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Express (NYSE:EXPR)

Q1 2014 Earnings Call

May 29, 2014 5:00 pm ET

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

Simeon A. Siegel - Nomura Securities Co. Ltd., Research Division

Betty Y. Chen - Mizuho Securities USA Inc., Research Division

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

Kayla Berg - Piper Jaffray Companies, Research Division

Lorraine Maikis Hutchinson - BofA Merrill Lynch, Research Division

Kate Fitzsimons - JP Morgan Chase & Co, Research Division

Richard Ellis Jaffe - Stifel, Nicolaus & Company, Incorporated, Research Division

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

Jay Sole - Morgan Stanley, Research Division

Janet Kloppenburg

Roxanne Meyer - UBS Investment Bank, Research Division

Rebecca Duval - BlueFin Research Partners, Inc.

Danielle McCoy - Brean Capital LLC, Research Division

Steven Louis Marotta - CL King & Associates, Inc., Research Division

Barbara Wyckoff - CLSA Limited, Research Division

Operator

Greetings, and welcome to the Express, Inc. First Quarter 2014 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, Marisa Jacobs, Vice President of Investor Relations. Thank you. Please begin.

Marisa Jacobs

Thank you. Good afternoon, 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 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, which speaks only as of the date given.

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, who will be followed by David and Paul. We will then turn to Q&A before concluding the call.

Michael A. Weiss

Thank you, Marisa. Good afternoon, everyone, and thank you for joining us today. Our first quarter results were disappointing to all of us. Our comps at a negative 11% were in line with our guidance, but our EPS of $0.06 was below the guidance we issued in March.

While not apparent in our first quarter results, we are making progress on several initiatives that position us for sustained profitable growth. Our outlet store launch is off to a strong start. We are taking costs out of the business, and we plan to utilize our strong balance sheet for the benefit of our shareholders with a new $100 million share repurchase program.

When we issued our outlook in March, we stated that it was predicated on the business improving substantially as the quarter progressed, and especially during April. We anticipated that traffic and sales trends would improve given the Easter shift and more seasonable weather. We also expected that reordered merchandise would be back in the stores to further help drive sales.

The business did turn, and our April comp was up high-single digits. It did not, however, reach our internal projection. The macro environment continued to impact us just as these headwinds impacted most retailers. We cannot, however, attribute our performance exclusively to external issues. We are laser-focused on improving our sales and our margin trend and have initiatives underway to achieve this result. David will address product and promotional issues in his remarks.

I want to spend a moment on steps we are taking to increase our efficiency and streamline costs. We have given -- excuse me, we have been in a growth mode for several years and believe we are running our business efficiently. Even so, we are always evaluating ways to drive greater efficiencies and improve operating performance.

After careful assessment, we are taking steps to reduce corporate expenses and eliminate certain discretionary items. In total, these actions represent approximately $18 million of annualized savings, with the impact in 2014 expected to be approximately $15 million.

At the same time, we continue to invest in our business, directing our resources to the areas we believe will deliver the highest returns. E-commerce is a great example and outlets are showing great progress.

We believe in malls as the place that offers shoppers an experience that can't be replicated online. They aren't going away, but some malls are getting stronger while others are quickly weakening. With that in mind, we have completed an evaluation of our store fleet, focused on how to best optimize our retail stores. While the vast majority of our locations are profitable, we identified 50 stores that we now plan to close over the next 3 years as their leases expire. The selection process focused on the size of their total contribution, their comp store performance over the past 3 years and an algorithmic assessment of our ability to migrate sales online or to nearby locations. Based on our findings, we believe we can generate $5 million to $8 million annually of incremental profit once all 50 stores have been closed.

It's been my practice to update you on our growth initiatives. Let's begin with North American real estate. Outlets first. We have now opened a total of 17 Express Factory Outlet Stores. The first one opened in April at National Harbor outside of Washington, D.C. Since then, we have converted 14 other locations and opened 2 new stores, one in West Palm Beach, the other in Grapevine, Texas. We are very encouraged by the customer response, with sales significantly exceeding our initial estimates. In fact, we are moving up our opening timetable and now anticipate that by year-end, we can have approximately 35 outlet stores open, up from 30 mentioned in March. We also plan to accelerate the pace of average store opening beyond this year to more quickly take advantage of the opportunity, which we believe is larger than initially anticipated.

In terms of our U.S. retail store base, during the first quarter, we opened our New York City flagship -- a flagship store, along with 2 other new full-priced stores.

Turning to e-commerce, you may recall that in last year's first quarter, e-commerce grew by 48%. That rate was far above the norm and made the hurdle rate for the first quarter of 2014 unusually high. E-commerce sales this quarter declined 2% compared to the prior year. In terms of the second quarter to date, the weeks leading up to Memorial Day holiday posted double-digit increases. Unfortunately, our Memorial Day event was not as strong as last year.

Despite this, we are still expecting modest growth in e-commerce for O2 (sic) [Q2]. We continue to be very excited about the potential of this business long term. In fact, e-commerce is on track to account for 16% of our total business this year, and we believe this business can potentially exceed 20% of our total sales over time as we continue to invest in this growth pillar.

During the first quarter, we did successfully drive online conversion higher as improvements we made to the site continued to make it easier for our customers to shop. This was particularly true at the fastest-growing subsegment of this business, which is on mobile application.

On the international front, we opened 1 new franchise store in Mexico, ending the quarter with 26 franchise stores. We also announced that we entered into a new franchise agreement. It covers South Africa and encompasses both stand-alone Express stores and shop-in-shop locations in selected Edgars' department stores. The development work is underway, and 2 to 4 locations within department stores should be opened by year-end. Over time, we anticipate this type of location in approximately 10 of Edgars' A-level stores. These locations will give us important information that will help us evaluate the potential of shop-in-shop locations in other regions such as Asia and Europe.

As it relates to our capital structure, you know we have a strong balance sheet. Given this, along with management's and the board's belief that our shares represent a strong value, we have announced a new share repurchase program in the amount of $100 million. We expect to execute this plan over the next 18 months for the benefit of our shareholders.

Additionally, we have been finalizing plans related -- relating to the refinancing of our senior notes, which we expect to redeem by the end of June, using proceeds from new term loan. After careful review, we have decided to increase our proposed refinancing to $300 million versus the $200 million previously indicated to take advantage of the favorable rate environment. We will further enhance our financials -- this will further enhance our financial flexibility.

We believe in the value and future of our brand, and further believe that share repurchases are an effective means of enhancing shareholder value, especially at a time when we believe our shares are undervalued.

With that, I'll turn the call over to David.

David G. Kornberg

Thank you, Michael. Good afternoon, everyone. The first quarter proved to be challenging, and we are all disappointed by our performance. While external factors intensified the challenges of the quarter, we did not execute as successfully as we are capable of doing.

Our women's business delivered weaker results than men's, which we attribute to the lack of differentiation and newness in certain key areas such as women's knit tops, sweaters and working bottoms. We also saw the need for additional inventory in some of our women's working tops and bottoms.

In knit tops, we're seeing steady demand for lace, feminine tanks and tees, Aztec prints and tops with embellishment or novelty fabric. However, a great percentage of the items in this key category did not perform to our expectations. We have placed orders to rebalance the selection, and new receipts have started to arrive. We're anticipating nice build from several items, introducing new styles that have tested well and continuing to focus on driving improvement in this important category.

Sweaters make up a smaller piece of our spring assortment, so their first quarter performance was below plan. Some new received styles have been doing much better, and newness will continue to flow in. The information we are gathering on our sweater assortment will be key to informing our fall sweater buy.

In March, we mentioned that as we moved away from colored bottoms, we overcorrected and went too neutral. With the Editor and Columnist, in particular, where our customers love the consistency of the quality and fit, we need to keep the assortment fresh by offering variety in color and pattern. We also needed to deepen our inventory levels to provide stores with a full-size offering of our new barely boot leg shape in both the Editor and Columnist fits. That new product is now flowing in and business has been improving since the start of Q2.

While we've had some challenges, I want to be sure that we don't lose sight of the women's product that is working well. We successfully identified new trends and interpreted them well, delivering items that our customers wanted. High-waisted bottoms, cropped and lace tops are a few examples. We also have some great items in woven tops and anticipate stronger sales in the category than in Q1.

We continue to make real gains in skirt and casual jackets. Casual shorts were also ahead of last year. We also [indiscernible] going into the season that we felt there was real opportunity in women's shoes, and we've seen significant growth there.

As we position ourselves for the fall season, we're continuing to optimize our mix of mid-rise and high-rise denim. We're also selling a more exciting presentation of dark washes, which are tested and proven.

Let me now turn to men's, where our performance was better than women's. In its entirety, while the men's business showed a decline for the quarter, business fell less deplete [ph] in traffic. Suits continued to do well, and jackets continued to grow at a rapid pace.

Casual looks, including graphic tees, color block tees and stripes did well. Casual pants also grew nicely, with chinos and fleece the key drivers there. Conversely, we didn't comp sales in short-sleeved knit tops. However, sales have rebounded in Q2 with the warmer weather.

To summarize, if we look across both genders in what was a challenging and disappointing quarter, we had success in certain categories and styles. We raised ticket prices on specific fast-turning men's and women's items, helping to generate more margin dollars on them within the promotional environment.

As I look across both genders, we are continuing to examine alternative approaches to the way we flow into and exit out products. A portion of our assortment will always highlight the latest trends, but we know that their staying power can be short. Fashion items, however, can potentially last far longer. The men's 1MX and the women's Portofino shirt illustrate this perfectly.

From what we have learned from outlet selling, I believe we have more opportunities to let fashion items run their course, while simultaneously ensuring that we also provide our customers with the newness which they demand.

Michael mentioned about cutthroat marketing. The Express brand has built up strong recognition and goodwill over the past 34 years. We have a large, loyal base of customers, and engagement through Express NEXT, social media, influential bloggers and in hard media coverage keeps growing. That's great but it's not enough. We have 2 large opportunities there. One is to drive traffic in general. The second is really a subset of that; it's about driving traffic and cultivating new customers at the lower end of our customer age range to introduce them to our brand. We've always targeted customers in their 20s and 30s, and that has worked well for us.

To advance this objective, we signed Kate Upton to be our Brand Ambassador given her great appeal to the millennial audience, both male and female. We just wrapped up our first photo shoot with her, and you'll begin to see her appearing in our marketing and advertising materials this summer.

Our demographic is quickly gravitating to mobile commerce. To capitalize more fully on this trend, we are redesigning our mobile app to simplify the shopping process. We are also shifting more of our marketing dollars to enhance our presence on top millennial, online entertainment destinations. Our goal is to connect more closely with this important demographic.

Separately, we've allocated more of our marketing spend to new customer acquisition activities, as well as to campaigns focused on winning back occasional or lapsed customers. We also need to introduce more impactful promotion, and related tests are proceeding.

At this time, I'm going to turn the call over to Paul to go into more detail about our financial performance.

Dominic Paul Dascoli

Thank you, David. Good afternoon, everyone. Our first quarter sales fell 10% to $461 million due to a decline in traffic, AUR and transactions. Our guidance took into account the impact of pulling some of our first quarter business into last year's first -- fourth quarter. However, it also anticipated a stronger April than we delivered.

Our gross margin came in at 29.8%, declining 370 basis points. Merchandise margins declined by 30 basis points. In March, we indicated that a modest improvement in our merchandise margin was expected. But as the quarter progressed and we kept the pace of promotions high, we were selling through units at lower prices than anticipated. This offset the additional dollars generated from increasing ticket prices on select items, as well as the aggregate savings resulting from better management of freight, shrink and fabric cancellations.

Our ability to quickly cut buying and occupancy and SG&A expenses was limited, which in turn limited our ability to preserve our bottom line. As a percentage of net sales, buying and occupancy expenses deleveraged by 340 basis points, more than anticipated in March. The greater-than-expected deleverage is tied directly to poor sales comps.

SG&A as a percent of sales came in at 26.6%. The dollars spent were actually a bit below our March plans, but the deleverage of 450 basis points versus the 350 basis points deleverage referenced in March is due to our lower sales.

Our effective tax rate was 44.3% versus 39.6% in last year's first quarter. This rate increase is due to the impact of certain nondeductible stock option-based compensation expenses. In combination, this all translated into lower operating income, net income and EPS.

Our capital expenditures during the quarter were $27 million compared to $17 million last year. The increase was primarily due to investments in information technology and real estate.

In terms of inventories, as you know, we began the quarter with our inventories down 1%. We ended the quarter with inventories of $235 million, an increase of approximately $9 million or 4% or essentially flat on a square-foot basis. The entire increase relates to the inventory build associated with our outlet stores.

I'm now going to turn to our guidance for the second quarter and full year 2014. Second quarter comparable sales are expected to decline in the mid- to high-single digit range. Merchandise margins are expected to decline as we've anticipated a continuation of the heightened promotional environment as well as the impact of clearing certain merchandise that did not perform well in Q1. As well, our buying and occupancy and SG&A will delever as a result of our expected lower comp sales. We expect our tax rate to be approximately 42%.

For the second quarter, we are guiding to a net loss of $2.5 million to a net profit of $2.5 million. In terms of diluted earnings per share, this ranges from a loss of $0.03 to a profit of $0.03 per diluted share, assuming a share count of 84.4 million diluted weighted average shares outstanding.

In the second half of the year, we continue to anticipate sequential improvements in our comps as we deliver improved product and our marketing initiatives begin to take effect. This will translate into full year negative mid-single digit comps based on our projections, which call for negative comp sales in the third quarter and a flat fourth quarter.

We are leaving our full year interest expense guidance unchanged until we complete the refinancing and can provide exact numbers regarding the magnitude of the ongoing interest benefits and the onetime costs associated with the refinancing.

We expect our tax rate to be approximately 40%.

We anticipate 2014 net income ranging from $63 million to $76 million, and diluted earnings per share within a range of $0.74 to $0.90. The EPS calculation assumes a share count of 84.6 million diluted weighted average shares outstanding. Capital expenditures are currently expected to range between $110 million and $115 million compared to the $105 million spent in 2013.

As Michael mentioned, we are taking steps to remove certain non-essential costs from our operating environment. Those savings of approximately $15 million for this year, and $18 million on an annualized basis have been included in our guidance, as well as any costs associated with executing those changes.

We have also completed a review of our store fleet and decided to close approximately 50 stores over the next 36 months, coinciding with natural lease expiration so that we mitigate any extraordinary closing costs. Once all those closures have been implemented, we expect to generate incremental profit of $5 million to $8 million annually. Because these closures are expected to start at the end of this fiscal year or the beginning of next, no associated costs or savings have been incorporated into this year's guidance.

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

Michael A. Weiss

Thank you, Paul. We have a strong brand presided over by talented and passionate -- by a talented and passionate team, excuse me. We are reacting strategically to change -- to changes in the marketplace and evolve -- and are evolving the way we execute against our growth pillars. This flexible approach ensures that we are directing our resources to those areas offering the highest returns. Specifically, that is why we are rationalizing our bricks and mortar fleet.

I believe strongly in many U.S. malls and want to focus on those locations and on the outlets, 2 key areas where shoppers are increasingly gravitating. At the same time, we're continuing to invest in the technology needed to support future growth in our e-commerce business and complete our transformation to an omni-channel brand.

On future calls, I look forward to sharing with you the progress we are making on our strategic objectives, with the goal of delivering more consistent financial results and improving long-term performance.

Operator, please open the lines so that we can turn to the questions-and-answer portion of the call. Thank you.

Question-and-Answer Session

Operator

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

Simeon A. Siegel - Nomura Securities Co. Ltd., Research Division

Can you talk about your comfort in the guidance in light of the expectations for sequential improvement? Any color on quarter-to-date trends that would help contextualize that? And, Michael, maybe did the store trends follow the e-commerce trends that you guys discussed? And then, Paul, just quickly, you noted the savings and the onetime costs from the strategic initiatives were incorporated into the guidance. Can you quantify what those onetime costs are?

Marisa Jacobs

Simeon, we have to stop at one question per person, and then we can certainly come back if there's time.

Dominic Paul Dascoli

So, Simeon, when we look at the marketing initiatives that we've put in place, we look at the product that's coming in for the fall season, and the things that have been turning fast as we move into Q2. We believe that those are things that will definitely help us turn the comps around as we enter into the back end of the year. We're also reallocating some of our marketing dollars to really try to help drive traffic not just into the stores but also into our e-commerce sites, so more dollars are being allocated to social and digital media. We have more dollars going into affiliated marketing and search optimization, and really trying to move the dollars around that will give us more immediately measurable activity that'll help bring people into the stores. We've been testing some new marketing activity throughout different regions over the last quarters. I think that the biggest thing is to get -- for us to get the product right, which we feel as we're going into the back end of the year, that we'll see improvements in that regard. David, I don't know if you want to comment on the product and what we think about that.

David G. Kornberg

I think that the most important thing is having great depth in proven and tested products. And in terms of what we have coming in, in terms of Q2 and what we've looked at for Q3 so far, we feel very good about it. And you look at some of the trends in terms of high-rise and mid-rise denim, lace, prints, jumpsuits, dresses, still very good in terms of the depth of inventory that we have put behind them.

Michael A. Weiss

And I'm going to answer the one you asked me, Simeon. Even though we're only supposed to take one question, I've got to answer it. What you asked me was whether the advance in stores would be similar to the advance in e-commerce. And the only way I can answer you is that I think trends count. And the e-commerce trend, despite Q1, has been consistently very, very, very good, much, much better than store trends. I do believe we have opportunities in the stores based on what is coming in and based on what we have learned, especially, believe it or not, from outlet in terms of assortment, in terms of mix and in terms of really what the customers are indeed looking for. We have to, however, stick with the trends when we do our guidance, so that we can't build any of this into what we really think going forward. But I would repeat the fact that we have much stronger trends in e-commerce than we do in stores.

Operator

Our next question comes from the line of Betty Chen with Mizuho Securities.

Betty Y. Chen - Mizuho Securities USA Inc., Research Division

I was wondering, Paul, if you can address what we should expect in terms of inventory position at end of the second quarter and what are the key buys or inventory plans for the back half as well? And any comments on AUC pressure related to those buys?

Dominic Paul Dascoli

Betty, we don't, as you know, give formal guidance on inventory as we look -- looking ahead. But I will tell you that we are managing inventory tighter as we get into the back end of the year. We -- and David has just talked a lot about us keeping more open-to-buys available for us to chase into those things that are selling well. We didn't do a good job of managing our inventory in the third and fourth quarters last year. I think we talked about that on our last call. So our intent is to go into the second half of the year with a more tightly managed inventory. In terms of AUCs, we're actually seeing -- I'd say, our AUCs in the back end of the year, right now, we're expecting to be flattish to maybe actually a little slight favorability in AUCs through the back end of the year. So it could potentially work in our favor.

David G. Kornberg

And if I could add, as we sit here today, Betty, we have more of an inventory for Q3 and Q4 than we had sitting here this time last year.

Betty Y. Chen - Mizuho Securities USA Inc., Research Division

So those inventory, is that a carryover inventory, David?

David G. Kornberg

Open-to-buy dollars. We have more open-to-buy dollars available as we sit here today than we did at this time last year for Q3 and Q4.

Operator

Our next question comes from the line of John Morris with BMO Capital.

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

From stepping back and looking at it from a big-picture perspective, you really weren't that far off of the revised comp guidance for Q1. And the merch margin was actually not that far off, and inventory was flat. So just having -- we're just having trouble understanding the reason for the delta of the shortfall relative to that guidance. And maybe if you can kind of explain that a little bit. I don't know if it was because of SG&A being up 9% or so, but I think you said that, that was not as much as you thought it would be, so maybe changes you see there.

Dominic Paul Dascoli

John, when I take a look at the comparison of how we were modeling our business at the time that we provided guidance compared to where we actually came in, we actually were off in our top line. While we gave a range, we actually were just hoping and expecting to be more in the middle end of that range. So our sales number is actually off by a bit compared to how we had modeled when we gave our guidance. As well, our merchandise margin is actually down some from how we modeled. We had actually expected to see a modest increase year-over-year in merch margin. We were down a little bit, but we were down even a little bit further compared to where we had thought we might come in, in the middle or -- more the middle part of our guidance at the time. So that put some pressure clearly on B&O. B&O in terms of absolute dollars was actually pretty close, as were our SG&A expenses. We actually saw a slight favorability compared to where we modeled. So it really wasn't -- as we were modeling, we were thinking we would be a little bit more in the mid-range of that guidance than where we actually ended up. Remember, we had -- what we had said in the call was that we were tracking in the first month or so toward the worst end of that guidance, but that we had built in a pretty significant change in trends. So that didn't happen, which is what put the pressure on margin dollars and margin -- overall gross margin rate compared to where we thought we'd be. Does that help?

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

Yes.

Operator

Our next question comes from the line of Neely Tamminga with Piper Jaffray.

Kayla Berg - Piper Jaffray Companies, Research Division

This is Kayla Berg on for Neely. Just wondering what are some of the underlying assumptions of the merchandise margin implied in the full year guidance in the back half versus Q2? And how much does that guidance contemplate on planned markdown following the spring underperformance versus maybe what you're anticipating as a stepped up promotional environment?

Dominic Paul Dascoli

So we're projecting right now that we will see some compression compared to prior year in merch margin in Q2. And as we said in the script that we've taken into account those items that we would have to flush through in Q2 that maybe didn't sell well in Q1. And so that merch margin decrease will be at a level that's higher than in Q1. And as we get into Q3 and 4, we are expecting, at this point, to potentially see a very modest improvement in merchandise margin getting some benefit from the AUCs that I referenced a while ago, as well as better inventory management, which David and I just spoke about.

Operator

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

Lorraine Maikis Hutchinson - BofA Merrill Lynch, Research Division

Can you talk a little bit more about your pricing strategies going forward? It sounds like you were able to take prices up on certain items. And I'm assuming that given the competitive environment, you'll have to take prices down on others whether it's initials or through promotions. So how do you think about your pricing structure and changes you need to make over the next year or so?

David G. Kornberg

I think -- if I could answer that for you, Lorraine. I think in terms of the price ups that we've taken and price ups that we're looking at going forward, it's really being very opportunistic based on the idea that we were going to have to promote more, which we have. There will be more things that are coming through for the balance of the year in Q2, Q3 and Q4, which yes, there will be price increases on. But by and large, our prices overall -- it's a very small percentage of the inventory. Our prices overall have remained pretty flat in terms of where they've been in the past year.

Operator

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

Kate Fitzsimons - JP Morgan Chase & Co, Research Division

This is Kate Fitzsimons on for Brian. You just spoke to the Memorial Day promotion falling short of plan. Last call, you spoke to consumers continued to the 40% to 50% off-box of promotions. Do you think that was at play there or was it more of an execution issue just in terms of product? And then just, should we expect any adjustments to your messaging go forward through the balance of 2014?

David G. Kornberg

I think it was more promotional I think than it was for the execution in terms of the Memorial Day weekend. As we look at the trends that we've seen over the last few weeks, we have seen improving trends, as Michael spoke to earlier. And it was really that weekend that we got hit. And we've seen things recover since. So, as we look at it, I think that the Memorial Day weekend, also based on the amount that we promoted prior to that, people have been able to buy it on promotion on previous weekends, especially on Mother's Day. So I think that affected us to a certain extent. But as I look of the product and I look at the turn that we have coming through, it looks promising.

Operator

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

Richard Ellis Jaffe - Stifel, Nicolaus & Company, Incorporated, Research Division

Given the relative strength of e-commerce and the opportunity that presents, is there, I guess, an opportunity to carry more online to do more in advance of season testing or have a greater range, depth and breadth of product that can give you more intelligent buys going forward for the bricks-and-mortar stores? How are you using that e-commerce business, and is there a way to use it even more effectively?

David G. Kornberg

Absolutely, Richard. I think it's really -- the key to it in terms of our e-commerce performance is the breadth of assortment, it's testing, it's looking at ideas that we can potentially flow into the bricks and mortar go-forward into the future. And we're very pleased in terms of what we're seeing from that approach in terms of the actions that we have tested by that route. I only see us doing that more and more as we go forward.

Richard Ellis Jaffe - Stifel, Nicolaus & Company, Incorporated, Research Division

And how much more do you offer online that is in stores on a rough percentage basis?

David G. Kornberg

It really depends on the department that you're talking about. So there are certain departments where we do offer more than others.

Michael A. Weiss

And we have a department or 2 where we don't even offer it in the stores, like swimwear, which is another whole foot that we can offer product on the Web that we don't offer in the store, not just product extensions.

David G. Kornberg

So just to be clear, on the swimwear, we've tested it in 5 stores in the warm weather climate. But the biggest part of that test was really what we got online. So very excited with what we saw from that. And also, when you look at it, our active wear, our performance active is in 30 stores, but we're doing very decent business on that online as well.

Operator

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

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

I was wondering maybe if just taking a step back and looking at the bigger picture if you're seeing anything new with your core customer, any new macro pressure or are you seeing maybe additional competitive pressure via the fashion players that are online? Maybe you can talk about that a little bit.

David G. Kornberg

Sure. We're seeing, in terms of the climate that we're working in, yes, we're working in a climate where mall traffic is declining. But the fact is in terms of what we've seen over a sustained period of time in terms of the growth of e-commerce and in terms of what we're seeing from our outlet business, it gives us great optimism in terms of what we can achieve going forward. So we're very pleased with what we've seen in the outlet business, which is really based on everything that has been proven in the past and all our bestsellers from the previous year. So I think that what we're seeing is a real radical shift in terms of the growth of online, which is now -- we said we wanted to get 15% of total. We're now operating at 17% of total. And that we believe somewhere in the future, we can get to a position of 25% of our total business online. When we look at our outlet business, we've talked in the past about the potential for 100 stores. Based on what we've seen from the first 5 weeks in selling on the 17 stores that we have, we believe that there's a potential to take our outlet business to 150 stores. So I think that the opportunity that we're seeing is presenting itself as we go, and we are accelerating our rate of pace of change in terms of adapting to that new reality. And I think we'll do very well from that.

Operator

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

Jay Sole - Morgan Stanley, Research Division

Just a question about the 50-store closures. Are you committed to just 50 or is it possible that the number could decrease? Or are there also some stores on your watch list that maybe you might consider closing in addition to the 50? And then, Paul, if you just talk about the store opening plans for 2015 and CapEx, just generally speaking, if you can comment on that, that would be very helpful.

Dominic Paul Dascoli

Sure. We did a pretty comprehensive review of our store fleet and believe that 50 is the right number for us right now. But with the trends that are changing, as David has indicated, certainly, that's something that we will continue to look at and evaluate on an ongoing basis because of the change -- as the trends change that we need to be willing and able to change with them. But right now, we feel like 50 is the appropriate for us.

Matthew C. Moellering

And this is Matt. The -- we have taken a look at the stores we have closed over the past couple of years and developed a pretty good algorithm around looking very specifically at which customers in the stores we will close, how many transitioned to a new Express store or how many moved to online for sales as well. So we have a pretty good feel for how much sales will transfer to other stores or other channels as we close them. We're being somewhat conservative as we look at the first 50 stores. Once we get those closed and verify where the numbers are, there might be opportunities for more.

Dominic Paul Dascoli

And in terms -- just quickly, in terms of CapEx, we guided $110 million to $115 million. We've maintained that guidance for the full year. And as you know, about 70% of our CapEx goes to real estate.

Operator

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

Janet Kloppenburg

I was wondering if you could talk a little bit about your tests for the fall season, particularly in sweaters and denim, and if there's any encroaching leads there. And if you could talk a little bit about the expectation on reorders. Perhaps this is -- you resolved the issues there with getting back in stock when you need to. And lastly, Paul, are we to expect that interest expense -- the interest expense forecast could change once you complete the refinancing at the end of 2Q or is this the way it looks for you?

Dominic Paul Dascoli

No, Janet. I think I said -- I think in my comments, it's -- we've left interest expense at a rate assuming that we have not completed because we haven't refinanced. And we'll communicate that when we finish it either by the end -- it will be in the second quarter that we finish that. But it should be less. We would expect it to be less.

David G. Kornberg

It's David. In terms of your previous 2 questions, in terms of sweaters, denim, our big test for the fall season, which really drives what we see in the holiday, is a test that we do at the end of May, beginning of June. And what we do is that based off of the results that we see from that. The styles that we bought into for the third quarter, we feel very good about based on the test results that we've seen. In terms of denim, it's been about reassorting the line to ensure that we've got greater penetration of dark washes, adding blacks and grays, and ensuring that we've got the right balance of mid-rise and high-rise, and that's what we've done.

Operator

Our next question comes from the line of Roxanne Meyer of UBS.

Roxanne Meyer - UBS Investment Bank, Research Division

I'm just wondering what areas you're focusing on in your cost-reduction plans. How much is going to occur at the store level versus corporate and some of those areas?

Dominic Paul Dascoli

A high -- a pretty significant portion of it is spread actually across the entire organization. We are -- we have our largest bucket of expenses obviously in the stores. So there'll be a percentage that's there related to how we manage labor hours and other expenses. And most of it -- I think the most important thing is our -- where we're reducing costs is not as much customer-facing. We're making sure that we keep the right amount of investment behind not only the pillars of growth and the things that we're expanding but also, in the areas that matter with respect to product development and merchandising. And given the question on costs, I'll take the opportunity just to let you know that the cost to implement the action that we've taken is less than $1 million, and we've included that in our guidance.

Operator

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

Rebecca Duval - BlueFin Research Partners, Inc.

David, if you can speak to this, or Michael. I just want to understand...

Michael A. Weiss

I'm sorry, Rebecca…

David G. Kornberg

We can't hear you. Could you speak up?

Rebecca Duval - BlueFin Research Partners, Inc.

Sure. Can you hear me now?

Marisa Jacobs

No.

Michael A. Weiss

No.

Rebecca Duval - BlueFin Research Partners, Inc.

Now can you hear me?

David G. Kornberg

We can hear you a bit better.

Michael A. Weiss

A bit better.

Rebecca Duval - BlueFin Research Partners, Inc.

Okay. So can you guys talk a little bit -- now, you talked about the fact that there wasn't a lot of newness in the assortment, that's what you felt like went wrong in Q1. And you talked about you have the steps and strategies, so you feel like you've -- your comps [indiscernible] for Q3. But where did it go wrong in Q1 and going into Q2? If you have a custom react strategy in place, how did you -- the sales [indiscernible] and that there's lack of newness coming into the stores? And is there a way to kind of correct that towards the end of Q2 or will it just be more of a chase and kind of reorder of styles that are working?

David G. Kornberg

I think it's a very good question, Rebecca. This is impossible to really take all the risk out of fashion clearly, and we have stated that repeatedly. It's always part [indiscernible] and there's always part [indiscernible]. I think the way in which we indexed the test was hampered by the sharp decline in traffic that we saw in Q1. And I think that, that had an overwhelming effect on it. I think that the most important thing for you to know is that our biggest and our best key items are all tested, they're proven and they're built into the items that they are today. And a lot of the items that we really, we got into, we didn't have the right depth in them in Q1, but we've really rebalanced the assortment for Q2. And we believe that we have them in the right level of inventory on some of our best items. So we know this is a strategy that works and has worked very well for us in the past, and it's prevented us from ordering too heavily in the product that the customers didn't like on many, many occasions. The fact is the way in which we index the test was hampered by the sharp decline in traffic that we saw in the first quarter.

Operator

Our next question comes from the line of Danielle McCoy with Brean Capital.

Danielle McCoy - Brean Capital LLC, Research Division

I was wondering if you can give us a little bit more color on some of the trends that you're seeing international?

David G. Kornberg

When you say trends, do you mean fashion trends or...

Danielle McCoy - Brean Capital LLC, Research Division

Fashion trends, just trends overall in Mexico and, I guess, anything differentiated of what we're seeing here as far as traffic and sell-through.

David G. Kornberg

We see that in a lot of cases that the brand translates overseas, internationally, in a way that it sells here in the U.S. in terms of the mix, in terms of the assortment. What we do see in the Middle East, there is a greater preponderance for logo product. They love the line and product of the brand. And then in Central and South America and also in Mexico, we see a lot of our party, our going-out product sells very well indeed. And clearly, where -- what is a strength for us is color and the fit, and that is something that appeals very much to the Mexican, Central American and South American markets.

Operator

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

Steven Louis Marotta - CL King & Associates, Inc., Research Division

Can you please comment on the aggregate marketing spend in 2014 versus 2013; the cadence perhaps through the quarter, if it falls in different buckets? And did the $10 million increase in SG&A cost, on a year-over-year basis in the first quarter, was any of that accounted for in a marketing differential?

Dominic Paul Dascoli

So marketing, we talked about at the end of -- at the last call that we expected to increase our marketing spend, as a percent of sales, by about 70 basis points. It had been running at about 4% of sales on an annual basis. And yes, in the first quarter, there was an increase in marketing spend by about 2 percentage points year-over-year.

Operator

Our next question comes from the line of Barbara Wyckoff with CLSA.

Barbara Wyckoff - CLSA Limited, Research Division

In the outlets, what percentage of the businesses is the merchandise made for outlet versus clearance? Do you test here too? Do you have a separate team for outlets? And is it more of a following business or is it -- how do you view it versus the regular priced stores?

Michael A. Weiss

It's 100% made for outlet, so we can have -- as opposed to what we were doing in the 5 clearance stores, which never had anything good, never had size or never had really -- it could not have been a business. This is 100% made for outlet by a totally -- the outlet team is totally separate, separate stores team, separate merchant, separate everything. It's being run as a wholly separate business. The only overlap is production is the same production department. But there are people dedicated in our production department to outlet. And the good news with outlet is that every single thing that's in there, whether it's in gifts or just in minor quantities, is a known good style from Express.

Barbara Wyckoff - CLSA Limited, Research Division

So it's a following business. That's great.

David G. Kornberg

Yes.

Operator

I would now like to turn the floor back over to Michael Weiss for closing comments.

Michael A. Weiss

That concludes our call for today. Thank you for joining us this afternoon and for your ongoing interest in Express. We look forward to speaking to you all. Thanks again.

Operator

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

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Source: Express' (EXPR) CEO Michael Weiss on Q1 2014 Results - Earnings Call Transcript

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