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Express Inc (EXPR) Q4 2018 Earnings Conference Call Transcript

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Express Inc (NYSE: EXPR)
Q4 2018 Earnings Conference Call
March 13, 2019, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, my name is Emily, and I will be your conference operator today. At this time, I would like to welcome everyone to the Express, Inc. Fourth Quarter and Full Year 2018 Results. All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question-and-answer session. (Operator Instructions)

Thank you. Mark Rupe, VP of Investor Relations. Please go ahead.

Mark Rupe -- Vice President, Investor Relations

Thank you, Emily. Good morning, and welcome to our call. I'd like to open by 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.

In addition, during this call, we will make reference to adjusted operating income, adjusted net income, and adjusted diluted earnings per share, which are non-GAAP measures. Information necessary to reconcile these non-GAAP measures can be found in our press release, which has been filed as an exhibit to our Form 8-K with the SEC and is available on the company's Investor Relations website.

Our comments today will supplement the detailed information provided in both the press release and the investor presentation.

With me today are Matt Moellering, our Interim President and CEO, and EVP and COO; and Perry Pericleous, our Senior Vice President and CFO.

I will now turn the call over to Matt.

Matthew C. Moellering -- Interim Chief Executive Officer & Interim President & Executive Vice President, Chief Operating Offi

Thank you, Mark. Good morning, and thank you for joining us. As many of you know in January, we announced the leadership change, whereby the Board of Directors appointed me as Interim President and CEO in conjunction with the departure of our former CEO. As Mylle Mangum, our Chairwoman stated in our earnings release this morning, the Board is making good progress on the CEO search. They are pleased with the quality of the candidates that have shown interest and they are actively interviewing multiple individuals. This is a very attractive role that provides the new CEO, ample, strategic flexibility, given the company's strong brand and solid financial position. The Board's top priority is finding the right candidate to return Express to growth, and they are confident that they will be able to appoint the strong leader in the near future.

During this interim period, I want to assure you that we are not sitting idle. We remain focused on our business and our customers and on returning Express to a place of sustainable, profitable growth. This morning, I will share with you our high level assessment of the business and what the organization is focused on over the next 6 to 12 months to reposition the company for future growth and improve profitability. But first, I'm going to provide a brief overview of our fourth quarter results.

Fourth quarter net sales decreased 10% with negative 6% comparable sales, and adjusted EPS was $0.19. This was in line with the guidance we communicated on last quarter's call. Here are some of the key takeaways from the quarter and full year. From a retail product perspective, there were bright spots in our women's business with comp growth achieved in dresses, pants, skirts, jackets, and jewelry. However, these were offset by weakness in tops and in particular, casual tops and sweaters.

Our men's business performed better than women's with comp growth achieved in shirts, casual pants, graphics and jackets. However, there were headwinds in sweaters, knits and dress pants. For the full year, suits had another record year of sales and denim was also positive.

E-commerce comparable sales increased 5% in the fourth quarter on top of 17% growth in the same period a year ago. And for the full year, e-commerce comparable sales increased 21% with sales surpassing $600 million. And lastly, we ended the year in a solid financial position with $172 million of cash and cash equivalents and no long-term debt. This is net of $83 million of share repurchases during 2018. We are at an inflection point as a business. We are being very prescriptive about the next 6 to 12 months and the work that must happen to reposition us for future growth and profitability. And we are confident it will happen.

We are confident because first and foremost, Express is a resilient brand. It has remained $2 billion plus brand for many years, despite the challenging competitive landscape in a rapid shift of customer shopping preferences toward e-commerce. Express is also a relevant brand. We have had more than 130 million customer visits to our stores and more than 150 million customer visits to our e-commerce platform over the past 12 months. This means more than 280 million opportunities to make a sale to our customers, providing us a very solid platform for growth and that is where we are directing our work.

For 2019, we are focused on improving three critical areas of the business. Product, brand and product clarity and customer acquisition and retention. While it is difficult to determine how quickly these changes will start to gain traction, we believe that by focusing on these changes, we have a significant opportunity to improve the trend of the business.

First, as it relates to product, obviously for a fashion apparel retailer, we must understand our customer and know that everything starts and ends with the product offering. We are going to double down on customer insights and how we acquire and use customer data to make buying decisions. We are reassessing our testing and buying processes to ensure we have the right data to inform our decisions. This will lead to increased quantities of forward season merchandise, so we have a better read on styles and more time to maximize trend-right product during the heart of the selling season.

In recent years, we have reduced our quantities of forward season merchandise in favor of wear now product that creates higher markdown risk at the end of the selling season and less actionable data to react to the upcoming season. Second, as it relates to brand and product clarity, over the past few years, we have shared with you the brand work that we have completed. We continue to believe the work and brand direction are correct; now we need to turn this work into actionable results. To ensure there is a focus on brand and product clarity going forward, we are sharpening our edit points for the women's and men's customer to ensure that we have a single fashion point of view for our design, merchandising, marketing, and stores teams.

We are also reviewing our commercial planning process to ensure we are aligning and focusing key customer messages with the key fashion trends and brand work each month. We want to have a clear and consistent message on the most important items across all customer touch points. And we are optimizing our product portfolio to improve clarity, particularly in our stores. We want to ensure that each product fits within our brand umbrella and allows us to create a differentiated position for the customer. We must also ensure that we have the marketing bandwidth to communicate the differentiated position to the customer.

Express built its business and brand by being a destination for fashion. Going forward, we will reassert ourselves in the market by underscoring our conviction in our fashion items. And we will support it with clear and consistent messaging aligned with our brand narrative and value proposition across all of our customer touch points. So, the key to the first two areas is getting everything in sync, our relationship with the customer, our testing and buying processes, our fashion point of view and our brand and product clarity and ensuring it aligns with our overarching brand narrative and value proposition.

Our third area of focus is customer acquisition and retention. While our customer base has remain relatively steady, we've recognized that growing it serves as an important lever in returning the brand to growth. We are attacking this focus area through a combination of analytics, new retention initiatives and partnerships with key fashion influencers to reach new customers.

For customer acquisition, we are working to optimize our ongoing marketing investment through a new marketing mix optimization tool. We will be up and running on the new platform by the end of July and we anticipate realizing improvements in our marketing investment starting in the back half of 2019.

In addition, we are going to increase our focus on further growing our social media presence and customer engagement on key platforms. As we strengthen our product offering and clarify the brand message, this will provide a larger platform to provide relevant content to our new and existing customers.

For customer retention, we are going to launch a new first impressions initiative to reduce one-and-done customers from the first 90 days of purchase. We will also continue to focus on signing up more customers in our next loyalty program to keep them engaged in the brand longer. This has been successful for us over the past couple of years, which is why it will continue to be a focus going forward.

As it relates to partnerships with key fashion influencers, we are pleased with our recent partnership with Olivia Culpo, the design collection -- the co-design collection with Olivia garnered significant buzz becoming our most successful campaign based on media impressions. We will build on this in May with a capsule collection designed in collaboration with Rocky Barnes, another widely followed fashion model and influencer. And in July, we will launch a limited edition collection of apparel designed by Karla Welch, one of the industry's most successful fashion stylists.

For men, we continue to be pleased with our partnership with the NBA. Last month, we had an Express-NBA pop-up shop at the All-Star Game and most recently, we further differentiated our NBA licensing offering by expanding our assortment to include dressy products such as blazers, shirts and ties. We are also offering fashionable women's NBA licensed product, which is unique in the market. So, as you can see, we are expanding our partnerships with key influencers to positively impact both customer acquisition and retention.

In addition to these three focus areas, I would also like to acknowledge our continued efforts to capture the benefits from our system investments as well as our disciplined approach to managing expenses. As we have shared previously, the organization is focused on completing the implementation of our new assortment planning software by the end of 2019.

We are beginning to benefit from enhanced hindsight in capabilities, which significantly improves our ability to analyze current season and historical selling. And we are optimistic about our ability to increase overall inventory productivity with enhanced planning and allocation capabilities next year. As it relates to expense, we have done a good job executing against our $44 million to $54 million total cost savings target by 2019. Since the program was launched in 2016, we have realized more than $40 million in savings and expect to successfully complete it in 2019.

We won't stop here though, and we'll continue to look for additional cost saving opportunities across the business to ensure we are operating, as efficiently as possible, without compromising our ability to deliver on our brand promise to our customers. Separately, we will also continue to reassess our optimal long-term retail -- real retail store footprint, given the continued convergence between our retail stores and e-commerce. To facilitate that, we have significant lease flexibility with over 60% of our retail leases up for renewal in the next three years.

So in conclusion, we have identified many opportunities to improve the business and we are taking action. I would like to circle back to the beginning of our conversation and remind everyone that Express is a relevant brand. We have a solid platform to work from with 280 million visits to our stores and e-commerce site in the past 12 months alone. As we focus the organization on a few critical areas, product, random product clarity, and customer acquisition and retention, we believe that we will significantly change the trend of this business and return it to profitable growth.

Before closing, I would like to make a brief comment on our guidance. Given the ongoing CEO leadership transition and the current variability in our comparable sales trends, we believe it is appropriate to provide only current quarter guidance at this time. We will revisit our go forward guidance approach, when a permanent CEO is appointed. That said, we continue to believe strongly in the long-term opportunity of our business, and the Board is equally supportive.

Before I close, I would like to take a moment to thank the associates of Express for their ongoing collaboration, authenticity and resiliency. We have an incredible team and a solid platform for future growth and we are confident that by working together, we will capitalize on our significant opportunity. We look forward to updating you on our progress in 2019.

And I would now like to turn the call over to Perry.

Perry V. Pericleous -- Senior Vice President, Chief Financial Officer and Treasurer

Thank you, Matt. Good morning, everyone. I'm going to start by reviewing our fourth quarter results and then discuss our business outlook. Fourth quarter net sales were $628 million, a 10% decrease as compared to $700 million last year. As a reminder last year's fourth quarter included a 53rd week, which constituted approximately $26 million in sales. Comparable sales were negative 6% with e-commerce comp growth of 5% and store comps of negative 11%.

Before turning to gross profit, I would like to provide an update on our sales reporting approach. As we discussed on last quarter's call in November, we were evaluating our reporting approach as it relates to comparable store sales and e-commerce sales. We have looked at how we evaluate the sales performance of our business as well as how others in the industry present this information. Based on this and the expansion of our omnichannel capabilities, including ship from store, e-commerce sales transacted in store and e-commerce returns in store, we have decided to combine the retail store and e-commerce channels from a sales and a comp perspective.

As a result, effective in 2019, we will provide a single retail comparable sales figure, which will include retail stores and e-commerce. We will also provide comparable sales for outlets and continue to provide a consolidated comparable sales figure. We see this as a natural step, as our business has transformed into an omnichannel model and as our outlook channel has grown. We are committed to maintaining an appropriate level of transparency and believe this will improve the meaningfulness of the data provided. Along these lines, we intend to continue providing perspective on e-commerce sales growth.

Had our new comparable sales reporting approach been in effect for Q4, we would have reported the same negative 6% consolidated comparable sales with retail comps of negative 6%, and outlet comps of negative 5%. And for the full year 2018, we will have reported the same negative 1% consolidated comparable sales with retail comps of negative 1% and outlet comps of negative 1%. And just to be clear, retail comps under the new reporting approach, include a retail store sales and e-commerce sales.

Turning to gross profit. Our fourth quarter gross profit was $173 million. Fourth quarter gross margin was 27.6%, down 250 basis points as compared to the prior year. As a reminder, last year's fourth quarter included a 53rd week, which benefited gross margin by approximately 50 basis points. Merchandise margin contracted by 150 basis points, driven by increased promotional activity as we were clearing through inventory during the fourth quarter.

Buying and occupancy cost, while down versus last year as a percentage of net sales deleverage by 100 basis points due to lower net sales. 50 basis points of which is related to last year's 53rd week, offset partially by favorable lease renewals.

SG&A expenses were $161 million, down approximately $6 million. However, as a percentage of sales, SG&A expenses deleveraged by 180 basis points as compared to last year to 25.6%, driven by the sales decline, as well as $5.4 million of costs related to the CEO departure.

GAAP operating income was $12.6 million and on an adjusted basis, excluding cost related to the CEO departure was a $10 million, or 2.9% of net sales as compared to last year's operating income of $42.5 million.

Income before taxes was $4.3 million, including an $8.4 million non-cash impairment charge related to our $11 million investment in Homage. And for fourth quarter, GAAP loss per share was $0.02 and adjusted earnings per diluted share was $0.19, as compared to last year's EPS of $0.33, which included an approximate $0.04 benefit from the 53rd week.

For the full year 2018, net sales totaled $2.1 billion, a decrease of 2% with a comparable sales decline of 1%. The sales decline pressured our overall margin structure with adjusted operating margin contracting to 1.6%. Adjusted diluted EPS of $0.32 compared to last year's adjusted EPS of $0.37, which also included the $0.04 benefit from the 53rd week.

Now turning to our balance sheet and cash flow. Our balance sheet remains healthy. We ended the year with $172 million of cash and cash equivalents, as compared to last year's $236 million. The decline versus last year is primarily due to $83 million of share repurchases and the $26 million non-qualified supplemental retirement plan distribution that will occur in the first quarter.

Inventories at year end were $268 million, a 2.7% increase as compared to last year's $261 million.

Fiscal 2018 operating cash flow was $74 million and capital expenditures were $50 million. Operating cash flow was negatively impacted by the previously noted $26 million non-qualified supplemental retirement plan distribution.

In terms of our share repurchase program, we repurchased 3.5 million shares for $27 million during the fourth quarter and for the full year 2018, we repurchased 10 million shares for $83 million. Subsequent to year end, we have repurchased an additional 900,000 shares for $4.9 million. Under our current $150 million share repurchase program, we have repurchased approximately 13 million shares for $105 million.

Before addressing our guidance, I want to comment briefly on the new lease standards that will go into effect beginning in 2019. As many of you are aware, lease commitments will move onto the balance sheet in the form of right-of-use assets and lease obligations. While we don't expect any material income statement impact from the adoption of the new standards, there will be a geographic change related to the elimination of build-to-suits accounting, which required us to recognize interest expense for the portion of the cost related to our accounting ownership of the two buildings housing our flagship stores.

Beginning 2019, this interest expense will move up to occupancy cost. As a result of this relocation, we expect there will be a negative impact on operating income and operating margin. However, we do not expect a material impact on pre-tax income. With that, I will now address our guidance, which includes the impact of the new lease accounting standard.

As Matt indicated, given the ongoing CEO leadership transition and the current variability in our comparable sales trends, we are providing only current quarter guidance. For the first quarter of 2019, we currently expect comparable sales in the range of negative 9% to negative 11%. Net loss in the range of $18 million to $23 million, and loss per diluted share in the range of $0.27 to $0.34. This compares to last year's diluted EPS of $0.01.

For the full-year 2019, we currently expect capital expenditures in the range of $40 million to $45 million, and as it relates to real estate activity, we're planning six retail store closures, five new outlet openings and 24 retail to outlet conversions that we expect 630 stores at year end, consisting of 417 retail stores, and 213 outlet stores.

With that said, in summary, we're highly focused on returning Express to a place of sustainable, profitable growth. We're executing against the three key areas of products, brand and product clarity and customer acquisition and retention, while continuing our efforts to capture the benefits from our systems investments and maintaining our disciplined approach to managing expenses. We look forward to updating you on our progress in 2019.

I would now like to turn the call over to the operator, to begin the question-and-answer portion of the call.

Questions and Answers:

Operator

Thank you. (Operator Instructions) And our first question comes from the line of Paul Trussell from Deutsche Bank. Your line is open.

Gabriella Carbone -- Deutsche Bank AG -- Analyst

Hi. Good morning. This is Gaby Carbone on for Paul. Thanks for taking our question. I was just wondering, if you could provide some color on your expectations for gross margin in the first quarter and kind of the puts and takes there. And then I understand you're not giving full year guidance, but any color around how we should be thinking about the progression there through the year, would be great. Thank you.

Perry V. Pericleous -- Senior Vice President, Chief Financial Officer and Treasurer

Hi Gaby, this is Perry. So, from a gross margin for first quarter, we're expecting a contraction of approximately 430 basis points. The contraction will come in the form of merchandise margin of approximately 180 basis points, and then B&O deleverage of approximately 250 basis points. The majority of the contraction that we're expecting in Q1 is, one driven by the reduction in sales, and the negative guidance that we're providing of negative 9% to negative 11%, along with the fact that we're going to be increasing the promotions in Q1 to clear through inventory to get us to the right place for Q2. As it relates overall to the balance of the year, we're not providing any gross margin color for the balance of the year at this point.

Gabriella Carbone -- Deutsche Bank AG -- Analyst

Thanks. And just a quick follow up, so you're planning on doing a number of conversions in 2019, if you can maybe just remind us, what kind of productivity levels are you seeing there versus the frontline stores? Thanks.

Perry V. Pericleous -- Senior Vice President, Chief Financial Officer and Treasurer

So Gaby, when we do a conversion, we see an increase in sales that we haven't previously said, the overall percent increase, but we see a meaningful increase in sales overnight on those conversions. And in some instances we do this conversions either one or two years prior to lease expiration and at some times we do them at lease expiration. When we do them at lease expiration, we also are able to get rent concessions from the landlord, as we renegotiate our leases.

Operator

And our next question comes from the line of Adrienne Yih from Wolfe Research. Your line is open.

Adrienne Yih -- Wolfe Research -- Analyst

Good morning, everybody. Now, I guess my question that we heard a lot about sort of brand positioning and the brand equity, but really my question is, how do you feel about, where Express lands in the pricing landscape? Prices have been 40 or 50 off box for some time, and how do you sort of resurrect the pricing?

And then for Perry, can you talk about, where you foresee at the end of this year, e-commerce penetration? And how you see kind of the rebalancing of the stores versus e-commerce? Thank you.

Matthew C. Moellering -- Interim Chief Executive Officer & Interim President & Executive Vice President, Chief Operating Offi

Thank you, Adrienne. I'll take the first question. So, from a pricing perspective, when we have the right fashion in our stores, there is -- the price elasticity is there. People are willing to pay for the right fashion. So, getting back to our three focus areas, one; the positives here that we do have a lot of visits coming into our stores and our e-commerce website on an annual basis. And we are focused on getting the product and the fashion right.

And if you get the product and the fashion right, with the appropriate brand umbrella, the focus from a brand standpoint that increases, improves your value proposition to the customer, and over the long term should lead to less promotional activity needed. And then you're focused on promotional activity that is strategically targeted for certain types of customers that you're trying to either attract or retain in the brand.

So, that is why we are stepping back, focusing on sharpening the brand proposition and then getting the fashion right, particularly on the women's side of the business, and creating more clarity for the customer, when they come into the stores. If you can do those things, the -- what follows is less promotional activity.

Perry V. Pericleous -- Senior Vice President, Chief Financial Officer and Treasurer

And again, from -- your question was around e-commerce penetrations and then from a store standpoint. I want to remind you, Adrienne that, going forward we're changing our reporting from a comp standpoint, where we're going to be providing retail comp that's going to include both retail stores, and e-commerce volume. And one of the reasons that we're doing that is because of the omnichannel capabilities that we have from a retail standpoint. And then we're also going to be providing outlet's.

So, as we look at the balance of the year, we're going to be providing some color, and as mentioned earlier from a guidance standpoint, we're not going to provide guidance for the balance of the year in terms of sales and/or EPS.

Adrienne Yih -- Wolfe Research -- Analyst

Okay. So, even from a penetration standpoint, the same goes, it sounds like. And then just a follow-up on the CEO search, it sounds like you're moving forward fairly swiftly on that. What are the characteristics of this new CEO? Is it a traditional merchant background? Is it brand expertise? Or is it sort of more forward looking digital tech background? Thank you very much.

Matthew C. Moellering -- Interim Chief Executive Officer & Interim President & Executive Vice President, Chief Operating Offi

Yeah. So, Adrienne on the last question, the Board is managing the CEO search, as we said, they have talked with and interviewed several very qualified candidates, and that would be more of a question directly for the Board. What I will say is that, obviously, we've talked about the Chief Merchant Officer opening. There are some key openings in the organization. So, as somebody comes in here, there is a significant amount of flexibility to bring in some new world class talent that fits within his or her management style, when they appoint a CEO. We have no debt and a strong cash position that creates a lot of room to maneuver too. So, this should be a very attractive role for somebody to come in, and really lead change and grow the Express brand dramatically.

Operator

Our next question comes from the line of Susan Anderson from B. Riley FBR. Your line is open.

Susan Anderson -- B. Riley FBR -- Analyst

Hi. Good morning. Thanks for taking my question. I was wondering, if you could talk about the slowdown in e-commerce in fourth quarter. Were there drivers just beyond product missteps that you saw that were different from the stores?

And then also the one-time customers you talked about, are these customers that are, I guess, buying for the first time, and then you just don't see them return? And I guess in that case, are they new customers kind of aging into the brand? And what are the reasons, why you think they don't come back?

Matthew C. Moellering -- Interim Chief Executive Officer & Interim President & Executive Vice President, Chief Operating Offi

Yes. So, the number one issue from e-commerce growth standpoint was product issues with more so on the women's side of the business than the men's side of the business. So, we are obviously with the three focus areas working on addressing that as quickly as possible, more so in tops than in bottoms. The good news is that there were, as we talked about, certain categories that showed strength in the quarter, and so we're going to continue to work on growing those as well as addressing the areas of weakness.

From the one-and-done customers, there are a fair amount of one-and-done customers and we're doing a lot of the analytical work around reasons for the one-and-done customer. What we do know is that, when we have a new customer enter the brand, there is about a 90-day window, where that customer is very receptive to returning to the business. And this initiative that we are putting in place is aggressively going after that customer to get a second and third visit, and turning them into a customer full time. And so that is what we are focusing on and we think there is significant opportunity to improve.

Adrienne Yih -- Wolfe Research -- Analyst

Got it. And then just one follow-up. I guess on traffic in the quarter, did you see it decline sequentially from third quarter? And then if you can maybe just talk about what you've seen so far in first quarter? And then also in terms of the promotions, it sounds like you're basically needing to promote that clear merchandise, but then also, are you finding it necessary to promote a little bit more to improve that traffic?

Perry V. Pericleous -- Senior Vice President, Chief Financial Officer and Treasurer

So, Susan, when you look at the traffic over the last couple of quarters in stores, it has remained relatively consistent. We have seen and I think we've said that in previous calls, approximately mid single-digit decline in the overall stores traffic. And we've seen that, as I said earlier been consistent over the last two, three quarters.

You've asked about promotions, yes, and I mean, as you can see from a merchandise margin in Q4, we had increased the level of promotions, given the softness of the business, which obviously impacted our overall merchandise margin in Q4.

And then did you have a follow-up on for Q1?

Operator

She is no longer in the queue. Do you want me to have her queue back up?

Perry V. Pericleous -- Senior Vice President, Chief Financial Officer and Treasurer

I think it's fine.

Operator

And our next question comes from the line of Roxanne Meyer from MKM Partners. Your line is open.

Roxanne Meyer -- MKM Partners -- Analyst

Great. Good morning. I wanted to follow-up on the change in approach to what has been a long-standing test and react strategy, putting in more forward merchandise versus the wear-now assortment. Can you give us a little bit more detail on that, how far you intend to, to move the pendulum there? I mean, certainly it's a way that you can increasingly differentiate yourself from others. Thanks.

Matthew C. Moellering -- Interim Chief Executive Officer & Interim President & Executive Vice President, Chief Operating Offi

Yeah. So, we certainly are not moving, -- just to clarify, we are not moving away from the testing approach, we are reassessing our testing approach and other actionable customer data points aggressively looking at where those data points exist in order to make decisions on buying merchandise.

One thing that has happened over the last three or four years, the fashion cycle continues to get faster and faster. And so as we test pre-season or, four or five months ahead of time, we always don't get an indicative results, once you get into the selling season four, five months later. How to combat that is to bring in small quantities of forward season merchandise. So, as an example for the fall season, bringing in small quantities of merchandise in late June, early July in your stores to get actual customer selling. It's not going to be a lot of selling, but the point is not about generating top-line sales for that inventory. The point of that is to collect extraordinarily important data that then you can action upon, so that when you get into the heart of the selling season, you already have real data that you can buy significantly -- significant quantities of great styles with conviction. When you bring in merchandise at the end of a season and it is wear-how merchandise, there is definitely a shorter life remaining on those items, you may sell them at $0.50 on the dollar, first of all, and then there's also larger markdown risk on that merchandise as well.

Forward season merchandise that you bring in, in small quantities that doesn't work, you still have six months to sell that merchandise as well. So, that is what we -- our approach is. We're going to continue with the testing process, but supplement it with bringing in more forward season merchandising to get a second checkpoint on our data before buying product.

Roxanne Meyer -- MKM Partners -- Analyst

Okay, great. That's helpful. And then just on the outlet business, with your plans for 2019, it looks like outlets are going to be roughly 34% of your fleet by the end of the year. How are you thinking about the ultimate balance between outlets and full-price stores?

Matthew C. Moellering -- Interim Chief Executive Officer & Interim President & Executive Vice President, Chief Operating Offi

Yeah, Roxanne that's a great question. So, we are reassessing our entire real estate footprint, as we speak and we'll have more news on that on future earnings calls. But there certainly is a -- as we're looking at that, there is certainly a balance between full-price and outlet stores and brand integrity as well as profitability. So, there's a balance between all of those things. We are reassessing the entire fleet, as I mentioned, we have 60% of our leases, more than 60% of our leases up very flexible that we can take action on, typically a vast majority of these stores leases expire in January. So, we should be in a good position to make some adjustments by the beginning of next year, based on our analytics.

Roxanne Meyer -- MKM Partners -- Analyst

Okay, great. Thanks and best of luck.

Matthew C. Moellering -- Interim Chief Executive Officer & Interim President & Executive Vice President, Chief Operating Offi

Thank you.

Operator

(Operator Instructions) And our next question comes from the line of Janet Kloppenburg from JJK Research. Your line is open.

Janet Kloppenburg -- JJK Research -- Analyst

Good morning, everyone. Hi, Matt.

Matthew C. Moellering -- Interim Chief Executive Officer & Interim President & Executive Vice President, Chief Operating Offi

Good morning, Janet. How are you?

Janet Kloppenburg -- JJK Research -- Analyst

Hi. Good. How are you? A couple of questions. This whole process of the testing for the forward season is something that the company used to do a few years ago. And I'm just wondering, when you think that will become impactful? In other words, when was -- when will we start to see that testing begin?

And then I was wondering, in the absence of a GMM, if you've brought in any outside consulting help to help configure the second, third and fourth quarter buys because you don't have a leader there directing those efforts?

Matthew C. Moellering -- Interim Chief Executive Officer & Interim President & Executive Vice President, Chief Operating Offi

Yeah. So, relative to the first question, obviously there is not a flip -- a switch you can flip to immediately get into goods. That being said, we have aggressively worked with our sourcing partners and impacted about 180,000 units of goods that we are able to pull forward and bring in early, fall receipts that we're bringing in early to get an initial read on those late June, early July.

So, we are aggressively working to do that as quickly as possible. It's not as many as we would like, certainly, but it is a step in the right direction. And then we will be certainly have targets in place by department go forward to make sure we are planning that into our inventory buys and that we also are able to get the actionable data that we need.

As that relates to a consultant coming in, we do have a headwomen's and headmen's merchants still in place. We are definitely looking for a head of merchandising and design to come in and obviously that's not in place at this time. We continue to search for that. That being said, we have not reached out to a consultant overarching for the business entirely. We have talked to some individuals about doing some potential work on some individual categories, where we're having significant weakness.

Janet Kloppenburg -- JJK Research -- Analyst

Okay. And then, your inventories are a little bit high right now as contrasted to your -- as you contrasted to your comp guidance. How should we think about inventory levels at the end of first quarter?

And a follow-on is on the outlet, that channel is under a lot of pressure right now, Matt, with traffic levels continuing to decline. And I know it's a profitable channel, but it is under pressure right now, and you guys are appear to be adding to your store count and penetration in that channel. So, I'm just wondering, how you think about it? Thanks so much.

Perry V. Pericleous -- Senior Vice President, Chief Financial Officer and Treasurer

Hi, Janet. This is Perry. I'm going to answer the inventory question. Obviously, as you guys have seen, our inventory finished up Q4 with a 2.7% increase. And when you look at it compared to the Q1 guidance, it's certainly higher than what we have liked it to be. We're taking aggressive actions in Q1, cutting receipts and have contemplated the appropriate level of increased promotions in Q1 to ensure that we're getting in a better place going into Q2. Having said that, the increase of promotional activity is reflected in our Q1 guidance that we have provided from both merchandise margin and EPS.

Matthew C. Moellering -- Interim Chief Executive Officer & Interim President & Executive Vice President, Chief Operating Offi

Yeah Janet, as it relates to the outlet question, yes, as we talked about in Q4, we had a negative 5 comp in outlets that was almost all generated through traffic. And so as one of our three focus areas that we talked about is customer acquisition and retention, we are looking at how we can aggressively acquire more customers and retain more customers in that channel to combat the overarching industry traffic declines in that segment.

Operator

And our next question comes from the line of Marni Shapiro from Retail Tracker. Your line is open.

Marni Shapiro -- The Retail Tracker -- Analyst

Hi, guys. I guess I had a couple of just quick questions. You talked about an overall the men's denim business, I think, you said was OK. I was curious if the women's denim business was OK? And it sounds a little bit like with suits and dresses and the wear to work, that part of the business, both in women's and men's feels healthy?

And on the women's side, it's on the more casual side of the business. Is that true in the stores and online? Is it also true in the outlets? And I guess when you think about it, do you need -- I'm not do you need that part of the business in the stores, but how are you rethinking that part of the business I guess? Because that seems to be the most troublesome part over not just this year, but in prior years.

Matthew C. Moellering -- Interim Chief Executive Officer & Interim President & Executive Vice President, Chief Operating Offi

Yes, hi, Marni. So, that is correct. So, the casual business is a focus point for us to improve from a product perspective, and I think a couple of things are going on there. One of the things we're taking a hard look at, when you look at our customer and you look at the product that we are, are presenting to the customer, we're looking at whether there is somewhat of a split between younger -- skewing younger to casual and older to the dressy wear-to-work, where we do have, to your point, significant strength.

It still does represent a large piece of the business both in stores and online. So, we're definitely not walking away from that. We think we can fix it, but the way to fix it is, one to make sure we're talking to a single customer through the customer lens, number one. And two is, as we are providing product on the casual side, where there is more competition, we have to ensure that we can differentiate our product versus competition. There has to be a reason for being on the casual side of the business and the little details matter.

We cannot get too commoditized on the casual side of the business, we have to have the little details that will separate us from competition and generate the interest and excitement along with the fashion. So, that -- those are the things we are focused on, but yes, that definitely is something we are working to address.

Marni Shapiro -- The Retail Tracker -- Analyst

That's great. Thank you, guys.

Matthew C. Moellering -- Interim Chief Executive Officer & Interim President & Executive Vice President, Chief Operating Offi

Yeah.

Operator

And there are no further questions at this time. I will turn the call back over to Matt for closing remarks.

Matthew C. Moellering -- Interim Chief Executive Officer & Interim President & Executive Vice President, Chief Operating Offi

So, thank you again for joining us this morning.

Operator

And this concludes today's conference call. You may now disconnect.

Duration: 49 minutes

Call participants:

Mark Rupe -- Vice President, Investor Relations

Matthew C. Moellering -- Interim Chief Executive Officer & Interim President & Executive Vice President, Chief Operating Offi

Perry V. Pericleous -- Senior Vice President, Chief Financial Officer and Treasurer

Gabriella Carbone -- Deutsche Bank AG -- Analyst

Adrienne Yih -- Wolfe Research -- Analyst

Susan Anderson -- B. Riley FBR -- Analyst

Roxanne Meyer -- MKM Partners -- Analyst

Janet Kloppenburg -- JJK Research -- Analyst

Marni Shapiro -- The Retail Tracker -- Analyst

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