Express Executive Insights: Knit Tops, Entry-Level

On Tuesday, Express, Inc. (NYSE:EXPR) reported its first quarter earnings and discussed the following topics in its earnings conference call. Here’s what the C-suite shared.

Knit Tops

Neely Tamminga – Piper Jaffray & Co.: Michael can we dig a little bit more into those knit tops issue. Just wondering, is that the primary change in terms of the delta of going from the mid-single digit cadence to a low to mid-single?

Michael A. Weiss – President and CEO: Yes it is. It’s both the bad news and the good news. The bad news being it was a big decrease, but the good news being that it is so specific. The rest of the business is really quite healthy. So, what we have discovered about that business is despite the fact that we dropped heavily in it. What we’ve discovered is we do have opportunity within that category to sell fashion T-shirts in much bigger (depths) than we had believed we could. When we basically abandoned the basic T-shirt business because of the low retail and the low margin and the fact that competitively we were just not there with the less expensive purveyors we really did not believe we could approach those kinds of units per style that we now know we can. So that going forward, you’re going to see fashion tops at opening price points and you’re going to be seeing a greater depth within that category of particular styles. Had we come close to our plan, the total picture would be very different, because we did solidly well in all of the ready-to-wear categories, when you put dresses and pants and woven tops together, it was really quite strong.

Neely Tamminga – Piper Jaffray & Co.: So, Michael related to that, it seems to me especially on knit tops that the lead times in fact are certainly shorter than maybe a tailored jacket and what have you, so can you give us a sense as to how we should be thinking about the timeline of your ability to really build into this with respect to volume and when it’s going to matter?

Michael A. Weiss – President and CEO: Sure. Luckily, the portion of our knit tops business going forward into fall is a much smaller percentage than it is in spring. So, there is not that much at risk, but you should be seeing this new formulation within two months.

Matthew C. Moellering – EVP and COO: This is Matt. Basically, we go back in hindsight and look at what we did. As Michael stated, we violated one of our guiding principles of taking a balanced approach to the business and we planned knit tops down significant double-digits for the spring season based on the strategy of getting out of these commodity type items, not understanding that we could sell more of the fashion knit tops. In doing so, when we planned the inventory down in knit tops, we put that inventory into several other categories in the business, and as Michael stated at the beginning of his comments, we simply didn’t have enough volume in the other categories, while they were good, not enough volume to make up our biggest category in the spring season which is knit tops. Because of that, there will be some liquidation of inventory in Q2 as we get out of some of these pockets of inventory where we shifted that inventory from the knit tops into some of these other areas, and that’s reflected in the guidance we’ve provided.

Neely Tamminga – Piper Jaffray & Co.: So if I may, just one more just to wrap this up, to the P&L for Matt or for Paul. Can you give us a sense of what maybe – I mean obviously there is going to be gross margin liability tied to Q2 and that’s certainly implied in your guidance, but as we peek around the corner to fall, I mean would we be thinking we can get some normalization, I mean comp prices are hitting on an all-time low as well right now, so how should we be thinking generally speaking about the gross margin line items in the back half?

D. Paul Dascoli – SVP, CFO, Treasurer: So, Neely, I think you are hitting it on the nail that we should expect some normalization in the gross margin as we get into Q3 and Q4. For Q3, we’re looking at product costs on a rate basis that are about flat with prior year, and then in Q4, as we’ve spoken about, we would expect to see a little bit of benefit in our product cost as we get into Q4.

D. Paul Dascoli – SVP, CFO, Treasurer: Mid single-digit decreases in product cost in Q4.

Entry-Level

Roxanne Meyer – UBS Investment Research: Let’s just continue on the conversation with knit tops, I guess what’s changed in the business that you think that you want to go after an entry-level price now knowing that that’s something that you’ve really stayed away from?

Michael A. Weiss – President and CEO: When we say entry-level, it’s not the entry-level of the basics, it’s entry-level for fashion which is a significantly higher retail than the basics were. So, entry-level is a very relative term for us and I’m sorry if I confused you about that. But the thing is that in terms of the basics, you all know who’s getting that business and it is not anybody that’s got a solid sort of multi-category brand, it’s the lower price purveyors. It’s the pilot high and watch it fly. We did that for many years, we did well at it, and it’s no longer our thing.

Roxanne Meyer – UBS Investment Research: Is there a way to think about how much comp you potentially left on the table as a result of not being there in the knit tops category?

D. Paul Dascoli – SVP, CFO, Treasurer: I say about between 1% and 2% of the comp.

Roxanne Meyer – UBS Investment Research: As it relates to the guidance update, obviously the low to mid single-digit comp range is part of the adjustment. Did you say that it was really – the update was really driven by this transition that you had kind of (at of) knit tops that you needed to go back into knit tops or is there anything else that had an impact on the revised guidance for the full year?

D. Paul Dascoli – SVP, CFO, Treasurer: So basically there is a couple of things that had impact on the revised guidance, the first thing was the fact that our Q1 we flowed that through to the year. Q2 was also include there based on the fact that we are going to have to liquidate some excess inventory based on the inventory that we put in other areas that was in knit tops that I just talked about. Then the third thing really is there was about $0.03 associated with this accounting statement for the New York flagship store this non-cash rent accounting treatment and the piece of it is well where it’s unfortunate that we have to take that. Where basically not even taken possession of the space for this new flagship store which should be very exciting but we are having to pay a record expense rent on that throughout the remainder of 2012 and we will take possession of the space in March of ‘13. It’s an interesting accounting rule that obviously we need to follow. But the other piece is, we are reflecting the current trend of the business, as Michael said you look at the fall receipts that have come in, they are reading very, very positively right now. We would hope that we could beat the guidance at the remainder of the year but we are putting guidance out there that we feel very comfortable with so that we don’t disappoint again.