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Edited Transcript of EXPR earnings conference call or presentation 28-Aug-19 1:00pm GMT

Q2 2019 Express Inc Earnings Call

COLUMBUS Sep 11, 2019 (Thomson StreetEvents) -- Edited Transcript of Express Inc earnings conference call or presentation Wednesday, August 28, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Dan Aldridge

Express, Inc. - VP of IR

* Matthew C. Moellering

Express, Inc. - Executive VP & COO

* Periclis V. Pericleous

Express, Inc. - CFO, Senior VP & Treasurer

* Timothy G. Baxter

Express, Inc. - CEO & Director

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Conference Call Participants

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* Janet Joseph Kloppenburg

JJK Research Associates, Inc. - President

* Marni Shapiro

The Retail Tracker - Co-Founder

* Paul Trussell

Deutsche Bank AG, Research Division - Research Analyst

* Roxanne Felice Meyer

MKM Partners LLC, Research Division - MD & Senior Research Analyst for Specialty Retail

* Steven Louis Marotta

CL King & Associates, Inc., Research Division - MD & Director of Research

* Susan Kay Anderson

B. Riley FBR, Inc., Research Division - Analyst

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Presentation

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Operator [1]

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Good morning. My name is Amy, and I will be your conference operator today. At this time, I would like to welcome everyone to the Express Inc. Second Quarter 2019 Earnings Conference Call. (Operator Instructions) Thank you. Dan Aldridge, VP of Investor Relations at Express, you may begin your conference.

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Dan Aldridge, Express, Inc. - VP of IR [2]

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Thank you, Amy. Good morning, and welcome to our call. I'd like to open my reminding you of the company's safe harbor provisions. Any statements made during this conference call, except those containing historical facts, may be deemed to constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. 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 Tim Baxter, CEO; Matt Moellering, Executive Vice President and COO; and Perry Pericleous, Senior Vice President and CFO. I will now turn the call over to Tim.

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Timothy G. Baxter, Express, Inc. - CEO & Director [3]

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Thank you, Dan, and good morning, everyone. I'm pleased to be with you on my first earnings call since joining Express. I am committed to leading this company to a bright and profitable future, and I am confident in the opportunities that exist for our brand. Today, I will speak to the 3 key areas I have been focused on in my first 60 days: developing a corporate strategy, building the right leadership team and taking immediate action to change the trajectory of our business. Following my remarks, I will turn the call over to Perry, who will discuss second quarter results and third quarter guidance. I will make a few closing comments, and then we will take your questions.

So let me start with our corporate strategy. I believe that the Express brand can play an important role in bringing great style at a great value to our customers' lives. But in order to return to the fashion authority we once were, we must have a more unique and differentiated product offering, a more compelling brand positioning and a more engaging customer experience. Since joining the company, I have asked a lot of questions, I have done a lot of listening and spent a lot of time in our stores. I wanted to get a clear understanding of what was working, what was not working and the most immediate opportunities. I certainly don't have all of the answers at this stage, but we are in the process of developing a comprehensive strategy based on my learning so far. And while it is not yet complete, I can share that it will be based on 4 pillars: our products, our brands, our customer and our execution. Everything we do going forward will be to improve and advance these 4 pillars. I am confident that we will return Express to sustainable, profitable growth and I look forward to sharing more details on our strategy with you soon.

Now let me talk about building and strengthening our leadership team. Identifying the right talent for key open positions on the executive team and quickly assessing where we need to upgrade senior talent was a clear priority. Earlier this month, we announced appointments to the 2 critically important roles of Chief Merchandising Officer and Chief Marketing Officer. And a search is in progress now for a leader for our stores organization. As Chief Merchandising Officer, Malissa Akay, will oversee women's and men's design and merchandising, with responsibility for product strategy across Express, Express factory outlet stores and Express.com. This also marks an important structural change to have all product strategies across all channels report to a single leader. Malissa's experience spans categories, price points and geographies, and this comprehensive perspective will advance our approach.

As Chief Marketing Officer, Sara Tervo will be responsible for brand strategy and positioning, creative services, customer insights and loyalty. Sara's experience is across all aspects of marketing. She has successfully built brands that resonate with customers and have delivered results. Both Sara and Malissa will join Express on September 9, and I am pleased to welcome executives of their caliber to our company. Ensuring consistent execution and turning around the performance of our brick-and-mortar business are absolutely essential. So I chose to take action quickly to address our store leadership. I can't talk about building a great team without mentioning and thanking our COO, Matt Moellering, who stepped in as interim CEO earlier this year and did an excellent job getting the organization focused. Matt and I have been aligned since our first meeting, and he has done so much to make this a very seamless transition of leadership.

The right strategy and a leadership team that reflects a balance of seasoned Express executives and those with fresh outside perspective will better position us for the future. But we're also taking decisive action where we see immediate opportunities for improvement.

Let me take you through a few examples within each of the 4 pillars I mentioned earlier: product, brand, customer and execution. Number one, product. Express was once seen as a fashion authority and a trusted resource to help customers build their wardrobe. We've lost some of that credibility due to product misses. And while there are areas of strength in our women's and particularly men's assortments, we need to be winning in key categories. We need to fix our women's tops business, which has declined in recent years. We've had too much depth in older key items and not enough breadth in style diversity. Over the last several weeks, we've conducted a test to understand the impact of optimizing our assortment by adding different colors, fabrics, prints and silhouettes. The results have been positive across all metrics, with customers responding well to the assortment in our test stores. We've impacted Q4 receipts where possible and will apply the learnings more broadly going forward.

We also have an opportunity to move faster and bring in more newness across all categories. To address this, we have implemented a new insta-buy process for both women's and men's. While the majority of products will continue to be created by our internal design team, this process gives us the option to instantly buy products from our vendors that complete or enhance our assortment. This approach will ensure that we are consistently delivering fresh, trend-right product and significantly improve our speed to market.

Another example where we've taken decisive action is to rethink the brand's traditional way of categorizing product into 4 lifestyles based on wearing occasion. Today, people want one wardrobe with great pieces that are versatile enough to work for multiple occasions and our approach has been out-of-step with this shift. The most immediate way we are addressing this is by changing the way customers experience our product in stores. Our floor sets will reflect a more modern approach and make it much easier for customers to see how to put outfits together. Early reads have shown improvement to sales and conversion, and sales associates tell us that customer feedback has been overwhelmingly positive. This shift away from the 4 distinct lifestyles will also influence how we design, merchandise and present our product going forward. So that's product.

Number two is brand. Alongside our corporate strategy work, we have also been refining the strategy for our brand. Most people know Express, but many don't know what we stand for or how we fit into their lives today. We must clarify our brand message and more closely connect it to our product strategy. We have more than 280 million visits to our website and stores each year. We also offer fashion that helps customers build a versatile wardrobe, and we have a following among millennials and Gen Z. But we must tell our story in a more powerful and consistent way. This work is already in progress, and our new Chief Marketing Officer will lead the articulation of our brand to strengthen our positioning and encourage people to take a fresh new look at Express.

Number three, customer. Simply put, we need to be much more effective at retaining existing customers and attracting new ones. This summer, we implemented 2 new tools to enhance the effectiveness of our marketing spend for both retention and acquisition. We are using a marketing mix model to assess how we allocate investment and which channels deliver the best return. We are using these findings to make adjustments starting in September.

We are also using multi-touch attribution to evaluate the real-time performance of our end market messages and to track the customers journey to purchase, both online and in-stores. This tool allows us to quickly shift spend to boost the channels and messages that are most effectively driving sales. In the back half of this year, we are very focused on earning a greater share of wallet from our customers who are already engaged with the brand. We know that participants in our next loyalty program have a higher lifetime value, making it one of our most important retention vehicles. We've already added a significant number of new customers this year and will continue to make enhancements to the program going forward. For new customers, we know that getting a repeat purchase within the first 90 days is key to earning their loyalty. We launched our new first impression program in May. And while it is still early, we've already seen an improvement in our customer retention rate. And compared to 2018, there is an increase of approximately 20% in our e-mail click-through rate.

Number four, execution. The 2 priorities here are delivering a better, more consistent experience across channels and achieving our financial goals. Our biggest challenge, and I believe our greatest opportunity, is our stores. Our performance has been extremely challenging and has lagged behind the brick-and-mortar performance of other retailers. I've already visited a number of stores and spoken with many of our field leaders in 5 of our 7 regions. It is clear that we must reduce the time spent on non-selling activities in order to improve our sales and customer experience. We will focus on improving conversion and increasing average dollar sales through efficient merchandise flow and better customer experience. These will be important areas of focus for our new store leader when he or she comes on board.

Through the changes we are making to our product, our merchandising and our marketing, we expect to drive top line sales improvement over time. In addition, we are in the process of identifying cost savings and rightsizing our expenses. And let me be clear. We will take the necessary action to significantly reduce our operating expense in 2020.

With respect to the second quarter, we are clearly disappointed in our results. However, we did deliver sales and profit at the top end of our guidance. The sales were negatively impacted by a 15-day reduction to storewide, site-wide and significant category promotions. As we continue to make real-time changes to improve performance in Q3 and accelerate our performance in Q4, we are doing so with the long-term health of the brand and the business in mind. We are moving forward with a sense of urgency to return Express to long-term profitable growth.

It is my expectation that we will get back to a mid-single-digit operating margin through a combination of top line growth, margin expansion, expense reduction and fleet rationalization. This will take some time, but we have the financial flexibility to take the necessary actions given our strong balance sheet and free cash flow generation. We appreciate that the road ahead is a difficult one, but we believe that when our strategy takes hold, we will add significant value to the company and to our shareholders.

I will now turn the call over to Perry and return with some closing comments before our Q&A.

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Periclis V. Pericleous, Express, Inc. - CFO, Senior VP & Treasurer [4]

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Thank you, Tim, and good morning, everyone. I will start by reviewing our second quarter results and then discuss our business outlook. As Tim mentioned, the second quarter, while disappointing, met the top end of our guidance and marked sequential improvement versus the prior quarter. Second quarter net sales were $473 million, a 4% decrease as compared to $494 million last year. Consolidated comparable sales were negative 6%. Retail comps, which include Express stores and e-commerce, were negative 7%. And Express factory outlet store comps were negative 2%. During the quarter, sales were impacted by our decision to strategically reduce storewide, site-wide and deep department promotions. While pulling back on this types of promotions did have a negative impact on sales in the short term, we believe this will improve the health of the business over the long term. Promotions will, of course, continue to be part of our strategy. But going forward, we will use them in a more thoughtful and targeted manner.

Our second quarter gross profit was $126 million, with a gross margin rate of 26.8% of sales, down 160 basis points as compared to the prior year. Breaking this down, merchandise margin contracted by 60 basis points. While we had less promotional activity across our stores and website, this was offset by our actions to move through clearance inventory and an increase in inventory valuation reserve for goods that will be marked out of stock in September.

Buying and occupancy costs, while down slightly versus last year, as a percentage of net sales deleveraged by 100 basis points due to fixed cost on lower net sales. SG&A expenses were $136 million, a decrease of $2 million compared to last year. As a percentage of sales, SG&A came in at 28.7%, deleveraging 80 basis points, driven by the sales decline. Operating loss was $10 million as compared to last year's operating income of $3 million. The second quarter operating loss was negatively impacted by $800,000 related to the new lease accounting standards. However, there was no material impact on our pretax loss.

Second quarter loss per share was $0.14 on a GAAP basis and $0.13 on an adjusted basis, as compared to last year's EPS of $0.03. By the end of this year, we will achieve the $44 million to $54 million of cost reductions we committed to in 2016. As Tim mentioned, we're actively identifying significant savings opportunities to further optimize our cost structure in 2020. We expect to provide an update on this in January.

Now turning to our balance sheet and cash flow. Our balance sheet remains healthy. Inventories at quarter end were $269 million, a slight decrease as compared to last year's $270 million. While we have made progress on our inventory levels, we still have work to do to get inventory in line with our comp expectations. We ended the second quarter with $154 million of cash and cash equivalents as compared to last year's $191 million. This balance includes $56 million to repurchase outstanding shares over the past 12 months. Our balance sheet reflects no long-term debt. Year-to-date capital expenditures were $12 million as compared to last year's CapEx of $17 million.

With that I will now address our guidance. For the third quarter of 2019, we currently expect comparable sales in the range of negative 6% to negative 7%. Net loss in the range of $5 million to $7 million and loss per diluted share in the range of $0.08 to $0.10. This compares to last year's diluted EPS of $0.11.

The third quarter guidance reflects our plans to continue pulling back on promotional activity. It also reflects our actions to change the composition of our inventory by clearing through slow-moving items faster, to free receipt to add newness to the assortment. We believe this approach will set us up for sequential improvement in the fourth quarter.

A few comments on tariff. Today, approximately 20% of our units are sourced from China. We are on track to bring that down to approximately 8% by the middle of next year. We will accomplish this by further diversifying our sourcing base. With what we know today, in the back half of 2019, we are expecting approximately $2.5 million of incremental cost. This is included in our third quarter guidance. We now expect capital expenditures in the range of $35 million to $38 million. This represents a decrease from our previous 2019 guidance of $37 million to $42 million and our 2018 capital expenditures of $50 million.

We expect to generate positive free cash flow in 2019 while continuing to invest in our business initiatives in a prudent way. As it relates to real estate activity, our current plan is to end the year with 624 stores, consisting of 409 Express stores and 215 factory outlet stores. This count does not include the impact of our fleet rationalization plans, the details of which we're finalizing and expect to share with you in January. As a reminder, 60% of our stores have a lease action date over the next 3 years, giving us significant flexibility.

In conclusion, while we're not satisfied with our financial results, we remain highly focused on returning Express to sustainable, profitable growth through our focus on product, brand, customer and execution. We're confident that the changes we're making will improve the health of the business in Q3, and we expect to accelerate this improvement in Q4, which was our most challenging quarter of comp performance in 2018.

I will now turn the call back to Tim for closing remarks.

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Timothy G. Baxter, Express, Inc. - CEO & Director [5]

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Thank you, Perry. I'll conclude my comments today by reiterating that while we're certainly not pleased with the current state of our business, I'm very encouraged by the progress we have made in my first 60 days. We are well on our way to developing a corporate strategy that will address the foundational issues around product, brand, customer and execution. We have strengthened the executive team with 2 key appointments, and we have taken a number of immediate actions to change the trajectory of our business. With consistent focus over time on the 4 pillars of our strategy, we expect to win in key product categories, restore the Express brand to its place as a leading fashion authority, deliver a compelling customer experience that builds loyalty and return the business to a mid-single-digit operating margin through top line growth, margin expansion, expense reduction and fleet rationalization.

Thank you all for your interest in Express. I look forward to updating you on our progress when we chat in December. I will now ask the operator to begin the question-and-answer portion of the call.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Paul Trussell with Deutsche Bank.

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Paul Trussell, Deutsche Bank AG, Research Division - Research Analyst [2]

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I wanted to ask a few questions. First, maybe just talk a little bit more about product and where you want to be positioned in the marketplace. And then second, if you maybe could talk a little bit more about your intentions in the back half around promotional cadence, and should we expect you to continue to pull 15-or-so days out of promotions in both the third and the fourth quarter as well?

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Timothy G. Baxter, Express, Inc. - CEO & Director [3]

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So let me start with product. Those of you that know me know I always like to start with product. So thank you for starting there. Our approach to product, as I said in my prepared comments, has been focused on 4 lifestyles, and those lifestyles were actually all wearing occasions. And everything we did as a company was organized and focused on those 4 lifestyles. And it is simply -- that approach is out-of-step with the way the consumer dresses today and the way the consumer wants to experience product both in-stores and online today. As I said, the customers really looking and building one wardrobe that has great pieces that cross multiple wearing occasions. So our entire approach to product is really going to change. Rather than being focused on a very specific wearing occasion, we're just going to start designing product and thinking about product in a much more modern way. And that is really about designing great, unique, differentiated product that a customer will actually have sort of an emotional connection to and then showing the customer actually how all those pieces on all those different pieces of product in our assortment can work together to build this incredibly versatile wardrobe. We've already started to change this approach. I mentioned that in my comments that we've changed the way we have merchandised our stores with the August floor set, and we've seen positive results. It's too early to call anything, but we have seen positive results. And I'm excited about this more modern approach.

In terms of the promotional cadence. As Perry said, our third quarter guidance includes, a, the continued pull back on promotional activity. I want to be clear, though, Perry said this, but I want to be very clear. Express will continue be a promotional brand. We will just be much, much more targeted in the way that we promote the products and categories that we promote and the promotional offers that we actually give to specific individuals. So you can expect that we will stay on this path throughout the balance of the year.

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Paul Trussell, Deutsche Bank AG, Research Division - Research Analyst [4]

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And my last question is just around the store portfolio. I know you're going to announce more details in January. But maybe just help us understand the guide point -- the guidepost as you kind of think about the rationalization plans and ultimately, how do you think about the mix of retail versus outlet stores?

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Matthew C. Moellering, Express, Inc. - Executive VP & COO [5]

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So -- this is Matt. What we're doing is, we have undertaken an analysis of our entire fleet, and we're looking at a number of different things to determine what the right end state is for our portfolio. First and foremost, we're obviously looking at what the coverage looks like in each market. So we're looking at 1-store markets, 2-store markets and multi-store markets. We have a lot of data at this point in time around transfer volume for stores that close in multi-store markets. We're now able to model that with a relative degree of accuracy, and we've taken that into account as we're developing our final plan around what this portfolio will look like long term. We're finalizing those plans, as Tim and Perry talked about. We will share the results of this analysis with the broader community in January. As it relates to outlet stores, we are clear that there is a balance between outlet and retail stores and there could be a brand impact to having oversaturation in the outlet market. So we're taking that into account with our modeling as well, but we'll have more to share in January.

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Operator [6]

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Your next question comes from the line of Susan Anderson with B. Riley FBR.

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Susan Kay Anderson, B. Riley FBR, Inc., Research Division - Analyst [7]

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I was wondering if you could talk a little bit more about the buckets of opportunity to reduce your operating expenses throughout the organization. I guess, where do you see that opportunity? And then also same on the margin expansion. If it doesn't relate to operating expenses, but also gross margin, where is the opportunity? Is it within your supply chain, within the org structure or how should we think about that over the next couple of years?

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Periclis V. Pericleous, Express, Inc. - CFO, Senior VP & Treasurer [8]

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Yes, Susan, thanks for the question. As you look at it, let me start from a merchandise margin standpoint. The opportunity to improve merchandise margin is through our focus on our product, our brands and is through the focus on the cash flow and execution and the ability to be far more targeted with our overall promotional activity and be able to get our inventory back in line with our comp expectation. And we do believe, through that as well as the systems that we're putting in place, the assortment planning system, that will improve the overall markdown rate and improve our overall merchandise margin.

As it relates to the buying and occupancy, we believe our buying and occupancy, we have an opportunity through one, is through the fleet rationalization. And as we announced the plans for the fleet rationalization, we believe there's going to be an opportunity to obviously reduce expenses there. But also we're looking at within the buying and occupancy, our overall processes and looking for opportunities to reduce -- improve and streamline our processes in order to reduce expenses.

From an SG&A, we're going bottoms up in terms of looking at all the expenses, and we believe there's an opportunity across the board, including looking at efficiency and process improvements within the stores organization in order to be able to drive significant expense reductions for the business.

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Susan Kay Anderson, B. Riley FBR, Inc., Research Division - Analyst [9]

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Great. And then maybe just one follow-up on the remerchandising of the product across the store and it definitely looks like there is some early remixing of product and it sounds like you're maybe seeing some early success. I'm curious maybe just if you could give some color around, is the consumer maybe mixing and matching a little bit more with the remerchandising that you've done across product categories? Maybe just a little bit of color on the early success going on there?

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Timothy G. Baxter, Express, Inc. - CEO & Director [10]

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Yes. Absolutely, Susan. The -- we set -- we changed our floor set in the first week of August. And I was actually able to be in about 20 stores since we've set the floor, getting first-hand feedback from our store management teams and sales associates in the field, but also then obviously looking at the results and all the metrics that we review centrally. And there has been great progress. And as I said, we're excited about and enthusiastic about the results that we've gotten. The customer is definitely mixing and matching product from each of what we would have considered those 4 lifestyles in the past. The customer is absolutely understanding in a much better way that product that we may have categorized is wear-to-work previously is actually product that she wants for a more polished casual look and she may be pairing it back to denim or pairing it back to a T-shirt. So there is absolutely a lot more mixing and matching of product between those legacy lifestyles. We've also heard anecdotally from virtually every store that customers are taking a lot more product into the fitting room and our conversion reflects that. So very excited about it. A lot of work still to do. But excited that just by changing the merchandising tactics with the same product, we were able to achieve a better result.

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Matthew C. Moellering, Express, Inc. - Executive VP & COO [11]

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And the good news as well with that is there's a lot more to come. So as you might imagine, as you go through the fall season a lot of commitments have already been made on product. As Tim has come in and made some significant changes to the assortment, particularly on the women's top side of the business, we're aggressively working through some of the legacy product to free up receipts so that as we get into the spring season, we'll have much more better -- a much better representation of what a go-forward comps business will look like for the organization as well.

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Operator [12]

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Your next question comes from the line of Roxanne Meyer with MKM Partners.

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Roxanne Felice Meyer, MKM Partners LLC, Research Division - MD & Senior Research Analyst for Specialty Retail [13]

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I wanted to ask about the denim category. I know you mentioned, of course, that the -- fixing the women's top is obviously very critical. But this also used to be a business with denim at the core. I'm just wondering how you're thinking about denim as really a key, key item going forward?

And then secondly, similar to what you're doing in the front-line stores with remerchandising, I'm wondering if there is the same type of opportunity within the outlet channel or if there is -- or if there are any other kind of low-hanging fruit type of changes you're thinking about that are necessary in the outlets, even though obviously they're performing better relative to frontline?

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Timothy G. Baxter, Express, Inc. - CEO & Director [14]

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Yes, thanks, Roxanne. Denim is a great question. Denim is obviously a key part of every one of our consumers' lives. So there is no doubt that we need to win in denim. And I would tell you that we have had success in 2019 in men's denim, and Hyper Stretch denim, in particular, has been a fantastic category for us, has performed very, very well and we've just launched a new fit in men's denim, an athletic fit that's also performing very well. So we continue to grab market share and outperform in men's.

It's been more of a challenge on the women's side. And we are as focused on fixing denim as we are on fixing our women's tops business. There is a shift happening in silhouette on the women's side of the business. We've been in a skinny/legging cycle for probably nearly a decade now, and that -- there is a huge momentum shift. And honestly, we missed it in women's denim. The women is definitely gravitating back toward a boot cut, a flare or a wide leg in denim and our assortment is still too heavily penetrated in leggings and skinnies. So we're making those adjustments. I'm excited that after I started, we actually moved up a launch that was slated for spring '20, in women's hyper stretch denim. We actually moved that launch up into the fourth quarter to try to get some momentum in the women's Denim business in the fourth quarter. But I expect that we'll be in much better position in denim as we move into 2020.

In terms of remerchandising outlet, there are absolutely always opportunities to look at how we're merchandising things in the categories that we're distorting across channels. What I'm most excited about as we move forward is that Malissa, in her role as Chief Merchandising Officer, will have oversight for all of our product and merchandising strategies in both full price and outlet. And I'm very confident that she will really lead the charge in driving the business in both channels.

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Operator [15]

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Your next question comes from the line of Marni Shapiro with Retail Tracker.

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Marni Shapiro, The Retail Tracker - Co-Founder [16]

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Welcome aboard, Tim. Great to hear your voice. I have 2 quick questions. The first is insta-buys, is that you guys going into the market kind of the old-fashioned relabeled goods, get them in, get some fresh new products in the store? Or is it working with your factories and really just moving things much faster?

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Timothy G. Baxter, Express, Inc. - CEO & Director [17]

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It's both. We started -- we just kicked this off in an effort to improve our speed to market. So we started, honestly, with working with our manufacturers on development and taking advantage of the development that they have. But going forward, Marni, it will be a combination of both things. We will do whatever we need to do to be sure we have trend-right product in our stores at the right time.

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Marni Shapiro, The Retail Tracker - Co-Founder [18]

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That's fantastic. And then you guys have launched the rental business. So I'm curious how does that fit in with this new approach? It seems to me, got instinct that it works really well with the new approach, but I'm just curious with the internal what your thoughts are?

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Timothy G. Baxter, Express, Inc. - CEO & Director [19]

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I would tell you, my thought is that I agree with you. It should and will, I believe, work really well with our new approach. We kicked off the rental business, which is called Express Style Trial, at the end of last year. And we measured the results obviously throughout the entire spring season. We are making some firm decisions on how we will move forward with Express Style Trial over the next several weeks. So that's something that we will update all of you on in our next call. But I do believe that we have an extraordinary opportunity because we do have product that is appropriate for all wearing occasions. I think that rental is an enormous opportunity for us.

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Operator [20]

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Your next question comes from the line of Steve Marotta with CL King & Associates.

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Steven Louis Marotta, CL King & Associates, Inc., Research Division - MD & Director of Research [21]

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During the prepared remarks, you mentioned that there are -- you expect sequential improvement in the fourth quarter. Are you referring specifically just to comp store sales? Or are there other income statement metrics embedded within that comment?

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Periclis V. Pericleous, Express, Inc. - CFO, Senior VP & Treasurer [22]

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Steve, thanks for the question. We're referring to overall the P&L, we're expecting to have improvements in the fourth quarter. We believe that based on the comp performance last year and based on how we performed thus far this year and quarter to date that we expect to see sequential improvements going into Q4. The way that we are managing the business right now is, and Tim mentioned from promotional activities, we continue to find opportunities to pull back on promotions. We're also very, very targeted with our promotions on moving slow-moving merchandise and promoting those, in order to make room for new receipts, and we expect to improve the health of the business in Q3 and then accelerate that into Q4.

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Steven Louis Marotta, CL King & Associates, Inc., Research Division - MD & Director of Research [23]

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That's very helpful. So Tim, can you talk a little bit about the levers in the near term to improve store traffic? Are there methods that you can employ through either direct marketing or maybe even as Perry just alluded to, promos on specific items to -- in order to improve traffic trends?

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Timothy G. Baxter, Express, Inc. - CEO & Director [24]

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Yes. Absolutely, Steve. And I can give you a couple of examples of things we've done. We certainly do have the ability to target marketing to certain individuals within our customer base to drive traffic both online and in-store. But one of the things that we've done quite honestly to drive traffic in-store is distort our clearance message over the past couple of weeks. It's a very different approach than we've taken in the past. But we, as Perry mentioned in the comments, had a larger amount of clearance that we had planned to mark out of stock in September. And we've gotten much more aggressive on selling through that product rather than marking it out of stock. And that has been a great traffic driver for us. And that's just simply by putting a banner up in the front windows, driving an end-of-season clearance message and the traffic has gone up pretty significantly with that change. So there are definitely levers that we can pull.

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Matthew C. Moellering, Express, Inc. - Executive VP & COO [25]

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There are other things too, Steve, that we are doing. We have taken a very analytical approach to customer acquisition and retention, which is somewhat of a departure from where we have been in the past. So we, over the last 2 years, have really built up an analytics function within the company. We have knitted all of our customer databases together now and now have actionable data to work with. We have implemented a new MMM and MTA models, so marketing mix model, marketing touch attribution model. We believe these 2 models will increase productivity of marketing spend by approximately 20%. That's the target we're going after. So as we move marketing investments into higher productive investments that should help drive customers to store.

We've also launched some new predictive modeling in the last month or so and that is starting to take hold as well, which has a better capability of targeting customers and getting the right messages to customers that are relevant to also bring them into stores. And as we do generate new customers, our first impression program kicked off in May. With that program, we're attacking customers after their first purchase and trying to capture them for a repurchase within the first 90 days. We're seeing traction on that as well, and we continue to emphasize our next loyalty program as well. All of these things over time should help improve traffic to our stores as well as the things Tim talked about.

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Operator [26]

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

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Janet Joseph Kloppenburg, JJK Research Associates, Inc. - President [27]

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I had a question on the product categories that Tim and Matt spoke about. For instance, on -- in the tops category, given the new test-and-react strategies that have been implemented, I'm wondering if you think that the assortments will get progressively better this fall? I know you talked a little bit about improvement. You see -- expect improvement in the spring, but I'm wondering if we should expect that we should see some progress as we go through the rest of the season?

And then secondly, on denim, Tim. I thought you guys did make a better effort here in the back-to-school season on the denim front, making it more predominant within the stores and on the website. And I'm just wondering the same, if you expect that the efforts there will bear fruit in terms of those -- the category performing better as we move through the season? Or do you expect that the change will really come next spring?

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Timothy G. Baxter, Express, Inc. - CEO & Director [28]

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Janet, the answer very simply is yes to both. I do believe that we will get progressively better this fall. As I have mentioned in my comments, we were able to have some impact in late Q3 and into Q4 in the tops category and in the denim category. So I do believe we will get progressively better. We should expect incremental improvement.

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Janet Joseph Kloppenburg, JJK Research Associates, Inc. - President [29]

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And then on the inventory front, and I did get on late, I'm just wondering if the content is where you want it to be? Is the investment per category trending in line with the sales results you're seeing? Or are those adjustments ongoing? And when do you think you'll be aligned with the proper investment by category?

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Periclis V. Pericleous, Express, Inc. - CFO, Senior VP & Treasurer [30]

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Janet, this is Perry. We have made sequential improvements compared to where the May BOM was and compared to the comp expectation that we had for Q2. The August BOM came at a negative 0.6%, slightly down to last year. And obviously, as I've mentioned, we have made some progress there compared to the Q1 levels. We still have work to do to get our inventory fully in line with our comp expectations. And what we're doing specifically to do so, one is we're managing our receipts and are planning the business appropriately in terms of the level of promotions, and we're targeting slow-moving merchandise in order to clear those through. So from an inventory composition standpoint, we believe that we're going to continue to make progress to the inventory composition, as we're moving through Q3 and then into Q4.

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Operator [31]

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This concludes our question-and-answer session. I will now turn the call back over to Tim Baxter for closing remarks.

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Timothy G. Baxter, Express, Inc. - CEO & Director [32]

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Thank you all for joining us this morning. We look forward to speaking with all of you, again, next quarter. Have a good day.

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Operator [33]

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Thank you. This concludes today's conference call. Thank you for your participation. You may now disconnect.