Express Inc (EXPR) 2017 Q3 法說會逐字稿

Greetings, and welcome to the Express Third Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

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

Thank you, Melissa. 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 the 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 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 on 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.

Our country has been impacted by a number of natural disasters and unfortunate events that have weighed heavily upon us all. As an organization, we provided help and support to many associates within the Express family affected by these tragedies. Our people are of major importance to us and are paramount to our brand.

I am proud of the resilience those affected have shown, along with their ability to manage through adversity. I would also like to thank our local teams for their tremendous effort and leadership in the face of these challenges and the broader organization for providing donations to support both our associates and other relief efforts.

Approximately 16% of our stores were directly affected by hurricane activity in the third quarter, resulting in temporary store closures that negatively impacted net sales and earnings by approximately 1% and $0.02 per share, respectively. Even in these difficult times, we worked hard to maintain our momentum.

Our third quarter results came in at the top end of our guidance when excluding the hurricane impact, demonstrating that our holistic approach to driving improved sales and profitability is gaining traction in a transformative retail environment.

Comparable sales of negative 1% continued to sequentially improve and were unaffected by the hurricanes, consistent with our comp methodology that removes temporary store closures. EPS was $0.08 and included a negative impact related to the hurricanes of approximately $0.02.

Some of the key highlights in the quarter included: another outstanding performance in e-commerce with sales increasing 23% on top of 15% growth in the same period a year ago; further sequential improvement in our retail stores' performance, driven by merchandise that resonated with our customers and greater clarity in our fashion message; significant enrollment growth in our NEXT loyalty program with customer sign-ups already achieving our 2017 targets; initial success from our expanded omni-channel capabilities, including positive sales contribution from ship from store and the pilot launch of buy online, pick up in store; and lastly, we strengthened our balance sheet by improving our inventory position and ended the quarter with $198 million in cash, up significantly year-over-year.

In terms of merchandise, our women's business was led by knit tops, denim, pants and jackets. I am pleased to note that woven tops turned the corner in October and finished the quarter on a positive trend. And sweaters and outerwear have improved significantly as we moved further into the fall season.

Our men's business performed slightly ahead of women's, led by suits, casual pants and accessories, along with sequential improvement in shirts and denim.

So we're pleased with the progress we're making towards returning our business to growth. Our third quarter results showed solid sequential improvement, and we enter the important holiday season with positive momentum.

In the fourth quarter, we expect to drive further improvement in our performance with a return to positive comps and year-over-year earnings growth.

The basis for our optimism is the progress we're making against our key initiatives, which I will now discuss in more detail in the context of our strategic objectives, which are: to improve profitability through a balanced approach to growth, increase brand awareness and elevate our customer experience, transform and leverage IT systems and invest 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 investing in areas of the business that offer the greatest potential return on our investment.

Growing our e-commerce sales, expanding our omni-channel capabilities and optimizing our store footprint continue to be our primary areas of investment focus.

E-commerce sales increased 23% in the third quarter and represented 24% of sales, up from 19% last year. Growth was driven by increased online traffic and conversion and was balanced across our women's and men's assortments. Year-to-date, e-commerce sales have increased 26%, which puts us well on track to reach $500 million this year.

At this pace, we expect e-commerce sales will exceed 40% penetration of our total sales within the next 5 years. We see this as a meaningful opportunity for the Express brand and our continued relevance well into the future while recognizing it represents a significant transformation in how we engage with our customers and support their diverse shopping preferences.

We, as a leadership team, have spent considerable time aligning our strategic initiatives to support this ongoing transformation of the brand. Along these lines, we will continue expanding our omni-channel investment and capabilities while also optimizing our store footprint.

During the third quarter, we successfully expanded our ship from store capabilities to 150 stores. We are pleased with how this has demonstrated our ability to drive incremental sales.

In addition, we are also gaining important learnings regarding the opportunity to drive inventory productivity and reduce markdowns. These include utilizing ship from store to clear through e-commerce exclusive items returned to stores and redirecting the fulfillment of e-commerce demand to stores to leverage store inventory.

We expect the contribution from ship from store to build in the fourth quarter as we continue to learn and adjust our processes and have a more significant impact in 2018 when we expand the capability to a majority of our retail stores.

We are also optimistic about the potential of buy online, pick up in store, which benefits customers by providing them quicker access to the product and benefits us by driving additional store traffic and another opportunity to engage.

We launched the pilot in a small number of stores during the third quarter and are pleased with the early results. We plan to expand this capability in 2018.

Our omni-channel strategy hinges on us having the right locations and brand exposure to serve our customers when, where and how they choose to shop. We will continue to take a holistic approach to managing our store footprint, recognizing a future where demand across channels is more balanced.

As we have outlined in the past, we are exercising financial discipline and making progress in improving the economics of our stores through three primary areas.

First, we are seeking significant occupancy cost reductions and greater flexibility in lease terms and are expecting to see benefits from our efforts in 2018.

Second, we are closing underperforming stores where the future economics no longer make sense. We have constructed a flexible real estate portfolio and have demonstrated the ability to transfer a good portion of closed stores' volumes to nearby locations or e-commerce.

And third, we are converting a select number of lower-volume retail stores in B and C malls to the Express factory outlet format. We have converted 21 retail stores to outlets so far in 2017 and have seen a significant improvement in the productivity and profitability of these stores. In the fourth quarter, we will convert three additional stores.

We also remain focused on managing costs across our entire business. We are on track to achieve our overall $44 million to $54 million cost-saving initiatives, which does not contemplate the benefits from any of the store actions I just discussed.

Turning to our second objective, increasing brand awareness and elevating our customer experience.

In 2017, we have successfully executed against our key marketing and customer initiatives and are beginning to see positive returns.

The relaunch of our NEXT customer loyalty program has been highly successful. Customer sign-ups are up significantly year-over-year and have already achieved our 2017 target. We believe that this positions us well to drive improved results for the remainder of the holiday season and into 2018. This continues to be an important and ongoing initiative for us.

We are also seeing continued momentum in social and digital engagement. We have increased our content creation capabilities and expanded our partnerships with fashion influencers. Our efforts are beginning to drive positive results, which we expect will continue in the coming year.

We are also working to expand our men's awareness and know that our partnerships with professional athletes in the past have proven to be effective.

Last month, we launched a league-wide marketing partnership with the NBA, where our Game Changers campaign will highlight the role that fashion and Express' lifestyle offering plays in the daily lives of four young, up-and-coming NBA stars playing in four key U.S. markets. We will leverage the campaign across all of our channels.

We are excited and optimistic about this new partnership and its potential to drive men's brand awareness and customer acquisition in the coming year.

For holiday, our campaigns build on our new brand architecture focusing on our fashion authority, along with the individual style, authenticity and self-expression of our customers. Express brand ambassador Karlie Kloss and several other exciting young artists project the key fashion stories to help our customers be their best selves this holiday season.

Our third objective is transforming and leveraging our IT systems. As I previously mentioned, in 2017, we launched important omni-channel capabilities, which are off to a great start. We expect their contribution to build in the fourth quarter and to have a more significant impact in 2018.

We also continue to invest in digital transformation and personalization, which enables us to target customers with greater precision through our digital marketing as well as on our website and mobile app. We have seen positive results in the areas where we are using it and will expand our efforts in 2018.

Finally, our fourth objective is investing in the growth and development of our people. We are committed to supporting our people and ensuring that Express remains a great place to work and grow. We will continue to evolve our high-performance culture to attract outstanding talent and to ensure that it aligns with the changing dynamics of our business.

In summary, we are pleased with the progress we are making towards returning our business to growth. Our third quarter results demonstrate that our initiatives continue to gain traction, and our 26% year-to-date e-commerce growth validates that Express remains a highly relevant brand. We will continue to manage our capital structure in a way that appropriately balances our business needs with our commitment to delivering long-term value to shareholders. In line with this goal, we announced in today's earnings release that our Board of Directors has approved a new $150 million share repurchase program.

Before closing, I would like to comment briefly on our recent business trends. Our performance during the month of November, including the recently completed Black Friday week, is contemplated in the guidance we have provided for the fourth quarter. While the majority of the quarter is still in front of us, we believe we have the right assortment and marketing plan in place to continue our quarter-over-quarter sequential improvement.

I want to thank everyone at Express for their dedication and relentless effort in executing against our key initiatives in 2017. Together, we have done great work to position the business to succeed during the holiday season and beyond.

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

Thank you, David. Good morning, everyone. I am going to start by reviewing the third quarter results, and then I will discuss our fourth quarter and fiscal 2017 outlook.

During the third quarter, we saw further sequential improvement across most of our key metrics.

Third quarter net sales were $499 million, a 1% decline from last year.

Comparable sales, at a negative 1%, showed further sequential improvement, highlighted by 23% e-commerce sales growth and better relative store comps of negative 7% versus negative 10% in the second quarter.

Comparable sales did not include the impact of hurricane activity in the third quarter, which is consistent with our methodology. However, we estimated the hurricanes negatively impacted total net sales by approximately 1%.

Merchandise margin increased by 30 basis points versus last year driven by sourcing-related cost savings, partially offset by the highly promotional environment.

Buying occupancy expenses deleveraged as a percentage of sales by 50 basis points. This was a relative improvement from the 120 basis points of deleverage experienced in the second quarter. As a result, third quarter gross margin rate was down slightly at 29.8% compared to 30% last year.

We continue to manage our expenses effectively. SG&A expenses were up slightly year-over-year due to wage inflationary costs and incentive compensation. As a percentage of sales, SG&A deleveraged by 60 basis points to 27.6% of sales.

Operating income was $11.2 million or 2.2% of sales, and included restructuring costs of $300,000 or a 10 basis point impact.

Now turning to earnings. As a reminder, it is important to remember that last year's third quarter EPS of $0.15 included a $0.04 net tax benefit, driven by certain discrete tax items. This year's third quarter EPS of $0.08 includes a negative impact related to the hurricanes of approximately $0.02.

Now turning to our balance sheet and cash flow. Our balance sheet remains healthy.

We improved our inventory position, which was essentially flat year-over-year, at $343 million. We are comfortable with the level and composition of our inventory heading into the important holiday season.

We ended the quarter with $198 million of cash and cash equivalents, up from last year's $102 million. Our cash balance and third quarter operating cash flow benefited from $20 million received as part of our recently amended private label credit card agreement, which was disclosed in our second quarter 10-Q.

Year-to-date, capital expenditures were $42 million, down from $81 million last year due to lower IT spending and prioritized store investments.

The final topic I want to address is our guidance for the fourth quarter and full year. Our updated guidance reflects adjusted numbers, excluding the impact from our Canadian exit. It is important to note that while we have narrowed our full year adjusted EPS outlook, which includes the negative EPS impact related to the hurricanes, we are affirming our previously implied fourth quarter guidance.

With that overview, I will now provide the guidance details.

For the fourth quarter of 2017, we currently expect comparable sales to be in the range of positive low single-digit, net income in the range of $32 million to $35 million and earnings per diluted share in the range of $0.40 to $0.44.

As a reminder, 2017 is a 53-week year with the extra week included in the fourth quarter. We expect it to represent approximately $28 million in net sales and $0.04 in diluted EPS. In addition, we expect fourth quarter net interest expense to be approximately $300,000 and the tax rate to be approximately 40%.

Based on the midpoint of our fourth quarter guidance, we expect our operating margin to expand by approximately 200 basis points, driven primarily by gross margin expansion, offset partially by SG&A expense deleverage. Similar to the third quarter, we expect higher SG&A expenses in the fourth quarter due to wage inflation costs and incentive compensation. On an absolute dollar basis, SG&A expenses will increase due to these items, plus the impact of the 53rd week.

Turning to our full year 2017 guidance, we currently expect comparable sales to be in the range of negative low single digits, adjusted net income to range from $34 million to $37 million and adjusted earnings per diluted share to range from $0.43 to $0.47.

The full year guidance excludes the negative $0.15 per share impact incurred year-to-date related to our Canadian exit. We expect net interest expense of $2.5 million and a tax rate of approximately 40%.

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 are confident in our ability to realize $20 million worth in savings in 2017 and remain on track to deliver a total of $44 million to $54 million of annualized savings over the 2016 to 2019 period.

In terms of store activity for the year, we plan to close 61 retail stores, 24 of which are conversions to outlets, and open 17 new outlet stores. We expect to end fiscal 2017 with 636 stores, consisting of 491 retail and 145 outlet stores, which is down 20 stores from the end of fiscal 2016.

In terms of capital expenditures, we plan to spend $58 million to $63 million in 2017, which is nearly $40 million below 2016.

Express has a history of generating strong operating and free cash flow, and our current guidance implies a similar outcome in 2017.

As a result, we are pleased that our Board of Directors has approved a new $150 million share repurchase program. We intend to be thoughtful in the execution of this new program, which gives us the flexibility to be opportunistic in repurchasing our shares in the future.

In summary, we remain confident in our strategy and continue to believe Express has a bright future. We are optimistic about our prospects for the balance of the season and beyond. We will continue to invest in our e-commerce and omni-channel initiatives while further optimizing our store footprint, and we will continue to align our strategic initiatives to support the ongoing transformation of our business. We look forward to updating you on our progress in 2018.

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.

Maybe talk, Perry and/or David, a little bit more about the outlook for the product costs and the savings that you've been getting. As we go forward into next year, how much longer can we continue to expect some of that improvement and good work that you guys are doing there? Certainly seen the contribute in the current quarter. And then, David, maybe talk a little bit about the marketing plans, I guess. As you see them going into next year, I think this new partnership with the NBA sounds interesting. I'm wondering what it -- in total marketing spend, you might be looking at on a go-forward basis.

Okay, John. To your first question, in terms of looking at the outlook of product costs into next year, obviously, our team here has made great progress. We have very strong relationships with our suppliers. And we've learned a lot over the last few years, through the growth of the Express factory outlet business, in terms of other countries of origin, other places where we can manufacture, and that has clearly benefited us this year. There is still ongoing work. It is not something that is a one and done. We're constantly looking at ways in which we can speed up production, ways in which we can improve our product costs, and I see that continuing into next year and also beyond.

I think that we had concerns in the past in terms of going into some of the countries that we're working with. But a lot of progress has been made in those countries, and we feel very comfortable with it. And what we've seen this year is that there has been no detriment to the quality of the product that we've delivered, and there's been no delay in the product that we have delivered to our stores. So overall, we're very happy with the moves that we've made, and we will continue along that path into next year.

In terms of marketing plans, you mentioned the NBA. We're very excited about that partnership. As I said on the call, on the prepared remarks, it's a great way of expanding the reach for the men's business and also for increasing customer acquisition. We know that the NBA reaches most millennial males and actually has more millennial fans than any other sports league out there, and so we're excited about it. The players that we're working with, Brandon Ingram, Denzel Valentine, John Collins and Jamal Murray, are all up-and-coming players who are new to the game, who reflect the values of Express, who are everyday achievers, who are looking to get to next in their career. And we see that it's a fabulous partnership.

As we go through the balance of the year, I'm not in the position today in terms of talking about some of the marketing plans that we have. But I believe that the work we've done this year has really helped us in terms of customer acquisition and retention, in terms of building the NEXT program. And I think that what we have created is a very, very clear format and brand architecture that we can carry into the future.

Okay. David, the -- it seems like the men's business has had some pretty nice improvement after a slower spell, and I'm wondering if I'm reading that correctly and what might be behind that. And then I'll turn it over to the rest of the...

Ultimately, it's about product. And as we always say, everything starts with product. And I think that what we've done in men's, and we're also doing in women's is, we are driving much better key items. We are doing better fashion storytelling. A lot of the men's dressier products has been doing particularly well, suits, which has done very well and continuing growth on top of growth, and we see that continuing. The other thing is we've seen a turnaround over the last few weeks in terms of men's shirt business, which has also gotten a lot better. So I think it's about the clarity of the assortment. I think it's the fashion storytelling. But above all else, it's having the right key items that can drive the volume.

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

Just wanted to follow up on the product question. On the women's side, I'd be curious to hear the same thing, a little bit more color on what it is that's been -- seeing the most improvement within third quarter and into holiday and what categories still represent an opportunity for improvement.

What I would say is the same ideas, the same story. It's -- really, it's about having the right key items that can drive significant volume. We talk a lot about the few that can drive the many. But in addition to that, it's also having the right fashion items, and it's about having the right fashion storytelling and the clarity of that storytelling in-store and online. And as you look at it in terms of the categories and the performance, we had a great quarter in dressy pants, really, really great quarter in dressy pants. We had a very good quarter in denim, also in knit tops and in jackets. So predominantly, it was really the wear-to-work side of the business, but we've also, as I said, in terms of knit tops and denims, seen progress on the casual side of the business as well.

Great. And when you think about the categories that are most important for holiday, I would think sweaters has maybe become a little bit more important. How are you feeling about some of those more seasonal and gift-giving categories?

I feel very good about them, very good, indeed. And sweaters got off to a slightly tougher start to the season. But as we move further into the fall, it has been very good, indeed. So pleased with the sweater performance, pleased with the outerwear performance as well.

Okay, great. And then just a follow-up on the NEXT program and maybe the impact. You said that you're seeing a nice healthy lift in the number of sign-ups, which is great. I'm wondering if that ended up having a positive impact on either your number of transactions sequentially this quarter or -- and/or on your conversion metrics.

So what we did see was we saw an improvement in conversion in the quarter. As you look at it and you look at it in -- online, all of the metrics were positive, and all were very, very good indeed. Really, the wild card, as we talked about for a while, has been in terms of store traffic, which was down slightly.

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

Just to continue the conversation on comps, and I appreciate the color you've given in terms of category performance already. But just in terms of the inflection here in the fourth quarter to positive comps, maybe just discuss a little bit more detail of how you expect that to be balanced between stores and online and also how you're thinking about traffic versus AUR and conversion. And any other color you could provide around what you saw in these first few weeks of November would be helpful.

We -- Paul, we don't talk about intra-quarter details, and I think that the color that we've given you is the color that I gave you on the prepared remarks in terms of our performance over Thanksgiving. And I think, overall, the key message is that we're pleased with the progress that we're making towards returning the business to growth. In terms of the actual metrics we're seeing in AUR and ADS, I can't go into that detail, and I also can't go into it by segment either for what we've seen quarter-to-date.

Fair enough. So on the margins, do you see an opportunity for merchandise margins to be similar or potentially outperform 3Q results in terms of this fourth quarter? And on buy-in and occupancy, in 3Q, I believe you deleveraged by about 50 basis points. Just wanted to -- a little bit of help on how to think about that line, generally speaking. I can certainly look back at prior periods, like in first quarter of '16, for example, when you were able to put up better results on worse comps. If you could just kind of help us think about the puts and takes there.

Paul, thank you for the question. I think you have a few part question over there. First of all, from a merchandise margin standpoint, you've asked the question on how to think about that in terms of our Q4. We've seen improvements in Q3, and we were expecting to see some improvements in Q3, as we stated in the Q2 earnings call.

In Q4, we're expecting to see more of an improvement in the merchandise margin, driven by the fact that as we start the initiative of the sourcing and production and low-cost initiative countries, we expect more of that to take effect in Q4 versus Q3 based on timing of deliveries. And obviously, we expect that to continue into Q1 and Q2 of next year in terms of those savings flowing through. And as David mentioned earlier, we're going to further look for opportunities to improve the cost structure there.

As it relates to B&O and in Q3, our B&O deleveraged by 50 basis points. There are a couple of things to keep in mind from a B&O standpoint. One is, the fact that, from a hurricane standpoint, that impacted the top line sales by approximately 1%. And you have certain fixed costs within the B&O side, such as your depreciation and rent, that they don't flex with the sales, and that negatively impacted the B&O in Q3. In addition to that, the other thing to keep in mind is, with the robust growth of e-commerce growing 23% in Q3, moving from 19% of net sales to last year's Q3 to 24%, e-commerce has a lot of variable costs. And as such, it impacted the B&O. So as we look at on a go-forward basis, again, the B&O will be impacted, whether we leverage or deleverage, based on the mix of stores and e-commerce. But as we said previously, we expect to start getting robust rent concessions starting with the beginning of 2018. That can obviously help offset the impact from the shift into e-commerce.

Our next question comes from the line of Susan Anderson with B. Riley FBR.

I think you had mentioned that store traffic was down slightly in the quarter, which relatively actually seems pretty good. Wondering if you can maybe talk about the trends there over the year. It seems like it probably has improved. And maybe give some color on what you think is driving that improvement. And then also on the traffic front, just wondering if you're doing anything special over holiday to drive traffic into the stores after Black Friday. I know some retailers are doing some new things such as maybe offering coffee or in-store only products or other incentives.

I think as I said before, it always starts with the products in terms of being able to get the right level of traffic and having the right key items, the right fashion items and the right storytelling and the right message and the right marketing. And when you put all of that together, the expectation is that what's going to drive it.

I think we've done a lot of work, as we talked about earlier, in terms of the new brand architecture, the work that we're doing in digital and social. I think that the new NBA partnership that we have is going to be a driver as well. Some of the work we've done around omni-channel capabilities are going to continue to help us in terms of traffic. But above all else, it all goes back to the product, and that is what's going to really make the change in terms of the traffic that we see in the store.

Obviously, there is an overview of store traffic that everybody's heard about from all the other calls that has been going on for the last few years and the decline in mall traffic that we've seen, and we have been a part of that. But we've got to control what we can control, and it's about putting out the best product that we can put out there with the right emotional, functional and technical benefits that resonate and appeals to our customer.

Great, that's helpful. And just one last one, if I could stay then, on the omni-channel initiatives. I know you talked about last quarter. You felt that they were going to be a big part of the improvement in sales for third quarter and going forward. Maybe if you could just give some color on kind of the impact there, how you saw it help to drive sales in the quarter and just kind of expectations going forward.

Yes. So this is Matt. Obviously, as we've talked about, we've rolled out the ship from store initiative to 150 stores. That helps us in a few different ways. One, it helps cover any out of stocks we see on the e-commerce website. It also has opportunity for margin improvement, over time, as we get the algorithms refined and really alleviate pockets of dead inventory within the stores. So we are very excited about what we've seen to date in the omni-channel arena.

We're also piloting buy online, pick up in store. But ship from store alone, we don't give out the exact impact of it, but it has contributed to the success to date. The really exciting news is it's only in 150 stores today, and we plan on rolling that out to the majority of the fleet in 2018, and we've just started piloting in 3 stores, buy online and pick up in store. We think that has huge opportunity for us as well, and we're going to refine that process within the stores and then start to roll that out later in 2018 as well. So there's a lot of big upside opportunity to come there, we believe.

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

So you had mentioned about the lease negotiation opportunity in the marketplace. Can you just give us any insight directionally if it's easing anymore or what you're seeing out there?

So Pam, as it relates to the leases, what we've said and what we have been saying is that our ability to negotiate and get rent concessions has improved sequentially over the last 9 months to a year. And we continue to see those negotiations maintain the same type of rent concessions. So we're very pleased with what we're seeing, what was in the expectations of what we're expecting over the last few months, and we're going to continue to look at opportunities to both get the rent concessions as well as maintain highly flexible store fleet.

Great. And then a follow-up with the real estate. When we think about the stores that you're converting from full line to outlets, so the ones that are in the B and C malls, is there anything that you could talk about with the economics there in terms of how much it costs or how long the stores are down for? And then when we think about -- and then ultimately, where you end up and how that helps. And then can you talk about the opportunity for next year, both in terms of potential new outlets within more traditional centers as well as ongoing conversions within malls?

Yes. So from an outlet standpoint, when we convert retail stores to outlets, the downtime is less than a week. The investment that we have in these conversions is pretty minimal, and it has to do mainly with just replacing a sign on top of the store. As it relates to what we see out of these conversions, we see a significant improvement in the top line results and also significant improvement because of the top line to the bottom line results. Now in some instances, some of the stores that we convert are at lease expiration, not only we get the top line improvement on the results but also get rent concessions. In that case, as I said earlier, we maintain highly flexible store fleet, and therefore, we only commit ourselves to maybe 1 or 2 years out.

In the cases that we convert some stores before the lease expiration, then the improvement is pretty much the top line and the margin flow through on the top line. So we see really nice financial results out of these conversions.

As it relates to 2018, we're planning for some more outlets in 2018, both in new and conversions. We're evaluating, obviously, our fleet, and we're going to discuss further as to the specific plans during our Q4 call.

And then if I could just ask last question, just your thoughts on the competitive landscape overall for holiday and how you're planning that within -- I think you made it very clear that you're happy with the direction, that the product is improving, and that's drawing the customer online and in stores. But can you frame that for us relative to what we're seeing out there overall?

Sorry. So you're asking in terms of what we're seeing...

Just how you're planning inventories, reflecting the competitive landscape, your thoughts on promotional activity, just given that it's still -- we've heard some positive early signs out there regarding Black Friday and Thanksgiving weekend, but we still have a while left and retail still is not healthy as it once it was.

I think in terms of our inventory positioning, we are happy with where the inventory is positioned going into the quarter. I think that our sales-to-inventory spread is at a good place, and our plan going forward is to ensure that our sales are always ahead of our inventory.

In terms of what we're seeing for the balance of the quarter and going into the Christmas timeframe is that it is going to be promotional. It has been promotional for many, many years. We're prepared for that. We built that into our cost base. We built it into our promotional plans, and we're ready for it.

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

Just a couple -- 2 questions in relation to the third quarter results and then a couple on the go-forward outlook. Could you quantify for us the hurricane impact on the gross margin rate? Gross margin improved a little bit less than I was expecting, so I'd love to know what impact you thought came from that outside events. And then, Perry, I know that inventories are -- I think you said they're flat. What are they on a comparable square footage basis? That would help a lot. And just on the go-forward, David, do you -- I think you said men's outperformed women's. Do you think that -- and then women's can comp positively in the fourth quarter, given what you're seeing in the trends in the women's business. And just sort of to frame out to work a little harder on Pam's question. I was just wondering, with your inventory situation and -- being better and trends being better, if you thought that Express could be less promotional in the fourth quarter year-over-year.

Okay. That was a lot of questions, Janet. I think the one I'll answer first is the question about whether women's can comp positive in the fourth quarter. That's our goal. We don't break out by segment in terms of what the comps are. But we've guided to a positive low single-digit comp for the business for the fourth quarter, and that's what we intend to achieve. So I can't break out whether women's will be ahead of men's or men's will be ahead of women's. But the goal is the comp, and the comp that we've guided for is a positive low single digit.

And on the promotional outlook, could it be given that -- I mean, it was pretty good operating margin guidance from Perry. I mean, that should translate to potentially lower promos, no?

I think we are prepared for whatever we're going to see out there for us to be able to take on the landscape. Obviously, our hope is that it will be less promotional.

Okay, great. And Perry, on the 2 items related to the third quarter?

Yes. And Janet, you asked the operating margin improvement that we're guiding to, and I wanted to provide a little bit more color to that.

One thing to keep in mind is we have the 53rd week. Now the 53rd week with extra volume gets to leverage rent and depreciation. So out of that 200 basis points, on a 53-week, if you were to look at it on a 52-week basis, the 53rd week has a 50 basis point impact on Q4 as a benefit to that 200 basis points improvement. So that's one.

Two, we're expecting improvements in merchandise margin. As mentioned earlier, we're expecting these improvements driven by sourcing and production savings, especially as -- based on the timing of the deliveries, we expect a lot of those savings. I mean, we saw some in Q3. We expect more of those to come in Q4 based on how we positioned that inventory.

Moving to the hurricane impact in Q3. The top line impact on hurricanes was approximately 1%. When you adjust for that, the gross margin was impacted by about 20 to 30 basis points negatively because you didn't have the sales on the expenses. And then as it relates to the inventory, when you look at the November B&O inventory or the Q4 B&O inventory, our inventory was slightly up. And when you look at it on a per square foot basis, it's, in essence, relatively flat.

(Operator Instructions) Our next question comes from the line of Adrienne Yih with Wolfe Research.

David, can you talk about sort of -- we always look at sort of these silhouette shares and kind of over a multiyear horizon. Last year, we were sort of in that early adoption cycle. Where do you think we are kind of late early adopter, kind of getting into more of the maturation phase? And how long could it last? And then, Perry, could you actually give us the year-over-year change in the AUC? It's obviously the first time it's been called out. Does it get increasingly better in the fourth quarter, as you said? And can we expect that to continue throughout 2018?

I think we are starting to see a shift in bottoms, clearly, towards wide legs and more volume, and I think that it is really very much at the beginning. But when you look at the performance that we've delivered in dressy pants, and we are a destination in dressy pants and the market share leader in dressy pants, it would say that the customer recognizes it, and they're responding to the fashion and the newness that we are delivering in that category. In terms of the timing of how long it can last, look at it, skinny pants lasted 10 years and also continue to be very good. I think, ultimately, the decision is going to be the customer's decision how long that lasts. But we've got to be prepared to be able to drive as much volume as we can throughout that trend. But we're clearly into that change and we're seeing the response in a lot of our key categories.

Adrienne, to answer your question on the AUC, we don't provide specifics on the AUC. But I will tell you, the improvements that we've seen from sourcing and production obviously have benefit on the AUC, and we are expecting this AUC benefit to continue at least in the first half of 2018, as stated, as part of the $44 million to $54 million of annualized savings. And then beyond the first half of 2018, we expect that we're going to continue to look for opportunities to further improve sourcing and production in the AUCs. And again, as a reminder, some of the AUC is impacted also by mix of product within the categories, of course. That's why we don't break out the AUC specifically.

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

I just have one follow-up on the men's side because nice performance there, and I was curious if you can just give a little insight as to how well the Performance suits were doing. You had a really strong presentation in stores with the Performance stretch suits, and I thought they looked fantastic. And then if you could just talk -- your social media has been very strong, and I'm curious if you guys are able to track. Are you seeing new customers come in because of the social media? And is she entering the brand through fashion? Or is she entering the brand through denim and wear-to-work?

Okay. To the first question, I've talked about in the comments about suits and the strength that we have in suits. Performance suits have been particularly good. I think that we talked about the emotional, functional and technical benefits of the products. And we have really focused the NBA Game Changers' story around the Performance suits, and it appears to be working. It's the product that does have emotional, functional and technical benefits, and we are communicating it in a very, very strong way, so very, very happy about it.

In terms of new customers, you said, coming from social media, your question around that. Yes, we are, and I think we're also really getting it through influencers and through the fashion storytelling that we're doing on social media. And we do it in many different ways across different platforms. So if you follow us on Snapchat, you'll see one different view of stories and storytelling and content and films that we put on there. And then you'll see it communicated in a very different way on Instagram, through the images that we put out there, that we shoot and we also communicate with the customers. So we look at it really between our social media. We look it through the fashion influencers that we have and across the product categories, where we can really drive the most new customers.

Is she coming into the brand, though, to first buy a dress or a fashion item from you? Or is she coming in first and buying the editor pants, for example?

I think that the editor pant, when you look at it in terms of some of the established key items, it's really more of the existing customers. It's the fashion that -- you've obviously got to focus on the fashion and the fashion storytelling to be able to pull her into the store.

Mr. Kornberg, there are no further questions. I'll turn the floor back to you for any final comments.

Thank you all again for joining us this morning. We wish you a happy and a healthy holiday season and new year.

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