Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Marisa Jacobs

Michael A. Weiss - Chairman and Chief Executive Officer

David G. Kornberg - President

Dominic Paul Dascoli - Chief Financial Officer, Principal Accounting Officer, Senior Vice President and Treasurer

Matthew C. Moellering - Chief Operating Officer and Executive Vice President

Analysts

Neely J.N. Tamminga - Piper Jaffray Companies, Research Division

Lorraine Maikis Hutchinson - BofA Merrill Lynch, Research Division

Eric M. Beder - Brean Capital LLC, Research Division

Brian J. Tunick - JP Morgan Chase & Co, Research Division

Betty Y. Chen - Wedbush Securities Inc., Research Division

Jay Sole - Morgan Stanley, Research Division

Richard Ellis Jaffe - Stifel, Nicolaus & Co., Inc., Research Division

Janet Kloppenburg

Janet Joseph Kloppenburg - Robertson Stephens, Inc., Research Division

Marni Shapiro - The Retail Tracker

John D. Morris - BMO Capital Markets U.S.

Susan K. Anderson - FBR Capital Markets & Co., Research Division

Express (EXPR) Q2 2013 Earnings Call August 28, 2013 9:00 AM ET

Operator

Greetings, and welcome to the Express Incorporated Second Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Marisa Jacobs, Vice President of Investor Relations for Express. Thank you, Ms. Jacobs. You may now begin.

Marisa Jacobs

Thank you. Good morning, everyone, and welcome to our call. I'd like to open by reminding you of the company's Safe Harbor provisions. Any statements made during the 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 those 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.

With me today are Michael Weiss, Chairman and CEO; David Kornberg, President; Matt Moellering, Executive Vice President and COO; and Paul Dascoli, Senior Vice President and CFO.

I'm going to turn the call over to Michael now to speak with you about our recently completed quarter and our priorities for the balance of 2013. When he completes his remarks, David will focus on some of our product initiatives, and Paul will cover our second quarter financial performance, as well as our third quarter and full year 2013 outlook. We will then turn to Q&A before concluding the call.

Michael A. Weiss

Thank you, Marisa, and good morning, everyone. I'm delighted to be with you this morning. Our second quarter was a strong one, characterized by continued progress across multiple initiatives. Growth was nicely balanced with women's showing marked improvement over last year and the men's business continuing to deliver higher sales. From a financial perspective, sales were up, comps were strong and we once again grew our EPS by a double-digit percentage. Specifically, net sales grew 7% to $486 million. Our consolidated comp came in at plus 6% and our diluted EPS, up $0.20, increased by 11% and near the upper end of our guidance. We attribute our strong performance to the improved execution of our Go-to-Market strategy and the progress we made against our long-term growth initiatives. Clearly, our customers are reacting positively to our brand, to our assortments and to our marketing, which combine to lay a solid foundation for further progress in the second half of the year.

Taking a big-picture view of our fashion, I continue to believe that we are firmly on target with our key looks and big ideas. And while traffic continues to be a challenge, I'm encouraged by the fact that we have continued to see a very healthy uptick in our conversion rate. This forward-looking indicator, as well as current trends both in our business and in the overall marketplace were taken into account as we developed our third quarter guidance. We're expecting our third quarter comps to increase in the mid single-digit range and our diluted EPS to come in between $0.21 and $0.26 per share. Paul will cover the specifics of our guidance in more detail shortly as many of you are aware the most important weeks of the third quarter still lie ahead of us, given that back-to-school is not as big a driver for us as with some other specialty retailers. Having said that, it's still a good note that -- it's still good to note, excuse me, that the quarter has gotten off to a strong start.

Our recent denim promotion capitalizes on the natural uptick in traffic that comes from back-to-school shoppers. As they come into Express to check out our jeans, they purchase other items as well. This boosts sales in other departments and positively impacts the overall margin dollars on the transaction. The denim promotion also furthers one of our merchandising strategies, which is to provide younger customers with a bridge into the brand. One of the things I like to do on a quarterly call is to update you on our growth pillars, and take anyone joining us is new to Express, you should know that when we think of driving growth, we have 4 primary areas of concentration. They are increasing our existing store productivity and margins, capitalizing on our e-commerce opportunity, expanding our store base and international expansion. I'll start with existing store productivity and margin improvement. David will discuss our product in detail, and I want to stress emphatically that the merchandise in our stores now is dramatically better than our offering at this time last year. I'm equally excited about the received plan to reach our stores over the next few weeks.

From an operational standpoint, we are driving productivity in a variety of ways, including marking gap slow selling products earlier in the cycle to free up inventory dollars, expanding merchandise categories to capture a larger share of our customer's apparel and accessories spend and improving our customer service to boost conversion, UPT and ABM. Our efforts in Canada are showing continued improvement as the trend of strong double-digit comps continues. We recently hired a new country manager for Canada who is herself Canadian and who has significant experience in that market. She has completed her on-boarding and is now on the ground there, which bodes well for even more growth in that reach.

E-commerce is continuing to grow rapidly. During the second quarter, it grew by 27%, an increase over the 24% growth in last year's second quarter. We still expect our e-commerce sales to approach 15% of our total sales on a full year basis. In terms of our store expansion, we are on track with our initial 2013 plan. At the beginning of the year, we referenced 16 locations for new stores with closures set at 9. During the second quarter, we opened 2 stores and we closed 1 store in the United States. Additional store-related details can be found on Schedule 4 of our press release.

I'm delighted to report that during the quarter, we took possession of the site in Times Square that will be the future home of our New York City flagship store. Now that we control both the San Francisco and Times Square locations, I'm reaffirming that the opening dates of holiday time for San Francisco and next spring for Times Square remain realistic. We've had a lot of interest in our outlet strategy. We began discussions earlier this year, and we're continuing to make progress on that front. Our new Vice President of outlet stores is on board and has put much of his team in place. The focus now is on executing the operating plan. More details will be provided on a later call, but our assumption is that the first outlet stores will be conversions from existing Express locations and will open during next year's second quarter.

On the international front, our latest plans call for us to open 12 to 13 new franchise locations this year. During the second quarter, we added 3 Latin American locations, while closing 1 Middle East store.

Before wrapping up, I just want you to note that we received some nice news a few months ago, which I didn't believe -- which I don't believe we shared with you. We were added to the Interbrand list of the 50 Best Retail Brands in 2013. It's our debut on the list, and we are delighted to be included.

Overall, I'm pleased that our financial results came in near the upper end of our guidance and that we improved the trend of the business. We are also well-positioned for a healthy Q3. I'd like to thank everyone at Express for their contribution. We couldn't have done it without their hard work and dedication. Our product is resonating with our customers. Our marketing message is clear, and we are intently focused on the operational metrics that drive our top and bottom lines. We're following our test-and-react strategy and managing our open to buy carefully to maximize flexibility. What remains to be seen now is how promotional the mall becomes, which, of course, is the wildcard we can't control. We are, however, prepared for a highly promotional environment and under any set of circumstances, we remain focused on delivering the high-quality fashion-right products that is the essence of the Express brand.

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

David G. Kornberg

Thank you, Michael. Good morning, everyone. Summer is coming to a close, and we are heading into the Labor Day weekend and the start of fall. It's an exciting time of the year since it represents a major shift in seasonal fashion, and we're feeling great about our product. Michael has provided an overview of the business, and Paul will speak to you about our financial results. I want to use my time to focus on our product with a bit of hindsight in with respect to Q2 and our vision heading into fall and the third quarter.

Our performance during the second quarter was in line with expectations. Decisions we made about key items and investment of our open to buy dollars were on target. We cleared through the desired amounts of our spring and summer merchandise, and our inventories are well-positioned for the balance of the third quarter. In terms of product, I'll begin with the women's side of the business. As we moved through spring, we saw a continued improvement in our mid category with the second quarter generating the strongest results we have seen in well over a year. Based on the early reach generated by our Go-to-Market strategy, we've reordered for the second quarter many of Q1's best-performing items, and they all did well. Crop tops, peplum, tanks and bra camis are all examples of strong casual knit sellers, and on the dressier side of the business, our party and studio knit tops performed well. Our relaxed tanks and entry-price point tees offered at $19.90 and $24.90 are good examples of successful opening-price point items.

At the other end of the pricing spectrum, women's shirts delivered strong growth with the dressy category driven by the Portofino. This shirt shows just what we can do at the higher end of our pricing continuum. We've also taken this soft fabric and incorporated it into the Portofino dress, another successful item. We've seen a good response to our casual and dressy sweaters. Our casual relaxed pullovers have particularly good sell throughs. We had another good quarter with dresses, especially our fit and flare styles across casual and dressy. We're adapting them for fall as we expect this shape to remain important for a while.

In terms of bottoms, demand for women's denim outstripped supply during the third quarter, which led us to leave a little money on the table during the second quarter. We've continued to build our denim inventory and are back in a solid position. It's also worth noting that the response to our 40% off denim promotion exceeded our expectations. Our indigo denim is in demand, and sales have more than offset colors for all last year. While denim is always important in August and September, in September we also see a pickup in demand for our suiting separates. We have rolled out 2 new leg shapes in editor, a barely boot and a slim, and a new columnist shape, the slim flare, and we're seeing good results in all of them. We've developed related marketing materials to highlight the pieces that are suiting components, which is calling attention to them and improving the navigation of the fit. We are seeing a great response to our below-the-knee looks, our pencil skirt is one example, as fashion shifts in that direction. Having said that, the newer shorter look, including our holiday [ph] party skirt are also doing well. They create a really fresh pairing with either crop tops or chunky sweaters. I'm optimistic that this assortment will bring some progress to a category where we haven't been at our best over the last few quarters. We are certainly seeing some positive signs.

The footwear category is also gaining ground, and we have increased the real estate being allocated to footwear in approximately 50 of our largest stores. Last quarter, we mentioned that we were developing some new categories for women. We have introduced the handful of newer pieces online and in a very small number of stores. While it's too early to report over the progress, we're very excited about this new initiative.

Love Express, the casual lounge and yoga wear concepts and the Express Core, the authentic active wear items, will each officially be launched in October with online debuts. The casual lounge product will also be delivered to our top 100 stores, while Express Core will initially appear in 6 stores. So as I hope you can tell, I think the women's team has done a great job setting us up for a strong second half.

Turning to Men's for Q2, I'm pleased to report that we continued our growth trajectory in terms of a comparison to last year's second quarter. The response to several of our key summer items is great: cotton linen and short sleeve solid chambray and woven shirts and short sleeve tees, henleys, baseball tees and solid polos in knits all deserve mention. Our key item, belted short, drove significant volume, however, we were disappointed with the response to our shorter-length shorts. The dressier business was driven by 1MX, as well as simple stripes, prints and bigger plaids. In terms of an early look at fall styles, we're seeing good response to our casual woven shirts driven by a great assortment of color blocking and chambray. Last year, July was the biggest month in men's colored bottoms. Given that tough hurdle, we did a good job going up against those sales. It gets easier going forward since we are up against lower volume numbers on color during the balance of the quarter and the year's responding positively to our indigo denim, especially dark and clean washes and fabrics that have been destructed and mended. The slim fit Rocco and the skinny Alec are performing really well, and we have a much better balance across all of our fits and a total of denim assortment that I'm very pleased with. Suits and fabric jackets continue to show outstanding growth, and I think with the quality of our product and the price remains extraordinary. Black and gray remain strong, and we're also seeing a big shift into navy and shades of blue . Our men's furnishing and accessory businesses are continuing to deliver year-over-year growth with socks and underwear driving significant comps. We're also very pleased with the development of our watch business across both genders.

Great fashion is obviously at the core of the Express brand. We're also actively driving in the homes recognition of our brand through various marketing and public relations initiatives. Back in May, we sponsored a series of events surrounding the grand opening of our first Canadian place store in Toronto. In July, we invited bloggers and editors from media and broadcast outlets to a fall 2013 collection preview in Hollywood. And in early August, we sponsored a fantastic event in Times Square, a fashion show featuring our holiday 2013 collection. Times Square was packed for the event. This quarter, we'll be hosting pop-up shops in 6 key college campuses. And this week, our Madison Avenue store in New York will reopen after a total renovation. We're very excited about reopening in that important location.

So last quarter was extremely productive, and we expect no less of the third quarter. August has gotten off to a strong start and of course, additional fall and holiday merchandise will be flown into the stores over the coming weeks. The reads we get from those receipts will provide us with critical information that will be taken into account as we place early spring orders, much of which will consist of goods that are tested and proven. Of course, we'll update you on that progress when we review our third quarter results.

At this time, I would like to turn the call over to Paul.

Dominic Paul Dascoli

Thank you, David. Good morning, everyone. Let me begin by reviewing our second quarter performance, then I'll turn to our third quarter and full year 2013 guidance.

In terms of the second quarter, we were very pleased with our performance. We navigated through a highly promotional season to deliver results in line with our guidance and saw a continued progress across a variety of metrics. In terms of specifics, I'll begin with the income statement. Our net sales for the second quarter grew 7% over last year's second quarter to $486 million. E-commerce sales grew to 27%, which was an increase from growth of 24% in last year's second quarter, amounting to $60 million in sales. On a comparable sales basis, business grew at 6%, which follows a 1% increase in last year's second quarter. Our gross margin came in at 31.4%, 8 basis points below last year. 1/2 of the decline relates to lower second quarter merchandise margin compared to the same period last year. This change in our merchandise margin is slightly more than the relatively flat performance I guided to on the last call. It's due to the fact that we layered on some additional promotional activity in July as competition in the mall heated up. Buying and occupancy expense increased by 40 basis points, which was in line with our discussion in May, as we incurred our last full quarter of the incremental noncash preopening rent expense of approximately $4 million associated with our Times Square and San Francisco flagship locations. This equates to roughly $0.03 on a per share basis.

We took a disciplined approach to our SG&A during the quarter, which enabled us to realize an 80-basis-point improvement. As a percent of sales, SG&A dropped to 24.5% versus 25.3% during the comparable period last year. Operating income was $33 million compared to $31 million in last year's second quarter, and in each year this represents 6.9% of net sales. Our effective tax rate was 39.7% versus 39.6% in last year's second quarter. Net income for the second quarter was $17 million or $0.20 per diluted share. This compares to net income for the second quarter of 2012 of $16 million or $0.18 per diluted share. Our balance sheet remains strong. Our cash and cash equivalents were $234 million at the end of the quarter and our revolving credit facility remains untapped. Our long-term debt was $199 million, virtually unchanged from last year. We continued executing against our share buyback program as well. During the quarter, we purchased approximately 600,000 shares at a cost of approximately $14 million. We ended the second quarter with $21 million of our $100 million repurchase authorization still outstanding. Since then, we continued repurchasing shares. And at this point, we have utilized the entire $100 million authorization. Our capital expenditures during the quarter were $29 million, virtually identical to last year.

In terms of our inventory, we're continuing to build inventory to support our higher sales plan. We ended the second quarter with $242 million of inventory, up 13% from the same time last year. The calendar shift relating to last year's 53rd week accounted for approximately 4% of that increase. On a per-square-foot basis, inventory on hand was 8.8% higher than last year. We are continuing to invest in those key items that are delivering strong sales growth, denim and dressy woven tops for example. Without taking significant dollars away from other categories, this ensures that all departments are positioned for growth and can contribute to the expansion of our total company performance. We feel good about our inventory heading into the back half of the year.

I'd now like to turn to our guidance for the third quarter and the balance of the year. Our expectations are for third quarter comparable sales to grow in the mid single-digit range. We expect net income to be in the range of $18 million to $22 million or $0.21 to $0.26 per diluted share on 85.1 million diluted weighted average shares outstanding. This guidance does include a small expense associated with the build-out of our outlet business. We are currently projecting an improvement in our third quarter gross margin. This is the final quarter that our buying and occupancy expense will include an interim incremental noncash rent expense associated with the flagship locations. However, because we are anniversarying this expense for a portion of the third quarter, that incremental expense will fall to $1.2 million. This, in combination with leverage associated with positive comps, will result in modest improvement in our B&O expense as a percent of sales. SG&A as a percent of sales is expected to increase during the quarter. We'll be accruing incentive compensation this quarter, and of course, we had no IT expenses in last year's third and fourth quarters. And we'll have some incremental IT-related expenses, as well as some incremental payroll. Lastly, we'll be incurring some marketing costs as we prepare for our grand opening in Times Square. In terms of full year 2013, we now expect comparable sales to increase in the low to mid single-digit range, an improvement over the flat comps delivered in 2012. Reflective of our performance to date and our guidance for the third quarter, we have taken our full year net income guidance up to $130 million to $137 million or diluted earnings per share of $1.52, to $1.60. These estimates include $9 million of incremental preopening flagship rent expense, which translates into approximately $0.065 per share and $1.5 million or $0.01 per share associated with the new outlet business. The EPS calculation is based on an estimate of 85.4 million diluted weighted average shares outstanding. In terms of our real estate portfolio, please refer to Schedule 4 of the press release, which details our domestic and Canadian plans for Q3 and the full year. Capital expenditures during 2013 continue to be estimated at $110 million to $115 million. The increase over our 2012 spend is primarily driven by the incremental costs of preparing flagship locations and investments in systems and technology.

That concludes my comments. At this time, I'm going to turn the call back over to Michael for his closing remarks.

Michael A. Weiss

Thank you, Paul. So the third quarter is off to a good start, and we are encouraged by the strength of our product offering, especially in some of our key items and by customers response in the form of increased conversions. The second half represents a greater percentage of our year than the first, and we are determined to win. Everyone at Express is focused on delivering the right product and managing the business with a singular goal of driving a healthy bottom line. We look forward to updating you on our progress when we convene again shortly after the Thanksgiving holidays. Until then, enjoy your Labor Day holiday. Operator, at this time, please open the lines up so that we can turn to the question-and-answer portion of the call.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from the line of Neely Tamminga of Piper Jaffray.

Neely J.N. Tamminga - Piper Jaffray Companies, Research Division

Just want to ask a little bit on the guidance for Q3 for, I guess, all 3 of you. The merchandise margin outlook, it looks like you're not looking for any sort of improvement in merchandise margin outlook that you've decided, basically, leverage on the buying the occupancy. If memory serves, you guys lost about 150 bps last year in Q3 on merchandising margin, do you think that there's an opportunity or do you have some conservatism in there based on promotional activity? And if I may, just a question here for David on the yoga product. How many stores do you have that in right now? And it sounds like it's doing really well. Do you think that it's an incremental purchase at this point when she's buying it, or is she replacing something within her existing basket? That would be helpful to have some perspective.

Michael A. Weiss

Good morning, Neely. Thanks. We do -- there is going to be some leverage off the B&O as we look for improvement in gross margin, but we also would expect in the third quarter, that we would begin to start recapturing some of the merchandise margin that we lost last year. As Michael said, the wildcard really is the what happens with the promotional environment as we look forward. But consistent with what we said last quarter, we would expect to start recapturing some of that merch margin. David?

David G. Kornberg

Neely, hi. In terms of the yoga, yes, we're doing it because we believe it is going to be incremental. It's only really been out there for a week. We tested it in the spring. It looked really, really good. We did it online, and it had some of the highest conversion rates that we've seen per page. So we're very excited about what it's going deliver to us going forward.

Neely J.N. Tamminga - Piper Jaffray Companies, Research Division

And David, how many doors do you think you can put that in?

David G. Kornberg

Ultimately, I'd like to believe it's going to be an all store thing, but we're really testing it at the moment in terms of yoga. Lounge is going to 100 stores.

Operator

Our next question is from the line of Lorraine Hutchinson with Bank of America.

Lorraine Maikis Hutchinson - BofA Merrill Lynch, Research Division

I just wanted-- Michael, I just wanted to follow up on the comment that you made about July. Obviously the environment's very tough out there. How aggressive did you have to get with promotions above your plan, and did you see a market change in the trajectory of the business that's continued into August, or were those promotions effective in keeping your run rate as it was in the beginning of the quarter?

Michael A. Weiss

I think the issue for us in July is that we don't push merchandise forward. No matter what were left, we get rid of it all so that our inventory is quite current by quarter. As you well know, we run a clearance sale with the quarter to relieve the inventory of anything that is clogging it up. We -- I think just the July increased promotion, and you're right, was more of a result of June than it was of July because we backed up a bit and we had to clear it, and we did. So going into August, we were quite current, and we are quite current right now. And we will be current going in to fourth quarter because we will clear in September as we always do. Does that answer your question at all? July did get better than June. The end of July got better, and we were and are quite happy with August.

Operator

Our next question is from the line of Eric Beder of Brean Murray.

Eric M. Beder - Brean Capital LLC, Research Division

Could you talk a little bit about the changes you've been doing online. I noticed there's more of these midnight sales. Now that you're in charge of your online business, what have you being to really drive that online conversion?

Michael A. Weiss

Yes. Though we have had a couple more tick-tock sales out there. The one thing with the online channel is that you can do things that you don't necessarily do in stores during off hours. And some of these flat sales, things like that, we've been playing in that area. We got a few of those. They do look to be incremental to the overall volume, so we've been pleased with that. And we'll continue to do that going forward. With the new platform that we have out there, as we said, we have taken the old platform, replicated it. And you will see more changes coming particularly in the spring, which will enable us to have better content management, better search capability, better overall presentation of the product, and easier check out as well. So those are all still to come, so we think there's still lots of upsides and as you can see, the growth in e-commerce continues in the high double digits, and we don't see that -- any reason that should slow going forward.

Dominic Paul Dascoli

The other thing with e-commerce, Eric, is we have an opportunity to have expanded assortments on e-comm in terms of style choices or color choices or as you know, certain product categories like swim and we also, as David was just discussing, have the opportunity to test items on e-comm such as we're doing with yoga right now. And we'll also do with our casual lounge wear, which will be online in 100 stores.

David G. Kornberg

I think the other thing to add, Eric, is that it enables us to clear product really, really well. So there were certain things at the end of the season, we consolidate them from stores, such as suits, and we sell them online and we're able to sell them online into the following season at very, very good margins.

Eric M. Beder - Brean Capital LLC, Research Division

Great. And could you talk about initial results you're seeing in outerwear? Is that an opportunity for you? I know you had it and some of the stores, we're testing it in the beginning of August and July.

David G. Kornberg

It's very -- obviously, it's very, very early in terms of the outerwear business, but we're seeing very, very good responses, in particular to our (minus the) leather, and we've tested some of that in the Pacific Northwest, and did very, very well with it. So we're excited about the opportunity that lies ahead in both genders on outerwear.

Operator

Our next question comes from the line of Brian Tunick of JPMorgan.

Brian J. Tunick - JP Morgan Chase & Co, Research Division

I was wondering if you could speak to SG&A in the quarter, and just where you pulled back in order to come in a little bit better than expected, and how should we be thinking about SG&A as we enter the back half?

Dominic Paul Dascoli

So from an SG&A perspective, we've really just been continuing to apply the discipline that we have over the last year as we had challenges with the overall comps. So we've been very tightly managing our headcount expenses and things like just travel. And also in this quarter, obviously, we had no incentive compensation expense where we had it last year. So some of those things in total contributed to our ability to leverage the SG&A as we did. Our SG&A as we have been indicating on a full year basis will be roughly flattish on a percent of sales as we have indicated that on the last call and that remains true. So with the leverage that we got in Q1 and Q2, that would suggest that we will have some deleverage on our SG&A in Qs 3 and 4, a little bit more in deleverage in Q3 for the reasons that I discussed in the script.

Operator

Our next question is from the line of Betty Chen of Wedbush.

Betty Y. Chen - Wedbush Securities Inc., Research Division

I was wondering if you can talk a little bit more about the outlet business. We're excited to see the outlet channel will be launching next year. Should we anticipate a meaningful outlet product kind of strategy, whether you can share with us at this point? What the long-term opportunity could be in number of stores or revenues or productivity?

Matthew C. Moellering

We -- this is Matt again. We haven't -- a lot of details on the outlet business, but the headlines here are effectively, in the spring, we plan on converting approximately 15 stores from either the outlet -- stores that are currently outlet stores today that are just taking existing store product and liquidating it, along with some of our full-priced stores. We're converting those over to these outlet stores as well. And then in the fall, we will start to open new outlet stores. We believe this opportunity is, over the longer term, at least 100 store opportunity, if not more, worth about $500 million in revenue. So it is a large opportunity for us. We're one of the few in the retail segment that have not taken advantage of this opportunity, and if you take a look at benchmark where other companies have succeeded in the outlet business, we certainly think there's big upside. And this business is, seems to be for most companies, largely incremental, and it will be a made-for outlet product, Betty.

Operator

Our next question is from the line of Jay Sole with Morgan Stanley.

Jay Sole - Morgan Stanley, Research Division

It seems like the second quarter in-store comp improved significantly over 1Q. If my math is right, it looks like the in-store comp is mid single-digit positive in 2Q versus kind of mid-single negative in 1Q. So my question is if my math is generally right, what drove the improvement quarter-over-quarter?

Dominic Paul Dascoli

First and foremost is the product. We feel like the product right now is some of the best product that we've had for quite a while. So we're really excited about that. The other is the focus. We've really made sure with the challenges in traffic that the sales associates in the store are very, very focused on the customer experience, as Mike talked about in his portion of the script. We did see an increase in conversion in the quarter, which certainly helped the comps. So I'd say those are 2 really key items that helped drive in-store comp into that positive territory that you suggest.

David G. Kornberg

Jay, what I would add to that is, obviously, as I said in my script, is we bought back into the things that we're really working in Q1. We bought back into them in depth, and they continue to work into Q2. And I think that obviously what matters in product is that it's differentiated, its desirable and it's innovative along with a compelling value proposition. And we were able to deliver that well into the second quarter. So we're very excited about that.

Michael A. Weiss

I think the other thing is that if you would remember, last year same quarter, we had significant problems with both sweaters and custom knits and those -- this is a very pragmatic answer-- but those both came back strongly.

Operator

Our next question is from the line of Richard Jaffe with Stifel.

Richard Ellis Jaffe - Stifel, Nicolaus & Co., Inc., Research Division

Can you talk about inventory for second half, your outlook and I guess, opportunity to build certain categories given the strength you've seen to date?

Dominic Paul Dascoli

We feel good about the inventory position, Richard, coming into the third quarter even though it's a slight dip higher than our sales rate. We've taken the opportunity to invest in some very key categories like I mentioned. We've invested in dressy woven tops. We've invested in denim. We've invested in pants, particularly on the women's side of the business. We're investing in accessories, which continue to be very, very strong for us, including watches. And we've invested in men's suiting. So those are some of the key categories that we've invested in. We're making great efforts to have a good open to buy so that we can chase into those things that are selling well, so we're managing our inventory at the highest levels within the organization, approving and releasing dollars as appropriate. And as Michael alluded to, or very specifically actually said, that we're trying to mark down things quicker that we know aren't working so that we leave ourselves money to chase into those things that are working. So we retain some good flexibility to chase into those things that are working well for us.

Michael A. Weiss

But I think that -- significant to me anyway, in terms of the balance of the business. If you listen to what we've reinvested in, that Paul mentioned, you see the important things on both sides of the business, the dressy, as well as the casual, which leads me to believe that the future business will be a really balanced business in terms of what's good.

Richard Ellis Jaffe - Stifel, Nicolaus & Co., Inc., Research Division

And in terms of dollars, or investment dollars, or dollars per square foot, how do you think that will change year-over-year?

Dominic Paul Dascoli

Richard, we generally don't give guidance on inventory projections.

Operator

Comes from the line of Janet Kloppenburg with JJK Research.

Janet Kloppenburg

I had a couple of questions for David and Michael, then a couple for Paul. I just wanted to talk a little bit about the denim promotion that was in place in the beginning of August, and I think that -- I just wanted to clarify that, that was something you have planned and perhaps, that the merchandise margin there had been -- has been engineered to be favorable and that, I also just wanted you to talk a little bit about the category. We're hearing a lot of softness there, and I'm wondering if you could distinguish your success there versus what's going on in the industry. And secondly on the sweaters, I think that is performing well. Is it too early to read through that trend, or are you confident in a strong quarter performance this spring -- this fall. Given how tough it was last year, I think that could be a real margin opportunity. And then just on the balance sheet, Paul, I was wondering how should we thinking or how you think about paying down the long-term debt? Are you comfortable with it, or is that something that a discussion you may have at year end, or is it something that we think should be staying there? I'm not sure how you think about that.

Dominic Paul Dascoli

Okay. Janet, let me start with the denim question. In terms of denim promotions, we have always looked at them in terms of margin dollars, not margin rate. Clearly, you have to get a big incremental jump in the business so that the dollars exceed the rates. However, the other big piece of the denim promotion is that we really strategized the transaction. We have a history of what sells with what. We have reports on a weekly basis of related selling, and we know what denim drags so that the rate on the jeans is lower than we'd like to get, but the rate on the transaction is really quite good. The other things makes up for that. The other piece is that it's the only product, and we talked about this and strategized this, that we use to bridge the younger customer into our brand. And we really can take advantage of that in the months -- of the end of July, August, and the very beginning of September, so we are delighted with the way that denim has performed.

David G. Kornberg

Janet. in response to the differentiation and how we differentiate our denim from the competition, I think the most important thing is that we have a very compelling value proposition. We're definitely not going out there to be the cheapest, but we do offer really, really great fashion at affordable prices. We have a broad selection of washes and fits. And I think that across all of our fits, we're doing particularly well at the moment in terms of what's authentic. And as I said, in dark washes, we've done very well, but we're also doing well across all of our fits. I think in terms of sweaters, very excited about what we've seen so far over the first 3 weeks of the season, and I believe that going into, obviously, the balance of the third quarter and also in the fourth quarter, we've got a very, very strong assortment ready to go. And we placed a significant amount of our units for the fourth quarter a few weeks ago, and we believe that we put them into proven and tested items that can deliver a very strong fourth quarter.

Dominic Paul Dascoli

Lastly, in terms of the debt, as we've spoken about before, we take the opportunity at each board meeting to talk to the board about our overall capital structure. Right now, as you know, that has a make whole provision until March of 2014. It would make it very, very expensive to retire it right now. So we -- I think we will have further discussions with the board about our appropriate actions as we get closer to that date.

Janet Kloppenburg

Okay. And Paul, a question on the buying and occupancy, I think you said it was the -- the nonrecurring $1.2 million in the third quarter of this year. Can you remind us what it was last year in the third and the fourth quarter?

Dominic Paul Dascoli

Yes, the third quarter was about close to $3 million and the third quarter of last year -- hold on a second, let me just find that.

Janet Kloppenburg

Paul, will we have that nonrecurring in the fourth quarter of this year?

Dominic Paul Dascoli

No. We had expensed it all in the fourth quarter of last year, so it shouldn't have -- right now, we're not projecting any incremental in the fourth quarter.

Janet Joseph Kloppenburg - Robertson Stephens, Inc., Research Division

Okay. So last year in the third quarter it was $3 million, and we just need the fourth quarter number. But you can give it to me offline and if you want.

Dominic Paul Dascoli

Yes, for the fourth quarter number last year was about roughly $4 million.

Operator

The next question is from the line of Marni Shapiro of Retail Tracker.

Marni Shapiro - The Retail Tracker

I was just curious. Obviously, the environment is very promotional out there. But it feels like a lot of the pressure is coming on the denim side, which is probably a little bit younger or more competitive in the mall. Are you seeing that kind of pressure on your pants business and your wear-to-work whether it's the editor pant or the shirts, or some of the skirts or has that business held up pretty well?

Michael A. Weiss

Interesting question. The dressy pants business has held up very well, and we're getting very nice increases from it. And because of that, we are looking forward to a really good September in that category. Additionally, we are finally getting a few skirts that are checking quite well. So the wear-to-work areas of our business are looking strong. They are not under the same pressure. You're absolutely right. The other piece of the business that continues to increase, which we have categorized in the wear-to-work, is, of course, the Portofino shirt, which can be worn with anything. So it's not necessarily wear-to-work, but that's how we categorize it. And it continues to perform to expectation.

Marni Shapiro - The Retail Tracker

Right. And then just also on the sweater business. It's been a long time since we've had any real sweater business that's been successful, and you guys have had some outstanding sweaters this season. If this trend in the sweater business continues to accelerate, is there an opportunity to put some, not all, but some sweaters into the wear-to-work space? It's been a long time since we've seen a trend in wear-to-work were sweaters have checked.

David G. Kornberg

I think we started to actually. We've gone back in to much more finer gauges in wear-to-work, and we've seen a very good response to those. So you'll see more of those during the third quarter.

Marni Shapiro - The Retail Tracker

Fantastic. And you guys feel good about the balance of wear now versus wear in the fall and the stores right now? I personally think the balance looks the best you've had in years. So you guys feel good about that as well?

David G. Kornberg

Very much so, very much so.

Operator

Our next question is from the line of Jennifer Redding of BMO Capital Markets.

John D. Morris - BMO Capital Markets U.S.

It's John Morris. Maybe talk to us a little bit more about international. You gave us some more remarks in the script. First of all, did I hear that you closed 1 in store in the Mid East. I'm wondering if so, why that is? But I think more importantly, the emphasis going forward by region and what kind of results you expect to see there.

Matthew C. Moellering

Yes, so this is Matt. The international business continues to move forward for us. In the Middle East, we did close that 1 store. It was simply as we are working with our franchise operator, there was another group that needed a larger space, which included ours. And we're working on a different space in that location. Middle East, if you look at regionally, the Middle East has been a little tougher, and I think that's true for all brands. A lot of that is the -- is simply the -- all of the activity going on there right now, with the uncertainty, that certainly hits consumer sentiment. From what we understand from our franchise operator is that it's a more of across-the-board thing with the consumer versus a singular brand type of activity. But we feel good about where we are there, and we continue to move forward with stores in Latin America and Mexico as well with those franchise operators. We obviously have, are in discussions with some additional deals that we're working on, that we're getting close to. We obviously don't announce those until we have signed deals, but we -- hopefully, we'll have news in the -- as we head into late third quarter or early fourth quarter.

John D. Morris - BMO Capital Markets U.S.

And Matt, strategic -- bigger picture strategically, if you were to look out over the next 3 years or so, regionally would the emphasis be Latin America from here? I'm not talking about Canada, but regionally, international.

Matthew C. Moellering

Well, the emphasis is on a combination of things. Latin America for sure, and we feel very good about the direction that's headed with particularly in Mexico. And then we are looking at Asia as well. There's a big opportunity we believe in Asia from a franchise perspective as well. And eventually, over time, some company-owned stores, but that will be down the road a little bit.

Operator

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

Susan K. Anderson - FBR Capital Markets & Co., Research Division

I was wondering if you could maybe talk about product cost for the back half? I've heard maybe from some retailers that they're maybe putting less quality into things like denim just to offset the competitive environment. I'm just wondering if you're doing anything like that. And then also, I mean, is this -- if you could talk about the comp progression through the quarter?

David G. Kornberg

I would start by saying absolutely not. There is no way in which we're putting less quality into our product. I think quality is a key differentiator of Express, and we continue to deliver a quality product. And we'll continue to do that.

Dominic Paul Dascoli

We might see -- as we look ahead at the quarters on a rate basis, we might see a very slight decrease in our AUCs, but nothing very significant compared to prior year. And that's all contemplated in the guidance that we provided.

Susan K. Anderson - FBR Capital Markets & Co., Research Division

Okay, great. And then just the comp progression throughout the quarter?

Dominic Paul Dascoli

We don't disclose comps by month, so we really just talk about comps by quarter.

Operator

Ladies and gentlemen, we've reached the end of our allotted time for today's question-and-answer session. I would now like to turn the floor back to Michael Weiss for closing comments.

Michael A. Weiss

That concludes our call for today. Thank you for joining us this morning and for your ongoing interest in Express.

Operator

Thank you. You may now disconnect your lines at this time. Thank you for your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Express Management Discusses Q2 2013 Results - Earnings Call Transcript
This Transcript
All Transcripts