Express Inc (EXPR) 2018 Q1 法說會逐字稿

Greetings, and welcome to Express, Inc. first-quarter 2018 earnings conference call. (Operator Instructions). As a reminder, this conference is being recorded.

I would like to turn the conference over to your host, Mark Rupe, Vice President of Investor Relations at Express.

Thank you, Sherry. 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 can be found in our press release which has been filed as an exhibit to our Form 8-K with the SEC and is 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 first-quarter performance demonstrates that our strategy and holistic approach to driving improved sales and profitability is working. Comparable sales grew for the first time since the fourth quarter of 2015, and earnings exceeded our guidance. And for the second consecutive quarter, we expanded our gross margin and increased earnings relative to the prior year. We are making significant progress executing against our initiatives, and the business is building momentum.

First-quarter total sales increased 1%, and comparable sales increased 1%. Earnings per diluted share was $0.01 versus an adjusted EPS loss of $0.05 last year. Some of the key highlights in the quarter included: a solid performance in our men's business, with strength in denim, casual pants, shorts, suits, and jackets. Women's saw above-average comp performance in dressy woven tops, dress pants, casual pants, jackets, skirts, and shoes. Outstanding growth in e-commerce, with comparable sales increasing 33% on top of 27% growth in the same period a year ago. E-commerce penetration grew to 28% of net sales, up from 21% last year.

Continued success from our expanded omni-channel capabilities: we doubled the number of active ship-from-store locations during the first quarter, reaching our target of 400 retail locations a quarter earlier than we anticipated. And lastly, we strengthened our balance sheet by improving our inventory position, which ended the quarter down 1% compared to the prior year.

These highlights demonstrate that the collective hard work of the entire team over the past several quarters is beginning to produce results.

As we look forward, product, brand, and customer experience are the three key areas important to our success in returning Express to sustainable and profitable long-term growth, and we have several initiatives across each of these areas to drive improvement. I will now discuss them, beginning first with product. Express has been a fashion authority across four decades. The very core of our business has been to offer a curated edit of the latest styles and best fits, providing customers with the most compelling choices when it comes to fashion.

Through quantitative and qualitative consumer analysis, we determined there was a scarcity of fashion styles in additional sizes across the mall; and, because of this, we have an opportunity to serve more customers. In early May, we introduced extended sizing across our women's and men's product assortment in stores for the first time. This required a tremendous amount of hard work for over a year, and I'm really proud of how our associates managed this from concept to execution.

This is a major initiative for Express. While we have offered extended sizing online for some time, the expansion of our in-store offering will help us address a significant portion of our target demographic.

We are offering extended sizing in 130 retail locations, and all stores in three major markets. In these stores and online, we carry double extra small to extra-large and 00 to 18 in women's; and in men's, extra small to double extra-large, 28 inch to 40 inch waist sizes, and 36 to 48 jacket sizes. This breadth of sizing in stores is unique and differentiates Express from other fashion apparel specialty retail peers. We are integrating these additional sizes into our existing size assortment with the overriding goal of offering a more inclusive shopping experience.

We have introduced a new campaign to support the launch with the goal of broadening our customer base. The campaign builds on our authority across fit and fashion and our history of collaborating with inspiring individuals. And we are optimistic that it will drive incremental awareness and brand familiarity. While we are only a few weeks in, we are pleased with the initial customer response. Feedback has been overwhelmingly positive, and we are beginning to acquire new customers.

Turning to our products in total, we continue to make progress with the overall direction of our assortment, evidenced by the sequential improvement over the past five quarters. Our men's business continues to perform well, and trends are improving in our women's business. We've seen a relative improvement in dresses, and we are optimistic that trends will further progress through the summer, based on additional receipts of our best-selling items. To better capitalize on these trends, we are amplifying our focus, marketing, and inventory investment in core categories, and sharpening the message of what we stand for.

I will now discuss our brand-related initiatives. As we have discussed before, we are laser-focused on driving customer acquisition, retention, and overall brand engagement. Express is one of the largest fashion apparel specialty retailers in the US. Women's awareness of Express is high, but familiarity continues to represent an opportunity, as does men's awareness. Our ability to improve familiarity and awareness is a key driver to unlocking significant customer acquisition and business for the brand.

We have made solid progress in retaining customers over the past year. The relaunch of our NEXT loyalty program has driven improvement in customer retention rates as well as higher penetration rates to the Express NEXT credit card.

However, we still have an opportunity for new customer acquisition. We have done a considerable amount of brand and customer work over the past 18 months to sharpen our understanding of the customer, along with their needs and desires. We continue to optimize the mix of search, digital, and social marketing; have furthered our work with fashion and social media influencers; and partnered with the NBA on the men's side. We have also increased the use of data analytics to identify areas of opportunity and have deployed our insights to drive improvement. These measures are working. New customer acquisition trends are improving, and we expect to build on them as we move through the year.

Improving the overall customer experience is also important to our long-term success. We have various initiatives underway across all of our customer touch points to improve the overall experience. E-commerce continues to be the highlight of our business. Comparable sales increased 33% in the first quarter, and this was on top of the 27% increase experienced in the prior year. All of the key performance metrics improved during the quarter, and we drove strong sales growth across our women's and men's assortments. During the quarter, we expanded our online assortment and further improved the online and mobile app customer experience.

In conjunction with our launch of additional sizes, we upgraded our product pages to include more product-related details, as well as images with models displaying multiple sizes. In doing so, we have improved the online customer experience and differentiated Express from many of our peers.

And as it relates to the Express mobile app, it continues to grow in penetration of e-commerce sales, driven by increased downloads and the number of active customers.

So based on these activities, our e-commerce business is growing rapidly and we are confident that we will be able to sustain the solid growth over the long-term. We expect e-commerce sales penetration to approach 30% in 2018, and continue to believe that it will exceed 40% within the next few years.

We are also making significant progress expanding our omni-channel capabilities. We doubled the number of active ship-from-store locations during the first quarter, reaching our target of 400 retail locations a quarter earlier than we anticipated. Equally important, we are seeing positive trends in our ability to maximize sales, drive inventory productivity, and reduce markdowns. And we continue to pilot buy online, pick-up-in-store in Chicago and Columbus to further our learning so we can apply it to a broader company rollout.

With respect to our stores, we're testing new, innovative, experiential formats to gain insight and continuously improve the overall customer experience. For example, we recently introduced a new store format at our 51st and Madison Avenue store in New York City, leveraging some of our consumer research. The store has a curated assortment of wear-to-work and going-out product aligned with its career-oriented customer base and features elements including a digital styling screen, charging stations, and the ability to book styling appointments online. The 51st and Madison Avenue store is also hosting regular events to connect with customers, including the Success & Style series, which features interviews and style advice from bloggers, influencers, and other industry leaders.

The store is very much a test at this point, but an important opportunity for us to gather insights with the potential to apply learnings to additional stores in the future.

We are also testing new Express outlet stores in a few power centers to understand our ability to drive traffic and sales productivity. We believe there is potential for additional growth with an improved financial profile in these locations. And we will continue to invest in technology and e-commerce to ensure that we are offering an innovative customer experience.

So while product, brand, and customer experience are the three key areas that we believe will be most impactful to our future growth, there are other areas of our business that are also very important and remain a focal point. They include our cost savings initiatives, optimizing our real estate portfolio, and investing in systems and technology.

From a cost savings perspective, we remain on track to deliver our target of $44 million to $54 million of annualized cost savings over the 2016 to 2019 period. In 2018, we expect to achieve approximately $12 million in savings, driven primarily through lower sourcing costs. We continue to seek additional cost savings opportunities and ways to operate more efficiently.

In terms of real estate, we continue to proactively manage our store footprint. We are benefiting from lower occupancy costs from last year's lease renewals and have significant flexibility in our fleet. Approximately 60% of our retail store leases are up for renewal in the next three years, and we see this as an opportunity to drive further efficiencies in our portfolio.

And lastly, we are investing in our systems and technology to improve the efficiency of our operations. In addition to many of the technology initiatives that I've already discussed, we expect to complete our store POS systems upgrade this fall, which will provide us advanced functionality with respect to price, promotion, and margin optimization.

In summary, the thoughtful and hard work of our team over the past couple of years is beginning to produce the intended results. We have positioned the business to continue to build upon our momentum with important initiatives across product, brand, and customer experience. We are committed to returning Express to sustainable and profitable long-term growth, and recognize that our first-quarter performance was an important step forward.

We believe strongly in the long-term opportunity of this business, and have continued to return value to shareholders through share repurchases. To date, under our current share repurchase program, we have executed $38 million for 4.9 million shares, underscoring our commitment to driving shareholder value.

I would like to close by thanking everyone at Express for their hard work, dedication, and determination in returning Express to growth.

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

Thank you, David. Good morning, everyone. I'm going to start by reviewing our first-quarter results, followed by a discussion of our second-quarter and fiscal 2018 outlook. As a reminder, we adopted a new accounting standard related to revenue recognition at the beginning of this year. We utilized the full retrospective method of adoption; and, accordingly, recast our income statement, balance sheet, and cash flow statement. All figures in today's earnings release are reflective of the new standard, as will be my comments.

First-quarter net sales were $479 million, a 1% increase as compared to $474 million last year. Comparable sales increased 1%, including 33% increase e-commerce comp growth; and store comps of negative 8%. Our first-quarter gross margin rate expanded by 200 basis points to 29.9%, driven by a 90 basis points improvement in merchandise margin and 110 basis points of leverage in buying and occupancy costs. The improvement in merchandise margin was driven by our sourcing-related cost savings initiative, while the leverage in buying and occupancy costs was driven by favorable lease renewals.

SG&A expenses increased 6% year-over-year, as a percentage of sales, deleveraged by 140 basis points to 29.3% of net sales. The increase was driven primarily by investments in marketing, technology, and e-commerce, as well as wage inflationary costs and an accrual for incentive compensation.

Operating income was $2.8 million or 0.6% of sales, an improvement from last year's adjusted operating loss of $459,000. First-quarter diluted earnings per share was $0.01, an improvement from last year's adjusted loss of $0.05 per share.

Now turning to our balance sheet and cash flow. Our balance sheet remains healthy. We ended the quarter with $185 million of cash and cash equivalents as compared to last year's $191 million. It is important to note that our first-quarter operating cash flow reflects a $26 million distribution related to the termination of the Company's non-qualified supplemental retirement plan. The decision to terminate this plan occurred during the first quarter of 2017, and it was a part of our cost savings initiatives. Inventories at quarter-end were $278 million, a 1% decline as compared to last year's $280 million.

As it relates to our share repurchase program, we repurchased 2.2 million shares for $15.6 million during the first quarter. And subsequent to quarter-end, we have repurchased an additional 700,000 shares for approximately $5 million. Under our current program, we have repurchased 4.9 million shares for $38 million, which reflects an average price of $7.74.

The final topic I want to address is our guidance for the second quarter and full year. As a reminder, our second-quarter and full-year 2018 guidance is based on the new revenue recognition standard. In addition, our guidance incorporates share repurchases that have occurred to date, but does not contemplate any future repurchase activities.

With that overview, I will now provide the guidance details. For the second quarter of 2018, we currently expect comparable sales in the range of negative 1% to plus 1%; net income in the range of a loss of $1.5 million to a profit of $1.5 million; and diluted earnings per share in the range of a negative $0.02 to a positive $0.02. This compares to last year's adjusted diluted EPS of $0.01.

Based on the midpoint of our second-quarter guidance, we expect our operating margin to contract slightly, driven by SG&A expense deleverage. As it relates to our second-quarter tax rate, it is considered not meaningful, given our projected near-breakeven pre-tax income. Lastly, we are assuming an average share count of 74.5 million.

Turning to our full-year 2018 guidance, we currently expect comparable sales in the range of a negative 1% to a positive 1%; net income in the range of $28 million to $35 million; and earnings per diluted share in the range of $0.37 to $0.47. This compares to last year's adjusted EPS of $0.37, which includes $0.04 from the 53rd week. Based on the midpoint of our full-year 2018 guidance, we expect our operating margin to contract by approximately 40 basis points.

We expect gross margin expansion driven by merchandise margin improvement and buying and occupancy cost leverage. However, we expect this will be more than offset by SG&A deleverage due to investments in marketing, technology, and e-commerce, as well as wage inflationary costs and an accrual for incentive compensation. As a reminder, last year's operating margin includes the benefit from the 53rd week, which was worth 20 basis points.

We expect an effective tax rate of approximately 33%. On a full-year effective tax rate, our full-year effective tax rate is higher than our operating tax rate of approximately 28% due to discrete tax items. We also expect 75.1 million shares outstanding for the full year.

In terms of store activity, for the year we plan to close 40 retail stores, 29 of which are conversions to outlet, and open 10 new outlet stores. We expect to end fiscal 2018 with 634 stores, consisting of 450 retail and 184 outlet stores. This compares to 635 stores at the end of 2017, consisting of 490 retail and 145 outlet stores.

In terms of capital expenditures, we plan to spend $60 million to $65 million in 2018 compared to $57 million in 2017. Our business has a history of generating strong operating and free cash flow, and our outlook for 2018 implies continued solid cash flow generation.

In summary, our performance is improving and our financial position remains sound with $185 million in cash at quarter-end, and no debt. We are focused on building on our first-quarter momentum and returning Express to sustainable and profitable long-term growth, and we're committed to driving shareholder value. Under our current share repurchase program, we continue to have $112 million available.

We look forward to updating you on our progress in August. I would now like to turn the call over to the operator to begin the question-and-answer portion of the call.

(Operator Instructions). Pamela Quintiliano, SunTrust Robinson Humphrey.

Great. Congratulations on the quarter, guys, and thanks for taking my question. So, one quick one, and sorry if I missed it, but did you comment at all on quarter-to-date trends as the weather has normalized, and what you're seeing out there? And then I'll go to my other one (multiple speakers).

Hi, Pam, it's David. We don't comment on current-quarter trends as is, but they are included as part of our guidance, built into our guidance.

Okay. And then as far as -- two other quick ones. As far as the Madison Avenue store, it was great insight that you provided. One of the things I noticed is that it seems like you don't have sale in that location. So, if you could talk about how the customer is responding to that, and if you think that's, longer-term, a learning you could take and apply to other stores to potentially clear product more online?

And then regarding your online customer, can you just talk a bit about how that customer is differing from your traditional brick-and-mortar customer? Thank you so much.

Yes, okay. So, in terms of Madison Avenue, the store there, you mentioned about the sale section. The sale section will build back up as we move into Q2 and the sale event which happens in the middle of June, so you will see that.

In terms of the overall performance of the store, I'm pleased with the initial performance. Some areas are doing better than others. And we are obviously building those into the way in which we are thinking about the floor set go forward for the rest of the chain. And there are areas that we need to tweak to improve the performance. But, overall, we're getting some very, very good learnings; not just in product, but also in terms of customer experience, in terms of the technology that we are using in the store. And we plan to use our sort of the best the results from it go-forward.

(multiple speakers) And your final point was what?

The online customer, just the big growth in online. Can you talk about the shopping habits of the online customer versus your brick-and-mortar? Is it the same customer or a different customer shopping? Just any insights you could provide, as well as are they responding to more fashion-oriented product, or is it the same type of product they are responding to as well? Can you use that as a test for the store? Just anything there you could provide.

Yes. Look, overall it's the same customer. I think that there is an element of overlap between store customers and e-commerce customers, but I think you've got to take into account that exclusives that we have online are an important growth driver. But when you look at it, the total assortment online is doing very well, indeed. So really not a significant difference in terms of the customer, but we clearly are doing a lot better, and there is some overlap between the store customers and the e-commerce customers.

Thanks. Best of luck.

Adrienne Yih, Wolfe Research.

This is Doug Drummond on for Adrienne. David, can you spend a moment talking about the promotional environment? Obviously the goal was to pull back on promos this quarter, but it looks like the plan was met with some challenges from weather.

And then, Perry, can you let us know how much of the expected $12 million gross margin benefit from sourcing benefits was realized during Q1? Thanks.

Okay, Doug. Look, it is still competitive out there. You see that every day. You see it from people's emails; you see it in store; you see it online. Our goal is to constantly evaluate and assess the environment that we are operating in, and our goal is to pull back on promotions. And what I would say to that is that our stance and desire and objective has not changed at all, but we take a pragmatic approach to promotions. We have obviously promotions that we build into the plan. And then there are product promotions that are based on turn and what we see in the competitive environment, because we have to compete. So obviously, yes, we still see it competitive out there, and I'm sure you see the same in terms of your channel checks.

Perry, do you want to --?

Yes. So Doug, as part of the $12 million savings, $10 million is merchandise margin, and the other $2 million is in buying and occupancy through some other efficiencies that we're driving in stores. Within the $10 million, we recognized approximately 50% of that in Q1, and we expect to recognize the remaining the balance of the season.

Okay. Thanks a lot, guys. Best of luck.

Paul Trussell, Deutsche Bank.

Hi, this is Gabby Carbone on for Paul. Congratulations on a nice quarter. So you didn't call it out, but could you give some color on how the weather might have impacted your results this quarter, and then performance by region? And then if you could provide us with the comp metrics for the quarter, that would be great. Thanks.

Okay. So, we don't like to blame or give credit to the weather in either direction. We really focus on what we can control. And what we can control is the assortment that we put out there. Having said that, what we did see was we saw a better performance in the warmer areas of the country. So in particular, the Southeast, the Southwest, and the West Coast, we saw an improved performance throughout the quarter.

And in terms of the metrics, I'm going to hand over to Perry.

So from a metrics standpoint, within stores, we saw that the impact in the negative comps was driven by traffic, whereas conversion was relatively flat. And when you look at the e-commerce metrics from an e-commerce metrics, our metrics across the board were positive and obviously driven by the -- are evident by the 33% comp that we posted.

Okay, great. Thanks. And then just a quick follow-up. Would you discuss the shopping behavior of your NEXT loyalty members versus non-members? And then what kind of improvement are you seeing in customer sign-ups still, and along with the feedback? Thanks.

We're seeing the customer sign-ups continuing to get better, which is great. And clearly the objective of having the NEXT loyalty program is that we see more a frequent shopping behavior and a more shopping pattern. So, really, that's the goal of having the loyalty program, is to have our best customers come in again and again. And what we're seeing is we're seeing that. And then obviously in terms of sign-ups, we're seeing continued growth.

Great, thanks so much. Best of luck.

(Operator Instructions). Marni Shapiro, Retail Tracker.

Congratulations. David, you mentioned that the women's bottoms business, both dressy and casual, are doing well. If you could provide a little bit more insight into denim without giving away trade secrets, so to speak. And then along those lines, there are some items and trends in your store that are selling very fast. It seems like you're in chase mode. Are these items that you're able to chase into, but in the appropriate styling for fall? And where do you stand as far as being in full stock on those kinds of styles and inventory for fall?

Okay. So in terms of denim, what I would say is I wish we'd had more in the first quarter. Our Denim Perfect, which we launched at the beginning of the first quarter, we saw very good results with. And that's obviously -- as we talk about, is a shaping jean. And we have chased into reorders which are coming in now, and we see that a bigger part of the mix going forward.

And then in terms of the chase product, yes, a lot of our Q2 receipts are chase products of the best-performing items that we saw from a fashion perspective in the first quarter. And we're also obviously evolving into some of those key trends that we saw success with in the first quarter, into the second, and the beginning of the third quarter as well. But, thankfully, we are obviously very open in terms of the way in which we buy our inventory, and we're able to chase.

That's fantastic. So you were able to get back in pretty quickly? It sounds like your turn times and lead times are pretty quick on things like that.

Yes.

And then just one last follow-up. You had a launch in several of your stores of Prive Revaux, which I thought looked fantastic. I'm curious how many stores this was in, and if you saw good results. I mean, it was snowing in April, but sunglasses might have been tough to sell. But I'm curious what your thinking was behind it, because I thought it was a very clever partnership.

Yes, no, we -- look, we talk a lot about our ability and our desire to grow awareness of the brand. And to do that, it is good to be able to carry other brands, and also have influencers who are associated with those brands to promote your brand. We have seen very, very good results from them. They are in 50 stores as it is currently. And we have also placed reorders on those sunglasses, as well, which will be coming in soon.

Fantastic. I thought it was great. Best of luck for summer.

Ladies and gentlemen, we have reached the end of our question-and-answer session. I would like to turn the conference back over to David for closing remarks.

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

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