Express Inc (EXPR) 2017 Q1 法說會逐字稿

Greetings, and welcome to Express, Inc.'s Fiscal First Quarter 2017 Earnings Call.

(Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Mr. Mark Rupe, Vice President of Investor Relations. Thank you. You may begin.

Thank you, Audrey. Good morning, and welcome to our call.

I'd like to open by reminding you of the company's safe harbor provisions. Any statements made during this conference call, except those containing historical facts, may be deemed to constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual future results may differ materially from those suggested in forward-looking statements due to a number of risks and uncertainties, all of which are described in the company's filings with the SEC, including today's press release. Express assumes no obligation to update any forward-looking statements or information, except as required by law.

In addition, during this call, we will make reference to adjusted net income and adjusted diluted earnings per share, which are non-GAAP measures. Information necessary to reconcile these non-GAAP measures to reported net income and diluted earnings per share can be found in our press release and in the investor presentation, which have been filed with the SEC and are available in the company's investor relations website. Our comments today will supplement the detailed information provided in both the press release and the investor presentation.

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 will now turn the call over to David.

Thank you, Mark. Good morning, and thank you for joining us.

While the business over the past year has been challenging, we are pleased with our recent trends and believe that our initiatives are gaining traction in a transformative retail environment. E-commerce sales growth accelerated in the first quarter, increasing 27% over last year. And store performance is showing sequential improvement. This led to a comparable sales improvement as we moved through the first quarter, a trend that has continued into the second quarter. As we look to the balance of the year, we are increasingly optimistic about our ability to drive improved performance.

We are excited about our summer and fall assortments and expect continued sales momentum in our e-commerce business, along with sequential improvement in stores.

We are also excited about the prospects for our customer loyalty and omni-channel initiatives, including the introduction of ship from store, where we are seeing early success; and the pilot of "buy online, pick up in store." And we will remain focused on carefully managing our cost base and further optimizing our store footprint.

I will now provide a quick review of our first quarter performance and then discuss the progress we are making on our 2017 initiatives in the context of our strategic objectives.

Our first quarter earnings per share was in line with our guidance. While first quarter comparable sales were negative 10%, e-commerce sales were very strong, increasing 27% to nearly $100 million and accounting for 21% of our net sales, up from 15% of sales last year. E-commerce traffic and conversion improved, with the most significant growth coming from mobile, which increased meaningfully in penetration. Women's e-commerce sales were strong, driven by expanded sizing and assortments, including the launch of petites. Our customer demographic continued to shift toward this channel, and we are aggressively adapting our business model to capitalize on this to drive further growth, with mobile being a priority.

As it relates to merchandise, our women's business performed ahead of men's. Women's saw better than comp average performance in dressy pants, dresses, sweaters, shorts and swim. We had tougher results in woven tops and accessories. While overall sales declined, several of our women's categories were positive in the quarter, which we view as an encouraging sign as we look to the balance of the year.

In men's, suits, sweaters and accessories performed above the comp average. We had tougher results across bottoms. However, we are seeing an improvement in this category as we move into the second quarter.

I will now discuss in more detail the progress we're making on our key initiatives in the context of our strategic objectives, which are improving profitability through a balanced approach to growth, increasing brand awareness and elevating our customer experience, transforming and leveraging IT systems and investing in the growth and development of our people.

First, as it relates to improving profitability through a balanced approach to growth, our goal is to increase sales productivity and profitability as we focus our resources on areas of the business that have the potential to generate a strong return on investment. Specifically, we see growing our e-commerce business, continuing to build our omni-channel capabilities, optimizing our store footprint and expanding our outlet business as the most promising opportunities. To capitalize on these, we will continue to keep our customer at the heart of our activities and decision-making processes and leverage technology and data analytics.

As I discussed a moment ago, we are thrilled with the growth we are seeing in e-commerce. It is already a sizable business for us, with sales over $400 million last year and on target to reach approximately $500 million this year. However, we are just scratching the surface on its long-term growth potential.

Where the Express assortment was restricted in the past by the size and number of stores, we have fewer restrictions online and are able to capitalize by expanding our market opportunity through greater reach. A recent example of this was our launch of petites, which is a new market for us. We launched it exclusively online in January. And while it is still a small piece of our business, we're pleased with its overall contribution and believe it has a large long-term opportunity as we further build and expand on it.

We also see significant opportunity to improve productivity through our omni-channel capabilities. We began piloting ship from store last month in a select number of stores, with a focus on ensuring that we have the appropriate rules and algorithms in place. We will significantly expand the number of stores in the second half of 2017 and into 2018. We also remain on track to pilot "buy online, pick up in store" in the second half of 2017. Both of these initiatives provide an important catalyst for sales and margin growth in the back half of the year and going forward.

Switching to stores. It is clear that we must improve the productivity of this channel. The current retail environment is rapidly changing. We must continue to adapt to this change, and our in-store execution needs to be excellent. In addition, we are taking action when store economics no longer make sense. We continue to assess our U.S. fleet's overall performance and have a heightened focus on realigning occupancy costs to reflect the meaningful traffic declines we have experienced in recent years. We expect to see reductions in occupancy expense given that 50% of our U.S. retail store leases are coming up for renewal in the next 3 years.

In terms of first quarter store activity, we closed 9 retail stores and opened 5 outlets. Looking to the balance of the year, we plan to close an additional 11 stores, resulting in 20 U.S. retail closures in 2017. This is higher than the 10 we planned in the beginning of the year and reflects the proactive approach we're taking in managing our fleet.

In addition, this year, we are on track to convert 20 retail stores in B and C malls to outlets. These conversions serve as an important way to improve the productivity and profitability in lower-volume retail stores that still have a few years left in their lease terms. We will also open 14 additional outlet stores. As a reminder, we launched our outlet business just a few years ago and are opening stores to round out our geographic footprint and ensure we have the appropriate number of locations where there is demand for our brand.

In early May, we announced our decision to exit Canada and close all 17 stores. In fiscal 2016, while Express Canada generated sales of approximately USD 34 million, it contributed a net loss of approximately USD 6 million, driven by high occupancy costs. We considered various alternatives but ultimately determined that exiting was in the best long-term interest for Express and its shareholders. Canadian operations are currently winding down. And Perry will provide more details on the accounting considerations of this action in a moment.

And lastly, we remain very focused on managing costs across many other areas of our business. We continue to expect to achieve $20 million in cost savings in 2017 driven primarily by SG&A and product-sourcing initiatives. And to be clear, these cost savings do not contemplate the impact of store closures.

Turning to our second objective, increasing brand awareness and elevating our customer experience. We have clear opportunities to strengthen the Express brand. Millions of customers shop Express each year. This represents a significant opportunity. And as I have said on a number of occasions, customer acquisition and retention is a major focus of the brand.

In March, we launched our spring brand campaign Your Life, Your Dress Code, which is designed to elevate and sharpen Express' overall brand awareness and positioning by showcasing our wearing occasions for both men and women. We also continue to invest in digital and social media, as well as focus on fashion influences, to further increase awareness and familiarity of our products.

At the end of March, we kicked off the exclusive Karlie Kloss x Express collection with a live fashion show held in Karlie's hometown of St. Louis. The event drove significant interest and attention for the Express brand. In fact, it was one of our largest events ever, generating a record number of media impressions.

Another very important customer acquisition and retention tool is Express NEXT, our loyalty program. NEXT customers shop more frequently, spend more and remain customers longer than non-loyalty customers. And therefore, by increasing our NEXT customer base, we expect to drive higher sales.

We are currently in the final phase of our NEXT relaunch. During the first quarter, we made it easier for customers to enroll and earn rewards with our one-step sign-up process. We improved the value proposition for private label credit card holders and further aligned NEXT with the recently upgraded Express mobile app.

We also significantly increased the overall awareness of the program in stores and online. Our store associates' focus and execution in enrolling customers has been very good, with store sign-ups exceeding our goals. In the first quarter, we began to see positive customer acquisition trends and remain optimistic in NEXT's ability to drive sales during the balance of the year. We will complete the full relaunch this quarter by integrating and leveraging social media engagement.

Our third objective is transforming and leveraging our IT systems. As we have discussed on previous calls, we have significantly improved our positioning from an IT systems perspective. We now have global visibility to inventory; can plan and allocate by channel; and have the foundation to implement additional omni-channel capabilities, which we are currently doing. While much of the heavy lifting is behind us, there are still a few key IT initiatives remaining that we believe will further improve our capabilities.

Later this year, we will upgrade our store POS systems, which will provide advanced functionality with respect to price and promotion optimization. In 2018, we will implement assortment planning software, which will advance our ability to get the right merchandise in the right place with greater precision and will drive additional sales and margin improvement into the future.

Finally, our fourth objective is investing in the growth and development of our people. We have an outstanding and dedicated team here at Express, and we are committed to ensuring that we continue to attract outstanding talent to the brand and develop that talent to grow and add value to the organization over the long term.

In summary, we remain confident in our strategy and continue to believe in our long-term opportunity. We are committed to driving shareholder value and are making necessary decisions to improve profitability and further strengthen our market positioning.

While we are in a challenging retail environment, we are shaping our own destiny with the actions we are taking and the initiatives we have in place, which are gaining traction. As a result, the trends in our business are improving both online and in stores. We are aggressively adapting our business model to capitalize on the shift towards e-commerce and are excited about the expanded rollout of ship from store, pilot of "buy online, pick up in store" and the full relaunch of NEXT. We are confident in our summer and fall assortments and expect our sales momentum to continue during the balance of the year.

We have strong balance sheet and cash flow fundamentals and firmly believe that Express will become a stronger company and a better-positioned brand through this transformative retail period. I want to close by thanking everyone at Express for their dedication and relentless effort as we continue to work to build a stronger company and deliver long-term value to our shareholders.

I would now like to turn the call over to Perry.

Thank you, David. Good morning, everyone.

I'm going to start by reviewing the first quarter results, which include the impact of exiting Canada and certain discrete tax items, neither of which were included in our guidance. I will then separately discuss the impact of Canada and the tax items in more detail. After that, I will provide an update on our fiscal 2017 outlook.

First quarter net sales were $467 million, a 7% decline from last year, with comparable sales down 10%. Merchandise margin contracted by 380 basis points driven by increased promotional activity due to the challenging retail environment. Buying and occupancy expenses deleveraged by 240 basis points as the sales comp decrease led to deleveraging of fixed costs.

As a result, first quarter gross margin rate contracted by 620 basis points to 27.2%. The higher-than-anticipated gross margin contraction was due to the lower comparable sales in the quarter and the increased promotional activity.

We continued to monitor expenses effectively. SG&A declined approximately $6 million despite an increase in depreciation expense of $5 million, which reflects the progress we're making on our cost-savings initiatives and, to a lesser extent, variable cost reductions. SG&A was 27.9% of net sales, an increase of 90 basis points last year.

GAAP operating loss of $9.7 million included a $6.3 million negative impact relating to exiting Canada. And first quarter GAAP loss per share of $0.06 included a net $0.03 per share negative impact related to certain discrete tax items and the exit of Canada.

I will now address the financial implications of our decision to exit Canada. As a result of our filing under the Companies' Creditors Arrangement Act on May 4, 2017, Express Canada was deconsolidated from our consolidated financial statements. In 2017, we expect the total impact to operating income to be in the range of $28 million to $34 million driven primarily by the write-down of our investment, along with exit costs. In addition, we anticipate related tax benefit in the range of $14 million to $16 million.

These will result in a negative impact to net income in the range of $14 million to $18 million or $0.18 to $0.23 per diluted share.

More specifically, in the first quarter, we recognized $6 million in restructuring costs primarily driven by a onetime noncash asset impairment, as well as a tax benefit of $7 million. The net impact was a benefit of $1 million or $0.01 per share to GAAP diluted earnings per share.

In the second quarter, we expect to recognize the remaining $22 million to $28 million of expenses, which will be partially offset by a tax benefit of $7 million to $9 million.

Thus, we expect second quarter net income to be negatively impacted by $15 million to $19 million or $0.19 to $0.24 per diluted share. In summary, the total after-tax cash impact to exit Canada is expected to be in the range of $8 million to $12 million, which will eliminate an annualized net loss of approximately $6 million.

Now turning to tax excluding Canada. In the first quarter, we had an approximate $3 million or $0.04 per share impact from certain discrete tax items. $2 million is related to regulatory changes in the accounting for share-based compensation. And $1 million is related to the discontinuation of our nonqualified deferred compensation plan, which is another action we have taken to improve our overall profitability. While we incurred a onetime tax impact related to the discontinuation of the nonqualified deferred compensation plan in the first quarter, we expect to realize expense savings going forward.

Our balance sheet remains very healthy. Inventory at the end of the first quarter totaled $287 million, representing a 2% increase over last year. We feel comfortable with our inventory composition entering the second quarter as we continue to fund the rapid growth of our e-commerce business and manage store-level depth to meet customer demand.

We ended the quarter with $191 million of cash and cash equivalents, up from last year's $111 million. First quarter operating cash flow was $1 million, an improvement of $17 million from last year. And capital expenditures were $15 million.

The final topic I want to address is our guidance for the second quarter and full year. Our updated guidance reflects adjusted numbers excluding the impact from exiting Canada. We expect our sales and margin performance to improve as we move through the year. We also expect mall traffic will remain challenging and the retail environment to remain promotional. As a reminder, our guidance also incorporates higher IT-related depreciation for our new systems, wage inflationary costs and building-in the return of incentive compensation to the plan in the second half of the year. With that overview, I will now provide the guidance details.

For the second quarter of 2017, we currently expect comparable sales within the range of negative mid-single digits, adjusted net income in the range of a loss of $2 million to a profit of $1 million, and adjusted earnings per diluted share in the range of a negative $0.03 to a positive $0.01. This adjusted EPS guidance excludes a negative impact of $0.19 to $0.24 per share related to the exit of Canada, as I previously discussed. In addition, we expect second quarter net interest expense to be approximately $1 million and the tax rate to be approximately 31%.

Based on the midpoint of our second quarter guidance, we expect our operating margin to contract by approximately 350 basis points. This will be driven by merchandise margin contraction, along with B&O and SG&A deleverage, associated with the lower sales expectations.

Turning to our full year 2017 guidance, which is a 53rd -- 53-week year. We expect comparable sales to be negative low single digits, adjusted net income to range from $32 million to $38 million and adjusted earnings per share to range from $0.41 to $0.48. The full year guidance includes the negative $0.04 per share impact incurred in the first quarter related to discrete tax items and excludes the negative $0.18 to $0.23 per share impact from exiting Canada.

We expect net interest expense of $3 million and a tax rate of approximately 41%. The 53rd week will be in our fiscal fourth quarter and is expected to represent $0.04 in diluted earnings per share.

On a full year basis for 2017, we expect that at the midpoint of our guidance operating margin will contract by approximately 170 basis points driven by gross margin contraction and SG&A deleverage. Depreciation expense will be $9 million higher due to the systems implementations.

As it relates to our cost-savings initiatives, we remain on track to deliver a total of $44 million to $54 million of annualized savings over the 2016-to-2019 period. In 2017, we expect to achieve $20 million in savings driven primarily by SG&A during the first half of the year and merchandise margin in the second half of the year.

In terms of capital expenditures, we continue to plan for $62 million to $67 million, which is more than $30 million below 2016.

Lastly, based on our retail and outlet store activity and the Canadian closures, we now expect to end fiscal 2017 with 638 stores, down 18 stores from the end of fiscal 2016. Specifically, we plan to open 19 new outlet stores; and close 37 retail stores, 17 of which are related to our Canadian exit. We're also planning to convert 20 U.S. retail stores to outlet stores. We expect to end the year with 495 retail stores and 143 outlet stores.

Our 2017 guidance implies that we will continue to generate solid operating and free cash flow. In summary, we're confident we have the right strategy and initiatives in place to improve our sales and profit trends. We're also financially sound with more than $190 million in cash, no debt and healthy cash flow. We are committed to driving shareholder value and look forward to updating you on our progress in August.

And now I would like to turn the call over to the operator to begin the question-and-answer portion of the call.

(Operator Instructions) Our first question comes from the line of Simeon Siegel with Nomura Securities.

This is Gene Vladimirov on for Simeon. I was wondering if you can give us some color on how we should be thinking about merch margins for 2Q and for the full year kind of given the promotional environment. I know new initiatives are in place for the year to help control, well, the margins. So just wondering how we should be thinking about the cadence there. And then if you could give us any learnings you've had thus far from the ship to store, that'd be great.

Okay, so from a Q2 standpoint, we expect merchandise margin to decline approximately, let's call it, anywhere between 20 to 30 basis points. And that is driven by what we have seen so far in Q2 and what we expect the promotional environment to be in the balance of the quarter. As it relates, though, to the balance of the year, we do expect merchandise margin to improve in the balance of the year. And it is driven by the fact that we expect our sourcing and production initiatives to take impact in the balance of the year, especially in the second half. As we've mentioned as it relates to our $44 million to $54 million of annualized savings and specifically the $20 million that we're going to see in 2017, we've said that we expect half of that to come in the form of SG&A in the first half of the year; and the other half, approximately $10 million, to be in the second half of the year. And that's why we're expecting the merchandise margin to improve in the second half of the year.

As it -- this is Matt. As it relates for -- to ship from store, we currently have a 10-store pilot ongoing that is going very well, and it's on plan. And we should have approximately 150 stores up by early fall. This will -- once we have this capability up and running in 150 stores, it will provide a combination of sales upside and margin improvement, as this will obviously allow us to liquidate pockets of nonproductive inventory and also fulfill orders that we don't -- or we're out of stock online with. So we're very encouraged by what we've seen so far with ship from store, and we are on track to deliver that in the fall.

Great. And in terms of the ship from store, just thinking about how that -- if we'll see any excess inventory growth from that? So just kind of any effect on the inventory management for the year for that?

So we expect as we roll out in the second half of the year the ship from store, we expect, as we continue to learn from it, that ship from store not only is going to impact the top line growth and improve comps but also is going to allow us to optimize our inventory investments. So as we move to the second half of the year, we should be able to see merchandise margin improvements driven by the ship from store.

Our next question comes from the line of Susan Anderson with FBR Capital Markets.

I just kind of wanted to, I guess, dig in a little bit more just on the gross margin and the merch margin. It seems like retailers are kind of more having to promote nowadays not because of high inventory but really just to drive traffic in the store. So I guess, as that environment continues as we go into the back half, like how do you kind of battle that? And if the promotional environment just with all your competitors remains high, to improve merch margin? And then my second question, just on fashion, are you guys seeing anything new out there for the back half of the year that could potentially drive traffic and sales?

Susan, it's David. In terms of merchandise margin and using it as a traffic driver, we've built that into our guidance in terms of the way that we're thinking about it. I think that a lot of the work that we have done across the business in terms of our production and sourcing initiatives should help us go forward significantly. So as it is, it's planned into our overall guidance.

That's correct. And then from an overall gross margin, the other thing I want to add is we have to keep in mind that the impact on gross margin is driven both by merchandise margin -- and as David said, we have that planned. But also is the impact of buying and occupancy. The second half of the year, based on our guidance, implies a very low single-digit improvement in terms of the comps. And as such, from a buying and occupancy standpoint, we're expecting to see some -- we're not going to see a significant leverage, but we're going to be right at the cash flow, fairly flat.

And in terms of your second question, about fashion trends as we're seeing going into fall. Your first question was obviously about the competitive environment. I'd like to go back to that and say that we really do not want to share on the call what we're seeing directionally because it's competitive information that we're giving away. I think that you can get the best view of what we're seeing and what we're testing by looking in our stores and seeing the composition of the inventory there.

Our next question comes from the line of Roxanne Meyer with MKM Partners.

My question is on the guidance. I just want to, I guess, really understand a little bit better what's changed. I mean, if you look at your new guidance of $0.41 to $0.48, it compares to the Street that had been at $0.66. And so aside from the discrete tax item, can you help us understand or quantify the impact of whether it's the increased IT depreciation versus wage inflation and incentive comp? And what's changed versus your initial view of the year?

So, Roxanne, when you look at the guidance and you get the -- you look at the previous midpoint of the guidance that we provided, we've seen about a $0.25 decline. When you look at the $0.25 decline, the $0.04, to your point -- the initial guidance that we provided in Q4 for the year did not include the $0.04 impact because, at that point, we called out what we were expecting to see but we excluded the discrete tax items. But now since they're behind us, we're including them in the guidance. So that's approximately $0.04 of the overall impact. The remaining $0.20, $0.21 of the impact to the annual guidance is driven by the fact that the initial comp guidance that we provided to the Street back in March was a flat to a positive low single-digit comp. Right now, we have revised our annualized guidance to a negative low single digit comp and which is driving the remaining $0.21 decline in our overall guidance. The reason that we have revised downwards our annual guidance is, as David mentioned in his prepared remarks, we're seeing improvement in the overall trend of the business but we're seeing these improvements come in a bit later than initially anticipated. As evident by our Q2 guidance, we're moving from a negative 10% comp in Q1 to a guidance of negative mid-single digits in Q2. So we are seeing the improvements, but they're coming in little bit later than what we initially thought.

And I guess, just a follow-up then. Is your view of the second half then unchanged from a comp perspective? Or are you also assuming maybe a slightly more conservative view of the back half?

We're assuming a slightly more conservative view in the back half, but we still are baking sequential improvement in the back half based on how the Q1, Q2 and then the back of the year guidance is coming in place.

Our next question comes from the line of Paul Trussell with Deutsche Bank.

Could you discuss what you believe is driving the strong e-commerce growth and just where you believe the disconnect is regarding the weak performance in store? Also, you mentioned earlier that about 50% of the store base is coming up for renewal over the next 3 years. Just help us better understand your game plan. As those leases come up for renewal, is the approach to negotiate in a very disciplined manner to get those occupancy rates lower? Or -- and what -- to what extent do you expect to maybe walk away from some of the -- or relocate some of those doors?

Okay. Paul, it's David. I think, your first question, in terms of why are we getting such significant growth online and why are stores performing worse? I think that the important message here is really what -- we are responding to the adaptive change that we're seeing in this industry. And as I said on the prepared remarks, it is very, very transformative. So what we're seeing is a great, great reception from our customer online. And it has been tougher in store. We feel confident in terms of the second half based on the improvement that we have seen across channels throughout the first quarter. And we've seen that continue into the second quarter, so I'm anticipating progress as we continue throughout the year. In terms of the store base and our game plan, as we said at the beginning, you look at our total number of retail stores. We ended 2016 with just over 550 total retail stores, okay, frontline retail stores. We will end 2017 with under 500 retail stores. So we are adapting our business as and when we see the store economics determine that we need to make the changes that we need to. So we are happy with the fact that we have 50% of our leases up for renewal over the next 3 years. And I think that by saying that we are going from over 550 stores to under 500 stores by the beginning of this year shows that we are making the changes to transform the business in the way in which the customer is demanding our products. If you look at it in total, our total fleet, we've actually adding outlet stores. So we started this year with just over 100 outlet stores. And we will end the year with close to 145 outlet stores, based on a number of conversions that we've done on a number of new stores. We're doing this based also on the great financial architecture that we see in terms of the outlets but also the demand for products that we're seeing in our outlet stores. So I think the key to it is that we are flexible. We have the flexibility built into our leases. We have great relationships with the landlords that we anticipate continuing. And all in all, it's enabling us to change our fleet and adapt our model as and when the customer is dictating it.

On top of that, we do believe that there is a bubble in occupancy expense that has been building over -- for a number of reasons, over the past few years. And has contributed -- been a contributor to the high number of store closures that we're currently seeing in the industry as a whole. We -- as David said, we're going to continue to create more flexibility even than we have today with our leases. And if we can't get the rents we need, we will close stores. And we will be very disciplined with our negotiations with the landlords.

That's very helpful color. And lastly and quickly, you've mentioned a few times the improvement you saw throughout the first quarter and into May. Can you just give a little bit more color on the trend that you saw, the cadence of comps over these last few months?

So as you know, we don't comment specifically on monthly comps, but what I will tell you is we've seen an improvement as we moved from February to March, April. And I'm combining March, April together given the shifting of the Easter event. And then also, it continued -- that trend continued from an improvement standpoint into the month of May. So right now when we look at the guidance in terms of the Q2, we've looked at the number of factors, including the Q1-to-Q2 comparisons, and then what we have seen over the last 13 weeks, starting with March into May, and then May in itself. So we're seeing the improvements. And one of the major factors is obviously traffic. Traffic is the one area that we've said all along has remained challenging, and now we're seeing some improvements come in via the traffic metric.

And I think, if I can add to that as well, Paul, our key initiatives are really kicking into gear. So a lot of work that we set out to do in terms of driving the business forward, in terms of increasing awareness, improving customer familiarity with the brand, in terms of customer acquisition and retention appear to be kicking into gear. So that's what leaves us very optimistic about what's going to come for the rest of the year.

Our next question comes from the line of Steve Marotta with CL King & Associates.

When will inventory growth be similar to the sales delta in your plan?

Steve, good question. As you know, we don't discuss future inventory positioning. And we don't provide guidance to the future end-of-quarter, beginning-of-quarter inventory. I think what your challenge -- what your question is, it's around the inventory position for the (inaudible) with a plus 2.2% compared to the guidance that we provided. As I have said in the previous quarter and even during last year, we're positioning our inventory to ensure that we're capturing the growth that we're seeing on the e-commerce. That's one. And two, from a store standpoint, we're managing the store-level depth to support the customer demand in the stores. And also, please keep in mind that, at this point, we still don't have the omni-channel capabilities and especially ship from store that is going to enable us to better optimize and maximize our inventory investment across the 2 channels.

The other thing I would add onto that is that, as because we are obviously a fashion business, we have 2 large sales per year in January and then in June, July. When those sales are done, we hold the clearance in the back for another month or 2 to liquidate additional portions of those goods. At the end of that period, we MOS or mark out of stock the remaining fashion goods that we have on the floor so we are clean when we get into March and when we get into September with our inventory because obviously fashion goods don't get better with age. And we're very disciplined with that approach.

Great, that's helpful. My follow-up question pertains specifically to closed stores. What's your average transfer rate for the stores that are closed to transfer those sales to another store in addition to e-commerce?

So good question. So we look at that. And obviously, the transfer rate depends on whether the store is a single-market store, how many stores that are in the market and obviously the e-commerce strength within the market. What we have said is that we've seen typically a 25% to 35% transfer volume. And again, as it relates to whether it's on the higher end or the lower end, it will depend on the number of stores within the market. As it relates to between stores and e-commerce, the more stores that are in the market, less transfers to e-commerce and more transfers to the nearby stores. But on an average is that 25% to 35% transfer volume.

Our next question comes from the line of Pamela Quintiliano with SunTrust Robinson Humphrey.

I had actually 2 quick ones for you. The first one, kind of a follow-up to Paul's question in terms of the online and mobile customer. Can you talk about if this is a new customer going online or if it's your existing customer shifting channels? The demographics of the customer, is it the same as the brick-and-mortar customer? Is it different? And just anything about their shopping behaviors. And lastly, any learnings you can take from there. And then I have my follow-up afterwards.

Okay, look, I think that overall what we're seeing is it's the same customer who is shifting. And when you talk about adaptive change, it's an adaptation in terms of the way in which the customer is shopping. What we are starting to see is good new growth in terms of customer acquisition online, which is part of the reason that we feel more confident in the second half of the year, that we're starting to see good growth. It is an element of the shift, as I said at the beginning, but I think that the important message is that what we're seeing is we're starting to see new customer acquisition coming online.

And then just on the outlet conversions, can you remind us, how long are stores down? What's the cost of the conversion? And then how have the ones that you've done already stack up to your full-line stores? And then ultimately, how many do you think you have the potential to convert -- or how many more, I should say?

So from a conversion standpoint, the downtime of the stores is minimal because, as we convert the retail to outlet, we really are not making significant changes to the existing retail store. So you're looking at about a 4-day downtime as we convert those stores. As it relates to the investment in the conversions to outlet, again that is a minimal investment. We're dealing, for the most part, most times, just updating the sign on the front of the store. What we have seen in terms of the performance, and we've seen this consistently, is a pickup in top line sales and a significant improvement in the profitability of those stores. We've done this in a number of stores so far over the last 2 years, and we're continuing with the 20 conversions during the -- in August time frame. We don't have a specific strategy in place that says we're going to convert another X number of stores, but we're looking at that opportunistically as we see retail stores that we feel that, if we were to convert them versus closing them, it's going to give us a pickup both in top line and profitability.

And those stores, when you look at the ones up for conversion, is that based on the lease renewals that are in place and when those are rolling, you're evaluating? Or is it just...

It's a mix of both. And I will tell you that, even the ones that are maybe on their end of their lease life, we're not really signing new leases. We're just kicking out and continuing to be on a very, very, very short-term lease. But we don't have a specific whether it's just the new -- at the end of their lease life or existing. It's a mixed bag of both. And it depends on the store's location, in terms of how many stores do we have in nearby markets because we do not want to be converting retail to outlets in areas that we have a number of retail stores. So we need to make sure -- we need to ensure that we'll continue to look at those metrics as well.

Our next question comes from the line of Marni Shapiro with Retail Tracker.

So I want to just clarify that last sentence. I think you just said that in a trade -- because I was going to ask about real estate as well. But in a trade area where you have full-line stores, you're not going to convert stores to outlets, for competitive reasons. Does that sound -- is that right?

Yes, we've looked at the areas that we have retail stores. And for the most part, where we're converting to outlet, it's making sure that the outlets are not going to impact the retail performance.

I think the main point there from Perry is that, for the most part, if a market determines that it makes more sense for us to have an outlet in that market, then we will have an outlet in that market.

That makes sense. And then in general it sounds like your outlet business is still doing very well. Are you seeing a difference between outlet stores that were converted within malls versus outlet stores that are in outlet malls?

We don't provide that level of detail, Marni.

Okay. And then one last final then also, I guess, sort of on real estate as well, but in stores where you've been able to downsize the footprint, are you finding the productivity is still very good? And how -- are you having to exclude segments? How are you thinking about those stores?

When we downsize, typically we will see an increase in productivity. What we obviously balance in stores that we're downsizing is the CapEx we need to put in versus extending the lease we currently have and making sure we're doing the appropriate repair and maintenance. So as we're looking at stores, it's a combination of things that we look at.

Okay, that's fantastic. And I'll take the rest of them offline.

Our next question comes from the line of Janet Kloppenburg with JJK Research.

David, I was wondering your comp guidance, if there is an assumption based on current trends that some of the categories that had been underperforming in men's and women's have begun to improve here in May. If you -- I know you're not going to talk about the categories, but if you could give us some outlook as to how some of the underperforming categories are tracking, that would help a lot. And, Matt, I heard what you said about inventory, but I'm still curious, based on minus low single-digit comp guidance for the year, if at some point we should expect that -- on a comparable basis that inventory should be trending in line with the sales outlook. And, Perry, can you just help us understand on the SG&A front, it was down on a dollar basis in the first quarter. But my hunch is it's going to be up on a dollar basis as we go forward because of some of the cost pressures that you outlined. If you could help on that, that would be great.

Okay, Janet, your first question, in terms of assumption of improvement in the categories of business built into our guidance, yes, we have built that into our guidance as we have planned it for the balance of the year. We are really seeing improvement across-the-board in terms of the category performance. So some of the areas, it's really, it's relative. Some of the areas that have been underperforming are still underperforming, but they are improving over where they were. So really it's across-the-board, but we're seeing it in total. I think that there is still work to do on woven tops in women's. And as I've said also on a previous call, as we get towards the end of the second half, we will be up against less of a comp on woven tops from the Portofino shirt. So I see that as being an opportunity as we go into the second half of the year.

Yes. And, Janet...

Any comment on One Eleven, David?

One Eleven continues to be an important part of the business. And as we get into fall, you'll be seeing that ramping up.

Okay.

So, Janet, as it relates to inventory, yes, we do expect, as we move through the balance of the year, to start seeing the inventory levels line up with the comps, especially as we expect the comps to have some sequential improvement in the balance of the year. And also, please keep in mind, and I mentioned that earlier on, is the ship from store. We believe that it can provide a significant opportunity to help manage the inventory and optimize the overall markdowns. So we still believe that, as we roll out the ship from store in the back half of the year, we're going to be able to further improve and manage our inventory.

And on the SG&A?

And then as it relates to SG&A, yes, you're right. In Q1, we have seen a reduction in the overall SG&A expense driven by a couple of factors. One is the expense initiatives that we have put in place last year. And we're seeing those materialize in Q1 and part of Q2, but as you move towards the back half of the year, you will see SG&A pressure. One is the reintroduction of the incentive compensation in the back half of the year. Two is the inflationary wage cost that we've talked about, and that is the minimum state -- minimum wage increases via some of the states. So we do expect in the back half of the year to see increase in the SG&A expenses. And also, we expect that we're going to see the SG&A being -- deleveraging at similar but not at the same level as Q1.

Our next question comes from the line of Adrienne Yih with Wolfe Research.

David, my question for you is we clearly have seen some of the uptrending categories sort of exiting April and then into early May. And we actually saw some pullback in promotional activity, particularly over the last weekend -- couple weeks. So my question is a lot of retailers are now kind of taking a strategy where they're okay to negative comp and perhaps lose a little bit of market share, but when they do comp, they want it to be healthy. And so when we're looking at the improvement in the kind of go-forward business, how should we be thinking about that philosophically for you?

Philosophically, for us, I would say, look, our goal, as I said on the prepared remarks, is to continue taking a balanced approach to the business, a balanced approach to growth, so in terms of top line sales and margin expansion. And that is the way that we're going to return this business back to a healthy operating model. Clearly, it has been a challenging year, as I said earlier, but I think that we're taking the actions in terms of not only the product but also the financial architecture to ensure that the business is a lot healthier going forward. And we're starting to see some results from that.

Okay. And then just at a higher-level sort of stepping back, how do you view Amazon's entrée into apparel fashion category? They've now hired a fashion editor. Obviously, they're marketing and advertising. Where do you see them as being kind of directly competitive? And how do you compete against that?

Look, we see all competition as competition. That's exactly what it is. And we watch all of it. So clearly, it's not just an entrée at the moment. It's a sizable business for them. And I think that, when you look at us and the way in which we continue to maintain our market share, I see it as another competitor that's out there in the marketplace. And we'll continue to fight against it.

Yes. And some of the key things, obviously, to fight against that are, one, we can create a curated assortment for the customer with a very specific fashion point of view, which is more difficult for someone like Amazon to do. We also have bricks-and-mortar stores and have a better opportunity to create a better customer experience than they do at this point. So those are things that are in our favor and ways we can combat Amazon longer term.

Our last question comes from the line of Michael Binetti with UBS.

I wanted to just check if we can quickly just -- help us disaggregate some of the trends that you're seeing in the retail stores versus the outlet stores. I know you've talked a little bit about it, but is there a meaningful difference in the trend in the underlying comps at -- and four-wall profit between the 2 channels? I guess I'll just start there.

Obviously, we don't comment the difference between outlets and retail stores, but what I will tell you is that, again, the main impact on the store performance has been traffic overall. In terms of the four-wall profit, we've talked before that the characteristics of the overall outlets are such that they're very accretive to the bottom line and they have a very attractive four-wall EBITDA.

Okay. I guess, separately, as you look at the balance sheet today, I would say that's one of the steadiest and more glaring parts of the business right now during this -- what you referred to as transitory period for retail. I mean, do you think at some point it's a good strategy to try to trade some balance sheet flexibility to find a strategic initiative to bolt-on some earnings or accretion through another brand in a shared services platform?

We don't comment specifically about any type of future transactions that may occur or that we might be looking at. We are always open to looking at opportunity in the future that would be beneficial to the company and our shareholders.

Okay. Maybe I could just ask one other one then. Can I ask you about your comment on the bubble in occupancy in recent years? That was -- I thought that was interesting. I think it goes without saying that the traffic patterns in the malls for the industry in recent years kind of force that comment to be true and almost force any lease term agreed to more than 2 years ago to be significantly different than what was expected in terms of economics. I guess it's just interesting to me to hear your comments that -- certainly, and from your peers as well, that any effort needs to be committed at this point to negotiating harder with the landlord. Maybe, you could just tell us, what is your feedback you're getting as to why landlords aren't coming down faster, more aggressively as they're seeing the kinds of occupancy rates spike, if they're seeing their big occupants like yourselves with B&O deleverage like you've seen over the last few years. Is there some alternative use that we're not thinking of that's allowing them to drag their feet on this topic?

We can't speak for the landlords. I can't comment on what their approach is that they're taking. We just need to ensure that we're working to drive the best shareholder value that we can.

Thank you again for joining us this morning and for your ongoing interest in Express.

Ladies and gentlemen, that does conclude today's conference. Thank you for your participation. You may disconnect your lines at this time.