Express Q4 Earnings Conference Call: Full Transcript

Operator: Greetings and welcome to the Express, Inc. Fourth Quarter and Fiscal year 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer will follow the formal presentation. [Operator Instructions]. As a reminder this conference is being recorded. It is now my pleasure to introduce your host, Marrisa Jacobs, Vice President of Investor Relations. Thank you, you may begin. Marrisa Jacobs: Vice President Investor Relations: 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 otherwise required by law. In addition during this call, we will make reference to adjusted net income and adjusted earnings per diluted share which are non-GAAP measures. Information necessary to reconcile these non-GAAP measures to reported net income and earnings per diluted share can be found in our press release. With me today are David Kornberg, President and CEO; Matt Moellering, Executive Vice President and COO; and Perry Pericleous, Senior Vice President and CFO. I am now going to turn the call over to David, he will be followed by Perry, and then we'll turn to Q&A. David Kornberg: Chief Executive Officer: Thank you Marrisa. Good morning and thank you for joining us. The fourth quarter and the year were both successful. When I first spoke to you in 2015, I laid out our priorities and we subsequently executed against them. The balance growth was achieved and we delivered strong product, used promotions with restraint, and managed inventory carefully to grow our top line and comparable sales and to improve our margins. Together, these actions enabled us to significantly boost our profitability and set the stage for further gains in 2016. For the fourth quarter, our sales increased by 5%, our comparable sales increased by 4%, our operating income grew 21% which in turn lifted our operating margin by 160 basis points to 12.1%. Our diluted EPS grew 37% to $0.67. It was gratifying to turn in a performance that once again exceeded our guidance and marked our fourth consecutive quarter of year-over-year growth. For the year as a whole, our sales increased by 9%. Our comparable sales increased by 6%, our operating income grew 52% which lifted our operating margin by 250 basis points to 8.8% and our adjusted diluted EPS grew 79% to $1.45. Our strong cash flow enabled us to continue investing in our business while also enhancing our capital structure for the benefit of our shareholders. To this end, during 2015, we used $215 million to redeem our outstanding debt and repurchased $69 million worth of our common stock. Given these positive results, I'd like to address what we have achieved and how we have incorporated these processes into our operating principles. We achieved many successes last year and I believe Express is to set out to continue winning. Let me explain why. In 2015, we made some fundamental changes to the way in which we operate our business. First, our product composition was modified to incorporate more fashion items and to floating newness more often. Product categories were expanded and new collections were introduced. We now cover a broader spectrum of our customer's wardrobe and intend to continue down this path. Second, we introduced new around product testing, inventory management and speed to market. Collectively, these are bringing better product to our customers fast, reducing fashion risk, and ensuring a tighter control of inventory. Third, we adopted a 360 degree approach to marketing and focused on many new branding activities to drive engagement with our customers. We are also partnering with key influencers which is elevating lineage of Express. While much was accomplished last year, we have significant opportunities to further build awareness and familiarity as it relates to the Express brand and we will see these opportunities. Four, we continue to upgrade to our systems and processes. Significant Omni channel opportunities lie ahead once we transition to new foundational systems. Fifth, we introduced new financial disciplines that create a more balanced financial architecture. We focused on top-line growth, product margin expansion, and expense discipline to ensure that every dollar spend has a clear purpose and that every project undertaken will deliver an appropriate return on the investment. We believe this ongoing focus on our financial architecture will drive consistent profitable growth for years to come. Sixth and lastly, we focus on strengthening our balance sheet by repaying our debt. We also returned excess cash to shareholders through our share repurchase program. Our pristine balance sheet provides us with financial flexibility to pursue growth opportunity and to continue enhancing shareholder returns. Those items represent just a few of the many changes put in place. Express as it is functioning today is quite different than the Express organization of the past. For example, we believe that our fashion and our brand are more relevant and appealing to our customers. We are more efficient and adaptable. We're more financially disciplined, and we're more technologically capable. The shopping habits and priorities of millennial have been written about. They are technologically astute, fashion savvy and want to wear things that make them feel confident. Each new collection is comprised of carefully curetted items which exemplify the best of the new season. We have a strong value proposition and are proud of our high quality and fair prices. And while today's customers may shop differently than in the past, they still like to shop in stores and online. We believe one of our competitive advantages is that we offer customers the chance to shop across channels. In fact many online and new brands our running tools to give customers a chance to experience that product and the human touch. Change is a constant in our industry and our focus is on providing our customers with the best possible store and e-commerce experiences. When our terrific product is supported by new systems, we will use omnichannel tools to bring increased flexibility to the shopping experience and new capability to customize shoppers interactions with Express. Our management team is fully committed to the concept of continuous improvement to ensure we remain highly relevant and successful. At this time I'd like to review a more detail roadmap for 2016 beginning with our key business initiatives. We drove store productivity higher in 2015 by delivering excellent products and a great customer experience. We expect continued gains to 2016 and we'll get there by continuing to deliver compelling products with high emotional content providing a steady stream of newness to keep the collection fresh, expanding our capital collections and further improving the customer experience. We'll continue to use promotions with in restrain and focus on story telling that let's our customers know what's now and to demonstrate how to create looks which simultaneously speak to them into the geography and incorporate the best sell of the season. Productivity will be further enhanced as we continue to implement our store rationalization program which closed fifty retails stores between fiscal 2015 and 2017, primarily at natural lease expirations. We're well on our way, twenty seven stores were closed during 2015 and another seventeen are schedule to close during fiscal 2016. In fact 13 stores have already been closed since the fiscal year began. We expect continued growth in our e-commerce business during 2016. All of the end so product is offered online. Additionally we offer product extensions in the form of additional colors and the product. Beyond that we will continue to carry online exclusives which enable us to project the Express life style free from straight constraints. Our most branded third party products represent an example of this approach. From an operational standpoint, we'll continue upgrading e-commerce experience. We have enormous opportunities to take advantage of segmentation and greater personalization. That could mean many things. For example more personalized emails or delivering customized pages in response to customer searches. In conjunction with the deployment of our new order management system, we are also relocating our customer service engagement center and our e-commerce fulfillment center. Specifically our customer service engagement center was just successfully moved to a new facility run buy a leader in the space. By late spring we expect to complete the move of our e-commerce fulfillment center to Northern Kentucky. This newly built facility is operated by another best in class provider. We expect to realize multiple benefits from these two moves. We now offer expanded round the clock customer service coverage that will better support customer enquiries and then new fulfillment center will be better equipped to respond to volume fluctuations during peak season and reduce package transit times. Turning to outlets, we continue to be extremely pleased with the performance of the Express factory outlet stores. New stores are doing well and stores open for more than a year are generating positive comps. We expect this to continue throughout 2016. We will continue to our add new locations at a steady pay. We ended 2015 was 81 outlet stores and have currently identified 21 locations for new outlets in 2016, 19 of which will be new stores and two will be retail store conversions. The made-for-outlet formula is working well for us and we are carefully maintaining product differentiation between our retail and outlets stores to meet the specific needs of the Express customer. I want to touch briefly on our international operations. We have been moving with great care in this area continuing to evaluate and refine our own priorities as it relates to our international presence and the allocation of our resources. A number of decisions being made recently which I want to share with you. Specifically at this time, we are going to concentrate on the Americas. We're on them to see franchise relationships across the globe. We have two franchise relationships in placement of this region spanning Mexico, and Latin America and based on our performance in these regions and our broad appeal, we believe we have opportunity to grow our business there over the long term. This is where we intend to focus our efforts. As the direct result of this decision we are winding down our activities in the Middle East and in South Africa. The termination of these agreements will not be material for our results and we believe that we should focus our resources on higher return activities. We sincerely appreciate all the work and commitment by those franchisees on the behalf of our brand. We look forward to working with our remaining franchisees to expand our presence in the Americas. The ability to advance our business initiatives is tide to our operational skills. Last year I unveiled our top priorities and as noted previously, we made important progress. For 2016 they will remain key areas of focus. Specifically, we will continue to evolve our high-performance culture to support our people and attract the best new talent. We will continue to provide exceptional brand and customer experience for all touch points. Our work transform and upgrade our systems and processes is continuing and of course from a financial standpoint, we expect our positive content to continue. We also intend to deliver additional operating margin gains moving up closer to our near term double-digit operating margin goals. Now I'd like turn to our product which is the heart of our business. The women's fall collection was extremely strong with several categories seeing their best year ever. The men's business was mixed with some categories growing nicely while others lagged behind. Our hindsighting continuous to provide us with valuable lessons which we have applied to our spring collection. We also give confidence that we have identified the key trends and have designed collection which appropriately interpret those trends for our customers. Customers are responding favorably to our spring products. We are continuing in terms by fashion and unit across the woman's business and we believe there is real potential in those categories such as shoes, swim and our performance active line Express Poll in the future. We will unveil a new additional collection in June and we continue to be encouraged about the branding aspects of this elevated capsule collection. I also want to note that we recently unveiled our new fragrance, Amaze, it certainly been available for a few weeks so far but we're very pleased with the launch. On the Men's side, our business continues to grow and while our chino business has been growing, we're seeing renewed interest in denim. We also see a large opportunity across the men's top side of our men's casual business and just last week we've rolled out a men's version of our successful 111 collection. It launched in 50 stores and online, like the women's product it's soft casual and easy to wear. We expect it to appeal to all of our guys making this a great new casual offering for us. The collection carries attractive price points starting at $19.90 and we intend to exclude promotions from the collection to preserve merchandise margins. Turning to marketing. In late February, we launched the EXPRESS YOURSELF campaign. We are once again using targeted TV spots in addition to print. This time around, we collaborated with the world recognized Fashion Photographer Inez and Vinoodh to create a campaign featuring the high profile model Natasha Poly. Throughout the year we intend to continue working with additional high profile models, celebrities, and bloggers who do a terrific job showcasing our product and building buzz among consumers. In terms of our men brand ambassadors, we couldn't have been happier with Seth. But our time with him has come to an end. We're equally excited about our newest men's brand ambassador, Kris Bryant. The 24-year old Chicago Cubs third baseman was the 2015 National League Rookie of the year. He is an inspirational individual and a perfect representation of our brand. Of course the program I just pulled out make up a small piece of a much larger marketing initiatives. Other activities will be taking place throughout the year with each one designed to bring new customers into the brand and deep in our relationship with our existing customers. Let me conclude with a few observations. I have been in my current role for over a year now and it has been a wonderful experience. The changes we put in place last year enabled us to deliver better products, a better customer experience and significantly improved financial results. They also set the stage for continued success. We continued to deliver the fashion our customers want and strive the best possible experience for our customers whether they are shopping in our retail stores, online via desktop, tablet or mobile devices, or visiting our app at stores. We bringing new discipline to our sourcing and inventory management practices and our most enforcing a heightened level of financial discipline across the organization. Beyond this heightened process and production discipline, lie additional opportunities related to collections such as Express 111 addition in our third-party brands. In the aggregate these and other initiatives mentioned earlier this morning provide a platform for improved shareholder returns. Finally I want to share with the entire Express team that I'm profoundly grateful to their support, hard work and terrific results and for their advocacy on behalf of this amazing company and brand. I'd like now to turn the call over to Perry. Periclis Pericleous: Chief Financial Officer: Thank you, David. Good morning, everyone. I wanted to join David in noting how pleased I am with our fourth quarter results. The game plan we adopted at the beginning of 2015 to approach growth in a disciplined and balanced way contributed to last year's successes and will remain as the foundation for growth in 2016. With respect to the fourth quarter, I'm going to spend a major financial highlights. Net sales grew by 5%. Comparable sales grew by 4% which exceeded our guidance. We grew merchandise margins by 180 basis points through a stronger fashion assortment, inventory disciplines coupled with improved speed in our supply chain and discipline around promotional activity. Buying and occupancy as a percent of sales improved by 50 basis points as our 4% growth enabled us leverage costs. Collectively, merchandise margin and buying and occupancy improvement enabled us to expand gross margin by 230 basis points. SG&A came in at 21.9% of net sales. As expected we deleverage SG&A by 90% basis points as a result of performance related incentive compensation, openings and IT investments. We had another quarter of significant operating income in margin gains. Operating income rose 21% to $93 million. This led to a 160 basis point gain in operating margins which came in at 12.1%. Net income grew by 34% to $56 million diluted earnings per share flat 37% to the quarter of $0.67. And with our performance for fiscal 2015 as a momentum of the first quarter continues throughout the year. In total mix sales of $2.4 billion increased by 9% and we generated a 6% increase in comparable sales. The top line growth coupled with various operating initiatives enabled us to grow merchandise margins by 200 basis points and B&O by130 basis points, which resulted in a gross margin of 33.8%, a gain of 330 basis points. Lastly operating margin improved by 250 basis points to get us 8.8% rate and adjusted diluted earnings per share grew by 79% to a $1.45. It was the year of the special progress. Our balance sheet remains very healthy. Cash and cash equivalents at year end were $187 million versus $346 million last year. As a reminder, we used $215 million to redeem our senior note early in 2015 erased an old debt for our balance sheet. We also invested $59 million in fiscal 2015 to repurchase common stock under our share purchase plan with $47 million of that amount repurchased during the fourth quarter. Fiscal 2015 capital expenditures came in at $115 million, yearend inventory totaled $265 million representing a 6% increase over the same time last year. This included approximately $61 million of Express factory outlet inventory a significant portion of which relates to new stores. With the respect retail business, inventory decreased 5% in the aggregate. We are comfortable with both the level and composition of our inventories. Next let me turn towards our IT projects. Our implementations are on track rollout as discussed on our last call. Specifically the new order management system is expected to be launched the May. The retail management and enterprise parts are scheduled to come online in late July. By the end of July, we will have a vast majority of our systems related investments behind us. One final program still to be undertaken is our assortment planning system which is scheduled to come online in 2017. At that time will have completed the last major project in our multiyear systems upgrade. As our teams become progressively more comfortable working with these systems, and more fully utilize to enhance capability we expect to realize both operational and financial benefits over the next couple of years. The final topic I want to address is our guidance for the first quarter and fiscal 2016. For the first quarter of 2016, we currently expect to deliver low single digit comfortable sales growth. Adjusted net income in the range $20 million to $22 million and adjusted earnings per share in the range of $0.25 to $0.28 per diluted share. Since the year began, we have repurchased approximately $42 million of our common stock, which brings our first quarter estimated diluted share count to 79.9 million shares. These latest share re purchases leave $30 million remaining in our $100 million share purchase program. I also want to inform you of an item that will impact our first quarter GAAP results. We recently entered in an agreement with landlord of our Time Squares Stores allowing to landlord to market the space and terminate our lease early if or when an affirmative tenant is identified. Our product execution of this agreement in Q1 will cost that expense approximately $11 million which will impact our GAAP net income because of the one-time nature of this expense it is not included in our guidance. If the landlord actually terminates the lease early, additional accounting increase in certain cash payments will be triggered included the reversal of the straight line accrual related to the store. This will result in future period income of approximately $9 million. Therefore the aggregate 2016 impact is expected to be less than $2 million loss and could spread over multiple quarters of the year depending upon the timing of the transaction. I want to reiterate that due to the non-recurring nature of this transaction, we have excluded the impact from our first quarter and fiscal 2016 guidance. Turning to fiscal 2016, we expect comparable sales to increase in the low single digit range, adjusted net income to range from $125 million to $137 million, adjusted EPS to range from $1.56 to $1.71 per diluted share based on 80.1 million diluted shares outstanding. As 2015 began we spoken to you about our objective of returning to double digit operating margins within the next few years. This was off a bit of 6.3% in 2014. We laid down the a multiyear path that included approximately 200 basis points of merchandise margin gains approximately 100 basis points of B&O leverage and approximately 100 basis points of SG&A leverage. What we actually accomplished in 2015 was to grow our operating margin by 250 basis points to close out the year at 8.8%. Merchandise margin alone increased by 200 basis points, and B&O leverage by 130 basis points. We are certainly pleased to have reached our target in those two areas more quickly than anticipated. On a full year basis, for 2016, we expect that slight increase in our merchandise margin, we'll continue to pursue opportunities to drive additional gains in the future by focusing on optimizing inventory levels, leveraging our new systems once we go live to have the right product in the right places and by advancing our omnichannel initiatives. We believe these additional margin benefit to materialize in 2017 and beyond. Moving on to B&O, additional leverage is expected in 2016 although the magnitude is expected to be more motive than last year based on our 2016 comparable sales expectations. We anticipate our SG&A as a percent of sales, will remain relatively flat as we continue to invest in outlets, marketing activities and our IT programs and absorb the impact of higher level of depreciation once the OMS and RMS systems are brought online. In summary we expect to generate higher operating margins in 2016 and further work towards our goal of achieving 10% operating margins within a few years. Lastly, in terms of guidance, our capital expenditures are expected to range from $110 million to $115 million as we continue investing in new outlet stores and our IT systems overall. At this time, I'd like to turn the call back to David. David Kornberg: Thank you Perry. 2015 was a strong year and we introduced the set of initiatives designed to improve our performance and to return Express to a growth trajectory. We executed against each of them which encompass such diverse thoughts as delivering more compelling product with the content, reducing promotions and expanding the brand reach. Of course with 2015 behind us, we will manage what we do this year. I want to assure you that everyone in this organization is laser focused on the importance of continuing to enhance Express brand, driving sales, comps and earnings growth and maintaining a high degree of discipline across all facets of our operations. We believe we have laid out a parked to advance on our journey towards the double-digit operating margins and enhanced shareholder value. Before beginning our Q&A, Marisa has one quick announcement. Marrisa Jacobs: Thank you, David. I would like to request the Q&A participants limit themselves to one question and one follow up so that we can get to everyone in the queue. Operator, please open the line we can began the question-and-answer portion of the call. Question & Answer Operator: Thank you. [Operator Instructions] Our first question comes from the line of Adrienne Yih with Wolfe Research. Please proceed with your question. Adrienne Yih: Wolfe Research: Good morning. Congratulations on a great year and a great end to the year and... David Kornberg: Thank you, Adrienne. Adrienne Yih: Wolfe Research: Quite that looks like the momentum is continuing. So David I actually saw the TV ad the other night, it looks great. I was just wondering if you could talk about the timing the marketing spend, ad spend and the timing of that this year over last year given the earlier spring break, are there any dollar differences or duration differences there and then Perry $11.4 million is my follow-up is really on the gross margin--on the gross margin is that an occupancy expense or is it a one-time operating down in SG&A and then can you help us after that 1Q how do we look at the gross margin underlying trend? I assume it's going to be up just given everything you talked about. So can you quantify that for us? Thank you so much. David Kornberg: Hi, Adrienne its David. First of all, in terms of the TV ad, we don't know the specifics marketing segment how we are going to portion it by month. But really in terms of our overall marketing spend, we don't see that changing for the quarter or for the year as a sense to the total see when see somewhere around the 5% of total mark. Exciting ad and it's going to be running right away through the end of March. Adrienne Yih : Great. Periclis Pericleous: So, in regards to your question around $11.4 million, the $7 million would be in the B&O and the $4 million to will be below the operating income by the profit before taxes. As far as gross margin goes, we would expect to expand gross margin for 2016. Adrienne Yih: Fantastic, best of luck. David Kornberg: Thank you. Periclis Pericleous: Thank you. Operator: Our next question comes from the line of John Morris with BMO. Please proceed with your question. John Morris: BMO Capital Markets: Thanks. My congratulations to everybody as well both on the quarter and year, really a lot of progress guys. David Kornberg: Thanks John. John Morris: First question, David, maybe you mentioned you walked through the initiatives which was really helpful for the coming year and obviously what you can doing some of those. I think it was maybe point number two, can you give us a little bit more color on how test you give specifically as one referring to testing and speed to market, how that's changed and or changing specifically to flows and fashion units, and then maybe a little bit more color on the men's business where we're seeing a fair amount of improvement here even as we begin the year, in things like Express Core, the Tech Polo shirts, really a lot newness there and what to expect and what those initiatives are in men's? David Kornberg: All right. Okay, so I start off briefly with the men's business. Yes we are delivering a lot more newness in men's. We are taking a lot of learning's that we've been achieved on the women side of the business for the past year and we are applying to the men's sides of the business. So it's frequency and introduction of newness. It's going to be a lot of the new collection, but in addition it's fixing on getting progress in our existing businesses, as they are on the men's side. I am encouraged by what we are saying going into Q1 of men's, which is the good news and we plan to continue to down that path. 111 is only been out for a week in men's but very pleased in terms that sells we are seeing. Your first question was really about testing what changes we've made to that process. Yes look overall we are still testing 70% to 75% of the units that we sell. So that hasn't changed at all. I think that we are really focused on testing the core key items that are driving the total business and we are not allowing that to prevent us from introducing newness as quickly as possible. I am ensuring that we are absolutely on the mark and on point with fashion. Having said that great discipline is enabling us to get more newness in more frequently, and clearly our supply chain agility has also helping us as well. So we're attracting products and we are able to do that. Because of some of the platforming in fabrics that we've been doing over the past year, and when I talk about that I really mean about prepositioning fabrics and capacity. So that we are able to get into it very, very quickly. John Morris: Thanks. Good luck for the rest of spring. David Kornberg: Thanks a lot John. Operator: Our next question comes from line Simeon Siegel with Nomura. Please proceed with your question. Simeon Siegel: Nomura Securities: Thanks. Good morning guys congrats on a strong year and a good start to this one. David Kornberg: Thanks Siegel. Simeon Siegel: So David with the success of the new capsule this year and the disciplined promotions, can you just talk about your thoughts around where you are and maybe the longer-term merger margin opportunities and then Perry, it sounds like the full year guidance is just a follow-up. Full year guidance embedded costs in the coming year from systems where I think you called the depreciation so the guidance embed need of benefits as those system go live? Thanks Periclis Pericleous: So Simeon I'll talk to your first question around what we seen in Q4 in terms of AUR trends analytical metrics. So in Q4 we've seen that our increase we have seen convergence increases during the Q4 and we saw some slight traffic declines during the Q4. To answer the second part of your question regarding our guidance expect any merchandise margin improvements because of the system implementation. At this point a 2016 guidance does not contemplate any of the benefit of the system implementations and that's on the prepared remarks we have mentioned about slight increases in merchandise margin in 2016 Matthew C. Moellering: Executive Vice President, Chief Operating Officer: And certainly and we do believe, this is Matt. We do believe there is opportunity for margin expansion with these new systems overtime. What we are doing is taking a cold walk run approach to these systems given the complexity of the system implementations and so we want to get the systems up and stabilize and then start to enjoy the benefits associated with them but these new systems can be a significant enabler for us over the long term. We believe that with these new systems we will be able to plan at much more granular level by channel getting the product to the customer where they want and how they want it. This also lays the foundation to enable us to start to implement the omni-channel initiatives that are out there that should also improve margin as well as top line sales and finally personalization and segmentation will be enabled by these new system implementations as well and we've been investing in content management system, campaign management systems to go along with these RMS and OMS implementations and we're in the process of knitting all of these together for a pilot in Q4 and then launch in the first half of 2017 where we really can start enjoying some of these benefits. Simeon Siegel: Perfect. Thanks a lot guys. Best of luck for the rest of the year. David Kornberg: Thank you. Matthew C. Moellering: Thank you. Operator: Our next question comes from the line of Neely Tamminga with Piper Jaffray. Please proceed with your question. Neely Tamminga: Piper Jaffray: Good morning and congratulation on phenomenal results last year David and team. I have a question on men's so you characterize men's as being somewhat mixed last year was it as easy as that tops versus bottom sort of dynamic that maybe there was more opportunity in tops versus bottom and I guess forward going with this is on 111 being primarily tops driven sort of initiative is that a possibility you see a pretty significant reacceleration here in the men's business overall and then a follow up question for Perry again on G&A for 2016 for this year, what are we planning for G&A as well as tax rate? That will be great. Thanks. David Kornberg: Certainly and answer to your first question Neely the response will be yes, it is really tops has been a tops related issue and I think the 111 gives us big opportunity, we have made progress, we've starting to show signs of making really good progress in men's shirts driven by our causal assortment but we're also seeing it in terms of where to work side as well. So overall I think I am encouraged by what I am seeing across all the tops. So whether it's a woven shirts, whether it's knit tops and weather it is in graphics Ts. Perry? Perry Pericleous: So as it relates to the depreciation and amortization for 2016 we are planning the year a bit higher than what it came in in 2015. We are expecting depreciation to be approximately $85 million and as it relates to our overall tax rates for the year, we are expecting the tax rate to be approximately 39%. Neely Tamminga: Thank you. David Kornberg: Thank you. Perry Pericleous: Thank you. Operator: Our next question comes from line of Jay Sole with Morgan Stanley. Please proceed with your question Jay Sole: Morgan Stanley: Hi. Good morning. Thanks for taking my question. My first question David is about the Express you mentioned the lines, can you tell us a little bit about how what that line might be like Jefferson similar study did a couple of the years ago, and then secondly on cap ex, can you talk about maybe from the $110 million to $115 million, how that breaks up into spending by outlets and IT system some other initiatives, and where you see cap ex growing forward into '17 and beyond. Thank you. David Kornberg: Jay, Jay sorry you broke up when you were talking about Active. Could you just repeat that part of the question? Jay Sole: Oh sorry I just want to know what piece tells more about that line and leg. What it might look like fabrications or different style and might have been how it compares to stuff that was from a couple of years ago there was a kind of to inspire. David Kornberg: Right. Well I think we've make good progress on our Express Call. We launched it in January in 120 stores. The stores that had it last year which I think was 30 stores had it last year, found business very well in January and thanks on the rates that we're seeing we are optimistic about expanding that line further. So very pleased and I think that the reason we are seeing progress particularly in the fashion that we are offering but in addition to the fashion it's the fit. We have made major improvements to the fit in the domain and she is responding very, very well indeed to it. So we're optimistic about what offers us for the future, Perry? Perry Pericleous: As it relates to the cap ex in terms in 2016 we expect approximately let's call it about $60 million to be spend in real-estate and the remaining to be spend on our IT initiatives and miscellaneous other projects, and we think the real-estate a lot of that money could be spend on remodeling stores as well as our new outlet locations. I think related to our go forward capital expenditures, we would expect in 2017 the Express shirt to come, come closer the $100 million below March and thereafter based on today's plans use to be below the $100 million mark between $90 million and $100 million. Jay Sole: Got it. Thanks very much. Perry Pericleous: Thanks you. David Kornberg: Thanks, Jay. Operator: Our next question comes from line of Betty Chen with Mizuho. Please proceed with your question. Betty Chen: Mizuho Securities: Thanks. Good morning and congratulations on a great quarter and a wonderful year. I was wondering if you can talk a little bit more about the supply chain aspect. I know David you just said the team has done a great job of prepositioning shortening the lead time any more opportunities on that front that could further help your speed and control inventory? My follow up question was regarding the product expense on average how should we think about the margin profile of core, fragrance et cetera relative to the existing business in terms of much more opportunity. Thanks. David Kornberg: So we think we're in progress Betty in terms of the speed. Over the past year, we've reviewed in processes really around the responsibilities, the positioning, the calendars that we use and we've delivered significant improvements in speed and improved collaboration. So, I think yes, yes there is still major opportunities. We are constantly looking at ways in which we can improve prove it. We targeted certain departments over the past year. We've seen major benefits in that department as a result of the work that we've done and this year we're looking to expand that further. Perry Pericleous: So, as it relates to the specific categories, our expectation of the overall merchandise margin is to be similar to the overall company's merchandise margin. Betty Chen: Okay. Thank you so much and best of luck. David Kornberg: Thank you, Betty. Perry Pericleous: Thank you. Operator: Our next question comes from the line of Janet Kloppenburg with JJK Research. Please proceed with your question. Janet Kloppenburg: JJK Research LLC.: Good morning, everyone. Congratulations great year, great quarter. David G. Kornberg: Thank you, Janet Janet Kloppenburg: I was wondering if you could help us understanding impact that 111 might have on comps this year. I think it was only in a handful of stores in the first quarter and maybe not that many in the second quarter, and also that product line has been broadened significantly since it was first introduced. So, could we look for that to be a comp motivator for the rest of the year and when you think about your new product category and projections that could maybe a sizable as 111 has turned out today, and clearly if I look at your guidance at the high end, and incorporate a flat SG&A ratio level I think gross margins going to have to be up anywhere from 40 to 60, 70 basis points 50 to 70, and I am wondering how much that might be from leverage and occupancy and how much that might be from improved merchandise margin and AUC benefit? Thank you. David Kornberg: Hello, Janet. Just to be clear, you want to know whether 111 could be a comp driver throughout the year. Janet Kloppenburg: So I think it was only in a few stores and not anywhere in the SKU count was much smaller. David Kornberg: Yes. We rolled it out in July to the chain last year and in March it was in 50 stores and online. Clearly we are delighted with the performance that we've seen from 111 and we expect that to continue. But we have built all of these into our guidance for the quarter and for the year in terms it. In terms of new categories biggest 111 yes, we're seeing terrific growth in shoes, we see swim as a great opportunity for us going forward, and as I said on the call we are going to deliver another collection of addition in June, and we see that also as an opportunity for us going forward. Perry? Perry Pericleous: So Janet, you had the overall 2016 guidance do your point achieving with SG&A being flat we are expecting B&O to leverage given our comp guidance call it approximately about 60 basis point and then we expect the overall gross margin being between 50 to 70 basis points given the merchandise margin expansion that we have currently anticipating for 2016. Now I did mentioned during the call that we're expecting more this merchandise margin expansion but that doesn't necessarily mean that we're not going to continue to look for opportunities to expand our margins by pulling back on promotions and also by our improved product offering and at this point also we not expecting any improvements driven by AUC. Janet Kloppenburg: So you don't expect AUC improvements because of cotton? Perry Pericleous: At this point we're expecting AUC to be relatively flat given by once the mix of the merchandise within our assortment and also moving towards merchant fabrics. Janet Kloppenburg: Okay. Thank you very much. Perry Pericleous: Thank you. David Kornberg: Thanks Chen. Operator: Our next question comes from the line of Marni Shapiro with the Retail Tracker. Please proceed with your question. Marni Shapiro: Retail Tracker: Hello everybody. Congratulations as source of what absolutely fantastic. David Kornberg: Thank you Marni. Marni Shapiro: Can you just give us a quick update on your rolling out all of these systems, how is it or when will it start to impact the loyalty program and you're credit card and I am curious what the penetration is of the loyalty program today? Matthew C. Moellering: Yes so the systems that, so we want, we've implemented some of the foundational systems on the financial side, HR side and on the warehouse management side of the business successfully already. The big programs we have remaining are on that enterprise planning and all of that's our retail management system. Those should be complete by the end of July and once we get them up and stabilized we will then start to use that as a foundation for other activities. So as I talked about such as the omni-channel initiatives. So the real benefits most likely will come in late 2016 but we're really counting and then to start coming in 2017. Marni Shapiro: So even things like the loyalty programs that all falls into '17. Matthew C. Moellering: So we have a loyalty program out there right now what we are really focused on is really working on personalization and segmentation of marketing activities and we have implemented a new content management system a new campaign management system along with the new customer data hub those are already in place and we are working on knitting those together which is the last step of the process in conjunction with the RMS and enterprise planning in OMS initiatives. Once we get all those together it should give us an ability to significantly increase the personalization and segmentation of our marketing activities which should not only increase the effectiveness of the spend in those areas but also improve the effectiveness of the customer experience as well. Marni Shapiro: Okay. Thanks guys. David Kornberg: Marni in addition to that you know our image program is very strong and it accounts for significant amount. We are continuing to make improvement to that and we are going to see it further so we are very pleased with what we have seen from the next program and believe it's going to get stronger for us. Marni Shapiro: That's what I was sort of trying to get out it. It seems like it's still under developed relative to the marketing breadth that the brand is pushed over the last year.? Matthew C. Moellering: Yes. But we believe it is a big opportunity for us going forward and it accounts for a significant amount of our sales and a significant amount of our customers and obviously we continue to achieve new people but we believe that there are enhancement and improvements we are going to be making to it which will make it even better and that's going to be over the next year. Marni Shapiro: That's great best of luck for spring guys. David Kornberg: Thank you, Marni. Operator: Our next question comes from line of Lindsay Drucker Mann of Goldman Sachs. Please proceed with your question. Lindsay Drucker Mann: Goldman Sachs: Thanks. Good morning guys, I just wanted to follow-up on giving your comp sales target for the year. How are you planning your inventories and then secondly as it relates to the flagship you gave us some really helpful detail on what financial implications could be but is there a bit more you can tell us about store productivity or profitability to help us on handle the model and the event and the closing of that flagship store in New York? Perry Pericleous: Sure. In terms of a inventory question we don't provide guidance for the inventory bi-directionally. If you look at the retail inventory would expect to the flat to down throughout the year for the corresponding. What was the second part of your question, Lindsay? Lindsay Drucker Mann: Goldman Sachs: I just wanted to talk about the financial implications of the flagship in New York. If you do end up giving that at lease back beyond just the charges related and the impact is not paying rent, how do we think about profitability or the productivity, how productive how profitable is that store for you? Perry Pericleous: Sure we don't going to specific detail regarding any of our stores overall and the decision with Time Square give the landlord the ability to market the space, it has to with fact that the store didn't meet our initial expectations, however we believe right now it's the right thing to do to look at give them landlord the opportunity to look for other tenants. Lindsay Drucker Mann: Goldman Sachs: Okay, good one last one do you have an ultimate outlet store target for the US? Perry Pericleous: Yes. We believe that from an outlet standpoint, a 150-store feet is appropriate for us. Lindsay Drucker Mann: Goldman Sachs: Great, thanks so much. Perry Pericleous: Thank you. Operator: Our next question comes from the line of Susan Anderson with FBR. Please proceed with your question. Susan Anderson: FBR Capital Markets: Good morning. Congrats on a really good quarter and good year. I wanted to maybe get some more color on denim. I think you guys said that you saw renewed interest on the men's side maybe if you can talk about what you are seeing on the women side and then also if you have any color on some early warnings on what the consumers responding well for spring and if there is anything they're not resonating with? Thanks. David Kornberg: Okay. First women's continuous to be strong, in terms of what we were seeing. We're seeing progress on across the board in men's top, denim, dresses casual pants our accessory business is doing very well, across all categories including footwear and as I mentioned earlier on the call, I may has got off to very great start in terms of the launch that we've seen there. So, overall we feel very good about what we are seeing in terms of the product there for spring. In terms of the some trends that we are seeing, it's sound strange to say but it's really in terms of what we're seeing in the combination of the 70's to 80's and the 90's in terms of the trends that are out there. In terms of what's not resonating, look there are areas we maybe a little bit too far in front of the customer but overall buy and large the product is absolutely on the mark and it's very good indeed. So, we're seeing some very good results. Susan Anderson: Good sounds great. Good luck next quarter. David Kornberg: Thank you. Periclis Pericleous: Thank you. Operator: Our next question comes from line of Richard Jaffe with Stifle. Please proceed with your question. Richard Jaffe: Stifel Nicolaus & Company,Inc.: Thanks very much guys and my complements to a very strong quarter. If you could just provide some detail for SG&A gross margin improvement across the quarters and then talk for a minute about the omni-channel opportunity, it's obviously very robust already I am wondering how you see it continuing to grow dramatically. Is it the factory outlet business going online or it's another factor? Thank you. Periclis Pericleous: So Richard the overall gross margin SG&A improvement we expect consistent gross margin improvement that while the quarters for the 2016 and as far as SG&A goes we would expect SG&A to be relatively flat throughout the quarters. Matthew C. Moellering For your second question on omni-channel initiatives, we currently given the system constraints which will be addressed here shortly. We currently do not offer customers reserve online pickup and store for example. We also aren't able to ship from store today which could help relieve some pockets of inventories that may need to be liquidated things of that nature we do not have those capabilities from omni-channel standpoint yet and once we have these new systems implemented we will be able to start to go down the path of offering some of these services to our customers. Richard Jaffe: And if you could just follow on with the factory outlet opportunity? Matthew C. Moellering: We are not looking at this time to offer factory outlet products online. Richard Jaffe: Okay, thank you. David Kornberg: Thank you. Operator: Our next question comes from the line of Roxanne Meyer with MKM Partners. Please proceed with the question. Roxanne Meyer: MKM Partners: Great thanks. I actually have two follow ups first as a follow-up to Janet's question. You know you've obviously had a ton of success with your 111 and now you've got Addition, you've got Core, I'm just wondering over the next few years how you think about the balance of all of these new collections relative to the legacy collections? How big can all these new collections be as a percent of the mix and then secondly on inventory, just wondering if you could help us think about how much more room there is for inventory to be a driver of expanded merchandise margin performance over the next few years and if there are any targets you can share in terms of improving turn? Thanks a lot. David Kornberg: Okay, so your first question is helping some of the new collections can be essentially just the total mix. We're really in the exploratory phase at the moment in terms of how we take this forward. Clearly all three of them have the potential to be growth initiatives for us and we're looking into it. We're building on them, we're taking it in slow steps, you will see in some of our stores have big 111 has become and we continued to see as a really big opportunity within the Express Store as a way of increasing the productivity of our footprint, as it is today. So we're very excited by what we're seeing there excited about what we've seen in Addition and Core that I would reiterate we're in the exploratory phases of how we have involve those going forward. In terms of inventory, as the driver of merchandise margin, we still see that there is opportunity going forward. We are focused on the optimization of our inventory as we have been for the past year, but we're putting an even greater emphasis on it in 2016 and we believe that there are merchandise margin gains we have there as well. But we are not going to in to the specifics of what that is. Perry Pericleous: Once we know what that the system implementations will help enhance the inventory optimizations that will having place. Roxanne Meyer: Okay great. Thanks for the color and best of luck. Operator: Our next question comes from line of Rebecca Duval with BlueFin Research. Please proceed with your question. Rebecca Duval: BlueFin Research Partners: Hi, thanks for taking my call and congratulations also. David Kornberg: Thank you. Rebecca Duval: David, I just want understand really quickly and you talk about the initiatives and there is been obviously lot of question on these capsules. But when you talk about expanding the capsules, are you referring to obviously the 111 in the Addition. But are you is that also encompass some of the product extension and are you considering are could be look for maybe some additional capsules like Addition that are more short term capsules on a go forward basis, and then the second question is also on this whole IT implementation. Obviously I understand the benefits of the omnichannel. But is this also going to have a more granular effect on store segmentations in terms of inventory and is that something that we can expect to see this year or is that something that were looking for in '17 as well. Thank you? David Kornberg: Okay, starting with your first question of Rebecca, in terms of expanding capsules. Yes it about expanding capsules but also about product extensions as well. So when we look at some of the results that we see in footwear, we see the footwear is also a major opportunity for us going forward. In terms of expanding the footprint in our stores and online as well. 111 as I said on the previous question I believe has very, very big opportunity for us as a business but as I said to Roxanne and we are very much in the historic stages and as Matt said earlier to an answer on the question is really a cruel world around the parts that we are taking. We tested it in 50 stores we rolled out the chain last July, we broadened the assortment to spring we are doing various tests this spring in terms of placement within the store and we are seeing some really great results from that and we are literally taking at an each day as they come. But yes, I do believe that there is big opportunity around that and there is big opportunity around general innovation within the business. So you talked about a addition 111 yes, there could be other line extension that we do go forward, and of the new lines we deliver in the stores and on line as well, and but we are in the sort of imagination imaginary stage and we are working on it every day. I will let Matt on to the next question. Matthew C. Moellering: So from a system's perspective just for perspective the current systems that we are operating with which were about to go off here in a few months, the remaining systems, these are systems that are 20 to 25 years old systems. Extraordinarily old systems when you step back and look at the planning we currently do by channel, e-commerce we plan as a single store in our planning system because that's the only ability we have today. When we started running our outlet business, we effectively have only 2 departments for men's and women's combined to plan for our outlet business today. It is a very difficult customized system that we have to plan the product and the allocation in today. These new systems will give us much more granularity to plan by individual channel and get down to the store level as well to enable us to really sharpened where we put product and how we liquidate product as well. So we think there are significant opportunities but again these opportunities given that the systems some are going in at the end of beginning of May and some are going in at the end of July a lot of the benefits will come in '17 and '18. Rebecca Duval: That's very helpful. Thank you and best of luck. Operator: Thank you. We have no further questions at this time. I would now like to turn the floor back over to management for closing comments. David Kornberg: This concludes our call for today. Thank you for joining us this morning and to your ongoing interest in Express. Operator: Ladies and gentlemen, this does conclude today's teleconference, you may disconnect your lines at this time. Thank you for your participation and have a wonderful day.