Express Inc (EXPR) 2014 Q4 法說會逐字稿

Greetings. Welcome to the Express, Inc. fourth-quarter 2014 earnings conference call. (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, Investor Relations. Thank you, Ms. Jacobs. You may now begin.

Thank you. Good morning and welcome to our call. I would 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.

In addition, during this call, we will make reference to adjusted net income and adjusted earnings per diluted share, which are not GAAP measures. Information necessary to reconcile these non-GAAP measures to our reported net income and earnings per diluted share can be found in our press release.

With me today are David Kornberg, President and CEO; Matt Moellering, Executive Vice President and COO; and Paul Dascoli, Senior Vice President and CFO. I'm going to turn the call over to David. He will be followed by Paul and then we will turn to Q&A.

Thank you, Marisa. Good morning, everyone, and thank you for joining us today. This is my first time speaking with you in my new role and it is good to be able to start off by reporting that our fourth-quarter results exceeded both our original and increased guidance.

Our comparable sales declined by 2%, falling less than the mid to high single-digit decline that we originally guided to. These results also surpassed our January guidance, which called for comps to decline by 3% to 4%. Our fourth-quarter earnings per share of $0.49 exceeded both our original and increased earnings-per-share projections.

Paul will review our guidance with you in a few minutes. Before he does, however, I want to note that we expect to deliver both top-line growth and greater profitability in 2015, starting in Q1.

The fourth quarter ended very differently than it began. November was disappointing, particularly around the Thanksgiving holiday. Then, during the last two weeks of December and throughout January, we saw business strengthen as customers came back in force and responded well to our early spring deliveries. This has continued into the first quarter of the new year and is reflected in our guidance.

As the fourth quarter wound down, we took a more restrained approach to promotions, and I am encouraged by the results. In January, for example, we did not anniversary two events, the five-day all store 40% off promotion and a four-day email event. This helped us to preserve and protect the value of our newest and best-selling items and the overall inventory level of our spring goods.

Our merchandise margin and our bottom-line both benefited, which is part of the reason that we exceeded our original Q4 guidance. Consequently, we began fiscal 2015 in a better position than last year.

I want to comment briefly on the topic of promotions. They have been a part of the Express DNA and they will continue to be. All-store promotions and CRM, for example, will each remain in our arsenal; however, they will be used more sparingly going forward. We are structuring many of our future promotions to be more targeted and, at times, less deep and less frequent. This will help us communicate a clearer value proposition to our customer.

The benefits we saw from this approach in Q4 will carry over into 2015 and will be an integral part of returning the Company to profitable growth, which I will comment on shortly. Normally we would now turn to an update on our growth pillars. Instead, Paul will touch on them when he discusses our financial results.

I would now like to take this opportunity to discuss my vision and priorities for our company. I want to be clear that this does not involve a shift in strategy. Our four pillars of growth continue to be the key areas of focus for our team. What will be somewhat different is how we think about advancing them to return Express to predictable, sustainable, and profitable growth.

I have been in my new role for little over a month now and have been meeting with associates at all levels of the organization. It has been a valuable experience. I've also participated in extensive meetings with my colleagues on the executive committee to discuss how we can best maximize the potential of our brand so that Express will prosper for years to come.

All of this work culminated in our priorities for 2015, which I've begun sharing with the organization and which I want to share with you this morning. They focus on five key areas: namely increasing profitability, elevating our customer experience, sharpening our brand position, continuing to upgrade and enhance our systems, and further developing our people.

Let's start with increasing profitability. We understand that the creation of shareholder value is intrinsically tied to our ability to grow, but it can't be just any kind of growth. Our focus is on delivering predictable, sustainable, and above all else profitable growth. To accomplish this, we intend to take a balanced approach to managing the business.

First, we intend to increase our revenue base across all channels. We expect to return our retail stores to positive comps as we deliver stronger assortments and increase our connection with the customer through our high-impact marketing. Our outlet business will continue to grow as new stores are opened.

We are also planning for e-commerce to grow faster than last year as we build out our e-commerce offerings and improve site functionality.

Lastly, we intend to grow our international business by opening additional franchise locations and adding new franchise partners to bring Express to other parts of the world.

Second, it is imperative that we improve our merchandise margin. Pulling back on promotions is one essential ingredient and I touched on that earlier. Another essential element is better inventory management and control.

To accomplish that, we have a number of initiatives that will allow us to buy smarter, turn goods faster, and optimize our inventory once it is on hand. We will, for example, capitalize on the agility of our supply chain to leave more of our open-to-buy dollars for later in the season so that we can aggressively chase into winning product.

Third, we expect to better leverage our expenses over the coming years to drive operating margin gains and anticipate making some progress here in 2015. At the same time, we will continue to invest in high-return growth initiatives such as opening new outlet stores. I assure you that we have set the right tone within the organization as it relates to expense management, and everyone understands that discipline in this area is essential.

Our second priority revolves around the customer, where our intent is to provide an exceptional experience across all touch points and become a truly customer obsessive company. We know from a third-party study that 70% of buying decisions are influenced by the customer's experience with a brand. We also know that we have the opportunity to create a deeper and more engaging customer experience.

The essence of this work is focused on evolving from a service model to a service and selling model, with greater emphasis on customer interactions that explain more about our product and how to wear and accessorize it. To do this, we will migrate our communication away from a promotional message first and more to a brand and fashion story-telling message, while also highlighting the great values that we offer.

We will deepen our customer engagement with the brand across all touchpoints, whether in stores, online, or through our various social media channels. As we do so, we expect brand loyalty and customer retention to follow, leading to higher conversion and sales.

This is why our transformation to a true omnichannel retailer remains a key objective. We have a very clear roadmap of activities over the next three years that will help us achieve this objective. This includes initiatives such as creating a single view of the customer to drive real-time interaction and better personalization of messages, global inventory visibility, ship from store, buy online and pickup in store, along with same-day delivery.

I mentioned our brand a moment ago, which is the third priority I would like to address. The Express brand is strong, but it can be even bigger and stronger. We intend to protect our leading position in wear-to-work and dressy and to elevate our position as a destination in denim and casual wear.

We are currently engaged in work that will sharpen the communication around our brand essence, vision, and promise. This will enable us to more clearly articulate what we stand for and to better differentiate us from others in our space.

Part of this involves consistent messaging around our pricing so that it is uniform across our retail and e-commerce channels. As mentioned earlier, this also involves reducing the breadth, depth, and frequency of promotions throughout the year. All of these things in combination, when coupled with a strong product offering and a clearly-defined value proposition, will deepen our emotional connection with our customer, enhance our brand equity, and contribute to the growth of our business.

Fourth, systems and their processes are at the heart of execution and this is an area in which we continue to invest. To that end, a number of transformative projects are underway, such as the retail management and enterprise planning systems that we have discussed with you on prior occasions. We are also in the process of bringing our order management system in-house to facilitate omnichannel capabilities. These systems upgrades are at the heart of our ability to deliver a truly customer-centric experience.

Lastly, but certainly not least, are the people who make up the Express family. Without them, nothing can be accomplished. We are fortunate to have an exceptionally talented, dedicated, and engaged team, and we depend upon them each and every day.

Our culture is one in which we challenge our teams and we challenge each other. We do this in an atmosphere in which people are both supported and appreciated.

Collectively, these priorities will pave the way this year and beyond as we continue to build for the long-term. We always ask a lot of the Express team and will continue to do so. Their commitment to the brand is evident and for that and for everything else that they do for Express, I want to thank you.

In closing, I would like to thank everyone for the tremendous support and best wishes offered to me as I moved into my new role. Throughout my tenure at Express, I've been proud to be associated with this amazing brand. My new vantage point has solidified my belief that our future is bright and that many years of sustainable and profitable growth lie ahead for Express.

We have a strong brand and a loyal and expanding customer base that we are serving by delivering great fashion with a compelling value proposition. As we focus on the priorities outlined above, we will drive the profitability that builds value for our shareholders.

At this time, I am going to turn the call over to Paul.

Thank you, David. Good morning, everyone. I'm going to begin by reviewing our fourth-quarter and fiscal 2014 results. Then I'll turn to our outlook for 2015.

Net sales in the fourth quarter grew 1% to $726 million. Our comparable sales declined by 2%, which was better than we anticipated when we issued our January update.

We grew our merchandise margin by 70 basis points. This gain reflects the disciplined approach we took to promotions during the last month of the quarter.

As David mentioned earlier, moving away from some of the all-store promotions used last year drove gains in margin dollars and margin rate. Operational gains in areas such as fabric cancellations and shrink were offset by higher freight costs, as we continued to rely more on air shipments and deliveries to East Coast ports to avoid West Coast port delays.

As a percentage of sales, buying and occupancy expenses delevered by 100 basis points compared to Q4 of 2013 due to the impact of higher rent expenses and depreciation charges. This led to a net decline in our gross margin of 30 basis points, or a rate of 31.7%.

SG&A as a percent of sales came in at 21%. The 90 basis points of deleverage was mainly driven by our negative comp along with increased investments in e-commerce, outlets, and marketing as well as IT-related activities.

Our effective tax rate was 39.8% compared to last year's fourth-quarter rate of 39.9%.

Net income came in at $42 million, or $0.49 of diluted earnings per share. This compares to $48 million of net income and $0.57 of diluted earnings per share in last year's fourth quarter.

In terms of the progress made against our growth pillars, 2014 was generally productive. While we did not drive gains in store productivity, we made progress during the year and our fourth quarter, as retail store comps were significantly better than those in the first quarter.

Looking ahead, our objectives are to drive more traffic to our stores, improve our conversion, manage inventory in a more disciplined manner, and most of all, ensure that we have the fashion our customers want. In combination, this will drive store productivity gains.

With respect to real estate, our 2014 outlet rollout exceeded our expectations on all levels. We ended the year with 41 stores in operation, 22 of which represented conversions from full-priced retail stores located in outlet malls or from our clearance stores. Together they generated approximately $55 million of incremental revenue, far surpassing our initial estimate. Looking ahead, we anticipate opening another 30-plus outlet stores in 2015.

The rationalization of our retail fleet began last year and will continue. We ended 2014 with 600 full-priced retail stores, down from 632 when we began the year. This net 32 store decrease consists of 9 openings, 22 conversions, and 19 retail store closures. As previously discussed, between 2015 and 2017 we anticipate closing approximately 50 additional stores around the time of their natural lease expirations.

Our e-commerce business grew by 4% in the fourth quarter and for the full year as well. Throughout the year we continued to invest in IT initiatives and to upgrade our website and our mobile platforms. Those investments are driving results in terms of heightened conversion and sales.

In 2015, we expect increased growth in our e-commerce business as we continue to invest in capabilities as well as product extensions and e-commerce exclusives that will contribute to this growth.

Turning to our international business, we ended 2014 with 34 locations, two more than the 29 to 32 store range anticipated at the start of 2014. This spring our first standalone Express store will open in South Africa. Overall, our existing franchisees are expected to open six new stores this year. We are also continuing to explore opportunities to bring Express to new markets through additional franchise relationships.

Returning to our financial results, our capital expenditures during the quarter were $29 million compared to $27 million last year. For the year in total, our capital expenditures were $115 million compared $105 million in 2013.

Our balance sheet continues to be very healthy. We ended the year with $346 million of cash and cash equivalents compared to $312 million at the same time last year. Our revolving credit facility remains untapped.

Of course, it should be noted that on March 1, we used approximately $215 million of cash to redeem our senior notes. This amount included principal, accrued interest, and the call premium. This redemption will eliminate approximately $19 million of interest expense annually.

We ended the year with inventories of $241 million, up 13% from last year. This included approximately $26 million of inventory related to outlet stores. Retail inventory, exclusive of our outlet product, increased approximately 1%. This was primarily due to inventory in transit, which was higher due to longer lead times associated with utilizing East Coast ports. We feel very good about the levels and composition of our inventory as we start the year.

For information related to our full-year financial results, please refer to this morning's press release.

I am now going to turn to our guidance for the first quarter and full year 2015. Our outlook for 2015 is one which we believe realistically balances risks and opportunities. The work we've been doing to deliver fresh, relevant product and manage promotions is continuing, as are our fleet rationalizations and expense initiatives.

At the same time, we recognize that the overall promotional environment remains intense. For the first quarter of 2015, we currently expect that comparable sales will range from a low single-digit to mid single-digit increase.

Our tax rate will approximate 47%. Keep in mind that that rate is an unadjusted or GAAP rate. For your modeling purposes, the rate used to derive our adjusted net income would be approximately 43%.

Adjusted net income will range from $9 million to $12 million, or $0.11 to $0.14 per diluted share, based on approximately 84.9 million diluted shares outstanding.

Net income on a GAAP basis will range from $3 million to $6 million, or $0.04 to $0.07 per diluted share, using that same share count.

On a full-year basis, we expect our comps to increase in the low single-digit range; our tax rate to be approximately 40%; our adjusted net income to range from $79 million to $91 million, or $0.93 to $1.07 per diluted share, based on approximately 85.1 million diluted shares outstanding; and our net income on a GAAP basis will range from $73 million to $85 million, or $0.86 to $1 per diluted share, based on that same share count.

Our guidance also incorporates the elimination of the interest expense following the redemption of our senior notes. During the first quarter, we will have approximately $10 million of non-core operating charges related to the redemption of our senior notes, which we have excluded for purposes of calculating adjusted net income and adjusted diluted earnings per share. The non-core operating charges include the call premium, the write-off of unamortized issuance costs, and the write-off of the debt discount.

Interest expense, exclusive of the aforementioned $10 million, is expected to be approximately $3 million for the first quarter, reflecting one month's interest on the senior notes and the interest associated with the accounting treatment of our flagship leases. Interest expense for the balance of the year is estimated at $1.2 million per quarter and relates primarily to the accounting treatment of our flagship leases.

Capital expenses are expected to be between $114 million and $119 million compared to $115 million spent in 2014.

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

Thank you, Paul. 2014 was a year in which we did not meet our expectations. We regularly hindsight our performance and have identified opportunities for improvement that give me confidence heading into 2015.

As I noted earlier, we have a plan in place to deliver improved results. We are always working to make our apparel and accessories more compelling and to further strengthen our price value proposition, drive profits, and improve margins. I feel very good about our spring assortment and its ability to drive our business.

We are examining budgets to see if further expense reductions are possible.

We are transforming our service model to provide an exceptional customer experience.

We are examining all aspects of our brand with an eye towards enhancing brand engagement and customer loyalty.

Lastly, we are examining processes and procedures to see how we can work smarter, faster, and more effectively.

Express is a nimble organization that has successfully evolved over time and we see this continuing as we proactively address new challenges and opportunities. I look forward to meeting with many of you over the coming months and updating you on our progress on future calls.

At this time I'm turning the call back over to Marisa for one quick announcement.

Thank you, David. I would like to request that everyone asking questions limit themself 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) Neeley Tamminga, Piper Jaffray.

Great, thank you. Good morning, David. Congratulations to you and the entire Express team on this great, strong start.

Thank you, Neely.

We want to ask a little bit about the product. What I am really trying to derive here is how far along you are in certain of your initiatives that we have seen. So, by and large, it seems to me that there are some broader fashion trends working towards knits. I would love your perspective on that or what some of the overarching fashion themes really are right now.

And then could you talk about One Eleven and what you expect from that; what you are seeing, early signs, what you expect from that? And maybe also throw in swim so far, too. Thanks.

Okay, that's a number of questions. I will start with Express One Eleven.

Express One Eleven, it's a new collection of casual women's knit tops, as you've seen. We introduced it into a very select number of stores, 50 stores, and online. It's been in stores now for two weeks. Obviously two weeks is very early in terms of being able to speak to the results of the test, but I'm very encouraged by what we've seen.

We launched swim online this week. It's also going to go to a small number of stores, about 15 stores. But, again, I think it speaks to what we've done with Express core, what we are seeing with Express One Eleven, and now also with swim. We are seeing that we are able to launch in a much better way fully-integrated campaigns. But again, it's very early days. Swim has been online now for about I think four days in total.

Moving on to your question about trends. In women's, really thematically there are three major trends that we are looking at, first of which is boho, where we are seeing some very good results across the board. The second is the Southwestern trend, where we are seeing a merger of boho and fringe product, really a sort of southwestern look and appeal to it. Then, thirdly, it's very much a 1970s glam look, which has worked particularly well on the dressy, going out side of the business.

In men's, we are looking at chinos and joggers delivering very good results. We are also starting to see some very good results in men's with destroyed denim that will deliver in greater depth. We are also seeing in tops, textured fabrics working very well.

Thank you.

Thomas Filandro, Susquehanna International.

Thanks and congratulations, as well, on the much-improved execution. David, thank you very much for that vision overview. Best of luck.

My first question is related to SG&A. You had that 6% increase and you guys highlighted that was due in part to higher marketing spend. So how should we think about the marketing spend in 2015 and can you expand on how you are leveraging the brand ambassadors?

And just very quickly on that comment about maximizing the agility of the supply chain; does that suggest any adjustments to testing process or is this just simply increasing open to buy? Thank you.

In terms of the supply chain, Tom, it's really about keeping our dollars open and really positioning ourselves into a chase mode, so that we are chasing after the items that are proving themselves to be the best sellers so we can get back into them in much greater depth.

In terms of the brand ambassador strategy, we have been working obviously with Kate Upton for approximately a year. I think it's 11 months at this point. In men's we've started with Stephen Curry and then also for Express Core we are working with Anastasia Ashley.

I think there are plenty of opportunities go-forward for us to work with brand ambassadors. And I think what it does is it broadens the overall appeal of the brand to a population who knows these faces and can relate to these people.

And then finally, in terms of the marketing spend, I think our marketing spend for the last year was approximately 5%. This year as we look at it go-forward I see it being somewhere in the region of 4.5% to 5% as well again.

Thank you very much. Best of luck, David.

Adrienne Yih, Janney Capital.

Good morning, everybody. Let me add my congratulations. The stores really look good, so kudos.

My first question is on test and reorder. Can you -- I'm assuming at this point you are testing some product for early fall, so can you give us any color as to is that testing better than some of the product that you had tested for spring?

And my follow-up is I don't know if you mentioned anything about impact of the port issues to 1Q or the first half of 2015. Thank you.

Sorry, could you just repeat your last question again? It didn't come out clear.

Oh, the follow-up? Will there be any residual impact from the West Coast port issues in the first half of this year, 1Q or the first half?

Okay. So in terms of the testing and reordering strategy, we are very encouraged by what we've seen in terms of our spring early reads and really our bulk deliveries that we've had. We are constantly testing. We're testing for Q3 at the moment and we are seeing some very good key items, as well as the ability to reorder some of the things that are working very well at the moment.

So, overall, we are very encouraged by what we are doing there. And I'm going to let Paul take the question about the West Coast.

With respect to the West Coast for Qs 3 and 4, as we had talked about, we felt an impact somewhere around $4.5 million. We had talked about that during the last conference call.

As we think ahead into Qs 1 and 2, we clearly will be moving more things to the East -- or have everything still going to the East Coast and some via air, so the impact in Q1 we estimate about $1 million to $2 million. But that's all taken into account in our guidance.

Great, wonderful. Best of luck.

Simeon Siegal, Nomura.

Thanks. Good morning, guys, and congrats on the results.

Just on the merch margin, so merch margin was up nicely for the second quarter in a row. Can you talk about your merch margin expectations embedded within the guidance?

And then, you've clearly seen meaningful occupancy deleverage for the past few years. Can you help quantify what degree of occupancy leverage you might get or you would expect that is baked into that low single-digit full-year comp guidance? Thanks.

From a first-quarter perspective, we would expect very modest improvements in our merch margin. We are really trying not to be too aggressive in our assumptions as we continue, as David said, to pull back on our promotional strategy and really see how that works for us. And I would suggest the same on a full-year basis that it would be very modest.

In terms of the leverage that we might get in terms of B&O, we would expect on a full-year basis to see a little bit of leverage there as we guided toward having some positive comps. And the same in the first quarter, but again not being too aggressive in those assumptions with respect to B&O leverage.

Great, thanks. Best of luck in the coming year.

Janet Kloppenburg, JJK research.

Congratulations on the progress being made. A couple questions.

On the knit and active introductions that you've made early in Q1, I was wondering if the outlook is for that to be a full chain rollout in stores. I think I've seen the One Eleven and the active product and it's pretty exciting and differentiated for the brand. And I'm just hoping that we can start to see that in wider distribution, particularly as one of your main goals is to drive store traffic in the store fleet going forward.

And also, I was wondering if you could comment on whether your guidance is reflective of current trends and if you felt there had been a weather impact to your quarter-to-date business trends. Thank you.

In terms of Express One Eleven and active, in active we saw very good results in January. The issue we have with active is the lead times. It was tested in 30 stores. Our aim is to take it to over 100 stores for September and to build it even further for January for next year.

Express One Eleven is, obviously, a very different story. It's knit top products that we can chase after very quickly. As I said, it is very early. The test has been out for two weeks and I would like to hold off on that in terms of how far and how fast we're going to expand it until later.

Then, Janet, in terms of the comp guidance, as always, we take into account the current trends in the business, what we've seen from the start of the quarter until we do our conference call, as well as what we think is going to happen in the back half of the year or back half of the quarter. And as we've spoken about before, we triangulate from a variety of different ways with historical data to estimate what we think the comps will be. We set our guidance this time no differently than we have in the past.

And from a weather perspective, we think the weather has had a nominal impact on us over the last few weeks. Clearly there have been a couple of days where we have had stores close, but we don't think it's anything of significance right now.

Okay, great. Thanks so much and good luck.

Richard Jaffe, Stifel.

Thanks very much and a really great quarter, guys. Especially a great finish.

A couple of quick questions on, well, the inventory being essentially flat in stores and the positive trend. Have you guys shifted into chase mode? Are there categories, now that it's middle of March, that you are chasing for spring/summer?

And then, looking over to the channels you source through, are you finding, one, that chasing is possible and that, two, how are costs coming through? There's been talk of labor increases and challenges on the cost side of the equation, so if you could sort of address both of those. Thank you.

Yes, we are in chase mode. We want to be in chase mode. We like being in chase mode. It is the way we work best.

We have a very agile and nimble supply chain and enables us to see what is selling and position ourselves in a way that we can get after it. So we are happy to be at that place.

In terms of labor, I'm going to hand over to Paul on that.

Richard, right now in terms of AUCs in the first quarter and really the first half of the year, we expect them to be relatively flattish. We have included that. We're taking that into consideration in the guidance and that's also inclusive of the dollars right now that we would have -- we expect to spend by moving things to the East Coast.

So the answer is, yes, there is some cost that you have had to incur in a year-over-year basis in terms of some of the sourcing issues? Is that safe to say?

Yes, this is Matt. I think there are offsets, so, yes, labor is going up. I think on the flipside, cotton prices are coming down. We also are lapping some costs associated with the West Coast port strike by moving product to the East Coast and also having to air in some additional goods.

Then fuel costs are also coming down, while diesel hasn't really come down that much at this point. That could be a tailwind as well. So when you add all of that together, including the increases for labor, we are still looking at about a flat AUC for the year.

Got it, that's helpful. Thank you.

Lindsay Drucker Mann, Goldman Sachs.

Thanks. Good morning, everyone. I wanted to ask a question about the promotional approach to this year. You obviously had success in dialing down the rate of promotions in the fourth quarter.

As you think about the plan to take promotional activity down across the full year, what kind of order of magnitude are you thinking? Is it similar to what we saw in 4Q? Will you be first testing to see how she is responding to the reduced promotions, and if it's not working, you will be able to up the volume a little bit? That is my first question.

The second is the outlet store openings versus conversions. Maybe you can help us understand from a dollar profit per store how accretive the outlet conversions are and how that compares with the new outlet openings. Thanks.

I'll take the first question, Lindsay, promotional activity. Yes, we plan to continue to reduce the amount of promotions we are doing. We actually, we in February had a Presidents' Day weekend where we reduced the amount of promotions that we did then.

We are seeing benefits from it overall and we want to speak to the equity of our product overall and the fashion position that we take, as opposed to speaking the whole time about promotions and price. Clearly, we want to be able to speak to the values that we offer, but we want to speak to, first and foremost, the equity that we have and that we've put into our product. We are constantly testing reduced promotions and we have the flexibility that if we see that there is some kind of negative turnaround that we can change back.

But our goal is long term to reduce the amount of promotions, and as I said earlier, speak to a more balanced approach to the business of top-line increase in margin dollars and leveraging our expenses.

And to follow on to that a little bit, as David talked about, we are going to take a very careful approach here. We will always have promotions in our business, as most other retailers will. We are talking about reducing promotions and we are not going to just hold all our promotions off in one year. Obviously that would not be beneficial for us.

So we are weaning off of promotions. You will still see all store promotions from us this year, but less than we had last year. eAnd we will continue to look for opportunities to reduce the promotions and create a much healthier business long term.

Lindsay, with respect to the outlets, we have continued to say that they have performed well beyond our expectation. The stores that we have converted have comped quite positively. As you know, we expected these stores to show productivity of upwards of 150% in some cases of our full-price retail stores, and the operating profit in those stores or four wall profit is expected to be into the mid-20s.

So they continue to do extremely well. We are excited about opening up 30-plus stores next year, so we would expect to end the year at a minimum with 71 to 76 stores next year.

Thanks so much.

Marni Shapiro, The Retail Tracker.

Congratulations, the stores look fantastic. Can you just remind us, it looks like you are adding quite a number of outlets next year. Could you remind us what or where your thinking is long-term as to how many outlets Express could have? And could you also remind me, is everything in the outlets made for outlets at this point?

We, as Paul just said, are looking to be at the end of this year at 76 stores. Long term we are looking to be at 150 stores, 150 malls that we believe are sensible for us to be in. And in terms of the product, it is all made for outlet entirely.

Then are you able to pull back on the promotions in the outlets? Because I know the outlets have been very promotional. Have you been able to pull back there as well?

We are not seeing that as an issue really. As we grow the business there, clearly the outlet business is operating at lower AUR than the frontline retail stores and we don't see any impact from that at this stage, any negative impact. Everything is positive there.

That's a good thing.

We don't allow any kind of coupons or email or any type of CRM to be used in outlet stores anyway.

Some of what you might have been seeing recently, too, is our first flow-through of some of the clearance merchandise, which we try to continue to mark down and move right through the outlets whereas at the full-priced retail stores, we will mark it out of stock at some point and take it off the floor. So some of what you might have been seeing recently is our effort to clear through our first round of clearance merchandise.

Fantastic. Best of luck, guys. The stores look fantastic.

Susan Anderson, FBR Capital Markets.

This is Andy Schmidt on for Susan. Congrats and good quarter, first of all.

So question on the service and selling model. How should we see that enacted in the stores? Should we expect to see more labor or is that simply a change in processes?

And then my follow-up question is on use of cash. Given the retirement of your senior notes, how should we think about your priorities for cash going forward?

For the change in the selling models in the stores, it's really focusing on the customer feedback and using existing labor and repurposing some of that labor. And also doing some incremental training and hiring the right skill sets for individuals within the stores to do the combination of selling and service versus just being a service model. So we believe we have the right leadership group in place, the store managers, district managers to change this focus and to make some good traction in the year ahead.

With respect to the cash, Andy, we are constantly reviewing with the Board opportunities for the best deployment of cash. We've paid off the senior notes at this point, so we are virtually debt free. Clearly, at the appropriate time, a buyback of shares could be appropriate and we will continue to talk to the Board on an ongoing basis about that.

Great, thanks. Best of luck.

Betty Chen, Mizuho.

Good morning. Congratulations on a great quarter.

I was wondering, David, if you can talk a little bit more about the order management system. It sounds like that could really unlock some omnichannel capabilities on top of what you already have. Can you just walk us through some of the timing and benefits of that?

And then my follow-up is regarding the inventory. It sounds like some of that number was also impacted by in-transit. Do you happen to have what that number would be excluding that and whether we should expect in-transit to impact Q1 in inventory as well? Thanks.

This is Matt. For your first question around the order management system, yes, we are bringing, as David mentioned, bringing the order management system in-house. And we believe this is a core capability that we need to have in-house versus outsourcing.

That will be completed in early 2016, early to mid 2016. What this will enable us to do is a lot of the omnichannel activities that we lack today such as things like ship from store, buy online pickup in store, reserve and collect, all of those type of activities the new omnichannel system over the next couple of years will be able to add on those capabilities by bringing this in-house.

The other thing I would add to that, Betty, is that the single view of the customer and inventory visibility for us should be in place across all channels by the end of this year. And then, Paul?

Betty, you're right, you're absolutely right; there was an increase in terms of our inventory in transit. From a retail inventory-only standpoint, we actually would've been down low single digits without the increase in in-transit year-over-year. You could expect a little bit of an increase or somewhat of an increase in in-transit in Q1, 2, but as you know, we generally don't provide forward-looking inventory guidance.

Thank you so much. The stores look great. Best of luck for spring.

John Morris, BMO Capital Markets.

Thanks. Good morning, everybody. My congratulations as well, especially coming in such a difficult challenging environment. Really nice job.

David, thank you for sharing with us some of the category performance. My question is about bottoms, the category there. How is that performing? Maybe talk a little bit about denim in particular and dresses.

And then, if you were to say what is not as strong, because it sounds like a lot is working, where do you see the opportunity for improved performance? And then a question for Paul would be, unless I missed it, can you give us a feel for where SG&A year-over-year increase in dollars would be for next year? What kind of a percentage increase in the guidance for SG&A next year? Thanks.

So in terms of the women's performance, we are up across the board in terms of tops, bottoms, ready-to-wear. We're not up in accessories. Denim, we have seen a really good turnaround in that as we've come into the spring season. Improvements in denim have really been driven by the girlfriend jeans, by destruction, and we are also getting some very good initial reads on flares so we are encouraged about that.

The dress business, we've seen a very good performance on the dressy dress business. And the casual dress business usually comes into its own in a much bigger way as we get into the end of Q1 and as we move into Q2.

The men's business has been more challenging than the women's business. During the fourth quarter, the men's business declined more than women's and we didn't deliver enough newness, especially in our shirts and sweater businesses. But I believe that we have the right measures in place to turn the men's business around very quickly.

John, in terms of SG&A on a percent of sales basis, we would expect on a full-year basis to be relatively flat year over year. Our overall expenses would be up, we believe, in the mid-single-digit range. Marketing, in terms of absolute dollars, would remain flattish. As David said, we would expect to be somewhere in the range of 4.5% to 5%.

We would expect to see increases in operating costs. Some of that attributable to the increase in the number of stores that we have, particularly the outlet store increase that we have been talking about. We are also seeing an increase in our IT spend and some of that has to do with the increase in depreciation that we are seeing with respect to the implementations that we have been talking about, retail management system, the planning system.

And then we also would expect and hope to see an increase in our incentive compensation this year as we perform better and hopefully can pay our associates for that performance.

Great, you deserve it. Good luck for the balance of spring. Nice job.

Pam Quintiliano, SunTrust.

Great, let me add my congratulations and best of luck. It's sounds like everything is going great.

I just have a quick question on the health of the core customer. How is she feeling and is she benefiting from the lower gas prices? Then also a second question on the consumer.

Any change in the composition of who is shopping with the new products hitting? Are you losing any customers as you are weaning off of those promotions that you have had for a while? And who do you see shopping the outlets?

Okay. Sorry, the first question was about are we seeing benefits from reduced gas prices?

Yes.

And the health of the customer. Look, I think looking at the results that we've seen -- the fact that we saw traffic increase at the end of December and into January; we saw traffic was slowed down in February, as most people saw, but we were able to offset that with increases in conversion in AUR and ADS, along with less promotions. It says that she, the customer who is coming out is feeling healthier and is liking what she sees and is prepared to pay for it. So that's how we view that in terms of the health of the customer.

Clearly, we are still very cautious. We've been through a very tough couple of years and I don't want to at this point say that we are completely out of the woods.

Your other question was around -- sorry?

Yes, who is shopping and are you seeing any change in the composition from the perspective of attracting a new customer with the newer product, but also losing anyone as you are doing less promotions? And then just who is shopping the outlets?

In terms of the outlets, we are seeing a very different customer. There is an element of a customer that is overlapping across both channels, so frontline retail stores, e-commerce, and outlets. But, by and large, we are seeing more new customers come into the outlet stores as it stands today.

And in the existing stores, is there any difference in the composition?

We are not really seeing it at this stage. It's very early on.

Thank you very much. Best of luck.

Roxanne Meyer, UBS.

Great, thanks. Let me add my congratulations on your improved performance.

My first question is a follow-up on the merchandising. I'm just wondering if you can address how you are doing in knit tops and cut-and-sew knit tops generally. I know it's early days for you testing that new collection, but in general, I�m wondering if you are seeing some of the strength in that category, a resurgence that a few other retailers are calling out.

And then, secondly, I'm just wondering if longer term you can help us think about how much opportunity there is in the merchandise margin specifically, but also the gross margin in terms of what we can target longer term. Thanks a lot.

Roxanne, your question on knit tops, we are seeing progress in dressy and we are seeing a much, much smaller decline in casual. I will let Paul take the call on margin.

Roxanne, I think in terms of margin maybe the way to look at it is our goal still remains to get ourselves back to a double-digit operating profit margin. Clearly, with the discipline that we are trying to exhibit around inventory management and promotions, we would expect there to be a couple of points maybe within our gross margin that we would love to get.

And then obviously, we can get some leverage as we grow comps against our expense structure to maybe see another point coming out of D&O and a point or so coming out of SG&A. But it's important to understand that that is not something that we expect we will see this year, that that is over time.

Absolutely. Thanks, and best of luck.

Barbara Wyckoff, CLSA.

Good job. Can you talk about denim again, high-rise, midrise, low rise? And then dark versus light?

And then, secondly, could you talk about the performance in the New York and San Francisco flagships and the penetration of e-commerce to total sales? Where would you like it to be, say, by the end of next year?

Okay, the question on denim. The strength in the denim business on rise is largely coming from the midrise. The high-rise has been very decent, but not at the level of penetration that we are seeing on the midrise. In terms of wash, really it's about processing and it's about destruction .

As we look at penetration of e-commerce, our e-commerce business is now up to 16% of our total. We are very happy with the contribution that we are seeing there. And as I said earlier on the call, we plan to aggressively ramp up our sales on the e-commerce channel of distribution.

And then, finally, your question was about San Francisco and Times Square. The sales are really not meeting the overall levels of expectation, but we are constantly looking at the assortment, the mix, and the merchandising that needs to be done to get them to the right place.

Great, thank you.

Jay Sole, Morgan Stanley.

Could you just go back to how your outlet strategy is affecting your clearance strategy and how it might affect your intention to clear goods online?

Jay, really the two are not related at all because the clearance that sold in the full-price retail stores, we MOS and we sell it to a third-party. We do not use the outlets to get rid of any clearance from the full-priced stores. Any clearance that you see in the outlet is all made-for-outlet product.

Got it. Then just looking out to 2015, you've done some great things, getting the stores more productive by introducing categories that take up a small amount of space but generate a lot of sales. Are there any opportunities to maybe reorganize the store, reconfigure the store that you think can boost productivity this year?

I think in terms of improving productivity, it's about us having the right product that he and she wants when she wants it, and driving increased sales. Increase volume, but also ensuring that that increased volume is profitable. That will lead to the best increases in productivity.

Got it. Thanks so much. Good luck.

Thank you. I will now turn the floor back to management for closing comments.

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

Thank you. Today's teleconference has concluded. You may now disconnect your lines at this time and thank you for your participation.