Express Inc (EXPR) 2015 Q2 法說會逐字稿

Greetings and welcome to the Express, Inc. second-quarter 2015 earnings conference call. (Operator Instructions). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Marisa Jacobs, Vice President of Investor Relations. Thank you. You may begin.

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

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 except as otherwise required by law.

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 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 Perry Pericleous, Senior Vice President and CFO. I am now going to turn the call over to David who will be followed by Perry, and then we will turn to Q&A.

Thank you, Marisa. Good morning, everyone, and thank you for joining us. I am very pleased to be here with you today to discuss another quarter of greatly improved financial and operational performance. Our comparable sales rose by 7%, our gross margin expanded by 480 basis points, and our diluted earnings per share rose to $0.25 from $0.08 in last year's second quarter.

We note consistently that it all begins with the product, and our product is on trend and is being well received. The momentum in the women's business is continuing and men's is improving.

During the second quarter, we delivered strong fashion which was bought conservatively, enabling us to use higher levels of open-to-buy dollars to chase into successful performers. We reduced the breadth, depth and frequency of our promotions and focused on growing our channels of distribution - stores, e-commerce and outlets, while rationalizing our retail store fleet. In total, this enabled us to deliver a record second quarter in terms of net sales, operating income and diluted earnings per share.

I am extremely pleased with the magnitude of our accomplishments during the second quarter. They reflect the coordinated teamwork taking place across our organization, which is united in its focus on a balanced approach to running the business to deliver consistent, sustainable and profitable growth.

During the quarter, we advanced our growth pillars which consist of: enhancing the productivity of our existing stores; continuing to grow our e-commerce business; optimizing and expanding our store base; and international expansion.

Existing fleet productivity improved during the quarter with store comps up 5%. We reduced promotional activity significantly. We ran narrower, less deep and fewer all store promotions to preserve margins. We also ran fewer and less deep CRM offerings and fewer online only promotions, which were structured to include only those items we wanted to clear through. Furthermore we shortened our semiannual sale. Perry will provide more details on this later in the call.

Those changes had other important results. They set the stage for us to better highlight new fashions and they resulted in traffic and transactions being spread more evenly throughout the quarter.

E-commerce grew by 21% during the quarter, driven by the strength of our product and an enhanced customer experience. We created a compelling reason to buy, by placing a greater emphasis on showcasing fashion and enhanced storytelling versus promotions. E-commerce also benefited from the work we have been doing to ensure consistent pricing across our retail distribution channels.

While being more restrained in terms of promotions, we continue to provide great values online for our clearance customers using our After Party Sale. It is a six hour offering that runs on Sunday nights and offers additional discounts on clearance product. It also provides us with an opportunity to clear through select items at a faster rate.

As part of our effort to highlight fashion and product equity as opposed to broadcasting promotions, we introduced The Edit. This new online feature is a place for our customers to see our latest fashion stories, video and social content. It builds upon our work with fashion bloggers who are curating personalized product catalogs, and enables us to post user generated content.

In terms of optimizing our store base, our outlet business continued to grow. We open 12 new stores during the quarter and we should be at approximately 80 Express Factory Outlet stores by year end. The results continue to be accretive and exceed our initial expectations.

Our 50 retail store closure plan is on track. We now expect to close a total of 24 stores in fiscal 2015, 22 of which have already been closed.

Together all of these initiatives are leading to more engaged shoppers which in turn have and continue to generate higher sales and increased profitability.

We have a milestone to announce in terms of our omni-channel journey. Global inventory visibility, which means seeing what is in stock in every store and in our e-commerce fulfillment center, is an essential component and one that we lacked until very recently. We are completing the process of rolling it out to our store associates, enabling them to service customers more quickly and locate requested products.

Starting this fall, as customers browse online they will be able to check product availability by store, better connecting our digital and physical experiences before the holiday season. It is certainly not the endpoint of our omni-channel journey, but it is a feature we know our customers will find useful.

On the international front, we still anticipate opening two additional franchise locations before the year end, one in Panama City and a second Johannesburg shop-in-shop location.

In March, I laid out five priorities for the year: increasing profitability; elevating our customer experience; sharpening the Express brand position; continuing to upgrade our systems and processes; and further developing our people. We are making progress on each of these.

We have already touched on our improved profitability in Q2 and our Q3 and full-year guidance clearly illustrates that we expect those improvements to continue. The projects underway to enhance the customer experience and our brand, to develop our employees and to ensure that Express continues to be a great place to work are all continuing. We are making good progress on our IT projects and Perry will provide more color on those in a moment.

Turning to the women's retail business, we had a great quarter from a top line, margin dollar and margin rate perspective. We accomplished this with great product and tight inventory control measures.

In terms of specific categories, our woven top performance continues to deliver strong growth and the same was true during the second quarter for dresses, denim and jackets. Knits have seen a positive trend change and OneEleven continues to be a standout performer within the casual knit category.

Let me elaborate a bit on Express OneEleven. In case anyone isn't familiar with it, it is a collection of opening price point casual knit tops that we began testing in 50 stores mid March. What happened since then perfectly illustrates the value of our go to market strategy. Customer reception to the product was immediately positive.

Based on data we compiled on every item in the initial collection, we collaborated with our manufacturing partners to quickly refine and expand the collection. In less than four months we launched an expanded OneEleven collection across the entire fleet of retail stores and re-launched it online. It is early, but so far we are very pleased with the performance of the collection. Additionally, it is worth noting that OneEleven has been largely incremental to sales.

Our next product rollout is the expansion of EXP Core, our performance active line which will begin shortly. We first tested Core in a small store group and online late in 2013, and in the intervening time have learned a great deal. We have narrowed the choice count to hone in on the best performing styles, improve the color offering and, above all, introduced a new fabric that represents an upgrade from a performance perspective. With the rollout, Core will be available in 100 stores, up from 30. This launch will he supported by fresh new imagery.

From a trend perspective, the key trends of the second quarter will continue into fall. It is still very much about Boho along with 1960s and 1970s looks. Of course the color palette will darken up for fall and we are introducing new patterns and prints reflective of the transition into a new season.

Denim is always a key area of focus at this time of the year and we have gone all out to highlight the three attributes that make our denim so great: fit, fashion and quality. In terms of styles, leggings, girlfriend and flares are our three key silhouettes, although the total denim collection encompasses additional styles, all of which are performing ahead of expectations.

Our Karlie Kloss denim campaign, Fit for You, is in full swing. It is a breakthrough 360 degree campaign for us, representing some of our best marketing work to date. It marks our return to television with 15- and 30-second spots appearing on network, cable and online video over a five-week period that began in late July. The overall response to the campaign to date has been very encouraging, driving sales and simultaneously enhancing our brand and increasing customer engagement.

We have a new initiative coming in the fall quarter which I want to mention. I am referring to a line we will sell called Express Edition. Edition exemplifies our philosophy of mixing runway fashion with street style. In this case we developed a capsule collection with a refined aesthetic.

The assortment is comprised of 15 styles focusing on our going out wearing occasion. The styles will include items such as the perfect tuxedo suit, along with cocktail and party dresses. Look for this to launch online and in approximately 25 stores in early December.

Turning now to the men's business, it is good to report that we are making progress. We mentioned on the last call that we had identified important areas where we could improve our performance. In fact, we did beat our operating plan and the turnaround began more quickly than we had initially contemplated. The best performances were in our casual pants, shorts and suits.

Before I wrap up, let me reiterate my belief that by adhering to our growth pillars and pursuing our 2015 objectives we will position ourselves for long-term success. We are presenting improved collections that deliver more fashion items and newness to our customers, while also keeping our high-volume key items new and appealing.

Our marketing is more engaging and by pulling back on promotions we are simultaneously enhancing the Express brand and making it possible to deliver stronger margins which in turn translate to a stronger bottom line.

It has been a good start to the year, but we are not taking anything for granted. We are all completely aligned on the need to continue to operate this business with focus and discipline so that the gains of the past two quarters lay a solid foundation for future gains over the coming years.

Finally, I would like to thank the entire Express team for everything they did to deliver such a strong quarter and to pave the way for a greatly improved second half of the year. I work with an amazing group of people who are talented and committed, and their efforts deserve to be recognized. At this time, I'm going to turn the call over to Perry.

Thank you, David. Good morning, everyone. I have been in my new role for almost two months and of course this is my first earnings call as the CFO of the Express. I met some of you last month at investor meetings and conferences and I would like to thank everyone I met for their gracious reception. For those of you I haven't yet had the pleasure of meeting, I would like to formally introduce myself.

I began my professional career as an accountant working first at Drug Emporium and then at Value City Department Stores. I joined Express in 1999 and, except for a brief stint over at L Brands, I have been here ever, since moving across the finance and accounting organization into positions of increasing responsibility.

In 2010, I became the Vice President of Finance and since then, have led the financial planning and analysis function. I have been deeply involved in developing Express' financial architecture along with long-range and strategic planning. I am fortunate to be surrounded by a very strong finance teams and we will continue providing you with transparent disclosure to assist you in evaluating our company and our prospects.

With respect to our financial results, I believe it is fair to assume that each of you have read our press release and have easy access to the financial tables. So I am going to limit the amount of time spent reviewing that information and focus primarily on what drove the results, and also on our guidance for the third quarter and outlook for fiscal 2015.

First, let's recap the second quarter. Our revenues grew by 11%, comparable sales grew by 7%, and EPS grew by 213%. In terms of top line and comps, we planned for low single-digit growth and built our inventory accordingly. This enabled us to maintain the flexibility needed to take a restrained approach to promotions.

We clearly did a good job of engaging with our customers and providing them with product and a shopping experience that they responded to with greater enthusiasm than we had anticipated. That translated into robust top-line and comparable sales growth, one of the prongs in our balanced approach to growth.

The next prong is margins, and we saw gains there as well, in the amount of 240 basis points of merchandise margin improvement. Obviously, driving improvements in this key metric is central to our growth strategy. Appropriate inventory levels going into the quarter made a big difference in terms of our promotional cadence as we were never under pressure to clear through excess inventory.

In fact, we only ran four days of all-store promotions during the second quarter, down from eight during last year's second quarter. We also canceled certain other promotions and CRM offerings that back in May we had anticipated running during the quarter. And as the quarter came to a close, our high sell-through rate enabled us to enter the spring semiannual sale with significantly less units than in 2014.

You might have ascertained as much when you saw us shorten the duration of that sale by approximately a week. The combined impact of all of these changes resulted in significant merchandise margin gains.

Moving to buying and occupancy, we generated 240 basis points of leverage compared to the second quarter of 2014. The increase in absolute dollars, which resulted primarily from higher incentive compensation, was more than offset by top-line growth. Collectively the merchandise margin and buying and occupancy improvement enabled us to grow our gross margin by 480 basis points.

SG&A as a percent of sales was 26.2%. The 90 basis points of deleverage was in keeping with our prior commentary anticipating this movement. The increase in our spend was driven by the addition of outlet-related expenses, incentive compensation and a catch-up expense tied to our 2014 performance-based equity compensation as a result of the improved trend in the second quarter.

Operating income for the quarter increased by 145% to $36 million. Net income grew threefold to $21 million from $7 million last year. This was driven by increased operating income and lower interest expense following our debt repayment, which more than offset a higher tax rate.

Diluted earnings per share were $0.25, representing more than a threefold increase over the $0.08 per diluted share reported in the second quarter of 2014.

As David noted earlier, we focused our efforts on balancing top-line growth, margin improvement and expense leverage. This ensured that we did not need to generate outsized movements in any one line item of the P&L that pressured our ability to succeed elsewhere. This balanced approach served us well this quarter, and it will remain at the heart of our go-forward strategy.

Our balance sheet continues to be very healthy. Cash and cash equivalents were $156 million at the end of the second quarter compared to the $253 million at the same time last year. The decrease is primarily related to our use of $215 million to redeem our senior notes on March 1. Capital expenditures were $28 million compared to $33 million in last year's second quarter.

We ended the second quarter with $272 million of inventory, representing a 13% increase over the same time last year. This included approximately $42 million of Express Factory Outlet inventory, a significant portion of which was driven by new stores.

With respect to retail alone, inventory increased approximately 1.5% in the aggregate and 5% on a per square foot basis. We are comfortable with both the level and composition of our inventory.

During David's remarks, he referenced that we are making good progress with the IT projects that are essential to positioning us for future growth. When Express became a standalone public Company back in 2010, we developed a multiyear plan to upgrade our IT systems and capabilities. The goal was to create a platform that would enable us to operate the business more effectively.

To that end, we required systems that would work across expanding business channels and that would enable us to evolve into a truly global company functioning in an omni-channel world. At this point, we have completed system upgrades on a large number of projects.

Three other projects that are central to the entire overhaul are scheduled to come online next year. Specifically, our retail management and our enterprise planning systems going live in February, and our order management systems launching in late spring. Collectively these systems will allow us to work smarter, more analytically and globally, which should boost efficiency.

Additionally, as we realize the full benefits of the new technology over time, we expect to fill a greater percentage of customer orders more quickly and in a manner that optimizes our inventory, driving top-line sales and reducing markdown activity.

As we prepare for next year's system migration, we will be frontloading inventory shipments late in the fourth quarter of 2015. All stores and our e-commerce distribution center will receive approximately two additional weeks of receipts to ensure that they remain fully stocked while the system migration occurs. This will of course impact our year-end closing inventory significantly, which is why we want to call it to your attention well in advance of the quarter.

Our best estimate at this time, is that our year-end inventory levels will be approximately 15 percentage points higher than our normal percentage point increase. So for those of you who model this metric, please keep this in mind.

Let me conclude by turning to our guidance for the third quarter and full-year 2015. For the third quarter of 2015, we expect that comparable sales will grow at mid-single-digit rates and net income will range from $22 million to $25 million or $0.26 to $0.29 per diluted share.

On a full-year basis, we expect comparable sales to increase in the mid-single-digit range and adjusted net income to range from $111 million to $117 million or $1.30 to $1.37 per diluted share.

In addition, we mentioned earlier this year that on a full-year basis, SG&A as a percent of sales was expected to be flat or close to it. Based on the strength of our business in the first half of the year and our second half forecast, we now anticipate approximately 60 points of deleverage, primarily driven by the projected achievement of incentive compensation and equity targets this year.

We continue to expect capital expenditures to range from $114 million to $119 million, compared to the $115 million spent in 2014.

This concludes my comments. At this time I am turning the call back to David.

Thank you, Perry. The year is off to a positive start and we are optimistic about the second half of the year as well. Early reads on our fall product indicate that it is being well received and we are managing the business in a way that should enable us to fulfill our promise to deliver consistent, sustainable and profitable growth. More than ever I believe that Express is prepared and positioned for a successful future.

Before turning to Q&A I'm going to turn the call back to Marisa for one quick announcement.

Thank you, David. I would like to request that Q&A participants limit themselves to one question and one follow-up so that we can get to everyone in the queue. Operator, please open the line so that we can begin the question-and-answer portion of the call.

(Operator Instructions). Betty Chen, Mizuho Securities.

Congratulations on a great quarter. The product looks great. I was wondering if you can talk a little bit about the product costing opportunity in the back half or maybe in spring 2016? And any sort of outlet performance that you can share with us and how that channel is performing since I think it has been performing ahead of plan year to date. Thanks.

Okay, Betty, so in terms of product costing opportunities for the back half and into spring, we are planning our AUCs really around flattish. And obviously, we are constantly looking for improvements and working on getting improvements, but in terms of the way in which we are looking at it, we are planning it flat.

We are obviously delighted with the performance of our Express Factory Outlet business. It continues to be very strong. As of today we are at 60 stores open and by the end of this year we will be at approximately 80 stores completely open. So we will be looking at, over a period of 18 months, having taken our Express Factory Outlet business from a standing start to an 80 store chain.

And David, the OneEleven collection continues to look terrific in the stores and we have noticed that it also remains excluded from a lot of the CRM events inside the stores. Can you tell us how it has done since it has been more broadly rolled out into, I think, at least 200 stores if not the entire chain? And how you are feeling about that business potentially longer-term? Thanks.

OneEleven has gone to the entire chain, Betty. We are thrilled with the performance of it and it looks to be largely incremental to our existing business and we plan to go forward with it.

Okay, wonderful. Thank you so much. Again, the stores look terrific.

Thank you, Betty.

John Morris, BMO Capital Markets.

Congratulations to everybody and really terrific work in a challenging environment. David, I think a question for you, thinking about the new initiatives that you have underway from a product standpoint, you talked about Express Edition and also EXP Core.

Thinking about those two that are coming on the horizon, are you taking elements from OneEleven, your learnings there? You talked about collaborating with manufacturers and applying them a to both of those new launches. And I am wondering if you can just talk in terms of how that might be in terms of sourcing, speed, pricing and whatnot. Thanks.

Okay, so, clearly our go-to-market strategy is at the foundation of our business, John. And it is the way we think about any products that we are going after. In terms of Express Edition, we are sourcing it in the same way and approaching it in the same way as we would approach any of our products. It is planned, as I said, to go to 25 stores. It will be launching at the beginning of December.

In terms of the pricing, it will open up at around $68 opening price point and there will be accessories in the collection starting at around $29.90. So I am excited about it. I think it adds another tier to our business and it adds a top tier to the business. And I think it will have a halo effect to the brand. So I'm very excited about what it is capable of delivering for us.

And on EXP Core can you give us some color on that?

Yes, EXP Core, as I said, is going to 100 stores. We did a launch of it in 30 stores in January. At the beginning of January, we had it in the hot zone of our store as opposed to having clearance in the hot zone of our store. As in the entry zone of the store. And it was extremely good.

And as a result of the business that we did really well within January, we decided to roll it out to 100 stores. And we are going to take it forward from there - we'll decide how it goes forward based on its performance in September.

Great. Good luck for fall and holiday.

Thanks, John.

Simeon Siegal, Nomura.

Good morning, guys, and congrats on a great quarter.

Thanks, Simeon.

So just really impressive new store productivity. Can you share any data on the new stores or how much more productive the outlets are? And just a follow-up, what is the implied gross margin within guidance? Can you talk to the path to recapturing gross margins, maybe breaking down merch margin and occupancy leverage? Thanks.

So, Simeon, from a productivity standpoint, we said that the outlet stores are expected to be about 1.5 times the average retail store on an apples-to-apples basis. So from an outlet perspective, if we look at the overall structure, we expect that the outlet prices are about 20% to 25% lower than the retail prices. But also from an AUC standpoint, we expect the AUC to be also about 20% lower and therefore, producing similar or close to the retail merchandise margin.

As it relates to the guidance around the gross margin and what the guidance implied, right now with a mid-single-digit comp what it would imply from a gross margin standpoint is leverage and expansion of the gross margin compared to last year, but not to the same level as we have seen during Q1 and Q2.

Great, thanks a lot, guys. Best of luck for the rest of the year.

Thank you.

Thank you.

Richard Jaffe, Stifel.

One of the things that really is impressive is the growth of e-commerce without the sacrifice of retail sales - that everything seems to be growing at once. Obviously product is a key part of it. But could you address some of the things you are doing with e-commerce to drive people to stores and, vice versa, to move some of the store visits into transactions online, how you are developing the synergy because it seems exceptional?

So in terms of the way in which that's working, clearly we are delighted with the results that we are seeing across both channels. I think that the work that we do with digital marketing we see a natural transference to stores that we get. So we obviously put a lot of effort into it and we put a lot of focus in terms of our digital marketing because we believe it is a major factor in terms of driving the customer into the store.

We have obviously made huge progress on the look and feel of our website and I think that -- in terms of some of the feedback that we are getting, we are seeing some very, very good results in terms of the overall customer satisfaction that we are seeing.

We look at data from external resources and we see that we have increased our scores consistently, whether it is in site performance, whether it is in the look and feel of the site, whether it is in the merchandise and the navigation of the site. So we are thrilled with what it does.

And as you know, and as we see in many surveys that are done at the moment, a significant amount of in-store sales start off their life as online searches. So we clearly see it as a major part of our omni-channel approach going forward.

This is Matt. There are a couple other things as well. So we mentioned the inventory visibility initiative that has just been completed. In the next couple of months , we will have the ability for customers to look online, if the product is not available, to understand if the product inventory is available in stores. That is not available today, so that should provide a tailwind for us going forward.

And as Perry talked about with the RMS and enterprise planning implementations that are going to occur in February, that will lay the foundation for future omni-channel initiatives. So we haven't implemented a lot of the ship from store capability, the reserve online pick up in store capabilities. Once this foundation is laid, it will allow us the opportunity to execute some of these omni-channel initiatives to drive even more traffic between channels. That is simply upside in out years for our business as well.

And just a follow on. Is there paid advertising either online or through Google searches and such that facilitate this or are you doing it yourselves?

Absolutely, there is both. There is paid search, there is affiliate search.

Organic search.

-- and organic search.

Great, thank you very much.

Adrienne Yih, Wolfe Research.

I'm going to add my congratulations on the product and the business momentum. Can you give me an update on the marketing? The television that you have on, it looks great. Is that incremental to last year? And then for fall, is there incremental marketing expense to last year?

And then there was a pause in the repurchase activity over the past year and a half. I am wondering with next year on an annualized basis that cash interest being saved just under $20 million, any revisiting of the repurchase and/or instituting a modest dividend to appeal to yield investors? Thank you very much.

So, from a marketing standpoint, the question around was it incremental -- the campaign is incremental compared to last year this year; we did not have a TV campaign last year. As relates to the overall marketing expense, we have said that we expect marketing to be about 5% for the year and we said that in the last couple of calls.

As it relates to the overall marketing expense compared to last year, at this point we expect it to be flat to slightly above last year from an absolute dollar standpoint, and overall close to a 5% marketing expense.

As it relates to the repurchases, I want to remind everybody that we do have a $100 million share repurchase authorization that goes through the end of November of this year. As of now, we have not had any share repurchases completed and we constantly have discussions with the Board and we talk about the prioritization of our excess cash.

From an excess cash standpoint we are comfortable if we have in the beginning of the year, a cash balance of anywhere between $100 - $125 million, and that can get us through the working capital fluctuations throughout the year.

As you have noticed, at the beginning of the year we paid off $200 million of senior notes, and at this point our balance sheet is strong and free and clear from any debt. We will be having our Board meeting next week and will have further discussions around returning cash to the shareholders.

And, Adrienne, if I could add one point about the advertising campaign. Obviously it is early in terms of the results that we are seeing. It is a five-week campaign. But what I am really thrilled about is that we are starting to see increases in the number of new customers coming to the brand. And I think that is a very, very important metric we should be looking at consistently.

Absolutely. Well, the stores look great, as does the product. Good luck.

Thank you, Adrienne.

Jay Sole, Morgan Stanley.

David, it is very clear that you put your stamp on the business, given all the new initiatives and how all of them seem to be really working together. Have you -- if we just take a step back - have you set any goals internally about where you would like to see sales and gross margins go or EPS growth? And can you share any of those with us?

Yes, well obviously I think I laid out priorities at the beginning of the year for the business and was very clear that the number one priority that we have to do is get back to the levels of profitability that we achieved in the past. And I think that the most important step that we can take is really starting to get back to double-digit operating income margins.

And I think this year in terms of what we have seen from the first half of the year, we are well on the road to getting back to those numbers. I can't set an exact timeframe on that, but we are making progress against it. So it is an important priority for us.

On that goal to get back to double-digit operating margins, are there certain checkpoints or paths on the road to get there where you have done a few things, but you still see more down the road that you plan on getting to as we go through this year and next year? Or is kind of everything in place, and it is a matter of just executing it from this point?

I think, Jay, the most important thing is that we are taking a balanced approach to the business and that we are going after top-line sales, we are going after margin expansion and we are going after leveraging our expenses. And we are seeing progress against all three of those metrics this year. And those are the most important ways in which we are looking at getting back to those double-digit operating income margins. Perry, do you want to add something?

No, David, you have addressed it. I think one of the things that we have talked about in the past, the path to get there, is by picking up 200 basis points of merchandise margin improvement, approximately 100 basis points of B&O improvement, and then leveraging SG&A by 100 basis points. Thus far this year, we are seeing the improvement in merchandise margin and B&O and we are obviously planning to continue to look for improvements in those areas and then leveraging expenses.

The other thing I would add to that is that we talked about the RMS enterprise planning implementation. Frankly, today we are operating with 20- to 30-year-old planning and merchandise systems that were homegrown years and years ago. We are getting into the current age with these new system upgrades.

And I would anticipate over time, not immediately, because there is a learning curve, but over time, there should be some margin improvement associated with these new implementations as well. We are taking a crawl, walk, run approach to the system implementation. So we won't see the impact there immediately, but that should provide a tailwind over the next couple of years as well.

Got it, thanks so much.

Thank you.

(Operator Instructions). Tom Filandro, Susquehanna Financial Group.

Kudos across the board. And, Perry, nice timing, sir.

Thank you (laughter).

I jumped on a little late, so apologies if this has been addressed. But can you guys give an update on what is happening in the non-apparel piece of the business, your experiences in those categories, what is trending up or down? And any initiatives for the fall or holiday season worth highlighting? And just a quick follow up, just when can we start to see the leveraging of the EXPRESS NEXT loyalty program? Thank you.

In terms of the non-apparel side of the business, we are seeing nice progress there, especially on the women's side. I think that our shoe business is going to have a great year. In our accessory business, we are seeing really great results on the sales of wraps and ponchos and ruanas. And we are starting to see some real progress now on our jewelry business as well. So, I feel very good about that.

In men's, we saw progress in the tie business, which was a major part of our accessories business as we got into Q2. And I don't see any reason why that shouldn't continue as we go into Q3 and into Q4. We also did a re-launch of our underwear in our top 50 stores -- our men's underwear -- in top 50 stores, and we've seen a very good response to that. That will be rolling out to the balance of the chain in the fall.

Thank you, David.

Tom, on your second question about the loyalty program, we believe we've gotten some benefit out of the loyalty program. One of the big things that we have done this current year, and will continue into the fall, is we are developing a customer data lake across all channels of distribution to really sync all of the customer information. We are also implementing a digital asset management tool that will allow us to manage our creative activity much better.

The combination of these two things, along with the information we have in the loyalty database that we have collected over the last few years, will enable us to get to more personalization and more targeted marketing to different segments of the population. So there should be benefits out of that as well heading into 2016.

Thank you, Matt. And best of luck, guys.

Thank you.

Neely Tamminga, Piper Jaffray.

Great, good morning. This is Kayla Berg on for Neely. Just congratulations first off on really good solid execution this quarter. And welcome, Perry, it is great to have you on the call.

My first question is - obviously, there is strength in denim, your OneEleven collection, which is great. Just wondering as we think about your inventory position for the back half, do you think you have enough inventory given the strength of the underlying comps there?

And then, my follow-up question is about those incentive compensation incremental expenses that you guys mentioned. Are you expecting a balanced cadence between Q3 and Q4, or is it going to be more heavily weighted towards one versus the other? Thanks.

So, first of all from an inventory standpoint, we are finishing up Q2 with an inventory that is up 13.4%. And as we mentioned on our call, a lot of it has to do with new outlet inventory. So from a retail standpoint we have inventory that is up by 1.5%. From a square footage standpoint, it is up about 4.8%, 5%.

We do believe that based on our recent approach to inventory management, that we have enough inventory to capture the upside. This is similar to what we did at the end of Q1 and the inventory position that we will plan for going into Q1. And then based on the trends of the business, we're able to chase into upside. What we don't want to do is obviously frontload the inventory ahead of the upside trends.

And to add to that, we have done a significant amount of work over the last six months around speeding up the supply-chain. We have had a very good supply-chain for years, we always have.

But we have continued improving the supply-chain speed and fabric platforming and on really focusing on the few that drive the many around positioning, capacity and fabrics where we really want to place bets and ready the business to maneuver quickly.

And so the combination of the reduced inventory levels and the speed that we have introduced in the system has allowed us to be much more nimble and still react to the upside in the business where it is appropriate.

To answer the last part of your question around incentive compensation and the impact on the last half -- the second half of the year. Between Q3 and Q4 we expect the impact to be about 40% in Q3 and 60% in Q4.

Great, thanks.

Janice Ong, UBS.

Congrats on a great quarter. Just was wondering if you were giving any commentary on quarter-to-date trends and how they compare to your mid-single-digit comp guidance for the quarter? And if you are seeing any -- or if you are anticipating any - impact from the later Labor Day?

So the quarter-to-date trends that we have seen are part of building our guidance of mid-single-digits. We don't disclose monthly comps.

Susan Anderson, FBR.

Congrats on a great quarter. I wanted to maybe follow up on the AUC question earlier on for the back half, I think you guys said flat. Is that because you are putting more into the product? Because I was thinking, with oil and cotton and the Yuan devaluation maybe it would be down. And then also, I may have missed this because I jumped on late, but if you could give some color on AUR, UPT and transactions in the quarter?

Yes, so there are puts and calls certainly to the AUC and there is a mix to the business as well. We do believe there will be some potential benefit coming into 2016. We are already into -- almost into September here when you look at the fabric positions that we have placed in anticipation of chasing product.

Also the fact that we only have about a third of our production in China. There is some upside benefit there from an AUC standpoint, probably not a whole lot in the back half of the year, more into 2016, we might see some slight improvement then.

And, Susan, in terms of the second half of your question, we are seeing traffic continuing to improve, conversion is really flattish, AUR continues to increase and ADS continues to increase.

Great, thank you. Good luck next quarter.

Marni Shapiro, The Retail Tracker.

Congratulations. I have one quick follow up. I know you said you shortened the sale days, but I did notice you left sale racks in the store and I was curious if that was successful for you. And then just one of these big picture good problem/bad problem situations.

You have had some really good momentum here, the stores look fantastic. Come holiday time, particularly Black Friday and in those last couple of weeks of December, your stores have been very busy in the past even when business was just okay. Have you started to think about how you are going to manage that, whether it is iPads, technology, etc.? Any insight you can give us?

Okay, I didn't fully hear your question about sale racks, but I think what you were saying was why are the sale racks still in the back of the store, is that right?

Well, that you left -- I actually like that you left them back there. Was that successful for you, that you shortened the sale but left some of the sale racks in the back?

One of the things we have done is we have moved to monthly markdowns as well versus just taking goods to sale. So that helps us to move through product. One, we have less overall distressed inventory in total. But as we see product that we would like to clear through quickly, we move through that faster so we keep sale racks in the back of the store.

What that does for us is we have more fully branded, full priced projections at the front of the store more days out of the year with some sale racks in the back where if you have a customer who is looking for that deep discount that is still available to them. And that helps us clear through our product there.

And in terms of the back part of your question which is about mobile POS and technology as we get into holiday. We continue to expand it into more and more of our stores so that we have the ability to create transactions in any area of the store as opposed to just at the cash rack. But we are making major progress in terms of rolling that out.

Fantastic. I wish you luck with the back half of the year. The product looks great.

Thank you very much.

Thanks, guys.

(Operator Instructions). Liz Pierce, Brean Capital.

I will add my congratulations. So kind of related to that on technology, do you have any comments on what you saw with your Apple Pay? And then if I am not mistaken, are you rolling out a new app at the end of this quarter-- in Q3? And then I do have a follow-up question about the Express Edition.

Okay, sorry. Your first question was about Apple Pay, right?

Yes.

Yes. So we launched it a few weeks ago, it is obviously in its very early stages and we're pleased in terms of what we are seeing. I think that what we are seeing overall, is that the customers who are using Apple Pay are spending a higher ADS in terms of their transaction than we are seeing on other payment methods. But overall it is something that I think is obviously going to build as we get into the future. But we are very pleased with the initial introduction of it. What was your second question?

Well then I thought you were launching a new app and then I had a question on Express Edition, if that is just confined to holiday or is that going to be something that we will see throughout the year but still kind of in a small capsule?

Yes, I would like to first of all learn at holiday what we are going to see from Express Edition. But assuming that it is successful, and I would like to believe that it will be successful, we will go on and continue to run it through the year.

And in terms of our new app, we have done a soft launch of our new app, which I am delighted with. I think it is very advanced. And I think it has a fantastic user interface. We will be launching it to the public with more marketing around it in the month of September.

Great, thanks. And best of luck.

Thank you very much.

Paul Alexander, BB&T Capital Markets.

Just a follow up on the comp guidance. Having just posted a plus 7, and guiding to mid-single-digit comps it doesn't sound like you are expecting a major deceleration. But, you may still be expecting a slight moderation. First, would you agree with that interpretation? And then second, what is the thinking there? Is it about the more difficult comparisons or just planning more conservatively? Thank you.

So, from a comp guidance standpoint, obviously you have seen the Q1 up plus 7 and Q2 up plus 7. Our guidance of mid-single-digit reflects what we are seeing so far in the quarter and what we believe we can achieve. At this point, as I said earlier, we are positioned from an inventory standpoint to be able to chase into the upside once we are getting through the quarter. Was there another part?

No, thank you very much.

Thanks, Paul.

Steve Marotta, C.L. King.

Just one question. What is the plan, the number of promotional full days off in store in third quarter of this year versus the third quarter of last year?

Yes, we don't disclose forward-looking promotions. Obviously there is a competitive issue with that, so -- but we are planning less certainly.

Okay, I will look back and see what was in last year's. Thank you.

Yes, thank you.

Janet Kloppenburg, JJK Research.

Congratulations. Just a couple questions. I think, David, you said that the store comp was actually up 5%. I was wondering if you could give us some metrics behind that pretty impressive number? And also, David, if you could talk a little bit about the men's comp. I think you said men's was improving. Did you comp positive in men's? Are you able to talk about that? And what would be driving that? Would it be tops, bottoms, both?

And also just for Perry, SG&A was up about 15% in the quarter. Should I be thinking that level is the correct level going forward for the back half of the year? I think you said 60 basis points of deleverage. I guess I could work that out, but perhaps you could give us a little help. Thanks so much.

In terms of the comp for the second quarter, as I said, we see traffic continuing to improve, we are seeing our conversion is flattish and then for the quarter we saw our AUR up and we saw an increase in ADS as well. We don't break out the comp by gender, so I can't give you information on that. But as I said on the call, the men's business beat its operating plan and it saw significant improvement going from Q1 into Q2.

And, David -- David, on the store comp -- it's the store comp I wanted you to talk about. I think you said the store comp excluding e-commerce may have been up 5%. Am I right on that?

Yes.

Yes. And was that driven by the overall metrics you gave for the overall comp?

Yes, and it was very similar.

So you saw higher traffic -- you saw higher traffic in the second quarter? David Kornberg^ We saw traffic continuing to improve and it was flattish.

Okay, thank you.

And then from an SG&A standpoint, in Q2, to your point, we saw a 15% increase. For the back half of the year, for the fall season, we expect to improve compared to the Q2 amount. But one thing that we want to guide you more to is that Q3 will be more similar to Q2 from a percent increase to last year.

Thanks, Perry.

Thank you.

Thank you. At this time I would like to turn the floor back over to David Kornberg for any closing comments.

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

Ladies and gentlemen, thank you for your participation. This concludes today's teleconference. You may disconnect your lines at this time. Have a wonderful day.