Q4 2019 Earnings Call
Welcome to the extra Inc. fourth quarter 2019 earnings conference call. At this time all participants are in listen only mode. After the speakers presentation. There will be question answer session Duck. The question during the session you'll need to press star one on your telephone. Please be advised of today's conference is being recorded if your car any further assistance. Please press star zero I would now like to.
The conference over to Mr., Dan Aldridge, Vice President Investor Relations. Please go ahead.
Thanks, Your good morning, and welcome to recall.
The opened by reminding you of the company Safe Harbor provisions any statements made during this conference call, except those containing historical facts may be deemed to constitute forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
All future results may differ materially from those suggested in forward looking statements due to a number of risks and uncertainties, all which are describing the company's filings with the FCC, including todays press release.
Express assumes no obligation to update any forward looking for information, except as required by law.
Our comments today will supplement the detailed information provided in both the press release and the Investor presentation available on the company's Investor Relations website. In addition, you can locate a reconciliation of any adjusted results discussed in our comments to amounts reported under GAAP on our website or in our earnings release.
With me today, our 10 Baxter Chief Executive Officer, Perry pair of glasses, Chief Financial Officer, and not Moellering, President and Chief operating Officer, I will now called turn the call. It went up.
Thank you Dan and good morning, everyone.
I'll start with highlights from the Investor event, we held in late January at the New York Stock Exchange, where we unveiled our new corporate strategy presented where expressed is headed and how we're going to get there.
He will then take you through the fourth quarter results and our guidance for the first quarter and I'll make brief closing comments.
We held an investor event, because express has begun the transformation.
We are rebuilding our organization, our brand and our business and it was important to me to put to work we're doing in the context of a clear comprehensive corporate strategy.
The new corporate strategy, it's called the expressway forward.
The reference to an expressways intentional because you do not choose that roadway. If you do not plan to move forward with responsible speed at a watchful eye on what is happening around you.
Expressway forward outlines the way in which the four foundational pillar as you've heard me talk about before we'd be addressed.
So if you remember product.
Brent.
Customer and execution.
Each one it's been flushed out and dimensionalize to provide clarity and tissue and to ensure that every express associate understands that our overriding objective is to return the company to profitable growth.
The shorthand version of the Expressway forward is E X P bar, which all of you will of course recognized as the ticker symbol for express.
He is for engaging our customers and acquiring new ones.
As for executing with precision to accelerate our sales and profitability.
He is for putting product first and our is for reinvigorating our brand.
The work we will do in each of these areas will define our focus guide our decisions and in time return our brand to relevance and our business to help.
Let me highlight just a few of the key strategies and initiatives embedded in each one of these areas.
Engaging our customers and acquiring new ones.
We are building strategies and developing tactics to communicate with customers in different and more impactful ways.
And we will be measuring our progress in gaining greater share of wallet from the people who already shop with us and then typing those who don't.
We will relaunch our express loyalty program and intend to reissue our express credit card. This fall.
We will continue to work I spoke about last quarter to optimize our marketing spend through analytical tools and predictive models, we will increase our use of personalized email and we expect all of this to drive stronger conversion across our channels.
Executing with precision to accelerate sales and profitability.
This is very much in progress with the complete redesign of our go to market process, and we are already driving stronger alignment and better cross functional coordination in the field at our corporate office in Columbus, and our design studio in New York, while increasing our speed to market by 20% to 25%.
Executing with precision has also about inventory optimization and this too is already in progress.
We will right size, our inventory and speed up our turn by eliminating unproductive inventory and optimizing the composition of our Assortments.
To comment on the progress today.
We have made a significant reduction in our inventory position over the last several months.
And while we still have a lot of work to do in order to more consistently calibrate our inventory to our sales trend. The work to date has already resulted in reduced inventory levels and we exited the fourth quarter with inventory down 18% compared to last year, which will enable us to present more new fresh product to our customers as we go forward.
Better execution also means improving conversion.
We have a real opportunity to convert at a much higher rate both in stores and online.
To address this in our stores, we're developing an entirely new customer experience model to make it possible for our associates to spend more time on customer service and less time on operational tasks during store hours.
And with our new SVP of E Commerce in place as of mid January we will be initiating a replatform up our web site, which will improve our online conversion and also add new functionality and capabilities.
[noise] putting product first.
You've heard me say before that if we get everything else right, but you're not consistently deliver relevant and compelling product we will not succeed.
The centerpiece of our new product vision, it's called the express at it.
While we are still in the early stages of this transformation. It is already driving the approach in mindset of our design and merchandising teams.
The expressed at it is about focus and curation.
It is about standing for those elements of fashion and style, we know matter most to our customers.
Some of these elements play to the core strengths of the express brand and our ideas that we were once known for but up let languish.
One example is a concept called mix and match versatility, which is about providing the customer with a wardrobe that has the functionality to cover multiple needs and wearing occasions.
Our chief merchandising officer has her teams thinking about each category and item and also about the assortment in its totality. So the customer can more easily build a flexible and harder working wardrobe.
This aspect of our merchandising approach will come through in key pieces introduced each month that can be worn in multiple ways and with marketing and in store imagery that will bring the versatility message to life for the customer.
We began testing this concepts concept in stores and online in February and the response from customers has been very positive.
The new product, we've introduced is resonating with our customers as is evidenced by a very strong sell through and we're just getting started.
For the fourth quarter, the percentage of new product in the women's assortment was approximately 20% and we saw double digit growth in choices that reflected this newness.
We expect that penetration will increase each month with the first season of product that reflects the full impact of our strategy to come in fall.
We've also made progress in our men's business and expected to be much improved by fall. This timing is based on the way in which we chose to sequence our product initiatives. The fact that our SVP of men's merchandising an outlet joined us not quite two months ago and that our search for a new men's design lead is currently underway.
Reinvigorating our brand.
There is white space for a modern versatile dual gender fashion brand that can help people get dressed for everyday and any occasion.
For us to effectively capture that position, we must clarifier brand message more closely connected to our product strategies and tell the express story in a powerful and consistent way.
[music].
At the Investor event, we unveiled our new brands purpose.
Creating competence and inspiring self expression.
This was developed based on research, we conducted to understand our target audience and the role they see our brand playing in their lives.
They believe that expressed can help the look help them look the way they want to look and feel the way that they want to feel.
That clothing can serve a higher purpose and empower them to take on new challenges.
And we believe that too.
Our chief marketing officer, and her team are working through the comprehensive plan and tactics that will bring this new brand positioning to life.
And we expect to launch a campaign and fall.
Engaging our customers and acquiring new ones.
Executing with precision to accelerate sales and profitability.
Putting product first.
And reinvigorating our brand.
He X P R.
With a great deal still to be done I will say that a great deal has already been accomplished.
Since becoming CEO not quite nine months ago, we have assembled an exceptional leadership team and each one of these leaders has done an outstanding job advancing the collaboration alignment efficiency and results orientation of their teams.
We developed a clear comprehensive corporate strategy to focus the company and move the brand and business forward and at the same time, we made a number of key decisions and took a number of immediate actions to change the trajectory of our business.
We identified $80 million and cost savings opportunities to be achieved over time.
We can dig conducted a significant organizational restructure.
We executed the first phase of a comprehensive fleet rationalization plan.
We designed and implemented a new go to market strategy that will allow us to move faster, it's already in place and making a difference.
We created a new SVP of East Commerce roll filled it quickly and have begun to work on a complete replatform of our website.
We rolled out the new corporate strategy across the organization and it made sure that all associates at all levels and across all functions understands their role in achieving our objectives.
We developed a new brand positioning and a rolling out new brand imagery, and we gathered our field leaders to ensure that they understand how their teams can most strongly represents and can pay this new message.
And most recently, we articulated the values and behaviors that will foster a culture of ownership accountability and results orientation.
Also making expresser rewarding and fulfilling place to work.
The feedback to the brand positioning and culture work has been incredibly positive.
Our leadership team has aligned.
Our associates are engaged and energized.
This organization is ready to get on the expressway and move forward.
So let me turn the call over to Perry will take you through our financial results and provide first quarter guidance.
Thank you team.
I'll start with a fourth quarter result, and then discuss our business outlook.
Fourth quarter, net though were $670 million.
Three person decreased as compared to 628 million bowler last year.
Consolidated comparable sales were negative 3%.
Look comps were nearly 5% and express factory outlet store comps were putting the 2% I.
As Tim mentioned, the new probably that we were able to did either sold well, we just didn't have enough.
For the fourth quarter were driven by strength in women's casual pants jacket, and outerwear any men sneak talk for them and suits, but beat strain was more than offset by weakness in boulder legacy items, we've seen woven tops and sweaters on the women side and dress shirt and graphic Tees.
In the men's business.
Our merchandise margin contracted by 60 basis points.
While we were more strategic with their approach to promotions. This was offset by the actions. We continued to take to move through clearance inventory as well at product that is not resonate with customers and didn't aligned with our go forward product strategy.
These efforts are reflected in our inventory position at the beginning of February which was down 18%.
Finally occupancy was flat as a percent upsale. However, it was down on a relative dollar basis as we continue our airports around rent reduction and other cost savings initiatives.
Our fourth quarter gross profit was $164 million with a gross margin rate of 27%.
60 basis points I compare to the prior year.
<unk> expenses were 149 million dollar a decrease of 12 million board on a GAAP basis compared to last year at the percentage of sales. It's you an 8-K mean at 24.5 person leveraging 110 basis points.
On a GAAP basis operating loss was $190 million compared to last year's I'll put it in income of $13 million.
On an adjusted basis, our operating income for the fourth quarter was 15 million 15.1 million dollar compared to last years adjusted operating income of $18 million.
Operating profit was negatively impacted by two significant charges recorded in the fourth quarter.
The first we'll see a pre tax restructuring charge of $7.3 million related to the previously announced corporate ofi infield restructuring activity.
This charge is three quarters that restructuring on the face of the income statement.
The second you say 198 million dollar right all of our intangible assets.
This is a noncash charge stemming from our annual impairment test the charge would be terming primarily using their market based approach you to the decline in market capitalization over the past year.
To be clear this charge has no cash flow implications and does not change our confidence in our strategy or the long term goal of achieving a mid single digit operating margin.
Fourth quarter loss per share was $2.21 on a GAAP basis compared to a net loss of two cents per diluted share in the fourth quarter of 20 team.
Adjusted earnings per diluted share was 19 cents.
Flat compared to the fourth quarter of 2018.
For the full year 2019, net sales totaled $2 billion, a decrease of 5% compare with the full year of 20 team.
Solid comparable sales were negative 5%.
We took home were negative, 6% and express factory outlet store comps were negative 1%.
This does decline was mainly driven by the change in our promotional strategy, partially offset by the early results from our strategic initiatives around pro that Ron customer and execution.
For the full year 2019 loss per share was $2.49 on a GAAP basis, which compares to earnings per share of 13 cents in 2018.
Adjusted diluted loss per share was 13 cents compared to last year adjusted EBIT.
32 cents.
The full year results were also impacted by the previously mentioned restructuring charge and the non cash write off of our intangible assets.
Now turning to our balance sheet and cash flow our balance sheet remains extremely healthy and we ended the year $207 million with cash and cash equivalents compared to last years $172 million.
Our balance includes the result of our share repurchase activity, which totaled 4.3 million shares during the year for $15.6 million.
Under our cutting 150 million dollar share repurchase program, we have repurchased 16.4 million shares for $116 million and we currently have $34 million remaining available.
Fiscal 2019 operating cash flow was 91 million dollar and capital expenditure was 37 million dollar, resulting in free cash flow of 54 million boards were 29 team.
Inventory at year end with $220 million.
18% decrease compared to last years $268 million.
The decrease was mainly driven by faster liquidation of underperforming goods. In addition, we made the decision to not by their input that until we had our strategy and full leadership team in place.
The work over the last seven months has significantly reduced our inventory level.
We continue to improve our inventory composition by increasing the penetration of new items in our assortment.
Our balance sheet reflects no debt.
With that I will now address our guidance.
For the first quarter of 2020, we currently expect.
Comparable sales to be in the negative mid single digit range.
Net loss in the range of $11.5 million to $14 million.
And loss per diluted share in the range of 18 to 22 cents.
This compares to last year's diluted loss of 15 cents.
Our first quarter guidance.
Impacted by two no systemic factory and is not indicative of our expectation for the remainder of the year.
First our inventory levels are too low.
This was due in part to an aggressive focus on improving inventory train.
Which while important to their long term health of the business with a bit too aggressive in the short term at the time first quarter was plan our strategy within early stages of development and we did not yet half key design and merchandising leaders in place.
We finished the fourth quarter with inventory down 18% and at the end of February were down approximately 25%.
We're encouraged that the new product and selling at a faster rate than we had anticipated the bottom line E. This gives us the flexibility to invest appropriately in new product in response to business trends in the back half of the year.
Second there is volatility surrounding the krona vitamins and its impact.
Hey, good possibility of continued implications for some of our raw material in finished goods vendors as well that consumer spending and traffic. We will continue to monitor the situation closely and do all we can to mitigate any impacts.
Our guidance contemplate where we know today.
Impact of these factors will have on our business through the first quarter. However, there could be additional impact that it's impossible to predict at this time.
With that said these are not systemic factors and therefore should not negatively impact our long term goal of achieving a mid single digit operating marching.
Turning to the full year 2020, we currently expect.
Capital expenditures in the range of $45 million to $50 million to fund and refresh of our stores to ensure consistent through presentation of our brand I quit the fleet.
New technology investments and the ongoing maintenance of technology platforms.
As it relates to real estate, we expect to close 35 stores as part of our previously announced fleet rationalization and opened two new store locations, one full price and one outlet.
That we expect to end the year with 562 stores, consisting of 356 retail stores in 206 outlet.
We currently expect to realize 50 million dollar of the $80 million from cost reduction opportunities from the previously announced corporate infill restructuring initiatives and improvements in our go to market process in 2020.
We expect the remaining $30 million in savings to be realized in 2021 and 2022.
[music].
We look forward to update you on our progress and now we'll now turn to pull back to team.
Thank you Barry.
On my first earnings call back in August I told you that I was confident the express brand could be restored to relevance and the express business could be healthy and profitable again.
Today my confidence in the success of this business and our long term prospects has not wavered.
Our transformation is comprehensive and underway.
Our organization has undergone a great deal of change over the last several months as we introduced a new corporate strategy, new leaders and reporting lines streamlined our teams and designed and implemented a completely new go to market process.
All of this was certainly a lot for our associates to receive and react too in a very relatively short period of time.
Our new go to market process is up and running smoothly.
And we have a lines the organization for the upcoming fall and winter seasons.
This along with all of the other initiatives we've spoken about will set us up for improved results as we move throughout this year and head into 2021.
Let me be clear.
Our first quarter guidance in no way reflects where this business has headed.
Challenges facing us in the first quarter are not systemic and we do not expect them to have an impact on our long term financial goals.
But with what we know today, we felt it was prudent to issue guidance at the level we have provided.
As we begin to implement the expressway forward strategy and the transformation of our company. We are building on a very strong foundation.
This is a well known brand with almost 300 million customer visits across our channels annually.
People know express and they appreciate the quality and value the brand has always offered.
And through our new brand mission promise and purpose throughout new marketing tools and approaches we will better articulate and differentiate the express brand.
This is a very large customer base and we will earn a greater share of their wallet and also attract new customers through smarter and more targeted marketing and a more compelling experience.
This is a product portfolio with the breadth and depth to cover a wide range of customers across an equally ride range of wardrobe needs and wearing occasions.
We are taking some of the core strengths of express and building upon them with a more modern versatile sensibility.
This is an organization galvanized around the new corporate strategy and a clear set of objectives and initiatives.
This is a company with extremely solid financials, and a sharp focus on cost reduction.
We have already identified $80 million and cost reduction opportunities and will generate additional profit improvements through the fleet rationalization plans, we announced in late January.
We have no long term debt and we ended the year with over $200 million and cash on hand, and we continue to generate free cash flow.
I am confident that express has a very bright future and that where we will return the brand to relevance and achieve our goal of a mid single digit operating margin over time.
This will not happen overnight and it will not happen in a single quarter.
But expressways are made for going the distance and we will.
As the Corona virus situation continues our primary concern is for the health and safety of our associates and our customers.
So we are following all of the Cdcs recommended protocols and our offices and our stores.
Due to the uncertainty of this situation and its implications for consumers and businesses. We will continue to monitor it closely and do our best to mitigate its impact wherever possible.
I'll now turn the call back to the operator, so we can take your questions.
If you'd like to ask a question at this time. Please press Star then the number one on your telephone keypad. If he would like to withdraw your question press the pound Keith. Your first question comes from Susan Anderson with B. Riley FBR.
Hi, Good morning, Thanks for taking my question and I guess on the gross margin for first quarter. How are you thinking about the puts and takes and what are your thoughts around the promotional environment, which I guess could change given the macro uncertainties and I think you said last quarter, though you had talked about.
You still needed to clear some old product in the first half the inventory looks very very clean. So just wondering if that's the case and if not should we expect a pullback sequentially. Thanks.
Thank you Susan.
He's getting from a GAAP gross margin at some point.
In the first quarter, we expect that's going to be a contraction of approximately 125 basis points. When you look at the 125 basis contraction.
It's broken between merchandise margin and being off from a merchandise margin standpoint, we expect the contraction of about 100 basis points and that contractual east coming in the form of one is the air Ocean adds were accelerating and pulling forward some receipts into Q1 and the expectation that that will help.
In our APC to stay impact on Patty.
From last year that we're expecting in Q1 and the number three is based on the light position that we had from an even through some point in Q1 is the mix of all of Red line to known Red line I put that in Q1.
Having said that when we moved to the being no line iden, even though we expect b note to be down 2% to outweigh.
Approximately mid single digits.
From a leverage some point, we expect that to the leverage the about a 25.
And given the decline in topline sales and looking at that at the mid single digits negative Kong.
But Susan it's Tim I would I would just add that.
Yes, our inventory is very lean and.
It is still not appropriately balanced, though between new and old product. So.
While it is significantly lower than a year ago, the penetration of product that that does not reflect our go forward strategy is still higher than I'd like it to be so we're still working through some of that product and as we move through the first quarter.
Great. That's helpful. And then if I could add a follow up Tim on the new product and maybe if you could give some more color how it's doing in the stores. It sounds like it selling very well I thought it looked much improved in the storage and maybe if you could talk about what the percent mixes now of kind of new versus the old first.
His last quarter, and I guess, what selling well and what still needs. Some work. Thanks, yeah, absolutely. So.
Coming out of the fourth quarter knew was about 20% of our inventory that percentage will increase as we move throughout the year I don't want to put exact numbers to it but it will increase obviously as we move throughout the year, but it's important to note that when I. When I joined the company last June we were still on.
Nearly we were still out our old go to market process and much of the first quarter had been put to bed. So we have been scrambling, obviously and doing a lot of hard work to change.
The on order for the first quarter and the new product that we put in tier two to your point into what I have said is performing very very well, we started attacking the categories that that needed.
The most work and Weve you've heard me talk a lot about women's tops that was a category that we were not performing well and at all and our performance in women's tops has improved very dramatically with the introduction of new product in both woven and knit.
And we also had.
Some success in new sweaters in the fourth quarter, So very very happy with where we are in women's tops and very confident that our women's tops business is going to continue to accelerate as we move throughout the year.
We also.
Recognized a pretty significant opportunity in women's denim.
Thats another category that's gone through a complete reinvent we have launched not only new fabrics and new.
Fabric platforms, but also new fits moving away from just the skinny and lagging fit which was 100% of our assortment when I joined the company and now having introduced a number of new leg shapes, all of which are resonating with the consumer.
So in addition to that we had great success and women's jackets, that's a category that we have always been known for.
And we've had great success with the jackets, we've introduced mens we've had similar success, although as I said in my comments.
We are a bit further behind and that was intentional.
We attacked the women's business first because it needed.
The most work.
But we have seen also success in men's denim our men's denim business continues to be very good very strong our mens clothing are tailored clothing suits business very very strong we still need to do some work. However in shirts in mens a lot of work to be done in shirts, and men's and we're making progress on that.
Yes.
Great. That's very helpful. Thanks for all the details good luck next quarter.
Thank you Susan.
Next question comes from Paul Trussell with Deutsche Bank.
Hi, Good morning. This is gabby carbone on for Paul Thanks for taking your question.
Analyst Day, you spoke about reengineering your go to market process that you've mentioned that today.
If you can provide an update there wouldn't be should start to see those benefits.
Sure. Yes. This is Matt so we rolled out as we talked in the.
After meeting we rolled out the go to market process to the organization in late January early February we have now finished two of the key milestone meetings and the associates have really embrace this process even more so than we originally anticipated. So we're very pleased with.
Where we are from change management perspective, what this process.
What will happen as this process we have.
Well impact Q4.
Tim talked about fall winter seasons will be the first time, we see the impact of this new process, but a lot of high level of coordination and alignment upfront and should lead to very strong product offering in the back half of the year.
The three development pathways that go along with the go to market process arent flights. So we will see some impact associated with that around incentivized co creation et cetera, and a little bit in Q2 more in Q3 as well, but in full force in Q4.
Got it. Thanks, So just a quick follow up was asking about the outlet chat channel and what drove that positive comp for Q or you see better traffic trends in that segment or is it more conversion story.
It's a combination of things number one we have not reduce inventory levels in the outlet channel to the extent, we have with the retail channel So number one.
We did pull back a little too far on inventories, we talked about in our prepared remarks.
In the retail side of the business that wasn't the case, an outlet traffic is a little bit better in that channel as well.
We also have not.
We also have not pulled back on promotion in that channel in fact.
We're going to push forward with that channel.
Being our promotional channel as we continue to pull back on the deep store wide insight way promotions within our full price business.
Thank you so much that's helpful.
Next question comes from Marni Shapiro with retail trackers.
Hey, guys. Congratulations the stores look really much better.
Hi, Thanks quick questions. Thanks, the first is the collaboration with 10, France.
Obsessed I love. It you guys have done collaborations in the past plus sports figures and things like that could you talk about maybe your thoughts going forward with things like 10 fans and sports figures and then I just wanted to follow up on supply and supply chain question.
Okay. So I'm glad you are obsessed with tan.
He he has been a great asset for us.
What I would say about collaborations going forward is that they will be very closely aligned with our brand purpose. So when you think about our purpose and promise, creating competence and inspiring self expression.
When we talk to Japan. There there are very few people, who do a better job of creating confidence and inspiring self expression in the people that he works with so he was perfectly aligned with our new brand mission, which is why we chose.
To work with him for this spring season, the consumer engagement with him has been incredible his engagement with our brand has been incredible.
So very very excited about that so going forward.
Whatever we do you know I've said this over and over whatever we do is going to be aligned with our expressway forward strategy. It will be aligned with our brand purpose and our brand promise and hopefully you'll be able to see a very close connection between our brand purpose and our brand promise and who we choose to collaborate with going forward.
Testing and then if I could just follow up pricing power you mentioned that there would be some impact because you put things on in the air rather than on the boat, but as factories are now starting to open we know they have some delays in fabrications and things like that some port congestion. If you could just give us any idea have you had to shift a lot of product for third.
What you're dealing with shifting pipe for third quarter already sort of any.
Forward look as to how much is going to what kind of impact you can have as far as shifting product round.
So we have done a good job of mitigating risk where appropriate one of the things that has happened, though we did use China for a lot of our chase water represents a little less than 20% of our total.
Finished product production to your point there is a fair amount of fabric created in China.
But as we entered Q1 with.
Very lean inventory positions one of the things that happened coming out of Chinese new year, we use China for a lot of our chase product.
The delay of factories opening two to four weeks.
Created an issue, where we weren't able to chase aggressively into the things. We thought were working for Q the back half of Q1 and into early Q2.
We're monitoring the situation right now.
Total finished product, we think less than 5% will be impacted by.
By three to four weeks of delay at this point.
To your point with Port congestion, we're watching that carefully both on air and boat as everybody tries to catch up on product deliveries. So we'll see more about what that looks like in.
The coming months fantastic. Thank you guys.
Thanks Marni next question comes from Janet Kloppenburg with J.J.K. research.
Good morning, everyone.
I was wondering first if you could talk a little bit about how much of the disruption in supply chain and possible traffic.
Domestic stores.
People are starting to selling slowdowns is embedded in your guidance or you know.
That is.
A level of uncertainty that could come later.
I'd Love to talk about that I'd also love you to talk about where you expect your inventory levels to be at the end of the first quarter and when we should expect them to be where you're most comfortable with and.
Another.
Question I have is given that the content of the inventory is going to continue to improve I'm wondering what's the outlook is for gross margins as we move throughout the year.
If you see a scenario where your quarterly gross margins could begin to improve and I guess, there's some uncertainty about air freight, but if you could talk us through those points I would appreciate it. Thank you.
Sure. Thank you Janet.
As I said, there is clearly a tremendous amount of volatility and therefore uncertainty around the corona virus situation and I think like many of my fellow Ceos I'm, obviously paying close attention with the entire team here to all of the potential impacts from supply chain to a traffic.
Okay.
But I'm also remaining very very focused and keeping our executive team.
Really focused on controlling what is hours to control.
The objectives in the initiatives of our strategy.
Because that is the work that we need to stay focused on because over time. That's the that's the work that's going to return our brand relevance and our business to financial health.
So great uncertainty.
[noise] around that to your inventory question.
Obviously a bit lower.
Right now than than where we would like to beat.
But making progress as we move toward the end of Q1, I think that will be most comfortable with where our inventory positions are.
At by Q3 and that that statement applies not just to the level of inventory that we will have but also the composition of the inventories that we'll have so Q3, I think is where we'll be most comfortable and I do think that because of the because of because of that and because of the penetration of newness is going to continue.
Due to improved and we're going to continue.
Two.
Two.
Pull back on the deep store wide insight by promotions and that gets better as we move throughout the year that yes. There is an outlook I I do have an outlook that our margins will improve as we move throughout the year.
Okay, and if I could just follow up.
On the first quarter side.
Mid single digits comps declined outlook.
Is that more reflective of what's happening now what did you in bed some outlook for perhaps you know some traffic slow downs because of what's going on file with.
I know you don't breakout digital but we're hearing that digital is we think some benefit.
The fact that you know social distancing is coming into play and people are going out as much. So maybe if you could talk a little bit about whats in the first quarter guidance with respect to the macro uncertainty that we're running about thank you.
Yes, obviously, we are later than many of our peers. So we have had more time to understand the potential impact so embedded in our guidance embedded in our guidance as always is where we are and what we have seen to date and our best estimation.
Of the impact that that that will have an our strategies going forward. So our guidance is built exactly as it always is so.
It includes.
What has happened over the past several weeks.
Mhm.
However, as I said, there is tremendous volatility and great uncertainty around the situation. So it's impossible to accurately predict what might happen in the coming weeks and months.
That being said he the second part of your question Janet on online and the shift to online <unk>, but I'm what I'm very excited about is that while we don't breakout sales we have a very very powerful online business and so we are prepared to service our customer in that way should the customer chooses to shop.
More online than in physical retail stores in the near future.
Okay, Great and probably if you could you talk about CSG M&A outlook for the fourth for the first quarter. I know you have maybe about 55 billion of 80 million.
Glam it is going to be incurred this year at least that's my understanding and I'm wondering if you could give us an idea of how that looks on a quarterly basis or where the first quarter since with respect to those reductions. Thank you.
Yes.
Hi, John It overhang from.
Q on some point, we're expecting Q1, I soups into a why to be done approximately.
Negative low single digit and we do expect Q1.
From a basis points to comprise about 75 basis points in that result of that come guidance as we do get the ERP expense savings that we announced and we said about 50 million both of these expense savings would expecting them to calm.
In for the year, we're expecting.
This is this an approximation right now, but we're expecting these savings to be roughly evenly throughout.
The quarters.
I will look for approximately $12 million to $14 million outlet in range basis by quarter to achieve over the next several quarters and that's what's embedded we've seen.
In Q1 wanting to remind you that some of these savings are coming both in terms of both FG and H and be a no because the restructuring actions that we have taken as well as the.
Rent reductions that were expecting those are heating.
The randy's keeping the B. I know what the restructuring hitting both.
As Ginny and being all the other thing I want to remind you that we're expecting a certain level of headwind.
From an expense some point not to relates to expenses.
And that these in the form of Merit increase at minimum wage increase as technology investments that we're making their heating days Gionee and then obviously depending on obviously the performance is a short term and long term goals.
Goals.
Okay claim Swiss look a lot better so less.
We're watching closely.
Thanks Janet.
Once again, if you'd like to ask your question. Please press star one on your telephone keypad, we have a question from Roxanne Meyer with MKM partners.
Great. Good morning, Thanks for taking my question.
First I just wanted to find out as it relates to your outlet business. How reliant you are on tourism for outlets and are you embedding a slowdown in outlets in your guidance.
So we have not disclosed exactly the tourist component frankly, it's.
Somewhat hard to get out as well I think it's really.
Center dependent as well there are certainly tourist dependent.
Outlet malls in.
Warm weather locations, particularly on the coast among others are much less dependent on tourism. So center of the country and balls that we have converted from outlet are from retail to outlet stores are much less dependent on tourism.
Okay, and then just I guess digging into the merchandise margin.
Look a bit more I know you pointed to the resources of decline I'm wondering if you're willing to.
Quantify each of those you know as they roll up to the 125 basis points.
And then you know as specifically as it relates to the mix of Red Lion to non bed lines I would assume that that would be more favorable than perhaps you may have expected before simply because you're entering the quarter with so much less inventory. So I'd love some more color around that thank you.
Yes from from quantifying the and kind of a clarification when the merchandise margin expectations about 100 basis points. The gross margins. They won 25, so the merchandise much and 100 basis points I would say that the the vast majority of the impact is the mix of selling between Nonres Atlanta ready.
Hi merchandise.
And then the remaining is even evenly split between the our ocean into tidy again, the tightest. If you remember based on the timing from last year Q1, really didn't have an impact and this is where we've seen that impact the coming due.
The second part you question around.
Just depreciating the at the mix and be now whether or not it's perhaps more favorable than before just knowing how much you've sold due to some of that inventory.
Well a couple of things there, yes, we sold the look through over the last few months and the inventory composition is better but then at the same time, though we have entered the quarter was down 18% in inventory and that inventory that we'd actually on its also new deliveries in that impact.
The units in Q1 interim so that mix.
So, yes, we're better positioned from a red lights, some point by building impacting our mix in Q1, and what I would say Roxanne is that.
We have been more aggressive and moving through those red lines at a much faster clip than we have historically so.
While we certainly own less and I'm very confident in where we're going to be positioned as I said the composition of the inventory is going to get better and better as we move throughout the year.
The the penetration of sales and red lines, even though the inventory is significantly down.
Where we were a year ago in Red lines. The sales are actually up.
If that makes sense, so actually driving through the inventory much much faster, we're turning through our red lines faster in it as well because we've been more aggressive in liquidating that product ever Silverline. So were down as we talked about down at the end of February down 25% inventory the silver lining here.
Is that.
While people may be heavy in inventory given corona virus situation, we are very nimble and flexible at this point with our inventory levels, we can infuse newness into our assortment, where a lot of people will probably be more cutting inventory and trying to liquidate.
What they have which can potentially put us at a competitive advantage as we head into Q2.
Okay, great. Thanks for all the color and best of luck.
Thanks, Chuck Sam.
At this time I'll turn the call over say the presenters.
Thank you for joining us this morning everybody.
This concludes today's conference call you may now disconnect.
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