Q1 2019 Earnings Call
We went to the Express Inc. First quarter 2019 results conference call.
All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there'll be a question and answer session. If you'd like to ask a question. During this time simply press Star then the number one on your telephone keypad. If you would like to withdraw. Your question you May press. The pound key also if you could please.
Limit yourself to one question and one follow up question. Thank you Allison Malkin of ICR you may begin your conference. Thank.
Thank you good morning, and welcome to our call I'd like to open by reminding you of the company's Safe Harbor provision any statements made during this conference call, except those containing historical facts may be deemed to constitute forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
Actual future results may differ materially from those suggested in forward looking statements due to a number of risks and uncertainties all of which are described in the company's filings with the SEC, including today's press release.
Express assumes no obligation to update any forward looking statements or information, except as required by law. 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 with me today are Matt Moellering interim.
President and CEO , and executive Vice President and COO, and Perry Perry Class Senior Vice President and CFO I will now turn the call over to Matt.
Thanks, Alison good morning, everyone and thank you for joining us on today's call I will review highlights from the quarter and provide an update on the key priorities, we outlined at the start of the year.
I will then turn the call over to Perry to discuss our financials in more detail and review our second quarter guidance.
Before we talk about the quarter I'd like to make a few comments regarding our recent CEO announcement.
Last week, our board of directors appointed Tim Baxter as CEO of Express effective June 17.
Tim was most recently CEO of Delta Galil premium brands, which include specialty retail brands seven for all mankind splendid and Ella Moss.
Prior to that Tim spent more than 26 years with Macy's in a variety of roles, including Chief merchandising officer.
As our chairwoman <unk> Mangum commented in the press release last week. The board is very confident in Tim's ability to help US return express to growth. He is a seasoned retail executive and a strong merchant with expertise in both department stores and specialty retail.
For those of you who don't know Tim He is very accomplished at building and managing brands and is an expert in brick and mortar and e-commerce .
He led the integration of Macy's stores, and Macys Dot com in 2015 and drove record sales and growth for their E. Commerce site over the next two years.
He also led the merchandising teams at Macy's Macys Dot Com Macy's backstage off price concept and Bloomberg theory.
As chief merchant at Macy's, Tim oversaw all product categories, including many that were among the largest in the U S, including ready to wear dresses.
Mens tailored mens collection fragrance.
Handbags fashion jewelry and shoes.
Met with Tim and I know I speak for the entire team at express when I say, we're all looking forward to working with them.
Now turning to our first quarter results, our comparable sales and earnings exceeded our guidance.
First quarter net sales decreased 6% with negative 7% comparable sales and EPS was a loss of <unk> 15.
As we indicated on our fourth quarter call, we had a soft start to the year. However, the health of the business improved throughout the quarter.
We are making significant progress on the implementation of the initiatives we embarked on at the start of the year.
Our retail business, which includes both stores and e-commerce saw a negative 9% comp overall.
A retail product perspective, there were bright spots in our women's business led by casual pants jackets dresses and footwear.
We continue to see underperformance in tops, which we are working aggressively to address.
Our men's retail business outperformed women's with comp growth achieved in graphics denim casual pants and underwear, we saw negative comps in shirts and accessories.
It is important to note that we were able to significantly pulled back on promotional activities in the back half of the quarter in both mens and womens and we'll continue to look for opportunities to pull back on promotions going forward.
We believe these actions will position us as a healthier business for topline and bottom line growth in the future Perry.
Perry will discuss the composition of our merchandize margin in more detail during his remarks.
I will now turn to our factory outlet stores, which had a negative 2% comp within <unk>, we saw positive comps in sweaters jackets skirts and accessories on the women's side and positive comps in denim graphics dress pants and jackets on the men's side.
So the first quarter marked solid progress towards the goal we outlined on our last call.
While we are pleased to see the early benefits of our actions. We are obviously not satisfied with our overall results and are aggressively focused on the work that lies ahead to position express for long term profitable growth.
As a reminder, we are focused on improving three critical areas of the business in 2019 product.
Brand and product clarity and customer acquisition and retention.
I will now discuss the progress we are making against each of these and highlight areas of continued opportunity.
First as it relates to product we have several initiatives underway to help us make the right changes to our offering.
While we are starting to see progress in this area, we still have work to do to improve the assortment on a consistent basis.
We are doubling down on customer insights and applying the learnings to how we make buying decisions and curate our assortment.
We have made good progress against this initiative in a short period of time, but still have a significant amount of work to do to ingrain this into all buying and customer experience decisions.
Additionally.
We are increasing the quantities of forward season, small bulk buys versus versus an assortment of mainly wear now product.
This will help us get a better read on styles and improve our ability to maximize trend right product during the heart of the selling season.
By doing so we will have more actionable data and be able to improve our markdown efficiency at the end of the season.
We have been able to effect a reasonable amount of receipts for late spring, which should get us in a better position to react to results in fall.
And we're taking action to stabilize our tops trend in the second quarter, we will get early reads on key items from our fall and holiday tops assortment.
With some small bulk buys.
We are landing on additional assortment test in select stores in August and we expect to increase the percentage of fashion tops versus key items within our assortment to differentiate our offering.
Turning now to our second focus area.
And in product clarity.
We've done a lot of work in the past few months to help redefine and clarify our brand positioning we are now putting this work into action to ensure a consistent brand message across all customer touch points.
We are improving our commercial planning process to ensure we are aligning and focusing customer messages with key fashion trends and brand work each month.
We want to have clear and consistent messaging on the most important items across all customer touch points.
We have a cross functional team working on this initiative with the goal of having the new process in place by the end of the summer.
We are also optimizing our product portfolio to improve clarity, particularly in our stores.
It is important that all products, we deliver fit within the express brand and create a differentiated position for the customer.
Where that is not the case, we need to exit these categories.
As an example, we have already made the decision to exit swim in watches.
We are also looking at floor set execution in retail stores and how we can make it clear to customers what we believe in <unk>.
Within our brand message and from a fashion standpoint.
This will first impact our July 2019 floor set and should enable more consistent store execution as well.
To summarize the first two focus areas.
We are doubling down on customer insights creating.
Creating avenues to improve the product.
Gathering data to make better buying decisions and improving our brand and product clarity.
The third area of focus is customer acquisition and retention, which we are addressing through a combination of analytics, new initiatives and key partnerships and collaborations.
As it relates to customer acquisition, we launched a new marketing mix optimization tool in May and we expect to have actionable output from the model at the end of July which we believe will drive higher returns on our marketing investment starting in the back half of 2019.
We are also increasing our focus on growing our social media presence and customer engagement on key platforms.
While we have been able to grow our reach on these social media channels over the past few months, we need to do it at an accelerated pace to reach more customers with our consistent focus brand message.
As it relates to customer retention.
Earlier this month, we launched a new first impressions initiative with the goal of reducing one and done customers from the first 90 days of purchase.
We believe this initiative presents a significant opportunity to grow our core customer base.
In addition, we remain focused on signing up more customers in our next loyalty program to keep them engaged in the brand longer. This has been successful for us over the past couple of years and we will continue to be a focus going forward.
Partnering with key fashion Influencers continues to be one of the primary ways, we reach new customers and engage existing ones.
Building on the success of our Livia Copel collection.
Earlier this month, we introduced a collection designed with Rocky Barnes, a widely followed fashion model and Influencer.
<unk> seen a strong start to this collection both in stores and online and believe it is helping introduce the brand to a new audience.
We will further build on this in July by launching a limited edition collection of apparel designed by Karla Welch one of the industry's most successful fashion stylists.
For men's we continue to be pleased with our partnership with the NBA and our game changer athletes, who have helped attract new male customers to the brand.
This year, we will further integrate them into our content and upcoming campaigns.
Additionally, the recent launch of NBA licensed product has been successful and we'll build on this with additional categories. Later this year.
Finally, we recently launched a new version of our express App, which is an important retention tool for us App users are some of the most loyal customers and the new app speeds, the shopping process and allows them to explore new content and trends.
In addition to the three focus areas. We also continue to capture the benefits from our systems investments as well as our disciplined approach to managing expenses.
As we have discussed on past calls the organization is focused on completing the implementation of our new assortment planning software by the end of 2019.
We are beginning to benefit from enhanced hindsight, <unk> capabilities, which significantly improves our ability to analyze current season and historical selling and we are optimistic about our ability to increase overall inventory productivity with enhanced planning and allocation capabilities next year.
As it relates to expenses.
As we have shared previously we have done a good job executing against our $44 million to $54 million total cost savings target and expect to completed on plan in 2019.
We continue to look for additional cost savings opportunities across the business to ensure we are operating as efficiently as possible without compromising our ability to deliver on our brand promise to our customers.
On the real estate front, we continued to assess our optimal long term store footprint given the continued convergence between stores and e-commerce .
As you know we have significant lease flexibility with an action date on over 60% of our leases in the next three years.
We will provide an update on our real estate strategy and expected fleet rationalization later this year.
In conclusion, we have made significant headway on our focus areas product.
And in product clarity and customer acquisition and retention.
And while we are certainly not yet where we want to be we expect to build on this progress throughout the year.
Express remains a relevant and resilient brand and continues to represent a solid platform for growth with millions of active customers.
Based on our action plan, we believe we will significantly change the trend of this business.
And we look forward to Tim joining us next month the entire the entire leadership team is eager to work collaboratively with him and accelerate our action plan to return express to profitable growth.
I would now like to turn the call over to Perry.
Thank you Matt good morning, everyone.
Yes.
I am going to start by reviewing our first quarter results and then discuss our business outlook.
First quarter net Philip were $451 million.
A 6% decrease as compared to $479 million last year.
Comparable sales were negative 7% with retail comps of negative, 9% and now the comps of negative 2%.
As a reminder, our reported retail comp numbers now include retail stores and ecommerce.
Our first quarter gross profit was $123 million.
Gross margin was 27, 1% in the first quarter down 280 basis points as compared to the prior year.
Merchandise margin contracted by 100 basis points we.
We were more promotional in the first part of the quarter, but as momentum built in the business. We eliminated a significant number of promotions in the latter part of the quarter.
The benefit of this was more than offset by quarter end inventory valuation reserves on slow moving inventory, primarily driven by the reduction in promotional activity in the back half of the quarter.
This will help make room for more units getting into full and we believe it will improve the long term health of the business.
Looking at buying and occupancy costs.
While flat versus last year as a percentage of net sales <unk> deleveraged by 180 basis points due to lower net sales.
SG&A expenses were $135 million down approximately $5 million compared to last year. However, as a percentage of sales SG&A came in at 30% deleveraging 70 basis points driven by the sales decline.
Operating loss was $12 million as compared to last year's operating income of $3 million.
First quarter operating loss was negatively impacted by $800000 related to the new lease accounting standard. However, there was no material impact on our pretax loss.
And first quarter loss per share was <unk> 15.
As compared to last year's EPS of <unk>.
Now turning to our balance sheet and cash flow.
Our balance sheet remains healthy.
Inventory at quarter end inventories at quarter end were $286 million.
A two 9% increase as compared to last year's $278 million.
While inventory growth above Q2 sales guidance, we've taken aggressive actions to ensure we end Q2 at levels more consistent with our self expectations. This is reflected in our expected merchandise margin rate.
We ended the first quarter with $144 million worth of cash and cash equivalents as compared to last year, when a $185 million.
The decline versus last year is primarily due to $72 million of.
Share repurchases over the past 12 months.
Our balance sheet reflects no long term debt and we recently renewed our $250 million asset based loan facility through 2024.
Capital expenditures were $4 million.
In terms of our share repurchase program, we repurchased 900000 shares for approximately $5 million during the first quarter.
Under our current $150 million share repurchase program, we continue to have $45 million available.
With that I will now address our guidance as.
As we mentioned last quarter, we believe it is appropriate to provide only current quarter sales and earnings guidance at this time.
For the second quarter of 2019, we currently expect.
<unk> sales in the range of negative six to negative 8%.
Net loss in the range of 9 million to $12 million.
And loss per diluted share in the range of 13 to 17.
This compares to last year's diluted EPS of three.
For the full year 2019, we currently expect.
Capital expenditures in the range of $37 million to $42 million.
And as it relates to real estate activity. We currently are planning 11 retail store closures.
Four new outlet openings and 27 retail to outlet conversions.
Thus, we expect 624 stores at year end, consisting of 409 retail stores and 215 outlet stores. However.
However, based on our earlier comment about our real estate strategy and fleet rationalization. These numbers could change given the number of lease explorations at year end.
With that said, we're pleased that we improved the health of the business throughout the quarter and we remain highly focused on returning excess spread to a place of sustainable profitable growth through our initiatives aimed at improving product brand and product clarity and customer acquisition and retention.
I would now like to turn the call over to the operator to begin the question and answer portion of the call.
Thank you once again as a reminder, ladies and gentlemen, if you would like to ask a question at this time. Please press star followed by the number one on your telephone keypad. Once again Thats Star then one if you'd like to ask a question and also if you could please limit yourself to one question and one follow up and your first question here comes from Susan Anderson with B <unk>.
Really FBR. Please go ahead your line is open.
Hi, Good morning, Thanks for taking my question nice to see that improvement in the quarter.
Perry I was wondering if maybe you could talk a little bit just given a little bit more color maybe on the gross margin and SG&A versus your original expectations seem to have come in much better than you. Originally expected. So just curious was it all pulling back on promotions further gross margin.
Are there things going on there thanks.
Thank you Susan So let me start from the gross margin initially we had expected.
Our gross margin rate of 430 basis points contraction and it came in at 280 basis points to 80 basis points contraction compared to the initial expectation that is better by 150 basis points, so that improvement compared to the initial expectation is driven by and then about 80 basis points.
And then the improvement came from less promos than initially anticipated and planned for the quarter as we saw the quarter progressed and we saw the improvement in the trends of the business from MBA No standpoint, we had initially guided for a contraction or a deleverage of 250 basis points and we came out on the 180 <unk>.
At this point an improvement there of 70 basis points that was driven by the fact that initially we had guided to a negative nine to negative 11% comp and we came in at a negative 7% so with improvement in the overall comp for the business, we're able to leverage the fixed cost from a P&L standpoint.
The expenses came in in line, where we initially expected them and as it relates to last question around SG&A.
G&A improvement came by the improvement in terms of the comp as well as we're able to pull back on some expenses.
For the quarter.
Got it that's really helpful. Thanks for all those details and then maybe just one follow up Matt you talked a little bit about the touch read react strategy.
I know express has always been known for their touch read react strategy. So I guess I was kind of curious maybe if you could talk a little bit how it's changed over the years.
Youre doing now differently versus what you had done historically or maybe even just last year.
Sure.
The one big thing that we're changing with that strategy is we're effectively.
Bringing in more forward season goods early in small bulk quantities and it's important to note small bulk quantities. So we did some of that last year. We've accelerated that this year. So when you get into as an example June and July we want to have some fall receipts and small ball.
Chronic quantities across the chain delivered to the stores, we're not going to sell a lot of those products, but it gives us invaluable information to quickly react to things that are working based on historical results comparing them to historical results to then aggressively chase the items that are resonating with the <unk>.
Customer so that when you get into September and October you have that product in the store and large bulk quantities during the heart of the selling season.
In the past with we're now and we got moved more toward where now.
What would happen is by the time you got year results in late.
July into August by the time, we reacted to those you were into mid to late November by the time, they reach the stores and at that point youre selling them at 50 cents on the dollar so we want to get great product in earlier and if the small bulk quantities coming in June July are not the right ones number one.
A small bulk quantities number two you still have six months to get through that product throughout the season. So you have plenty of time to glide path any of the product that's not working so we believe this is a much better strategy for us.
From the perspective of getting customer information and then reacting quicker to Reed's.
Got it that's very helpful. Thanks, So much guys. Good luck next quarter.
Thank you.
Your next question comes from Janet Kloppenburg with J J K Research. Please go ahead. Your line is open.
Great.
Good morning, everyone.
Morning, Josh.
Hi, how are you.
Alright.
I have a couple of questions.
On the inventory content and <unk>.
<unk>.
Key investments by category.
<unk> for the second quarter.
Therefore.
Perhaps.
You could see further improvement in wholesale and also the level seem a little high Perry.
We will comp guidance, maybe you could talk about clearance levels of all the war on where you are.
Spectrum to be able to answer the quarter, Matt I got on a little late so you may have talked about.
We're hearing that early may trends or mid may trends have been challenging and I was just wondering if you could address that or have any data points.
Thank you.
Basis points versus the prior.
Janet I'll take the.
The Pago.
The question on the inventory our inventory growth.
If you look at <unk> and <unk> <unk> above the Q2 <unk>, we have taken aggressive actions and that we said at the beginning of Q1.
To ensure that as we enter Q3, our levels of inventory will be more consistent with our sales expectation. So specifically what we have done.
In early parts of Q1, we started looking at the receipts and pulling back on receipts.
In Q2 and at the same time, we have contemplated the appropriate level of promotions in the Q2 guidance to insure.
That will get into this to the right level of these promotions are already reflected in the overall merchandise margin contraction that we're planning for Q2.
Yes.
Yes, when you take the inventory.
I'll be in good shape Thematise keybanc, good shape than at the end of <unk>.
Yes, it will be in better shape than what they have been for February <unk>.
In alignment with the.
The expected sales for Q3.
Thank you.
And then Janet to your second question on May trends.
As you know we don't comment on monthly activity, what I will say is our comp guidance does contemplate trends to date as well as what were projected to do for the rest of the quarter.
What I will say is that we mentioned on the in the remarks that we have pulled off a significant number of promotions in the back half of the quarter for Q1, and we have continued to do that into Q2 as well what we're trying to do is.
Opportunistically.
So off from some of the unhealthy promotions that are layered into the business.
Obviously that will help us from a margin perspective over time as we rightsize our inventory.
Create a clear value proposition for the customer and it gives us an ability to focus the customer message on actual key fashion messages and our differentiated brand position versus simply sending out.
The indications on promotional activity that being said I understand this is retail and we're managing day to day. So we're going to opportunistically pull off where we can.
Thanks, and one more if that's okay.
Sure.
And in April could.
Could we assume that comps turn positive and maybe you could give us some.
Outlook on.
The top business in house.
<unk> may if cargo Smith.
In April and.
Maybe some thoughts on the denim category.
What opportunity might lie.
For that business from abacus for payroll. Thank you.
So John when you look at the comps overall, we have seen sequential improvement going from Q1 into the back half of the quarter approved specifically was positively impacted by the Easter shift as well as the overall trends of the business.
I cannot really comment in terms of the.
Specific numbers on the comps.
Okay. Thank you.
Then.
Janet from a tops perspective, the good news is tops on the women's side, we called out for a couple of quarters now is something that needs to be aggressively addressed we are as I mentioned in my remarks, we are putting an optimal assortment test in place for July August time period.
Try to reset the tops business, particularly the casual knit tops dressy knit tops and the dressy woven tops business.
So we are taking action to re craft, what that offering looks like that being said, particularly on the casual knit side, while we're not positive we're starting to see a little traction in the last month or so in the casual knit top business, which is encouraging.
And on denim.
Paul Denim from a back to school standpoint.
Im not going to go into detail on our back to school strategy at this point for competitive reasons.
<unk>.
But.
We continue to focus on denim and as you know we have denim perfect out there in our offering.
That we continue to focus on to try to drive that business as well.
Okay.
Thanks, so much good luck thank.
Thank you.
Thank you and once again, ladies and gentlemen, if you would like to ask a question at this time. Please press star followed by the number one on your telephone keypad.
Next question comes from Marni Shapiro with retail tracker. Please go ahead. Your line is open.
Hey, guys congratulations on Tim I'm.
Looking forward to working with them.
Can you give a little bit of insight.
We've talked about the women's tops business for a while I think.
Hey, you guys mentioned about including some more fashion I guess is this true in the wear to work area as well as on the casual knit side because on the wear to work area. Historically Express has had these very big powerful hits, the portofino and things like that so how should we think about that.
Perry around that part of the business versus the casual side of the business.
Yes, 100%, it's both on the casual and the dressy side of the business what we do know is.
We are seeing customers voting for new silhouettes.
Wolf Research. Please go ahead your line is open.
Hi, everybody good morning, I got a little bit late so forgive me if you've already addressed the but can you talk about your direct exposure to China's sourcing that may have already been covered and then secondarily inventory plans for the back half of the year sort of particularly.
From units and then Perry if you can talk about average unit cost associated with those.
So start there thank you.
Sure. Thank you Adrian so I'll take the tariff Washington, Perry can handle the other questions are obviously are 222 guidance reflects the impact of impact of the tariffs.
Longer term, we are aggressively working to minimize our exposure to China. So there's two things we're doing right as we speak one is working with our sourcing partners.
To share the impact of any teraphim of the tariffs through cost reductions first and foremost and the second thing. We are doing is reducing our China sourcing footprints. So three years ago.
We were approximately had approximately 40% of our source units coming from China. This year, we're just a slightly over 20% of our units from China, and we're targeting getting that down to 8% to 9% of the units by the middle of next year. So we continue to aggressively look for all.
<unk> sources.
But obviously as you know that is not possible in the shorter term in certain categories, but overall, we are going to continue to reduce our footprint there and we feel like we're in a pretty good place.
Perry you want to take yet so AGN on the inventory you had a two part question on the inventory.
One is a inventory levels in the back half of the year.
And as we look at the we haven't provided comments on the back of the year, but we have commended comments around.
The inventory expectation going into August .
Be in a better shape any more in line and consistent with our sales expectations going into Q3. So throughout Q2, we're going to continue to manage the inventory levels to give them even more appropriate levels. That's one from an au system point for the back half of the year again, we haven't given any guidance for accumulate Q4.
Sure.