in savings and are on track to hit our $15 million 2014 target.

I do want to point out that these savings hit multiple lines, not just SG&A. You should expect to see approximately $12 million of these savings realized in SG&A and the balance flowing through cost of goods sold and buying and occupancy.

Our effective tax rate was 20.6% versus 39.7% in last year's second quarter. This quarter's tax rate reflects the benefit of $1.7 million, or $0.02 per diluted share, associated with the completion of a multiyear tax examination. We generated $7 million of net income and $0.08 of diluted earnings per share compared to $16.9 million of net income and earnings per share of $0.20 in last year's second quarter.

Our capital expenditures during the quarter were $32.5 million compared to $29 million last year. The increase was primarily due to investments in information technology and outlet stores. We ended the quarter with $253 million of cash and cash equivalents, compared to $234 million at the same time last year.

Turning to inventories, we ended the second quarter with inventories of $240 million, down 1%. Of course the reduction would have been even greater without the Express Factory Outlet inventories. On a per-square-foot basis, inventories were down 4%. In terms of the retail stores alone, excluding outlets, inventories on a per-square-foot basis actually declined by approximately 8%.

We are comfortable with our current inventory levels at this point in the fall season. We are also taking steps to more quickly redline merchandise not meeting our turn requirements, which will free up dollars to chase into better-selling items. Our third quarter is, of course, essentially bought at this point, but we are more liquid this year than last when it comes to our fourth-quarter open to buy.

One final point as it relates to our balance sheet. On our last call we announced that the Board of Directors had authorized another $100 million repurchase program and had also authorized us to move ahead with the debt refinancing transaction.

Following our first-quarter earnings call, Sycamore Partners expressed an interest in acquiring the Company. In light of that, during the second quarter the Company did not repurchase any shares of its stock or proceed with the refinancing of our outstanding senior notes. We will not be making any further comments at this time regarding Sycamore Partners' expressed interest in the Company or our plans regarding refinancing or share repurchases.

I am now going to turn to our guidance for the third quarter and full year. For the third quarter we expect to see the sequential improvement we've been discussing for the past few quarters continue.

Specifically, we expect comparable sales to decline in the low single-digit range; some gross margin leverage, but to a lesser degree than in Q2; modest SG&A deleverage as we continue to be impacted by the anticipated negative comps, but also to a lesser degree than in Q2; and we expect our tax rate to be approximately 40%. This brings our third-quarter net income guidance to a range of $11 million to $15 million, or $0.13 to $0.18 per diluted share.

On a full-year basis, we expect our comps to decline in the mid single-digit range, expect our interest expense to be approximately $24 million, and our tax rate to be approximately 39%. We now expect our 2014 net income to range from $72 million to $80 million, or $0.85 to $0.95 per diluted share. Given our second-quarter outperformance, we narrowed the ranges while also increasing their high end.

Capital expenditures are currently expected to come in at the high end of the $110 million to $115 million range provided earlier in the year, compared to the $105 million spent in 2013.

On our last call we referenced plans to close 50 stores. I just want to remind you that closing dates will generally coincide with lease expirations taking place between 2015 and 2018, so they will have no impact on this year's store count. I also want to remind you that our guidance excludes any non-core operating items that may occur.

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

Thank you Paul. I am encouraged by the progress we made during the second quarter in the face of a retail environment that remains quite challenging. We expect to make further progress during the balance of the year, especially during the holiday season. We will continue our disciplined approach to inventory investments and expense management as we expect business to remain promotional.

Longer-term, we have significant opportunities for growth across each of our growth pillars. We will remain true to our core vision of serving 20- to 30-year-old customers across multiple wearing occasions, while doing so in a manner that adapts to their changing needs and desires. Before turning to Q&A, I am turning the call back over to Marisa for one quick announcement.

Thank you, Michael. I would like to request that each person asking questions focus on our second-quarter performance, our guidance, and our business strategy. We will not be answering questions regarding Sycamore Partners' expressed interest in the Company or related matters on this call.

And as always, please limit yourself to one question and one follow-up so that we can get to everyone in the queue. Operator, please open the lines so that we can begin the question-and-answer portion of the call.

(Operator Instructions)

Betty Chen, Mizuho.

It's Alex Pham on for Betty. I just want to say congratulations on a nice improvement in 2Q so far.

My question is in regards to the competitive environment. What are you guys seeing so far in 3Q and is guidance incorporating quarter-to-date trends? Thanks.

Yes, in terms of the guidance, Alex, it is incorporating third quarter-to-date trends. In terms of the competitive environment, it is continuing in terms of what we are seeing. We are seeing a lot of all-store promotions that have been going on for the past three weeks. We haven't gone to any all-store promotions yet and we started today with our Labor Day sale of 40% off the entire store. But that is anniversarying what we did last year.

So we still continue to see it as a very, very competitive environment.

Brian Tunick, JP Morgan.

This is Kate Fitzsimmons on for Brian. Thank you for taking our question. I was wondering if you could speak to your assumptions regarding the merchandise margin in the back half in context of what you are seeing in terms of the promotional environment, some of the AUC work you're doing, as well as bringing down inventory potentially in the back half. Thank you.

Kate, we are still hoping that we will see some modest improvement in merchandise margin as we get into the back half of the year. We really didn't comment on that. We are little hesitant to commit to that based upon the environment that David described.

We have continued to work on AUCs as we have talked about in the script. We've seen some improvement in AUCs, particularly in denim, that have been helping us as we promote that product during the early part of the third quarter. It's helped us keep our margins in reasonable shape for that product category.

We continue, as always, to try to work on AUCs with our key vendors. So that, as well as some discipline around how we are managing inventory -- we have more open-to-buy right now for the fourth quarter. We think that will help us compared to last year.

As you remember, we went into the third quarter and fourth quarter last year with heightened levels of inventory based upon strong business in the May and June time frame and we ended up having to promote some of that more heavily in the back half of the year. So we hope that our discipline around inventory this quarter or this year at this time will help us manage that merch margin in the back half of the year.

We do continue to expect there to be some pressure on B&O, though, in the back half, particularly the third quarter, as we have guided our comps down low single digits. So hopefully that's helpful.

Okay. And so are you still thinking about comps being flat in the fourth quarter? Is that how we should think about it?

We are still hoping for sequential improvement quarter over quarter as we look to the back half of the year. We would hope that we could get ourselves to flat, but we really haven't provided any guidance on Q4 at this point.

Great, thank you very much. Best of luck.

Simeon Siegel, Nomura Securities.

Great, thanks. Good morning, guys. Your guidance calls for I think 19 outlets conversions, which I think is a slight increase from last quarter. How many retail stores do you still have in outlet centers at this point? And then are there any notable differences in the ramp up between the converted stores versus new outlets? Thanks.

Simeon, we don't currently have any full priced retail stores in outlet centers. In terms of where we stand -- sorry, the only one that I would say is Dolphin Mall, which is an outlet center, and we're going to be converting that at the end of October.

Other than that, we are sitting here today at 23 stores. I think at the end of the quarter we said we were at 19 stores. We have opened in the past few weeks in Las Vegas, we've opened in Minneapolis, and we've also opened in Rio Grande, all of which are important outlet malls. Then tomorrow we open our 24th outlet stores which is in Charlotte.

Simeon, each of the conversions, as well as the new stores, are opening at a pace that is a little bit faster, much faster actually, than we had expected. I wouldn't say there's a big difference, huge difference between the conversions or the new stores in terms of their overall performance right now that we are able to see. But they are exceeding our expectations with respect to both sales performance as well as margins.

I would add that the conversions really give us a much better view of what real estate in these malls is producing, because we see the comps on the conversions.

Great. Thanks a lot, guys. Good luck for the back half.

Jay Sole, Morgan Stanley.

Good morning. I just wanted to ask another question about the outlets. What are consumers buying? Are they buying higher-priced products or lower-priced products than they are in the full-priced stores?

And I think it sounds like you are a little bit less incrementally positive on the full-price stores. Is there an impact on the brand if you see customers going to outlets more than you expected and maybe pulling away from full priced a little bit?

I think it's kind of early to tell exactly what the overlap of customers is. We've got about 12 weeks or 13 weeks' worth of data at this point, but I think it's kind of early to actually see the overlap.

Over time we don't see it as detrimental to the brand at all actually, the outlet business. We think it's actually going to be very good for our brand. We see a lot of other people who are out there doing the same thing that we are and have been doing it for longer, quite frankly, and don't see any detriment to the brand.

In terms of what they are buying, remember that a lot of what or most of what's being sold in these outlet stores are proven winners from what's sold before in the full-priced retail stores. We've done some things to manage the costs on those items based upon how we bring them into the business, meaning boat versus no air, as well as maybe changing a little bit of the packaging on those products without sacrificing any quality.

So I don't think we are really seeing a change in what people are buying. I don't think we can make a statement that they are going for higher-priced items versus lower-priced items. It's a pretty good mix of sales in the product categories that we are offering.

It's pretty balanced -- this is Matt. It's pretty balanced across all categories. We have architected the business, to Paul's point, where we still get relatively comparable margins to our retail business, product margin-wise.

And as Michael mentioned in his comments, when you get down to profit, profit margins are, operating margins are much higher in the outlet business as well. So we think this should be a plus for us overall long-term for the business for sure.

Got it, thanks so much.

Adrienne Tennant, Janney Capital Markets.

This is Gabriella Carbone calling in for Adrienne. I just had one question. I was wondering if you could talk about your pricing strategy and what you have learned from raising ticket prices on certain categories and if there's any other additional opportunity there moving forward, thank you.

We are quite happy with our pricing strategy as it stands today. I think in terms of what we've learned over the last few weeks with denim, we are excited that we have been able to promote it at a sharp price point and exclude it from the CRM. But we have always believed that denim is the entry point into the brand, so we've been offering women's denim at $39.90 and men's denim at $49.90, and we are pleased with the results that we have seen.

Other than that we are very pleased in terms of overall where we stand on our pricing strategy.

Okay, great. Thank you so much.

Janet Kloppenburg, JJK Research.

Good morning, everyone, and congratulations on the progress being made. Michael, I listened to your comments about the stores versus the e-commerce channel and the outlets and I am wondering if the Company will consider a re-examination of the existing store base for incremental store closings beyond what you've announced.

And also, David, if you could just talk a little bit about trends, we are hearing a lot about the jogger bottom for women and I'm wondering if you think thats that is a silhouettes which can compensate for some of the weakness in denim or what your view is on that trend. I know you are showcasing in the men's, but I'm wondering how it's working in women's.

And as far as the shift in tops go, I wonder if your investment in wovens and fashion knits is where you want it to be so that the casual knit weakness may be less of a negative impact to your business in the second half. Thank you.

I'm not sure we can get all of these, but we will try.

It's not that many questions. It stores and then it's joggers and tops.

I got it, no worries. I got it. In terms of store closings, we are constantly reassessing our entire fleet. We have frequent real estate meetings. We look at leases every couple of weeks and I am confident that we are looking at it in a very appropriate and very sharp manner in terms of the actions that we've taken so far.

In terms of your second question, you were asking about trends that we are seeing, correct?

No, I'm asking about the jogger bottom and what it means and have you invested in that in the women's sector?

We haven't invested in it in a big way in the women's sector. Actually what I feel like is that the investment that we've made in leggings is very much the right investment and we are seeing some very good results on those leggings. And also the increased amount that we are investing in skirts is totally the right thing as well.

Having said that, our denim business quarter-to-date is on a very good path and I am confident that we have allocated our dollar inventory into the right places.

Barbara Wyckoff, CLSA.

My question has to do -- good quarter, first of all, thanks. And then can you talk about high-rises, mid- and high-rises doing better. Can you talk about how big they are as a percentage of your sales mix right now and where would you ideally like them to be, say, by holiday?

And looking beyond the jogger, I want to know about the -- I call it the evolving ath-leisure trend and you talked about leggings being strong. But is it more than this? These clothes are being worn for street as opposed to -- in addition to, I guess you would say, working out.

In terms of the mid- and the high-rise trend, looking at it between the mid- and the high-rise trend we are at about 45% to 50% of our total denim business; our inventory is in the mid- and the high-rise. We see that increasing slightly as we go through the balance of the season.

In terms of your question on leggings, I think in terms of the customers using the leggings and wearing the leggings much more and more as weekend wear as well as workout wear. So I feel like we have covered the trend very, very well.

Thank you.

Susan Anderson, FBR Capital Markets.

Good morning, thanks for taking my question. I was wondering if you could talk about the back-to-school or back-to-college demand you are seeing. I know last year I remember you were kind of seeing increased demand even though it's not a huge focus, such as the teen guys, but I think increased demand last year as the consumer was coming in the store for the denim offerings.

Are you seeing the same thing this year? Is it a little less since denim is less of a focus? Just any color there would be helpful, thanks.

We are seeing very good demand across the board really in terms of what we are seeing for the three weeks to date, so denim the promotion has been very successful for us, $39.90 and $49.90. Clearly we are moving on to the Labor Day promotion, which started today. That was a very, very good weekend for us last year and our expectation has got to be that how this weekend comes out is really an indicator of where we believe that we are going to go for the quarter. But we have built that into our projections.

Great, thank you.

Tom Filandro, Susquehanna Financial Group.

Thank you. First, a quick shout out to you, Michael; amazing career. You are an amazing individual and so we really thank you for your insight, your support, and your friendship. Great guy. We love you.

Thank you, Tom.

If I could ask, Paul, a quick one for you. Can you just maybe quantify for us exactly what the open-to-buy is, maybe from a percentage standpoint and how it compares to last year? Then I have a broader question on marketing.

I was hoping you guys could provide us with an update on the spend for the quarter as well as your view into the second half. I�m wondering if you are co-branding it all to bring down the cost of the LED screen. And in conjunction with that, do you think Kate Upton is bringing in a different customer profile than you currently attract? Thank you.

Tom, we generally don't talk about the exact percentage that we are open for inventory purchases. I can tell you that for the fourth quarter, particularly on the women's side of the business, we have more room than we had last year. A meaningful amount of additional room compared to where we were last year, so that will allow us to chase into the quick-turning product.

We are -- when you say co-branding, we are at times actually renting out the sign in Times Square, so it is generating some revenue for us throughout the year. But we are obviously in the early stages of that and � the percent of time that we are renting it is actually ramping up as we own it for a longer period.

In terms of the Kate Upton question, Tom, it's very early in terms of us being able to say the reaction to the campaign. We are very excited by it, but in terms of being able to speak to the difference in the customer profile that's coming into the store, it's really too early for us to speak to.

Okay. Thank you all and best of luck.

Neely Tamminga, Piper Jaffray.

Thank you. Michael, you have left an indelible mark on the retail landscape and we are just profoundly grateful for all that you have built at Express. So thank you very much for that.

Thank you very much for that.

And hearty congrats to David, very well deserved.

Thanks, Neely.

Specifically for you, could you talk a little bit more about some of your tech initiatives? We are really pleased to see the good strides you guys have been making on mobile. We have noticed it in our own benchmarking, so we are really pleased to see that.

But what is that next step as we think about the back half or early 2015 in marrying mobile with omni in the stores? Do you have the infrastructure and do you have a timeline for some additional initiatives? Thank you.

Neely, it's Paul. I will just start and let David chime in as he sees fit. We have made over the last couple of years pretty significant investments in our e-comm business, starting with the movement of the hosting of our website about 18 months ago from outside the organization to inside the organization, which allowed us to really build the foundation to take over development of the capabilities from within the organization.

So over the last 12 months or so we have really been working on the design and the functionality of the website and taking a mobile-first look at development with a focus on a consistent experience as you go from mobile to tablet to desktop. So one of the things that you have probably seen most recently from us is if you switch from either of those mediums to the other there is a very consistent look of the website, which makes the experience a lot less frustrating for the consumer when they get on the site.

We've also changed the way in which we are doing development and we would call it moving much more to agile development. Instead of working on large projects that over a longer period of time have a big bang at the end, we are allocating dollars more closely in and having development done and introduced into production more quickly.

So recently, as I think David or Michael had referred in his script, we've made changes to our checkout process. We've also moved to allowing people to post reviews and selfies in our product on our website. You can see that.

We've also made the navigation through the website much easier for the consumer. And we will continue to work on development that is forward thinking and allows for a more omnichannel experience in the years ahead.

If I could add to that as well, Neely. Obviously, Paul spoke to the responsive Express.com redesign which we launched this month, but there are other things that we have been doing which I think are advantageous in terms of the overall look and feel of our website such as full-body images.

And as you look at it go-forward for the balance of this season, we have a redesign of our mobile app, which we are working on at the moment. Then we are obviously working on key omnichannel initiatives, such as being able to pick up in store and also ship from store, which we see as going live towards the back end of next year, beginning of 2016.

Fantastic. Thank you, guys. Best of luck out there.

Roxanne Meyer, UBS.

Great. Thanks and congratulations on the progress. Michael, you will always be remembered as one of the best merchant visionaries of all time.

My question is on the knit tops business. You are clearly not the only one to call out a weak casual knit top area and I'm just wondering if you think that this category is undergoing -- is it part of a structural issue or an issue that you think that you can fix yourselves? How do you think about, if it is structural, how much you need to ramp down that business over the next two years and how it could impact your margin structure, knowing that it's one of the highest margin categories? Thanks a lot.

Okay, I think first of all, Roxanne, the most important thing is that we are seeing significant growth in our woven tops business and we don't see that slowing down at all. In terms of the casual knit top business, yes, it is tough, but we are making up some of that dropped volume on our dressy knit top business, which I'm very excited about going forward for the balance of the season.

In terms of it being structural, I think it is but I think also we have to be focused on our creativity and the way in which we are focused on the product, redesigning the product, and enticing the customer in a way in which she's going to come back in and buy our knit tops. And that is really what we are focused on at the moment. So you're going to see a lot of testing from us in terms of knit tops, casual knit tops.

But the good news is I think that as we go forward for the balance of the season, we will make up significant volume in sweaters and also in woven tops.

Great, thanks a lot and best of luck.

Pam Quintiliano, SunTrust.

This is Nick Hiatt. I am on for Pam. Thanks for taking our call. You've talked about denim a little bit already. You mentioned that it was challenged in the second quarter but quarter-to-date you've seen some progress, so I'm just wondering if you can talk a little bit more about your denim inventory commitment in the back half.

And I�m wondering if that is planned up or down and if you can just give us your thoughts on the current denim cycle, if you can talk about high-rise and mid-rise and some of the other trends you�re seeing out there. Thanks.

Okay, in terms of our overall inventory going into the fourth quarter, I thought we have plenty. I think we're in a very good position. We are constantly reassessing it on a weekly basis. We've gone out and committed to more denim that we needed based on what we have seen over the past four weeks, so I'm confident we're in a very good position to be able to drive the business in the way that we need to.

And we still have a chunk of open-to-buy.

Yes, and we still have open-to-buy dollars available for the fourth quarter.

In terms of the balance of mid- and the high-rise, again I spoke to that earlier on a question. In terms of our overall penetration, I think we're in a very good place. I think we are absolutely right on trend, right on the mark. We are seeing a bigger penetration on the mid-rise than we are on the high-rise and we see that continuing as we go through the balance of the third quarter and into the fourth quarter.

If I could add something here, I think the denim category for us is just the opposite of the casual knit category. I think in the casual knit category we, and people like us, have lost a lot of business to the low-priced retailers. I don't think that's true in denim.

I think in denim the customer really sees the value of quality. Always has, always will. I'm not saying the customer doesn't want a bargain on quality, but inexpensive, cheap jeans are not appealing to most women. They don't look right. They are just not right.

So we believe that our denim has tremendous, tremendous upside. We also believe we can offer the quality that we do offer on a go-forward basis, which as we have said in the past, in terms of the quality, we can compete up, not down at prices that they really love. They seem to love our denim these days and at prices that we can make decent money at.

Great, thank you.

Richard Jaffe, Stifel.

Thanks very much, guys. Just a couple of thoughts about the franchise opportunity as you see it, both countries and ultimate size. And also the outlet business and how high or how big that can be, particularly given its recent success. Has that changed your views on it?

Then just a quick clarification. You mentioned gross margin approaching flat in the fourth quarter. Did I catch that correctly?

So to start with the franchise operations, we are pursuing some additional deals. As we mentioned in the prepared remarks, we are launching South Africa shortly. This is the first time that we are actually opening some shop-in-shop locations. We are doing this with a very good partner who knows how to make this work.

If we get good results there, this could open up many other locations for operations in Europe as well as in Asia, places like Korea to get an initial foothold taking advantage of footfall traffic that is endemic to the department stores that we are in and then move out, expanding into some stand alone stores. We are pursuing other geographies. Due to competitive reasons we won't outline what those are, but over the next couple of years, we hope to sign on approximately two new franchise partners a year.

Richard, then in terms of outlets, we did say at the last call that we think the number of outlet stores could approach 150 and we still believe that that is the opportunity over time for us. So we are very excited about the impact that that could have on the business long-term.

I don't think I really actually commented on our gross margin for the fourth quarter. I think what I said is in the third quarter we would expect to see some -- hopefully some -- improvement in our merch margin compared to last year. A lot of that depends on the promotional environment and we would still expect to see some deleverage in our overall B&O.

Okay, thank you for your clarification.

Thank you, it appears we have no further questions at this time. I would now like to turn the floor back over to management for any additional concluding comments.

That concludes our call for today. Thank you for joining us this morning and for your ongoing interest in Express. We look forward to speaking to you in early December. Bye.

Thank you. Ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation and you may disconnect your lines at this time.