Express Inc (EXPR) 2015 Q3 法說會逐字稿

Greetings, and welcome to the Express Inc third quarter 2015 earnings conference call.

(Operator Instructions)

As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Ms. Marisa Jacobs, Vice President of Investor Relations for Express. Thank you. You may begin.

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

Any statements made during this conference call except those containing historical facts may be deemed to constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual future results may differ materially from those suggested in forward-looking statements due to a number of risks and uncertainties, all of which are described in the Company's filings with the SEC, including today's press release. Express assumes no obligation to update any forward-looking statements or information 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 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'm now going to turn the call over to David. He 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'm delighted to be here with you today to discuss our strong third quarter.

We successfully executed on our strategy, delivered great product, approached inventory levels and the timing of our buys with discipline, and reduced the breadth, depth and frequency of our promotions. This enabled us to once again grow top-line sales and expand our operating margin.

For the quarter, our sales increased by 10%, our comparable sales increased by 6%, our operating income grew 46%, which lifted our operating margin by 200 basis points to 8.1%, and our EPS grew 82% to $0.31. This marks our third consecutive quarter of growth. We also resumed our share repurchase program, which Perry will elaborate on shortly.

All of you have heard me say that when it comes to our performance, it starts with the product. So let me begin the call with a few observations on this subject. I believe the Express product keeps getting better. Our fall collection is stronger and customers are responding positively, as we offer a great balance of fashion and must have key items. New product is being introduced more frequently.

As we place intentionally tight buys of fashion, we are giving customers a reason to return often. Additionally, as we continue to reinforce our price-value proposition, we are seeing positive results in the form of higher merchandise margin dollars and better sell throughs, which should lead to fewer units going into our end-of-season sale.

In terms of the women's business specifically, we saw a robust performance, evidenced by solid gains across multiple categories. Our woven-top business continues to excel, as our customers shop with us for great shirting, both casual and dressy. We are seeing growing strength in knits, which extends well-beyond the One Eleven line. We had a good fall denim season, and interest in leggings remains high, both in denim and casual. Unseasonably warm weather somewhat affected sales of outerwear and heavy sweaters, but strong sales in other categories more than offset the impact.

On our last call, I told you about a new capsule collection that was designed to be rolled out in December. I am referring to Express Edition -- and in fact, it was rolled out online and in 27 stores two days ago. It is a highly targeted collection of refined women's going-out pieces that mix runway fashion with street style. We believe Express Edition will further enhance our brand and our business.

On a separate note, let me mention swim for women. Next week, we will introduce the latest collection online, and will roll it out to approximately 50 stores in March. We're continuing to evaluate opportunities for growth in this category.

With respect to men's, our suiting business continued to show great strength, and bottoms also performed well, with casual pants contributing to the growth, and denim delivering higher margin dollars. Our guys are responding positively to the use of stretch fabric across various departments, including underwear, shirts, jeans and suits. Men's tops continued to lag behind bottoms, but we believe we've put the right corrective measures in place.

One final comment on men's: I hope you've seen our new featured brand items. We're bringing our online customers a creative assortment of third-party branded products. This includes items such as shoes, bags, wallets and technical accessories. This collection complements the internally designed Express Collection.

Before turning to our growth pillars and strategic initiatives, I want to address our performance over the Thanksgiving period, including Cyber Monday. We were happy with the results, we drove solid performance and we met our expectations. Beginning last Tuesday through noon on Friday, our offering was 50% off, the same as in 2014. The success we had during that time period enabled us to then transition to Saturday and Sunday promotions that were less deep than the ones we ran last year. The guidance we issued today and which Perry will review shortly, takes into account our November results, along with our expectations for the balance of the quarter.

With respect to our growth pillars, we continued to make good progress.

We saw a lift in our retail store performance, with higher sales, fewer promotions and fewer red lines.

Our e-commerce business had another good quarter, growing 6%. During last year's third quarter, we drove a significant amount of business in this channel by running online-only promotions. We ended that practice earlier this year as part of our focus on creating a consistent shopping experience for our customers across channels. Accordingly, we are satisfied with the e-commerce growth we delivered, while lapping an extraordinarily promotional calendar from last year.

In September, we upgraded our mobile app, and the results have been great. Page openings and time spent have increased substantially, along with monthly revenues. Given the rapid rate at which our customers are adopting mobile commerce, we will continue to optimize our mobile app for appeal and usability.

Outlet openings and fleet rationalization continued. We opened 17 Express Factory Outlet stores and converted one retail store, to wrap up the quarter with 78 locations. We continue to be very pleased with the outlet channel, and expect to end the year with 81 outlet locations. In terms of the retail fleet during the third quarter, we opened one store and closed one store. Year to date, we have closed 23 stores, and continue to make progress on our 50-store closing initiative announced last year, and expect to end the year with 573 retail locations.

With respect to our outlets, I want to reiterate that all Express Factory Outlet product is made specifically for sale only in these locations. The outlet product is derived from retail best-sellers. But I want to stress, that means best sellers from prior seasons. This approach of selling tested and proven product limits fashion risks at the outlets. It also places a priority on differentiation to minimize the risk of trade-off with our retail stores. To date, this business approach has generated strong incremental sales and margins.

We went into the outlet business believing that the trade-off from our retail stores would be low, in the ballpark of 5% to 10%. To date, it appears to be running at the low end of that range. We're also very pleased at the degree to which we are gaining new customers through the outlets. There is a large contingent of price sensitive consumers who do most of their shopping in outlet malls, and prior to our arrival there, we were simply not serving them. So in total, it is a win-win for our customers and for us.

Internationally, we continue to make progress. In Canada, better product and an enhanced customer experience are driving strong sales. Focused marketing investments are increasing brand awareness. As a result of these initiatives, our key metrics improved.

While a very small part of our business today, our international franchisees are seeing customers respond well to the same elevated product that is driving growth in North America. We are, however, seeing challenges in certain geographies, based on the economic conditions, ranging from currency devaluations to the impact of lower oil prices on oil-based economies.

Turning to the 2015 priorities I outlined at the start of the year, they consist of: 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 against each one of these.

Starting with profitability, we have now delivered three quarters of steadily improving results. Our guidance speaks to our belief that continued growth is expected, and that we will continue to make progress against our goal of getting back to a double-digit operating margin.

From a customer experience perspective, the repositioning of certain products throughout the store is enabling shoppers to coordinate outfits more easily. Monthly floor-set changes are highlighting the breadth of our new fashion items more clearly than ever before. And the introduction of additional product categories enables us to sell an ever expanding portion of our customers' total needs.

Online, better product presentation continues to make the shopping experience easier and more enjoyable. Additionally, we continue to reinforce our store associate selling model which is leading to significantly improved customer experience scores at all touch points.

Initial phases of the brand work we've been carrying out this year are complete, and our updated brand vision has been rolled out across the organization. This work is enabling our associates to better understand the essence of the Express brand and our target customer. It is leading to a sharper filter for our designers and merchants, who in turn, are creating and buying product with enhanced and targeted emotional content. In addition, our website and social media are better reflecting the needs and aspirations of our customers.

Our fall denim campaign with Karlie Kloss and our Steph Curry campaign each exemplified our adoption of a 360-degree approach of generating content across the full spectrum of traditional and social media offerings. Our holiday campaign, Give Style, which launched on November 2, is utilizing the same approach.

We're also thrilled to again be featuring amazing personalities who resonate with our customers, such as Hailey Baldwin, Suki Waterhouse and Joan Smalls. I believe that campaigns such as these, in combination with our other impactful marketing initiatives, are elevating the Express brand.

Our IT modernization project continues to progress and Perry will provide more details on those initiatives. Employee development work is continuing to provide opportunities for our associates and to ensure that Express remains a great place to build a career which embodies being challenged, supported and appreciated.

As we move into the final quarter of the year, a bit of hindsight seems fitting. The past few years were challenging. We analyzed our performance, determined what adjustments were most appropriate, and took swift and decisive action.

We have made great strides since the year began. We have grown sales and delivered solid comps, and we are well on the way towards returning our business to double-digit operating margins.

But there is so much more. Numbers alone do not tell the full story.

We're delivering more frequent units and improved fashions, and opportunistically expanding the collection.

Through improved sourcing and inventory discipline, we are buying smarter.

We are communicating better, enhancing the brand and introducing new customers to Express.

We are rationalizing our real estate fleet to better serve our customers where they are shopping.

We are upgrading our IT to enhance operational flexibility and enable omni-channel and international expansion.

And while the list goes on, I'll stop there.

Collectively, all of these advances are paving the way for a long runway of success.

I would like to conclude by saying that I am fortunate to work with such talented and hard-working professionals. The Express team is dedicated and focused on the growth of our brand and our business. I want to take this time to thank our entire team for all that they do.

At this time, I'm going to turn the call over to Perry.

Thank you, David. Good morning, everyone.

David's enthusiasm for the business is evident, but I want to add that I'm also very pleased with our third-quarter results. We have been pursuing a number of initiatives since the beginning of the year, with the goal of delivering balanced growth that is sustainable, both in the short and long term. Three quarters of good results, coupled with our fourth-quarter expectations, show that we are on right track.

With respect to the third quarter, let me touch on the key metrics in the P&L. Net sales grew by 10%, and comparable sales, which rose by 6%, came in at the high end of our guidance. The product was strong, and customers responded favorably throughout the quarter.

These positive results were complemented by higher merchandise margins, which expanded by 160 basis points during the quarter. This is higher than what we expected when we provided guidance.

Once again, we acted opportunistically and succeeded in driving further gains. We assessed our upcoming promotions, and as we determined that some were unnecessary, we canceled them. For example, we eliminated all six of the 40% of days contained in last year's third quarter. Other promotions were reigned in as well, and the inventory discipline David spoke about was a further contributor.

Buying and occupancy as a percent of sales improved by 170 basis points, and strong comp results enabled us to leverage costs.

Collectively, merchandise margins and buying and occupancy improvements enabled us to expand our gross margin by 330 basis points.

SG&A as a percent of sales was 26.8%, leading to 140 basis points of deleverage, primarily driven by incentive compensation, outlet openings and investments in IT and marketing. The increase in spend was anticipated and in keeping with our commentary on the last call.

Operating income for the quarter increased by 46% to $44.5 million. This represented an 8.1% operating margin compared to the 6.1% in last year's third quarter. At the start of this fiscal year, we announced our objective of returning to double-digit operating margin within the next few years. The 200 basis points gain we just delivered speaks to the progress we are making.

Net income grew by 80% to $26.3 million from $14.6 million. Diluted earnings per share were $0.31, representing an 82% increase over the $0.17 per diluted share reported in the third quarter of 2014. Share repurchase activity, which I will discuss in a moment, contributed less than $0.025 to the total.

Our balance sheet remains very healthy. Cash and cash equivalents were at $91 million at the end of the third quarter, compared to $218 million at the same time last year. The decrease is primarily related to debt repayment and share repurchases. Earlier in the year, we used $215 million to redeem our senior notes.

Since the last earnings call, we repurchased $40 million of our common stock, $22 million of which took place during the third quarter. Lastly, capital expenditures were $34 million compared to $27 million.

We ended the third quarter with $365 million of inventory, representing a 4% increase over the same time last year. This included approximately $69 million of Express Factory Outlet inventory, a significant portion of which relates to new stores. With respect to our retail business, inventory decreased approximately 6% in the aggregate and 4% on a per-square-foot basis. We're comfortable with both the level and composition of our inventory.

Let me turn now to our IT project. On our last call, I talked at length about our legacy IT systems and the work that is underway to upgrade them. We've continued to make progress in this area, and we have completed system upgrades on a large number of projects.

Our retail management, enterprise planning and order management systems are still scheduled to come online next year. We have, however, decided to reverse the order of implementation. We will bring order management online in May as initially planned, to be followed by the retail management and enterprise planning systems shortly thereafter.

The project management plan for each of these systems involves testing at multiple stages to ensure, among other things, that foundational data is carried over with accuracy. We recently made the decision to layer in some additional testing and verification work in an effort to ensure a successful implementation. We are excited about bringing these systems online, which should provide long-term benefits in terms of sale and margin expansion. As a result of this decision, year-end inventory levels will follow normal patterns and will not to be elevated at the end of Q4, as previously indicated.

Let me conclude by turning to our guidance for the fourth-quarter and full-year 2015.

For the fourth quarter of 2015, we currently expect that comparable sales will grow at low single-digits, and net income will range from $50 million to $54 million, or $0.60 to $0.64 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 $116 million to $120 million, or $1.38 to $1.42 per diluted share.

We now expect capital expenditures to range from $112 million to $117 million, compared to $115 million spent in 2014. This concludes my comments.

At this time, I am turning the call back to David.

Thank you, Perry.

We have made significant progress since the year began, and I believe we're well-positioned for the holiday season. Our stores look great, and our website continues to elevate the online shopping experience. Whether shopping at our stores online or using both channels, customers will find a compelling assortment of products. We excel at interpreting the most important looks of the season in a manner most suited for our customers.

I want to close by stressing that as we continue to execute with discipline and advance our pillars of growth, we will be poised to deliver profitable growth well-beyond the fourth quarter

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 to one follow-up, so that we can get to everyone in the queue.

Operator, please open the lines so that we can begin with the question-and-answer portion of the call.

(Operator Instructions)

Simeon Siegel, Nomura Securities.

Thanks. Hey, guys, good morning and great quarter.

Thanks Simeon.

Thank you.

Can you just talk about your store comp metrics for a second? You put up a 6% comp, with e-com up 6%. So it seems like pretty impressive store results, which is clearly not the message many other retailers are giving. So is there any color there? And then just for the follow-up, Perry, given the strategic initiatives, can you add any color on SG&A dollar growth for the quarter, and what to think about for next year? Thanks a lot.

Thank you. From a comp standpoint, we see the comp coming from mainly our AUR and our ADS, given the pulling back on our promotional activity. From a traffic standpoint, we saw average traffic to be slightly up, and our conversion was fairly flat. What was the last part of your question, Simeon?

Just thoughts on where -- the context around SG&A dollar growth, given the initiatives going on?

So from an SG&A standpoint, we said at the end of Q2 that we're expecting our SG&A to remain, in Q3, higher, given our incentive compensation, our IT investment, as well as our outlet openings. Specifically in Q3, our outlet openings were 17, compared to 9 last year. And therefore, we saw, given the timing of the openings, a little more pre-opening expenses in Q3 than we have seen previously.

So the other thing that I would add, Simeon, is, obviously overall, we're very pleased with the comp we delivered across all of our channels. And as you noted, clearly not many people are delivering that. But we are focused on delivering consistent, profitable, sustainable growth. And that is the path that we are taking, and we have those expectations whether it is across our buying groups or it's across our stores or it's across e-commerce. It's about consistency of improvement, and clearly, it's about now comping the comp for next year.

Perfect, thanks. Best of luck for the next holiday, guys.

Thank you.

Tom Filandro, Susquehanna Financial Group.

Hi. Let me add my congratulations to a very well-executed quarter. Congrats across the board.

Thanks, Tom.

Perry, could you offer some puts and takes on the gross margin into the fourth quarter, and just a view on how we should think about that path to double-digit margin? What do you need to see in terms of comp? And what should be the makeup between the SG&A and gross margin, just broadly? That would be helpful. Thank you.

Our guidance right now for the fourth quarter will reflect a merchandise margin that is going to improve, but not at the same rate as we have seen the last few quarters, given that the holiday season, and specifically Q4, is fairly promotional. From a B&O standpoint, and gross margin, we are expecting, obviously continued improvements. But again, we would not expect it to be at the same rate that we have seen the last few quarters. As it relates to SG&A leverage, -- from a deleverage standpoint, we expect SG&A to be deleveraging at a far lesser rate than we've seen in Q3, and more comparable to, if not less than what we've seen in Q2. And we do expect operating margins to improve in Q4.

Tom, this is Matt. As with every holiday season, it tends to be the most promotional quarter in the year in general for the industry. And what Perry talked about here is the fact that we have contemplated that in our guidance and we are prepared to react as necessary. But staying with the fact that we want to make sure that we have a very clear customer value proposition as well.

Thank you very much. Best of luck and happy holidays, everybody.

Thanks, Tom.

Adrienne Yih, Wolfe Research.

Good morning, everybody. I'm going to add my congratulations. The stores look wonderful, the product also looks great.

Thank you.

You are welcome. My first question is on the capsules. We saw that come in online; obviously, it will be rolled out to the stores. How many capsules do you think you can do a year? And does that impact the number of turns per year? And then my follow-up question is, can you give us any insight into 2016 AUC trends? Do you think they could be down? Any color there would be very helpful. Thank you.

Okay. In terms of -- you're talking about the capsule collection Edition that we just launched two days ago?

Yes.

Okay. Look, clearly, it's two days into it. It is the first one that we've ever done, which is encompassing across all departments. We're very pleased with what we've seen over the first two days. It is early days, but I would like to think that this is something that we can clearly take forward for the business, that it presents us with some significant opportunities going forward. I'm very pleased with the execution of it. And I think that it is something that we can clearly take forward in a bigger way for the business, overall. Your comment about AUC -- we are looking to go forward, really, at about flattish AUC. Obviously, we are opportunistically looking at opportunities in Asia, based on the devaluation of currencies. But in terms of our overall strategy on sourcing, it continues in the way that it has been. But we are really looking at around flattish.

Yes, and we will provide more color on that in the Q4 earnings call.

Okay, great. Best of luck.

Thank you.

Betty Chen, Mizuho Securities.

Thank you. Good morning, congratulations on a great quarter. I was wondering if you can talk a little bit more about merchandise margin opportunity? Nice gain in the third quarter. And can you remind us where we are against historical average or peak levels? And what are some of the opportunities for next year? And similar to that, it seems like the stores are driving traffic way above some of your mall peers. Is that potentially another comp driver for next year? Or should we look for, whether it's UPT or ADS to be a bigger factor going forward? Thanks.

From a merchandise margin standpoint we obviously have seen significant improvement this year. And I'm going to remind you, in Q1, we saw a 200-basis point improvement. In Q2, we saw a 240-basis point improvement. And now in Q3, 160-basis point improvement. So as it relates to our historical -- if we are at peak performance, I would say we're not at peak performance, from a merchandise margin standpoint.

As it relates to 2016, we have not given guidance on merchandise margin in 2016. But consistent with what we have been saying, going forward, we're going to focus on a balanced growth approach, where we're going to look at modest, low-single digit comp growth, along with merchandise margin expansion and SG&A leverage. And having said that, we're going to continue to manage our inventory with discipline, and looking at the promotional activity, and evaluating it, and therefore, striving to achieve further improvements in our merchandise margins.

If I could just add to that, you talked about traffic as an opportunity, I think, for next year. I think, clearly, yes, that is an opportunity for us as we go forward. We saw improvements in terms of average store traffic in our stores over the past quarter. But really, it is about our focus on delivering consistent, profitable, sustainable growth as a business. And the way in which we are going to do that, above all else, the biggest opportunity is us continuing to deliver differentiated fashion and exclusive product, continuing going down the path of elevating our brand, constantly improving the experience for our customer. And as Perry said, taking this balanced approach to our financial architecture. We are focused on consistency of results and continuous improvement across the business, and I want to be really clear about that, Betty.

Okay. Thank you, David. The stores look great.

Thank you.

Neely Tamminga, Piper Jaffray.

Great. Good morning. Solid execution, indeed. David, I have a question for you on product. My first question is on men's, and the follow-up is on holiday. On men's, it sounds like men's tops are not working so well. In your customer read and react model, you guys have the advantage of being able to just test a lot of ideas. Are ideas not hitting right now? Or are ideas hitting, and things aren't being executed well? So we are just trying to understand a little bit more of what is going on in men's tops. And the follow-up is on holiday. Any sense -- it sounds like you are finding more frequent fashion flows as being a good strategy. So how are you applying that into holiday? Particularly, we're looking at the weeks post-holiday. Any changes there? Thank you.

Okay. So your first question, I think, was men's, and is the product in the tops there just not hitting?

Yes.

The men's business -- bottoms obviously, continue to be very strong. Suits continue to be very strong. We are seeing signs of progress where we are bringing in the frequency of newness in men's that we have been bringing in women's. And where we're seeing that particularly, is in graphics. We have had a very decent men's sweater season overall, by bringing in frequency of newness and frequency of fashion. And I believe that we have the corrective measures in place, particularly on shirts, and we are doing lots of testing on knits.

So I think that there is opportunity going forward in men's for us to really start making some good progress. And so I feel good about that overall.

You also asked about the frequency of fashion flow. Clearly we have delivered a lot of spring already. And we are starting to see some really good results, particularly on our spring sweaters that we brought in on women's. So it is really -- clearly, it is about the frequency of flow and the frequency of delivery, and about us transitioning into seasons sooner, which we are doing very well. But yes, transitioning into seasons in a wear-now appropriate way.

Best wishes out there.

I hope that answers it.

It sure does, thank you.

Okay, thank you.

John Morris, BMO Capital Markets.

Hi, good morning. My congratulations to everybody, as well. Great job to the team.

Thank you.

David, I'm really impressed with what you guys are doing with Express One Eleven. And the merchants are really doing a great job in your approach to how you are sourcing that product at good cost, so you are able to be very competitive in pricing and realize good margins, and yet also have great quality. So it is really win-win across the board. I am wondering if you are applying some of those same initiatives to Express Edition? Can we be expecting the same kind of unique strategic approach to that? And also, as you look ahead into 2016 with what you guys have been doing with One Eleven, now Express Edition, should we expect to see more innovation in that sub-branding category going forward, that really helps make you increasingly a destination, and more and more of a brand in the customers mind? Thanks.

Think you, John. Good question. I think that the frequency of sub-branding, yes, is very important for us. We've got to be clear though that everything that we are doing is about the overall elevation of the Express brand. The Express brand is at the center of everything that we are doing. And I think that the fundamental difference between Express One Eleven and Edition, is Express One Eleven is about introducing sharper price points that enables us to get more traffic into the stores. And obviously, it's in our knit top category where we are able to do that.

The difference between that and Edition, is Edition is really us going after the upper end, while everybody out there is going after the lower end. And we are offering a very elevated collection of dressy, going-out, party pieces. Which clearly, it is only two days into it, but appears to be resonating very nicely in terms of what we are seeing. So it is about elevating -- obviously everything that we are doing is about elevating the Express brand. Sub-brands, I think, are an important part of our ability to continue to increase traffic into the store, and continue to increase frequency of visits from our customers, as they are clearly seeing newness whenever they are coming in. And we're going to go forward with that.

So does Edition have the same potential in terms of profitability contribution or profitability profile, directionally, as One Eleven does?

I believe that it does, yes.

Great, guys. Good luck for the rest of the holiday.

Thank you, John.

Marni Shapiro, The Retail Tracker.

Hello, everybody. Congratulations.

Hi, Marni. Thank you.

The stores look gorgeous. I just wanted follow up with some of the IT work that you guys are doing. I'm curious, as you invest behind the old technologies and roll out the new ones, when should we start to see things like -- I see you have find-in-store. When should we see things like reserve-in-store? Is this something you are planning to roll out? And I've noticed online over the last little while, you have things like in-store-only -- which I find very interesting. If you could just touch a little bit on the thought behind that?

Sure, Marni, I will take the first question. As you alluded to, most of our systems are about 25 years old today, and that is what we have been operating with for quite a while. We have been on a program of implementing state-of-the-art systems in the business. We are almost done with that at this point. We have already implemented several of the systems over the last couple of years. We have the RMS and enterprise planning systems that will go live in the back part of Q2, and the OMS systems in June.

So what these systems do for us is that they lay the foundation for omni-channel capability, the ship-from-store, the reserve-online/pick up in-store, et cetera, where we can meet the customer's needs where they want it, when they want it. And then it also helps us with things like multi-channel planning. So today, our system is such that we plan everything in a single system. For example, we have almost a $400 million e-commerce business, and we plan that as an average store within our planning system. It sounds crazy, but it is true. And we are able to get the results we have with that. But when these new systems come online, we will be able to plan by channel, we will be able to implement omni-channel capability, and we will be able to increase our speed to innovation with more flexible systems, as well. All of these things should provide some significant top-line and margin upside. And we are taking a crawl-walk-run approach to this. Over the next two to three years, we should start to see some of this upside materialize for the business, which does give us a good tailwind for the business.

And in response, Marni, to your second question about items being shown in-store only, obviously, in segue from Matt's answer, we're not in a position yet where we can ship from store. And we are getting to that point, but clearly when something is sold out online but it is still available in-store, whether it is in Easton or at 34th Street or in Flatiron, the customer is able to find it in their local store, based on the global inventory visibility that we have introduced.

So just to clarify, in-store-only is because it is sold out online, not because you are trying to -- I thought it was because you are trying to drive people into the store, like: too bad you can't buy it here.

The reason is -- it's not that we're putting exclusive items in-store. It is because we will have sold out of that item on online. But when the customer is able to see the item, based off of global inventory visibility, they will be able to go and pick it up at a local store, because we haven't got the capability yet to ship from the store.

Oh, that is fantastic. Well, best of luck for holiday, guys. The stores look fantastic.

Thank you very much, indeed.

Susan Anderson, FBR.

Hi, good morning. Let me add my congrats also on a very nice quarter. I was wondering -- the products looked really great lately -- if you could talk about your test-and-react strategy? Are you doing anything different there than what you've done in the past? And then if you could touch on open-to-buy this quarter versus historically? And then on the e-commerce business, any plans down the road to take it in-house? Thank you.

Test and react. We've refined it. We haven't changed it. And I think the key to it is us, obviously, keeping more units open longer so that we are able to really buy much closer in. And as you obviously look at the target, the more information that you have on the target, the more accurate you're going to be in terms of the shot that you are taking. So we clearly are continuing to test. We're continuing to test probably over 75% of the units that we're selling in the store. But the key to it is us being able to keep the units open longer, and take a really clear centralized approach to how we are releasing those open-to-buy dollars, so that we are going into the season with a much larger kitty than we have had in the past. We are in the same position as we are looking at spring now, and feel very good about the amount that we have open into Q1 and Q2, at this stage.

Great, that's helpful. And then on the e-commerce business, any thoughts down the road on taking it in-house?

The fulfillment piece-- the front end of our e-commerce business is in-house today, with a ETG platform. The fulfillment is not in-house. And at this time, that business continues to grow very rapidly. We have third-party fulfillment that is very flexible. And so at this point in time, we don't feel it's appropriate to build a distribution center on our own, or to spend the capital. Because we are getting very competitive rates, and it gives us the flexibility as the e-commerce business evolves over time, to be more flexible on whether we want a single or multi-distribution center set up, et cetera.

Got it. Thank you. Good luck next quarter.

Thank you.

Richard Jaffe, Stifel.

Thanks very much, guys, and my congratulations as well. Just a question for some more detail on the outlet business, clearly a source of confidence. You guys are growing it quickly. Could you share with us some of the metrics that give you that kind of confidence, whether it's per square foot or the opportunity for greater stores with margin and SG&A levers compared to regular store? Thank you.

From a productivity standpoint, our outlet stores are more productive. As we said before, they are 1.5 times more productive than our retail stores. Some of our other metrics -- the AUR of the outlet locations is about 20% to 25% lower than the AUR of the retail locations. But also, from an AUC standpoint, our AUC is about 20% lower. And therefore, when you look at the merchandise margin, the merchandise margin of the outlet locations is close to the overall merchandise margin of the retail locations. As you move down to the P&L from a B&O standpoint, the B&O of the outlet location is fairly attractive, given the rent profile. And from an SG&A standpoint, it is similar to the retail business. So overall, the margin for the outlets continues to be very favorable to us.

Thank you. That is very helpful.

Roxanne Meyer, MKM Partners.

Great, thanks, and let me add my congratulations on a terrific quarter, and your stores do look fantastic.

Thank you.

Sure. Perry mentioned and reiterated that your margin gains year to date, are obviously very strong in each of the first three quarters. So as we look into 2016, where do you see the biggest opportunities? Are we are still in early days of appreciating the potential, in terms of whether it is inventory management or continuing to execute on more frequent flows, or other things that should drive continued margin gains. Thanks.

I think the number one thing is continuing to offer the best fashion that is available out there, and in a differentiated way. And continuing to offer our exclusive product and elevating our brand. I think that is the number one big opportunity for us. And we can continue to do that.

And we have made big strides this year with several areas of inventory discipline. While we've made big strides, there's still more opportunity there, from holding more back in reserve, as David talked about a minute ago, to, while we have a good, pretty fast supply chain today, looking for opportunities to continue to increase the speed of the supply chain as well. So we think there is still big opportunity there, along with the growth in the outlet channel.

In addition to that, we are moving all our deliveries -- relevant deliveries -- back to the West Coast now, as well. So that's also another opportunity for us.

But the good news is, as Perry said, we are bucking the trend to some extent with traffic in-stores, which is a positive. And I think that a lot of that is driven by the brand work that we have done, along with the great product that we have in the store.

Okay, great. Thanks so much, and best of luck for the holiday.

Thanks, Roxanne.

Lindsay Drucker Mann, Goldman Sachs.

Hi, good morning. This is Eddie McLaughlin on for Lindsay. You mentioned that online business was going up against heavy promotions last year, and implied that, that weighed somewhat on growth. Are you seeing any sort of similar impact in your brick and mortar businesses? And are you comfortable with the current level of promotions, or do you see any room to throttle in another direction for the next few quarters?

Well, what happened last year with the e-commerce business was, we had specific e-commerce-only promotions that we ran last year. And we made the decision this year to have a single view to the customer around promotional activity. Whether it be in stores or online, it should be the same customer experience, a consistent experience to the customer. So we pulled off some of the e-comm-only promotions that we had on last year. And that is what led to the 6% comp online in the third quarter. We believe this is absolutely the right thing to do, from the long-term health of the business, and that is should be able to help us overall long-term with the overall customer experience.

Okay, thanks.

Liz Pierce Brean Capital.

Thanks. Congratulations, you guys. Talking about frequency in your supply chain, is this the best that it can be, in terms of your deliveries? Or, I just want to make sure I understood, I think, your comments a few minutes ago, in terms of -- are you going to get to daily deliveries? Or perhaps just shed some light on that? Thanks.

Liz, look, the way we're working it here is, we are constantly looking at continuous improvements in every area of the business. And there are clearly opportunities still with our sourcing, for us to be able to get faster. I think some of the work that we have done over the last six to nine months has been magnificent, in terms of moving on speed. But there is more that we can do; there's always more that we can do. And we're clearly focused on that.

And so just to follow up, just to make sure, you still think that you can keep at 75% of what you test and continue to increase the frequency of deliveries?

Yes.

Great. Okay, all my other questions have been asked. Thanks, and best of luck.

Thank you very much.

Thank you. Mr. Kornberg, there are no further questions at this time. I would like to turn the call back to you for any final concluding remarks.

Thank you. This concludes our call for today. Thank you for joining us this morning, and for your ongoing interest in Express. Please accept my best wishes for the holiday season.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.