Express Inc (EXPR) 2017 Q2 法說會逐字稿

Greetings, and welcome to the Express, Inc.'s Second 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, VP of Investor Relations. Thank you. You may begin.

Thanks, 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 operating income, adjusted net income and adjusted diluted earnings per share, which are non-GAAP measures. Information necessary to reconcile these non-GAAP measures to operating income, 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 is 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 we continue to operate in a transformative environment, we are pleased with the progress we've made against our initiatives. Second quarter comparable sales of negative 4% and adjusted EPS of $0.01 came in at the top end of our guidance. Our strategy continues to be focused on taking a holistic approach to driving improved sales and profitability, and this quarter's performance demonstrates that we are moving in the right direction.

E-commerce sales growth in particular was very strong, increasing 28% and accounting for 19% of total sales, up from 14% last year. We continue to invest in expanding our omni-channel capabilities. And I'm pleased with the success we are seeing from our ship from store launch, which is now active in 150 stores. At the same time, we remain focused on driving performance in our retail stores, which showed further sequential improvement in the second quarter. We have improved the clarity in our stores through choice count rationalization and increased depth per choice, allowing us to speak to clearer fashion stories and trends.

Our marketing efforts are resulting in improved trends and customer engagements, and we believe they will drive increased customer acquisition and retention. And we completed the relaunch of our customer loyalty program, NEXT. The early results are very encouraging, with a significant improvement in customer sign-ups during the quarter.

In terms of merchandise, our women's business this quarter saw better than comp average performance in pants, shorts, denim and swim. Our men's business performed slightly ahead of women's, with suits, mid-tops, shorts and accessories outperforming the comp average.

As we look to the balance of the year, we are committed to driving further improvement in our performance. The momentum of our initiatives continues to build, and we expect their impact to be more meaningful going forward.

We're optimistic about our fall and holiday assortments, where we are well positioned in our top items and on-trend attributes. We expect e-commerce sales growth to remain solid and store performance to improve sequentially, with incremental sales and margin contribution from our expanded omni-channel capabilities. And we remain focused on managing our costs and see clear opportunities to enhance the overall efficiency of our business.

I will now discuss in more details the progress we are making on our key initiatives in the context of our strategic objectives, which are: improving profitability through a balanced approach to growth; increasing the 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, we are committed to improving sales productivity and profitability by focusing our resources on areas of the business that have the greatest potential to generate a strong return on investment. We continue to view growing our e-commerce business, building our omni-channel capabilities and optimizing our store footprint in both retail and outlet as the most promising opportunities. We are aggressively attacking each of these areas.

E-commerce sales increased 28% in the second quarter, driven by higher online traffic and conversion, with the most significant growth coming from mobile. Our women's e-commerce performance continue to benefit from expanded sizing and assortments, including the successful launch of batik. And we see a large opportunity to improve our men's e-commerce business and have assets in place to begin capitalizing on this in the third quarter, one example being the recent launch of our men's tour shop, where we feature longer lengths and in-seams.

We are also making it easier for customers to shop by enhancing the overall experience through improved functionality and speed. As we execute our omni-channel strategy, customers will increasingly have a seamless experience across our platforms. We began piloting ship from store in the second quarter and have recently expanded it to 150 stores, slightly ahead of our original end of August target. The initial results of the launch are encouraging, validating our future ability to leverage store inventory to maximize sales, drive inventory productivity and reduce markdowns.

The contribution from ship from store will have a greater impact going forward, and we will further expand it into 2018.

We are also optimistic about the upcoming pilot of buy online, pick up in store, which we see is another way of fulfilling our customers' expectations through a seamless shopping experience across channels. We will launch the pilot in a small number of stores beginning next month.

As we have previously communicated, omni-channel represents a significant opportunity for our company. We believe that it can increase our overall productivity and profitability to greater sales conversion and improved inventory management. Stores will continue to represent an important element of our omni-channel strategy, and we are focused on making progress in improving their financial profile.

As we discussed on our last earnings call, we are realigning occupancy costs with lower traffic levels and obtaining greater flexibility in our leases by way of shorter lease terms, kick-out clauses and co-tenancy agreements.

To date, we are pleased with our progress. On lease renewals signed in 2017, we have obtained a meaningful reduction in occupancy costs. We have also demonstrated our willingness to walk away from locations, where the future store economics were not sustainable and have shown the ability to transfer a good portion of the closed store volume to nearby locations or e-commerce. We will continue with this approach going forward.

We have constructed a flexible real estate portfolio with approximately 50% of our U.S. retail store leases coming up for renewals in the next 3 years, and are focused on ensuring that we are aligned with where customers are shopping.

We have also had success in converting lower-volume retail stores in B and C malls to outlets. While largely opportunistic, we have been able to maintain our brand presence and significantly improved the productivity and profitability in these locations.

We converted 19 retail stores to outlets late in the second quarter. The conversions went well, with sales exceeding our expectations. Based on the initial results, we are optimistic about the prospects for improved results from these locations during the balance of 2017 and into next year.

And lastly, we are very focused on managing costs across our entire business. As a part of our overall $44 million to $54 million cost savings initiatives, we are on track to achieve $20 million in 2017, which does not contemplate the impact of store actions.

Turning to our second objective, increasing brand awareness and elevating our customer experience. Express is an important and relevant brand supported by the millions of customers that shop us each year. However, our potential is much larger, and we have initiatives in place to build engagement and increase customer acquisition and retention.

In early 2017, we introduced a new brand architecture focusing on the individual style of our customer. Our marketing efforts are now more holistic and leveraging bigger brand message more consistently across all of our platforms.

Our August Fit For You denim campaign is an example of the success we're seeing from our assets. The campaign features a broad mix of more than 60 of our customers from around the U.S., including Express brand ambassador, Karlie Kloss, displaying our fit styles and technology. The creative has clearly connected with our customers, driving important increases in engagement across our digital and social platforms.

In the second half of the year, we will further our efforts through a greater emphasis on content creation and continue to work with fashion influences to expand awareness and familiarity of our products. We are also seeing a positive trend and engagement from higher customer touch points. Late last year, we returned customer touch points back to 2015 levels following a plan decline in 2016. We began to see higher attached sales during the second quarter, which we view as a positive sign. We have also talked to a lot about the significance of our NEXT customer loyalty program relaunch and specifically, it being another very important customer acquisition and retention tool.

During the second quarter, we completed the final phase of the relaunch, integrating social media engagement into the program. For example, customers can now earn points by linking their NEXT and Instagram accounts, and can earn additional points by sharing a photo using #ExpressLife. While early, we are thrilled with the results we're seeing. Customer sign-ups during the second quarter were up significantly year-over-year for NEXT and the Express NEXT credit card, driven by a strong program supported by solid execution by our store associates and enrolling customers.

We see this as an important leading indicator in our ability to drive future sales, as NEXT customers have historically shopped more frequently, spent more and remained customers longer than non-loyalty customers. We feel good about the progress we are making through our marketing and customer initiatives. Our marketing is proving effective, and we're beginning to see improvement in key brand metrics. Engagement is building, and our NEXT relaunch is leading to encouraging trends in our customer base.

To capitalize on this momentum, we plan to increase our short-term demand generation and longer-term brand-building marketing investment during the second half of the year. We expect to support it through other marketing offsets. As we have discussed in the past, we see a significant opportunity to strengthen women's familiarity and increase men's awareness of Express. And given the general uncertainty in retail with many pulling back, we feel the timing is right to be more aggressive in capturing greater mind share within our demographic and enhancing our overall market position.

Our third objective is transforming and leveraging our IT systems. We're beginning to leverage the new tools and resources of our IT systems. We're reacting faster to trends and planning at a more granular level, which is apparent in our full assortment. And we're launching important omni-channel capabilities, as I discussed a moment ago. We continue to believe that we will begin to see the initial benefits from our systems investment during the back half of this year, with greater benefits realized in 2018 and beyond.

Finally, our fourth objective is investing in the growth and development of our people. We have an outstanding and dedicated team here at Express. We're highly focused on executing our strategic initiatives and, as a team, are determined to succeed. We're also dedicated to giving back to our local communities. Collectively, our associates volunteer thousands of hours each year, which we take great pride in. We remain committed to attracting outstanding talent to the brand and developing that talent to grow and add value to the organization over the long-term.

In summary, we're pleased with the progress we've made against our initiatives and the direction in which our business is moving. Our confidence in our strategy and conviction in our long-term opportunity remains resolute. Express is a vibrant and relevant brand to our demographic, evidenced by the strong 28% year-to-date e-commerce sales increase and the positive trends we're seeing in customer engagement.

With the majority of our initiatives now in place, we expect our results to improve during the balance of the year and into next year. We are optimistic about our fall and holiday assortments and the expansion of our omni-channel capabilities, and we see clear opportunities to enhance the overall efficiency of our business.

We are managing our capital structure prudently, recognizing that our strong balance sheet and solid cash flow fundamentals provide us a tangible competitive advantage in the current retail environment.

I want to close by thanking everyone at Express for their dedication and relentless effort to improving our business and performance. Express has a great future, and we are committed to delivering 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 second quarter results, followed by a brief update on our Canadian exit. After that, I will discuss our third quarter and fiscal 2017 outlook.

During the second quarter, we saw sequential improvement from the first quarter across many of our key metrics. Second quarter net sales were $479 million, a 5% decline from last year. Comparable sales were down 4%, which was an improvement relative to the first quarter decline of 10%, driven by strong e-commerce growth of 28% and better store performance.

Merchandise margin contracted by 120 basis points, driven by highly the promotional environment and costs related to our Canadian exit. This was a relative improvement from the 380 basis point contraction experienced in the first quarter. And buying and occupancy expenses deleveraged by 120 basis points, driven by the lower sales. However, this was also a relative improvement from the 240 basis points of deleverage experienced in the first quarter. As a result, second quarter gross margin rate contracted by 240 basis points to 27.5%.

We continue to manage our expenses effectively. SG&A was down slightly despite increases in depreciation expense and other wage inflationary costs. This reflect the focus we're making in our cost savings initiatives and, to a lesser extent, variable cost reduction. SG&A was 27.5% of net sales, an increase of 110 basis points to last year.

GAAP operating loss of $15.9 million included a negative $17.6 million impact related to our Canadian exit, resulting in adjusted operating income of $1.7 million.

Second quarter loss per share of $0.15 included a net negative $0.16 per share impact related to our Canadian exit. As a result, adjusted EPS was $0.01.

I will now provide a brief update on our Canadian exit. In June, we closed all 17 of our stores, and are currently working through the CCAA process to wind down the Canadian business.

In the second quarter, we recognized a negative $17.6 million impact to operating income, consisting of $16.3 million of restructuring costs and a $1.3 million inventory adjustment included in cost of goods sold. This was partially offset by a tax benefit of $5.1 million, resulting in a net negative $12.5 million impact to net income or $0.16 per share.

The total negative impact to operating income incurred in the first and second quarters was $23.9 million. This was partially offset by a tax benefit of $12.4 million, resulting in a net negative $11.5 million impact to net income or $0.15 per diluted share.

In summary, the total after-tax cash impact during the first and second quarters was $10 million. And as we have previously stated, exiting Canada will eliminate an annualized net loss of approximately $6 million.

Now turning to our balance sheet and cash flow. Our balance sheet remains healthy. Inventory at the end of the second quarter totaled $261 million, representing a 2% increase over last year, driven primarily by support for our e-commerce growth and retail-to-outlet conversions that occurred late in the second quarter.

We ended the quarter with $173 million of cash and cash equivalents, up from last year's $120 million. And year-to-date capital expenditures was $30 million, down from $50 million last year due to lower IT spending and prioritized store investments.

The final topic I want to address is our guidance for the third quarter and full year. Our updated guidance reflects adjusted numbers, excluding the impact from our Canadian exit. Our guidance assumes that sales and margins will further improve during the remainder of the year. With that overview, I will now provide the guidance details.

For the third quarter of 2017, we currently expect comparable sales to be in the range of negative low single digits, net income in the range of $5 million to $8 million and earnings per diluted share in the range of $0.06 to $0.10. In addition, we expect third quarter net interest expense to be approximately $1 million and the tax rate to be approximately 40%.

Based on the midpoint of our third quarter guidance, we expect our operating margin to contract by approximately 80 basis points, driven primarily by SG&A expense deleverage, offset partially by merchandise margin expansion.

Turning to our full year 2017 guidance, which is a 53-week year, we are affirming our outlook and currently expect comparable sales to be in the range of negative low single digits, adjusted net income to range from $32 million to $38 million and adjusted earnings per diluted share to range from $0.41 to $0.48. The full year guidance excludes the negative $0.15 per share impact incurred during the first and second quarters related to our Canadian exit. 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 EPS.

Based on the midpoint of our full year 2017 guidance, we expect our operating margin to contract by approximately 160 basis points, driven by gross margin contraction and SG&A deleverage.

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're confident in our ability to realize $20 million in savings. While SG&A drove the majority of the savings during the first half of 2017, we expect merchandise margin to be the principal driver in the second half.

In terms of capital expenditures, we're planning for $60 million to $65 million which, at the midpoint, is more than $35 million below 2016. It is important to remember that Express has a history of generating strong operating and free cash flow, and 2017 is no different. Our current guidance implies that we will generate solid operating and free cash flow.

Lastly, in terms of store activity, during the second quarter, we closed 40 retail stores, 19 of which were converted to outlets and opened 4 new outlet stores. On a net basis we reduced our store count by 17 and ended the quarter with 635 stores.

For the year, we now plan to close 58 retail stores, 21 of which are conversions to outlets, and opened 17 new outlet stores. We expect to end fiscal 2017 with 636 stores consisting of 494 retail and 142 outlet stores.

In summary, we're confident we have the right strategy and initiatives in place to improve our sales and profit trends. We're pleased with the progress we're making against our initiatives. We have seen sequential improvement from the first to second quarter and are optimistic about our prospects for the balance of the year. We look forward to updating you on our progress in late November.

I would now 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 John Morris with BMO Capital Markets.

This is Trevor Lamb on for John Morris. I was wondering, could you give us a little more color on the merch margin? I believe on the last call, you expected 2Q merch margins to be down 20 to 30 basis points. So were you guys more promotional than planned? Or was this mostly from the impact of exiting Canada? Any color there.

Yes. So when you look at the expectation that we had on the merchandise margin, I think a couple of things to call out is, we had an expectation of the merchandise being down about 50 basis points. When you look at the GAAP financial statement, it shows approximately 150 basis points. When you exclude the impact of Canada, you can look at approximately anywhere between 90 to 100 basis points of margin contraction in the second quarter, which delivered significant improvement from where we were in Q1 of 380 basis points. That contraction to the initial expectations at the beginning of Q2, it was driven by increased promotional activity based on the environment. But just to put it in perspective, we're off about 50, 60 basis points, which when you look at it on a $500 million quarter, that approximates to about $3 million off on the merchandise margin.

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

This is Doug Drummond on for Adrienne today. Just to piggyback on the merch margin thought, obviously, you're looking for a sequential improving year and actually a positive merch margins year-on-year. I guess, how -- can you help frame that given the promotional environment? And what do you expect for the upcoming quarter?

Yes, absolutely. So when you look at the midpoint of our guidance for Q3, the operating margin is expected to be 80 basis points contraction compared to last year. And part of that contraction is based on a merchandise margin improvement. And I will say the midpoint of the guidance, Q3 improvement is expected to be at about 50 basis points. That improvement is driven by the fact that as part of our $44 million to $54 million of savings, we said that we expect $20 million of savings in 2017, $10 million of which are going to be in the first half of 2017 as part of SG&A. And the latter part of 2017, we're going to see the other $10 million that is going to be in merchandise margin, driven by sourcing production opportunities. So that is the driver of the Q3 improvement as we look at it today. We're expecting approximately 50 basis points at the midpoint of the guidance.

And then, I guess, if I could just follow up with that. How are you, I guess, seeing the promotional environment quarter-to-date?

We're seeing it very similar to where it's been. We see it continuing to be heavily commercialized back and doesn't see any change. And obviously, we will prepare for that to continue.

Your next question comes from the line of Jay Sole with Morgan Stanley.

David, there's been a lot of talk about on the athletic side of the apparel business that some of the trends have been kind of not improving, getting a little bit worse in performance. Fabrics in that kind of apparel is not selling as well as it was. Is it possible that maybe there's a fashion update picture of fashion trend changing to more nonathletic looks that can be a tailwind for you as we go through the back half of this year and into next year?

No. I think the -- clearly, I don't think that fashion changes that quickly. And in terms of what you're seeing from people, second quarter results and the athletic apparel side of the business, what we do see continuing there is a continued trend in terms of performance apparel. And when I talk about performance apparel, I mean, performance benefits to the product, such as stretch, such as wicking properties, easy care, et cetera. And we see that becoming much more important in terms of sportswear and in terms of the wear-to-work side of apparel.

So I see that it's transitioning over to apparel in a bigger way, which is our area of the business. We see good reads. We're seeing some very good early reads for fall, so we're encouraged by that. But in terms of the overall shift from athletic apparel to sportswear and wear-to-work, I don't see a very quick shift.

Our next question comes from the line of Simeon Siegel with Nomura Instinet.

This is Julie Kim on for Simeon. Could you just give more color on the main factors of the SG&A deleverage in the quarter? What levels you're expecting for the back half and the main drivers there?

Yes. So when you look at the SG&A deleverage in the second quarter is driven primarily by the reduction in the comp. When you have a negative 4% comp, some aspects of SG&A are fixed in nature, and that is a driver of the deleverage in Q2.

When you look at overall the back half of the year, we're expecting SG&A to also deleverage, but not to the same extent on the deleverage in Q1 or Q2. We're expecting slight improvements in the deleverage. And as part of the improvement, it's driven by the fact that we're expecting better top line performance in the latter part of the year versus the first half of the year.

Okay, great. And then just in terms of the market expense there for the back half, do you expect to increase levels or similar levels to what you saw in the first half?

On a relative basis to the first half, we're expecting, in an absolute dollar basis, to obviously spend more in the second half than the first half in an absolute dollar basis. And as a percent of sales, we're spending more in the second half than the first half as a percent of sales, but they're not relative compared to last year. We're spending at the same levels as last year in terms of percent of sales.

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

This is Luke Hatton on for Susan. I was just wondering, how did the traffic trends compare in the second quarter versus the first quarter? And then what are your expectations for the back-to-school season in the second half of the year?

So when you look at the traffic trends, we saw improvements from Q1 to Q2, as evidenced by our performance in the overall comp going from a negative 10% in Q1 to a negative 4% in Q2. And given that e-commerce performance between Q1 and Q2 remains the same, you can easily assume that improvement in a store -- in performance overall was driven by stores. And we have seen improvements in traffic. As it relates to the latter part of the year, the second part of the year, it's everything baked into our guidance of that -- of positive low single-digit for the second half of the year. And that is assuming sequential improvements going from Q1 to Q2, and then from Q2 into Q3 into Q4. And we believe that sequential improvement will come, driven by our initiatives that we have in place, mainly the relaunching of our brand campaign, as well as the NEXT loyalty program, the customer touch points and everything that David has described during his prepared remarks.

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

I wanted to ask about the store footprint optimization program. Just wanted to know if you could quantify at all the term of meaningful reduction when it comes to occupancy costs. And just also, is that related to malls that are specifically lost in anchor, and so there was some type of trigger in co-tenancy clauses? Or is the reduction in occupancy costs something that you're actually able to achieve on the majority of the fleet that comes up for lease renewal?

Paul, this is David. What I'd say is, look, we've signed a broad mix of renewals in 2017 across all tenants and all mall tiers. The percentage of reductions vary by mall and by tenant, but they're generally reflective of what is an overall challenging retail environment. I can't be specific in terms of meaningful, of what that means, but what we're seeing is generally across more peers and across landlords.

In terms of the timing, we'd expect to see a rent expense decline in 2018, driven by the anticipated reduction in square footage that we have executed in 2017, which also includes the Canadian exit and the lower rent that we're currently executing.

That's helpful. And just to follow up on that, you've obviously continued to close doors, 40 here in 2Q and a number over the past few years. What are you seeing in terms of recapture of those sales in other nearby stores or online in those ZIP Codes? Or are you finding a scenario where your e-commerce business actually decreases in those areas once you no longer have a store present?

So a really good question, Paul. What we have said in the past is, what we're typically saying is 25% to 35% volume transfer in either in nearby locations or on the online business. That percent varies practically depending on the density of the market and the nearby stores and the e-commerce presence. So we've seen a broad variety of performance when we have closed stores.

And again, the factors that makes a difference is how many stores we have in a nearby location and the strength of the e-commerce business. In some instances, where we have lower stores nearby, we see a much higher volume transfer to the nearby location and less on the online.

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

I just wanted to better understand the differential between the stores and web performance. I mean, obviously, you're seeing some great e-commerce strength. And you mentioned in part, that comes from things like extended sizes, like in petites. But I'm just wondering if you could talk to any other categories or trends that are particularly strong on the web versus stores.

Roxanne, look, I think that the most important message here is that we recognize that our demographic is spending much more time online, and we're seeing the consumers shifting to online. And that is primarily the reason. The e-commerce, I would say, benefited from being able to communicate a stronger and clearer marketing and merchandising message. As you said, it benefited from expanded sizing and assortments, particularly in women's, and we also saw great growth in terms of mobile traffic and mobile transactions as well.

Men's growth was obviously not as high as the women's. But we have put plans in place, and we obviously see an opportunity to extend the aisles of our stores, so to speak, through our website and to be able to drive significantly increased sales. And we see that the opportunity continues for the balance of the year and into 2018 to continue double-digit growth online.

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

Congrats on the improvements. So I mean, outstanding digital growth. Can you talk a little bit about your ability to take advantage of that? I guess, what percentage? Or do the majority of the consumers return products to store? And are you able to convert those to sales? And have you trained your salespeople to convert them and maybe upsell them when they come in the store?

Yes. I think that's a big opportunity for us going forward, particularly with the buy online, pick up in store for us to be able to upsell. But clearly, it's an advantage of having a reasonably large store footprint that we are able to create essentially in our stores a 3-dimensional website in bricks and mortar. So going forward, you're going to see that more and more. We want to test buy online, pick up in store. And as I said, that's going to happen very soon in a small number of stores, and we see the potential to be able to roll that out in a big way going into 2018. But it's really all about creating the seamless experience for the customer, whether it's online, whether it's in-store, and that's the way in which we're going forward. We've made great progress with our app. And the convenience, the way in which the customer can shop with us online, has improved massively over the last 18 months. So I see that continuing.

Do you see most of your returns coming to store or most of them ship back to the warehouse?

This is Matt. We see significantly more of the online orders return to stores than going back to the warehouse. And to your point, that is definitely an opportunity for us to convert those customers when they come back in, either to sell new products or exchange our products form immediately. So we believe that is certainly a competitive advantage versus pure-play online retailers. And we are continuing to work on the customer experience to make that even more of a seamless experience for the customer when they come in with those returns.

Your next question comes from Janet Kloppenburg with JJK Research.

I was wondering if you guys could talk about the strategy you have in place to improve the store performance, maybe some engagement events or whatever to help traffic there. And David, on the clearer fashion stories that you want to present, I'm just wondering, do you feel like you're there? Do you feel like you'll complete that? Or do you think -- feel like that's a project that will be completed later in the third quarter? And if you could also comment on what seems to be a bottoms trend of the expensive dresses, and how you think that may impact your business.

Okay. So I think that was 3 questions there, Janet. I'll start with the last one. In terms of the bottoms trend, yes, our bottoms business is very good. I think that there's a big opportunity for us going into September, October with the back-to-school -- sorry, with the wear-to-work period becoming obviously more important.

Sorry, there's a lot of feedback on our line here, Janet. Could you mute?

Okay. Sorry. So we see that as a big opportunity for us going forward, particularly with our strength in the wear-to-work category and knowing that we're coming in September. And so we see that actually with upside potential.

Your second question was in terms of the clearer fashion stories. I think that by rationalizing our choice count, it's enabling us to tell clearer stories. It's something that we've been focused on for the past year to reach this point. We have our choice count under control. And as we get into holiday, I think that the beauty of what you're seeing online will be much clearer as you see it in stores, as I talked about the stores are an opportunity for us to be able to create a 3D website. And part of our marketing and part of our signage and communication is very much around that, and it's getting stronger as we get further into the fall season.

And then I think your first question was around, what are we doing in stores in terms of elevating the customer experience? So there are a lot of things that we're doing, and I think that part of what I talked about so far in terms of clarity of message is an important way in which we can improve it for the customer. So whether it's navigation, whether it's price point library, whether it's the signage in-store, brand communication, all of those kinds of things are really helping us in terms of elevating the customer experience. Having said that, the virtual merchandising of the stores is another way of improving the customer experience, simplifying the buying process for the customer.

So things like being able to check out with mobile devices in-store, which we've expanded in a big way. The customers being able to check out where they see an associate as opposed to going to the cash rep is another way. I think our operational effectiveness in terms of in-store processes is helping us improve the customer experience. And then, also, as Matt mentioned, the ability for the customer to be able to make easy online returns and for us to be able to upsell in a bricks-and-mortar environment is another way.

So I think that there are a lot of other things that we're looking at in terms of elevating the customer experience in-store, which I don't want to go into at the moment for competitive reasons. But we're clearly on it, and we are doing everything that we can in terms of trying to ensure that the experience in-store is a great experience for the customer and builds the brand in their mind.

David, I have one last question on the -- what have you said the categories of women's that were doing better: pants, shorts, denim, and I'm missing something?

I said pants, shorts, denim and swim, which is obviously a smaller category. And that was in terms of the Q2 results.

Our next question comes from the line of Rebecca Duval with Bluefin Research Partners.

Congratulations on the progress. My question is -- so when you're -- as you're kind of thinking about this omni-channel capabilities and the ramp-up of this, I know you have online exclusives, do you have any in-store exclusive merchandise that you would be able to kind of turn on to your online to offer that to the consumer? That's my first question.

And then just if I can quickly ask. You talked about men's, David. Is it more of an online assortment expansion? Or are we going to see kind of revamped merchandising efforts there?

In terms of men's, what you're going to see is a greater expansion in terms of the online assortment, increased number of choices, style. And that's what's really, as we're seeing, starting to see making the difference in terms of the men's business.

In terms of on -- sorry, in-store exclusive versus online exclusive, it's not something that we're really looking at, at the moment. And I think that it's really in-store. It's about elevating the experience for the customer. That's the biggest way in which we can make that difference.

Sorry, if I could just clarify it. So you don't have any in-store-only products? And if you do, would -- my question really is, as you're kind of going towards this more omni seamless channels inventory, would you have the ability to kind of turn that on? So if you have something that's in-stores, kind of turn it on to your online environment.

Well, then if you put it in the online environment, it wouldn't be an in-store exclusive.

So yes, everything in our store is also available online for the customers to purchase.

Yes.

Okay. There's no in-store exclusives? Great.

Yes.

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

Most of my questions have been asked and answered. I just have one. I want to make sure I'm thinking about this right. Implicit in the current-year guidance and the initial guidance for the third quarter is a positive comp in the fourth quarter in the range of roughly 2% to 5%? Perry, I want to make sure I'm thinking about that right. And if I'm not, if you could tell me where I'm wrong?

Yes, what you're getting is at the midpoint of the Q3 guidance. And let's call it a negative 2%. In order to achieve the low single digit for -- the negative low single digit for the year, you're looking at a positive low single-digit in Q4. That's how you need to look at that. And then if you're going to look at it between first half and second half, the second half is a positive low single digit. I think the differentiation in Q4 and the second half is just Q4 is slightly better because of the sequential improvements that we expect from Q3 to Q4.

There are no further questions. That does conclude our question-and-answer session. I will now turn it back to your President, David Kornberg, for closing comments.

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

This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time.