Express Inc (EXPR) 2014 Q3 法說會逐字稿

Greetings and welcome to the Express, Inc. third-quarter 2014 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.

I would now like to turn the conference over to your host, Marisa Jacobs, Vice President of Investor Relations. Thank you, Ms. Jacobs. You may now begin.

Thank you. Good morning 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 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, 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. By now I'm sure all of you have seen our third-quarter press release, which recaps our performance. Our third-quarter EPS of $0.17 was at the upper end of our guidance range of $0.13 to $0.18. Our third-quarter comp came in at negative 5%. In August, our comp was in line with the sequential improvement we had been seeing. The remaining two months of the quarter, however, were reflective of the weakness seen in mall traffic, and as a result, we did not achieve the third-quarter comp contemplated in our guidance.

I do want to note that during the quarter, and in spite of the declines in mall traffic, we approached promotions carefully. We only ran one blanket 40% off all of store promotion. That was our Labor Day event, which was identical to last year's Labor Day promo.

During the third quarter, we continued to execute against our strategic initiatives and our growth pillars, both of which are designed to elevate our brand and better serve our customer. We are continuing to deliver sought-after fashion that provides a compelling price/value proposition.

We are optimizing our retail real estate to focus on hub locations that our customers view as the most attractive destinations. We're successfully serving a different segment of our demographic by building out the Express Factory Outlet store base, and we are expanding our international reach.

With that framework as a backdrop, there were a number of positive developments during the quarter that I want to call out. We opened nine new Express Factory Outlet stores. Collectively, the outlet stores are continuing to exceed our initial expectations, both the ones now open for a few months as well as the ones opened most recently.

Our e-commerce business once again grew more quickly than the prior quarter, posting an increase of 11% and continuing the sequential improvement we had been projecting. And our marketing initiatives are enhancing our brand, while our website upgrades are delivering positive results and boosting online conversion.

Let me elaborate a bit on each of these points. First, the outlets. Customers are reacting enthusiastically to our offering, which consists of proven winners from last year as well as some of our key items reengineered in a way that allows sharper price points.

On our last call, when discussing outlets, we told you that the incremental revenue from these stores were estimated at $55 million to $60 million. That projection remains on track. We are encouraged by the great comparable-store sales growth we are seeing at outlet locations that were conversions from other formats as well as the overall strength in outlets.

One of our recent conversions was a C-level mall store we converted to the Express Factory Outlet format. Early results are good, and we are exploring the potential to convert more C- and D-level mall locations. We expect outlets to continue to be a powerful growth vehicle for us over the coming years.

In terms of outlet store count, we ended the second quarter with 20 stores and the third with 29. In August we indicated that we would most likely end the fiscal year with an outlet store count of 37 but also noted that we had ramped up our search for suitable new locations. We now expect to end the fiscal year with 41 outlet stores in operation. This is in just eight months.

We've continued to make nice sequential progress in e-commerce this year as we moved from negative 2% in Q1 to a positive 3% in Q2 and a positive 11% during the third quarter. In addition, we anticipate solid gains in the fourth quarter.

We rolled out a number of enhancements which are contributing to this progress and are working on new e-commerce initiatives. A few examples are improved product descriptions and pricing clarity, easier navigation, and simplified checkout processes. As we continue to learn more and more about customer preferences, we are getting smarter about the way we pulse offers to drive sales in individual categories.

As the rapid shift away from desktop to mobile devices continues, mobile capability is, of course, critical. Our customers are not the only ones migrating; we are as well. And we continue to equip more of our sales associates with mobile devices to simplify the shopping process for our customers.

Our online and mobile efforts are leading to improved conversion rates. We've also seen external validation that Express customers like our new Web design, which includes improved navigation, bigger and better product photography, and an easier-to-use mobile Web experience. Our customer satisfaction rankings among users, as measured by an external source, have improved nicely over the last measurement period. The number of new visitors who say they intend to purchase from us again, both online and in stores, has grown as well.

In terms of our international business, the third quarter was an exciting one. Our South African franchise partner opened Express shop-in-shop locations in three Edgars department stores -- one each in Johannesburg, Cape Town, and Durban. We are pleased with our initial foray into this format and are seeing particular strength in our women's bestsellers.

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. The spring launch of the first freestanding Express store in South Africa remains on track.

Our other franchisees are continuing to add new locations as well. Recently, two additional stores opened in Mexico -- one in the third quarter and one in November. And a third new store opened in that country a few days ago. In addition, a new Express store opened in Abu Dhabi last month, and within the next two weeks a new store will open in Guatemala. By year-end, our franchised store count is expected to reach 34, up from 26 at the beginning of the year.

The last topic I want to touch on is the fourth quarter. Based on what we saw during the latter part of the third quarter and the month of November, we now believe that the holidays will be even more challenging than originally anticipated. Last week and through Cyber Monday, we rolled out a combination of promotions, doorbusters, and free shipping options to drive sales.

Our e-commerce business was above plan, but store traffic was weak. And while I think our assortment is stronger than at this time last year, it's not at its best in every category, and we are focused on driving improvements going forward in the areas that are lagging.

The net result is that we did not generate the business we had anticipated in the aggregate. On a positive note, this past Saturday and Sunday we did not anniversary the percent-off-entire-store offering we ran last year, and as a result achieved an improvement in our margin rate. We are continuing to test a variety of promotional formats with more inherent flexibility, since they enable us to focus on specific items we want to promote while preserving margins on new receipts and fast-turning items.

In addition, the results of this year's 40% off Labor Day promotion and our 50% off Thanksgiving and Black Friday promotion proved that as these all-store events are anniversaried, they cannot drive comps like they did when first introduced. As a result, going forward, we will use them much more selectively.

Our latest thinking about the fourth-quarter and full-year results is reflected in our updated guidance. We believe it's a prudent and appropriate response to the current environment.

At this time, let me turn the call over to David.

Thank you, Michael. Good morning, everyone. Michael commented on our accomplishments during the quarter and also spoke about our financial results. From an operational point of view, it was a mixed quarter. Shoppers came out in August and seemed enthusiastic, but then caution reemerged as a theme.

Our results were also impacted by the disruption of the West Coast ports. We mentioned on our last call that we anticipated labor disputes there and consequently acted early and proactively to divert product, primarily to the East Coast, but also to a heavier reliance on air. It was the right thing to do.

During the third quarter, certain categories performed nicely, delivering sequential and/or year-over-year positive comps. At the same time we had other categories that remained challenging, and I will elaborate on both in a second.

In terms of Q4, we have a number of key items across both genders that we expect to drive sales during the holiday period. But, the simple fact is that some categories are still underperforming, with women's casual knits and dressy sweaters being the toughest.

With respect to our women's business during the third quarter, our woven tops continued to be a standout, delivering strong growth that we believe will continue. We have a number of key items in this category, including the Portofino shirt, and we are continuing to test for equally large key items.

We continue to see customers favoring woven tops over knit tops right now, a sentiment we have seen expressed by a number of other retailers. In general, our dressy knits are outperforming casual ones. And we are testing new casual styles, some of which have given us very promising reads.

During the third quarter, casual sweaters grew compared to the comparable quarter last year, while our dressy sweater business declined. In terms of the fourth quarter, while some of our key items have been performing well, the category as a whole has gotten off to a tough start and is not performing as we need it to, given its importance during the holiday season.

We were pleased with our denim performance during the back-to-school time period, and we delivered a positive comp for the quarter. Lower AUCs have allowed us to get sharper on price points without eroding margins. We are also finding that customers are responding more favorably to specific price point offerings in this category compared to percent-off deals.

Skirts have been another area of strength for us as we delivered variety that our customers loved, whether they were full, pencils, or maxis. Dresses delivered a mixed performance during the third quarter, with casual outperforming dressy. We feel good about some of our new holiday and spring receipts and are planning for sequential improvement in both of these categories in Q4.

In terms of the men's third-quarter business, our casual pants were once again the standout department. We are winning in chinos with a greater depth of inventory. Our fleece pants have done well, and our jogger sales continue to build as styles flowed in throughout the quarter.

The strength in shorts that we talked about in August continued well into the third quarter, along with strength in polos and short-sleeved tees. We saw categories such as outerwear and sweaters decline in Q3. However, as we moved into the fourth quarter, those same categories began to perform better.

We saw a sequential and year-over-year uptick in our men's knit top business in Q3. We also feel good about this category for holiday, since we will be much better positioned from an inventory perspective than we were last year.

Let me shift now to marketing and give you a brief update. Kate Upton continues as our brand ambassador, and you can see her featured in an integrated campaign spanning across all of our marketing channels.

We launched a GQ campaign in the spring called Back-to-Business. It was such a success that we are continuing the campaign, which involves four MBA entrepreneurs competing for a grant to grow their start-up businesses.

And in November, we partnered with Cosmopolitan on its first Fun Fearless Life weekend. Over the course of this two-day event, some of the world's biggest influencers offered career, health, and image advice to thousands of young women. Each of these programs goes a long way to elevating our brand while simultaneously introducing Express to new customers.

Our focus on social media is still going strong, and our blogger program is expanding our reach and our network of highly engaged followers. The same is true of our programs that incorporate user-generated content into our Web and mobile channels. We've seen a really great response in this area. We are continuing to build out our personalization capabilities as well and so far are seeing positive results from those more targeted email campaigns.

Media coverage continues to trend nicely as well. So while the process of evaluating marketing spend and shifting allocation to deliver the greatest impact continues, we are pleased with the progress we have made over the past few quarters. This is particularly true in terms of our direct mail initiatives, where we are continuing to maximize ROI by segmenting mailings to concentrate on our most profitable customers.

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. As Michael and David commented, the third-quarter proved a bit more challenging from a top-line perspective than we had expected. That said, we were pleased to deliver improved merchandise margin during the quarter and earnings per share that were at the upper end of our guidance.

Net sales were $498 million, 1% below last year's $504 million. Comparable sales during the quarter declined 5%. We were pleased to see that our e-commerce business grew nicely on top of our second-quarter performance; it was up 11%.

Our gross margin came in at 31.7%, declining 110 basis points. This was primarily driven by buying and occupancy deleverage. Merchandise margins improved 30 basis points, which was a little better than the slight increase I had indicated might be possible when we spoke with you in August. This is reflective of the ongoing work we are doing to improve our inventory management. Without the additional costs incurred to bypass the West Coast ports, this improvement would have even been greater.

As a percentage of net sales, buying and occupancy expenses de-levered by 140 basis points compared to Q3 of 2013. This was primarily due to the combined impact of lower sales, higher rent and higher depreciation expenses, including $2.3 million of asset impairment charges.

SG&A as a percent of sales came in at 25.4%. The slight improvement of 10 basis points versus the prior year was driven by our previously announced savings initiatives, the favorable settlement of a state sales and use tax audit and continued overall discipline around expense management. Our effective tax rate was 40% versus 39.2% in last year's third quarter.

We generated $15 million of net income and $0.17 of diluted earnings per share compared to $19 million of net income and an earnings per share of $0.23 in last year's third quarter. Despite lower-than-expected comps, EPS came in at the upper end of our guidance due to previously mentioned factors impacting our SG&A coupled with the reversal of our incentive compensation accrual for the quarter.

Our capital expenditures during the quarter were $27 million compared to $33 million last year, which is simply the result of timing. We ended the quarter with $218 million of cash and cash equivalents compared to $182 million at the same time last year.

Turning to inventories, we ended the third quarter with inventories of $350 million, up 2%. This included approximately $23 million of inventory related to the outlet stores. So excluding outlets, retail inventory declined by 5%.

I'm now going to turn to our guidance for the fourth quarter and full year. Our third-quarter and November sales were lower than we had anticipated. We took this fact and our current views on the remainder of the holiday season into account as we formulated our fourth-quarter guidance.

With that in mind, we currently expect comparable sales will decline in the mid- to high single-digit range. Our tax rate will be approximately 40%, and our fourth-quarter net income will range from $32 million to $38 million, or $0.38 to $0.45 per diluted share. On a full-year basis, we expect our comps to decline in the mid- to high single-digit range, our tax rate to be approximately 39%, and we expect our 2014 net income to range from $59 million to $65 million or $0.69 to $0.76 per diluted share.

Capital expenditures are now expected to be between $113 million and $117 million compared to the $105 million spent in 2013. I do want to remind you that our guidance excludes any non-core operating items that may occur.

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

Thank you, Paul. While we expect the fourth quarter to continue to be challenging, I don't want to lose sight of the important work being done this quarter to set the stage for 2015. As we continue testing spring product, we are seeing some encouraging results across both genders, and I believe that our assortment will be a strong one. We expect our e-commerce channel will continue to grow in 2014, and that our branding and marketing initiatives will continue to generate favorable coverage for Express.

The Express Factory Outlet team is continuing to prepare for a significant number of new store openings next year, with those stores expected to make a meaningful contribution to our results. We will also enjoy a full year of benefit from our cost-cutting initiatives and will begin to recognize some of the benefits associated with our fleet rationalization program.

Before concluding, I want to thank everyone on the Express team for their hard work and dedication and let them know that their efforts are truly appreciated. As you know, this is the last Express call I will host. I want to close by wishing each of you a very happy holiday season. It has been a pleasure getting to know so many of you. And because we may not speak again, I also want to wish you a lifetime of health and happiness.

At this time, I am turning the call back over to Marisa for one quick comment.

Thank you, Michael. I would like to request that each person asking a question focus on our third-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 on the queue. Operator, please open the lines so that we can begin the question-and-answer portion of the call.

(Operator Instructions) Simeon Siegel with Nomura.

Best wishes going forward, Michael. So merch margins were up on top of last year's increase, and then you lap a big two-year decline in Q4. Can you talk about your expectations for the merch margin, given your color on the promotions, and how much occupancy deleverage you would expect within the comp guidance?

And then, just as my follow-up, to your point about converting C malls to outlets, what does that look like? Do the stores just become outlets within the mall, and the product offering shifts to made-for-outlet? And how many C-mall locations do you guys have?

Regarding merch margins in Q4, we would expect to see a decline in merch margins, probably not -- right now maybe not as high as we saw in Q1, not as little as we saw in Q2. I'd say somewhere probably in between there is what we are thinking right now. And from a gross margin standpoint we would expect to see a decline somewhere in between what we saw in Q2 and Q3.

And with respect to the conversion of the C-mall locations, we've got one that we've converted now. We have a couple more that we are going to be testing over the next few months. And what we are doing with that is changing the signage on the store and then primarily changing the inventory to outlet inventory, which is what we have in the other outlet stores.

And we have seen a nice uptick in the sales performance of that one store; but it is only one store, and it's a little bit early to draw any really solid conclusions from that. But we would expect to get some good reads over these next couple of stores that we are going to convert as well.

The key to it, Simeon, is this is very much in the exploratory stage at the moment.

Got it, perfect. All right, best of luck for the holidays, guys. Thanks.

John Morris of BMO Capital Markets.

Michael, all the best. We'll miss you.

I guess my question is for David and Michael. Looking ahead now in terms of trends that can drive the business as you look out to the spring, are you more encouraged by what you are seeing out there? How are you thinking about buying for the business? Should we continue to directionally expect inventories to be down, as you are probably buying already for spring currently?

And then my follow-up is: should we assume that the Company is still in suspension mode on the buyback program? I know you don't want to comment about the current status of the situation, but can you just update us on the outlook for the parameters on the buyback?

Okay, I'll start off with your inventory question on trend. So in terms of our go-forward deal with inventory, yes, we will continue decreasing our inventory over last year in total in our retail stores. Our outlet stores, as you know, are doing very nicely, and we are very pleased with the performance we are getting there. And we are aggressively going after that area of the business.

And obviously, our e-commerce business is on an uptick as well, and we've seen sequential improvement with our e-commerce business as we've moved through the year. So we are very pleased with what we are seeing there.

In terms of the trends that we are seeing, we've obviously just completed some of our warm weather testing for the spring. And we are very pleased with what we've seen there. We are seeing improved sellthroughs in a number of categories. And what I am excited to say is that our knit category is seeing much improved sellthroughs over what we've seen over the past three years in our warm weather testing. So I am cautiously optimistic there in terms of what we are capable of achieving going into the spring season.

And, John, with respect to the refinancing, we are really not going to comment on that at this point in time. But I would refer you to what we've said in both the third-quarter and the second-quarter press releases with respect to that.

Janet Kloppenburg of JJK Research.

Michael, I don't know what we are going to do without you. We'll muddle our way through. And I hope you will keep in touch with us. Best of luck for your retirement.

I wondered if you guys could talk a little bit about your outlook for new fashion trends next year -- if there's an update in the knit category that could perhaps turn the tide here? And I was also wondering, if you looked at your content of inventory for the fourth quarter right now, if you thought that it was positioned in the right direction, or if you have a little bit of overhang, perhaps, in your basic programs and wished that you had more fashion? And if you could talk about how that may influence your assortments in the first half, that would be great.

Okay. So if I could start with your question about the content of our inventory for Q4, I feel very good about the content of our inventory for Q4 in terms of where it stands. Our overall inventory is down. But as I look at it and look at it across the board, the increases in inventory that we have over the last year are in the categories that we are doing best in, so primarily the casual and dressy woven tops and then also the dressy knit tops, which we've done very well with recently.

How are the dresses doing? How are the festive holiday dresses and skirts?

Well, the new delivery of holiday dresses is looking fantastic -- looking really, really good in terms of some of our party dresses. So I'm very optimistic about that go-forward.

As we look at the trends, go forward into the spring season, as I answered in terms of John's question before, we have had very good warm weather testing. I'm very encouraged by the sellthroughs that we are seeing.

In terms of some of the trends that we are seeing, skirts are continuing to be very important, only getting bigger for us. Longer lengths in skirts, in dresses, and also in tops in terms of some of the tunic lengths as well are important. And then this boho trend is really happening, and we are seeing that in a very big way. So I'm optimistic about what this can mean for us in the spring.

And do you think your inventories can be aligned to those trends, or are you chasing into some of them?

Well, we've kept significant open-to-buy dollars open so that we can chase into these trends.

Okay, thanks so much. Good luck for the holidays.

Susan Anderson of FBR Capital Markets.

Michael, best of luck. We'll definitely miss you. I was wondering if you could talk about what you are planning in terms of AUR and AUC in the fourth quarter, and then maybe a little bit for 2015? And then, also, any early reads on the outlet stores in terms of productivity or margins relative to the mainline fleet?

So Susan, we don't generally comment on looking-forward AURs. I can tell you that AUR for the third quarter was virtually flat year over year. From an AUC perspective, we are seeing flattish AUCs in both Q3 as well as what we are expecting in Q4.

So nothing significant either up or down there. And then we really haven't begun speaking about 2015, particularly as it relates to an individual metric like AUR. With respect to the outlets, could you just -- you asked -- the productivity? Is that what you asked?

Yes, productivity or margins relative to the mainline fleet.

So we are seeing productivity per square foot in the outlet stores that's higher than our retail stores, which is what we expected. When we went into this, we talked about productivity that we thought could reach upwards of 150% of the productivity in the retail stores. So we are seeing increased levels of productivity in the outlet stores.

That's really helpful. Thank you. Good luck next quarter.

Tom Filandro with Susquehanna.

Michael, we also wish you the best. You will be missed.

This is a broader question. With the state of the industry clearly uncertain, the business has been challenging. You've now got growth, accelerated growth in outlets; the DTC is growing; you're cutting costs. I was hoping you guys could just frame the long-range view of the business from an operating margin standpoint and, more specifically, maybe give us a little handle on what the targets are for gross margin and SG&A rates over the next couple of years.

Clearly, there's a shift in our business from the retail stores into both e-commerce and outlet. I think Michael talked a couple of conference calls ago or maybe even last conference call that ultimately we could see our business shifting to be close to half e-commerce and outlets over time and then half retail stores.

We are taking a very critical look at our retail store base, as you know. We announced that we are going to close 50 stores over the next few years at our natural lease expiration dates. As well, we are going through a regular process of evaluating our store base. I think that one of the things that's a result of that review is our decision to test some of these lower-tier malls by converting them into outlets and seeing if we can make them more productive. So over time you'll see us continue to take a real critical look at the retail store base.

We are very focused on trying to get this business back to a double-digit operating income business. But frankly, that's going to take a little bit of time. And I don't know if we will see that over the next couple of years, but we are very focused on that and managing margin -- managing our merchandising and gross margins to eventually allow us to do that.

Longer-term, we really haven't spoken and given any guidance with respect to our gross margin target, so I'm a little reluctant to talk about that right now. But we are very focused, knowing that we are below our peak years of operating profit performance and trying to get ourselves back, in fact, to a double-digit operating profit.

And as Michael said on the call, we've got to get off these blanket store offers, and we've got to reduce the frequency of them. And I'm pleased to say that last weekend -- instead of being 40% off the store, we were able to preserve some margin on some of our new spring deliveries by not having them on the promotion.

So last year we were at 40% off the store. This year we did a message of up to 50% off the store, and we were able to lower the reduction, the markdown on some of the items that we are carrying forward into the spring.

So we believe that there is opportunity there. But we really have to pull back and get off some of these all-store offers.

Thank you very much.

On top of what David just said, Tom, if we all think back, we understand the way we were able to generate the kind of profits we were able to generate was by maximizing the profitability of the good things and getting out of the bad things as fast as possible. When you commit to a cross-the-board discounts, you can't do that. So I think that perhaps the difficult times will lead us to some much better ways of operating.

Right. And this is an issue across the industry, not just with us. But this has become a prevalent issue in the last couple of years with several retailers in the United States. We've obviously seen it. We are working on addressing it and getting it fixed on our side.

Thank you, Gentlemen.

Neely Tamminga with Piper Jaffray.

I've said before, I'll say it again. Michael, you've left an indelible mark on this industry. You will be missed. So a question here on the overall KPIs that you are looking at. Maybe, David, this is a little bit more for you.

As we think about this broader landscape shift, obviously on the promotions, but then also as the consumer engages -- and their search process being nearly 100% digital at this point -- what is going on in your organization that's giving you the sense that you are making progress to align your organization with that behavior? That she's not getting in her car, and going to the store, and then shopping; she's doing all of it digitally before she shows up. What's going on with your organization to get those products up?

Right, so really what you are talking about is our approach to omni-channel. Right?

Omni-channel, but it's also on -- I think particularly on the social media and on the marketing side as well.

Right. And clearly there is a big shift there. As we look at our business, I think in the third quarter, 16% of our sales were online versus 14% of our sales last year for the same quarter. So we are seeing that shift in a very big way. We've made some real enhancements this year in terms of our approach to mobile, in terms of our approach to website, and also in terms of our approach to social media.

We started off from a very small base in terms of our Instagram following. We are seeing rapid growth in that area. We are not up into the millions yet in terms of our following. But we are -- I think last night we hit 180,000 followers on Instagram. So we are seeing that pick up, and we are seeing, also, very, very good engagement in terms of what we are seeing on Instagram as well.

As we look at mobile, we are really taking very much a mobile-first approach to all of our development initiatives. We are enhancing our mobile platform. We've redesigned the mobile app. We've made mobile checkout easier. We are building our SMS database very, very rapidly.

And in terms of our website, our website is now working with responsive technology so that you are seeing the same website, whether you are operating off your phone, whether you are operating off the tablet, or whether you are operating off of the desktop.

We've moved our photography to full body images. We are working on search optimization to really provide more choices of desired product in terms of how it works with search -- and also, clearly, search engine optimization. And then we are rolling out sequentially e-commerce upgrades quickly versus waiting for a major project to be completed.

In terms of omni-channel, Neely, we are working in terms of getting a single view of the inventory and also very much a single view of the customer, which we are working to have completed by the end of next year. So I think we are taking the right approach. We are clearly focused on it, and we see that it's becoming a much, much bigger part of the business going forward overall. So I hope that answers your question.

Thank you.

Lindsay Drucker Mann of Goldman Sachs.

Hi, good morning. This is Eddie on for Lindsay. Could you provide some more context around what you believe is continuing to place comps under pressure? How much of it would you attribute to being less promotional? And then how much of it do you believe is driven by just an increased competitive environment, specifically? Are you seeing any increased competition from fast fashion? And then, given that comps appeared to continue to be under pressure, do you see any other opportunities to rationalize your cost structure incremental to what you have already done?

With respect to the first question, I think you've seen with a lot of the other companies that have reported recently that the comps are under pressure -- not just with us, but throughout the industry. So we also -- I think David talked about some of the product category that we think that we could have done better in.

So it's really a combination of both what's happening around us as well as some internal things that are putting pressure on the comps. I don't think I could break that negative 5% down into what percent was driven by each of those, but it's a combination of both factors.

And then with respect to rationalizing costs, as I said, we will continue to look at our retail store base and see if it makes sense to close additional stores that might not be performing as well as they should be, and where we expect that we could move business to other stores. And I think in general we continue to do a pretty good job at managing our overall expense structure. In Q3 our overall SG&A expenses were virtually flat to last year as a percent of sales.

And in the fourth quarter of this year we would expect a slight uptick in our SG&A as a percent of sales. But that also includes, for both those quarters, the dollars that we have absorbed associated with the Times Square location's LED sign -- which, as we spoke about earlier in the year, is a pretty significant expenses. So we will continue to look at ways to reduce expenses within the organization. But I think it's an area we've done a reasonably good job at in the past.

Eddie, If I could add to it, I think that clearly mall traffic is a major factor in terms of the comps and what we've seen. As you know, our comp increased significantly in our online business and our DTC business. And also, as we look at the outlet business, the stores that we've converted to outlets are also comping significantly. So as you look at it, mall traffic is a major contributor.

Okay, got it. Thanks, guys.

Richard Jaffe of Stifel.

Thanks very much, guys. And well done managing through what appears to be an evolution in the Company. If you could share with us your thoughts about the benefits of online versus the cannibalization?

And then if you could help us quantify the negative impact of air freight? And, obviously, we are going to assume going forward it will not be necessary, so trying to get a number on that.

I'll start with the air freight, maybe, and let David handle the other. So in total we think that between air and having to move things to the East Coast in the third quarter, our expense increased approximately $1.5 million. And we would expect a little bit more of that in Q4 as well. We would expect a little bit more than $1.5 million in Q4.

But I think the benefit that it's given us is that we really haven't experienced shortages on product that others might have, because we were able to get ahead of it, or we chose to get ahead of it and divert things over to the East Coast.

Q4 -- it's going to be closer to a little over $3 million of incremental expense this year for air freight.

And then just in terms of your question of online, clearly it's -- from my understanding of your question, it's about convenience. And it's convenience for the shopper, and it's enabling the customer to shop where they want and how they want, when they want, and have it delivered to where they want.

And I think that as our customer base changes and we are welcoming new customers to the brand, those new customers are more and more tech savvy and live their lives more and more on their phones and on their tablets. And we have to be prepared for that. And we are seeing that in terms of our business and working to accelerate it in every way.

Is it possible that 50 store closings is not going to be sufficient as the customer does shift to more online?

Richard, we have a list of additional stores as well that we are watching. And we review it every single month in terms of what action needs to be taken at our real estate meetings.

Yes, so we have these 50 store closures we announced. As we close those stores, we are looking at what kind of transfer rate we are actually getting versus what we projected to get from the store volume shifting to either other stores nearby or online. And that will help us determine if additional store closures would be beneficial.

And Richard, another thing we're doing with real estate, as we've spoken about before, is we are doing a lot of shorter-term leases to try to maintain as much flexibility as we can in our store base.

Got it. Thank you very much.

Betty Chen with Mizuho.

Congratulations, Michael, on your retirement. You will be missed. I was wondering if you can talk a little bit about the comp performance between men's and women's during the quarter. I know you had gone through some product color, David. And I'm sorry if I missed the comp numbers for the two genders.

And then I was wondering, separately , the international business seems to be picking up some momentum. Can you remind us where we will end up at the end of this year in terms of revenue or margin contribution to the business, and how that stands in terms of your longer-term targets as well?

In terms of comp performance between the genders, Betty, we don't break out the comp performance. But what I will tell you is it was very similar.

And then in terms of your international question, it's still not a very significant piece of our overall top line this year, similar to last year. We will be at a breakeven or a little bit of profit by the end of the year.

We feel good about the infrastructure, though, that we've put in place around the international business and the fact that it can support a fair amount of continued growth so that we won't have to add a lot of SG&A costs as we look ahead and open up businesses with additional franchisees.

If you look at the international business that we have today, to Paul's point, we set up the infrastructure, and now we need to leverage that infrastructure. If you look at the actual retail sales generated by the franchise operators, we do over $50 million in international retail sales through those stores.

Thank you so much. Best of luck.

Adrienne Tennant, Janney Capital.

Michael, congratulations. You will be missed.

Actually, for Michael, just to get your perspective on what's happening in the retail space, certainly over the next, call it, five years as we go forward, can you talk about some of these new players: very early-stage Topshop, Primark coming into the US. Obviously, H&M has been around. Does it change or make you think that Express needs to do something differently, or the current strategy that you are on is the right one to compete effectively?

And then very quickly, on the promotions, the box off, shifting from box off, does that mean that you are willing to forego sales in order to get that margin stability first; and then, when you do comp, get healthy margin comp?

Okay. Starting with the first thing, I really do see that the new competition is kind of forcing a reevaluation of the local retail industry. And by that what I mean is the first, quote-unquote, new competition from Europe was really kind of low-priced.

But with Primark coming, that low price is not going to look like such a low price anymore. And I think what we are going to be seeing in terms of that is people understand -- and especially shoppers that are spending money understand -- that the cheapest is not always what they want. And you can keep going cheaper and cheaper, but it's not necessarily the way you want to see yourself in the mirror.

So I think that that will really, really enhance a more quality offering as that becomes a bigger piece of the mall offering. I do believe that, despite the fact that we believe very heavily in the growth of e-commerce, that hub malls will still be very, very important. I think shopping is more than a shopping experience. I think it's a social experience. I think it always has been.

And you know, at this time of year, we travel a lot and see a lot of malls. And we are in the process of doing that. And what I would tell you, in my travels in seeing a lot of malls, is that some of them really don't have any reason for existing. And people that used to go there are going to shop on the Web, while other malls are very exciting, very compelling, very intent on becoming destinations, and I think they will.

So I think there's going to be a reshuffling of the business and a different way of doing it. In terms of the promotions, we really -- you know, when you said we could take less sales, we would take a little less sales. We absolutely would.

But what we are after is margin dollars -- but I have to tell you that. And in the years when you could get margin dollars with cheap and deep and many more units -- we are not seeing that to be true that much anymore. What we need to do is to have a lot of units on stuff that they really want and they are willing to pay for.

As an example, Black Friday week, one of our biggest unit drivers in sweaters -- we had a higher percentage margin and a higher dollar margin than we did the week before, because we were able to sort it out. I think that what will happen is a lot of it is going to be brand-new. It's going to be new approaches; it's going to be new views. But a lot of it is getting back to the old basics of where you've got to make money on the good things.

You just have to make money on the good things; it's that simple. And the only way to do that is to be more in control of what the prices are per item, not for the whole store. That's what I think.

Thank you, very helpful.

Marni Shapiro with The Retail Tracker.

Michael, it's a sad day. Who's going to have those conversations with me?

I have one quick question and one bigger-picture question. You guys talked a little bit about denim, woven, casuals. You didn't mention at all the core wear-to-work Editor Pant business, and September/October tends to be a time when people get dressed to go to work. So if you could just give a quick bit of color on that?

And then this has been a couple of quarters in a row where you guys have seen some very good early reads, and then sales flattened out or softened a little. Do you think that -- are you seeing that if there's a shift, in part because she is browsing at home; she gets the email about a new delivery, be it the new holiday dresses or the new fall sweaters; it's exciting, it's new. She goes to the store and she buys it.

And then after that maybe it's not as much newness for a month or so until the next really big hit. Does that make you think about how maybe you should start to change up your delivery flows or anything like that?

Yes, you are right. I would say it's about frequency of newness, but it's also about having the depth in the key items. And that's really the approach we are taking, Marni.

I think, also, in terms of your question on wear-to-work in the pant business, we are seeing progress in the pant business, for sure. And a lot of our patterns are looking very good for spring. And also the ankle pant continues to be very strong, and we are seeing potential for big growth in that in the spring season as well.

In other wear-to-work categories we are making really good progress on jackets, which I'm thrilled about after a couple of very tough years on the dressy jacket side of the business. And then, obviously, the woven tops are a major part of the wear-to-work business as well. And we are seeing very solid growth there as well.

Fantastic. Best of luck for holiday, guys.

Roxanne Meyer of UBS.

Let me add my best wishes to Michael. My question is about mall traffic. I'm just wondering if you are able to share how much mall traffic fell in your A-malls versus B-, C-, and D-malls; and then what you think it's really going to take to drive increases in transactions at some point in your stores.

I'm assuming it's the conversion that's going to become the more meaningful metric. And how much of the opportunity is product based versus service or marketing based?

Well, obviously product is central in every way. Okay? And we've got to be focused on giving her and him what they want when they want it. Again, that's absolutely at the center of the wheel in every way.

In terms of the declines in mall traffic, we don't give detailed numbers. But what we are seeing is pretty consistent across the board, whether it's in A-, B-, C- or D-malls.

What was your other question as well? I think there was one more.

That was basically it. It was more how much will improving service or potentially marketing be needle moving to really improving conversion going forward?

I think it's a major part. I think it's a very, very important part of the way that we look at it go-forward. But product is central to everything that we do.

Okay, great. Well, thanks a lot and best for holiday.

Rebecca Duval of BlueFin.

Thanks for taking my question, and best of luck, Michael. David, I just have a question on the testing strategy. You've talked about it, I remember, in Q2 and Q3 that you had gotten some initial good reads on sweaters.

Are you finding now that since mall traffic and foot traffic is down, that there's maybe time to go back and re-adjust your testing strategy to be able to get better reads on things that should sell through? And then the second part of that is: knowing that there has been this shift and kind of a drag on some of the casual items for quite some time now, are there plans to recalibrate the assortment go-forward; maybe adding more dressy items and then pulling back on some of the casual items that haven't been working for quite some time?

I would say yes and yes. I think in terms of the casual side of the business, it is a very big opportunity for us. We are currently looking at it very, very closely in terms of the value proposition that we are offering and the approach that we are going to take to it go-forward for sure.

And then changing testing strategy there? That's in the works as well?

Concerning testing strategies, we are constantly looking at it -- constantly looking at it. And, I think, relooking at the depth, the amount that we are testing, and also the categories of the business that we need to be doing go-forward. But we have always said and we always maintain that 70% to 75% of our units should be tested prior to going into the season. And we will continue with that.

But we are taking a very close look at the indexing of our test results as well, recalibrating that. To your point, given mall traffic is down, if you are selling a certain number of units early in the season that doesn't have as much depth as you might have once you get into the season, we need to recalibrate some of the indexing of results, which we are looking at very carefully as we speak.

And central to that is maintaining open-to-buy dollars.

Great. Well, best of luck for the holiday.

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

Thank you. This will conclude today's teleconference. You may disconnect your lines at this time, and we thank you for your participation.