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Express Inc (EXPR) Q3 2019 Earnings Call Transcript

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Express Inc (NYSE: EXPR)
Q3 2019 Earnings Call
Dec 5, 2019, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Express, Inc., Third Quarter 2019 Earnings Call. [Operator Instructions] After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]

I would now like to hand your conference over to your speaker today, Dan Aldridge. Please go ahead, sir.

Dan Aldridge -- Vice President, Investor Relations

Thank you, Marcella. Good morning and welcome to our call. I'd like to open by reminding you 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 Investor Relations website. In addition, you can locate a reconciliation of any adjusted results discussed in our comments to amounts reported under GAAP on our website or in our earnings release.

With me today are Tim Baxter, Chief Executive Officer; Matt Moellering, President and Chief Operating Officer; Perry Pericleous, Chief Financial Officer; Malissa Akay, Chief Merchandising Officer; and Sara Tervo, Chief Marketing Officer.

I will now turn the call over to Tim.

Tim Baxter -- Chief Executive Officer

Thank you, Dan, and good morning everyone. Thank you for joining our third quarter earnings call. I've now been with Express for a few weeks shy of six months, and preparing for this morning's call, gave me an opportunity to step back and reflect on the priorities I set when I arrived, the insights I have gained, the actions we have taken, and the progress this organization has made in a very short amount of time.

The three priorities I identified on our last earnings call as key areas of focus were: developing a corporate strategy, putting together the right leadership team, and taking immediate action to change the trajectory of our business.

First, our corporate strategy will be unveiled at an investor event that will take place on January 22nd at the New York Stock Exchange. I hope to see many of you there. The foundational elements of product and customer and execution are already serving as important compass points for the work our teams are now doing. I am pleased with the progress I've seen in these areas and I've been impressed by the new thinking and new ideas that have come forward to animate and advance each of these elements.

Second, our executive leadership team is now largely in place, and we received the right balance between seasoned Express executives and new voices and viewpoints. It was important to me to form a leadership team made up of results-oriented strategic thinkers with diverse skill sets and perspectives. Our Chief Operating Officer, Matt Moellering, was elevated to President in October. Many of you know Matt, so you will not be surprised by my decision to expand his responsibilities and apply his thoughtful, disciplined approach across more aspects of our organization. Mike Dolan [Phonetic], our top performing Regional Stores Director was named Head of Stores. With three decades of retail experience and in depth knowledge of our stores, he has already immersed in the work of enhancing our customer experience.

We also attracted some extraordinary new talent to Express, Chief Merchandising Officer, Malissa Akay; Chief Marketing Officer, Sara Tervo; and SVP of Planning and Allocation, Carlye Bills, who all joined Express in early September and hit the ground running. I'm also pleased to announce that Michael Ringel will be joining us in January as the new SVP of Men's Merchandising, reporting directly to Malissa. This exceptional team has been working with me to shape our corporate strategy, while also managing and improving the performance within each of their respective areas. In just a few moments, you'll hear directly from Malissa, Sara, and Matt on how each of them is thinking about the product, brand, customer and execution pillars, as well as a few of the initiatives we expect to drive results in the fourth quarter and beyond.

Third, we have taken a number of actions to change the trajectory of our business by seizing immediately present opportunities. We have done so with both an imperative to improve our near-term results and an objective to better position our brands and our business for the long term.

Let me give you a few examples. On our last earnings call, I spoke about some changes we were just starting to make to the floor sets in a few of our stores. Those changes continue during the quarter and expanded such that our Women's presentation across the entire store fleet has now a more modern approach. In the near-term, this has made it easier for the customers put outfits together, and for the long-term, this shows a more fashion centric and modern view of the Express brand. This shift away from separating our products according to a more traditional wearing occasion format, now influences how we design, merchandise, present and market our product going forward. And we've already made progress as is evidenced by a continued improvement in our store trend throughout the quarter in response to these changes.

Another immediate action we took was to improve our inventory position by using more strategically targeted promotions, and our inventory levels are now better aligned with our current sales performance. On the last call, we indicated that it would take a few quarters to restore the health of our inventory, but thanks to the sharp focus and disciplined work of our teams, both inventory levels and the composition of our inventory are in a much healthier place for the fourth quarter and heading into 2020. I am very pleased with that progress and we will continue the work to sustain this going forward. Developing a corporate strategy, building an outstanding leadership team, and taking immediate action to change the trajectory of our business, those have been my priorities and I'm pleased with the progress that has been made on all fronts to quickly and definitely begin to move Express forward.

Now let me turn to our results for the third quarter. While we are pleased that sales and profit, both for and within the third quarter shows sequential improvement and came in above our guidance, we are still not satisfied with these results. With that said, for the third quarter, our sales were $488 million, a 5% decrease compared to the third quarter of 2018. Comp sales were down 5% compared to the prior third quarter but came in above the guidance we issued on our last earnings call. This marks the second consecutive quarter of comp sales improvement despite the headwinds caused by our pull back of deep storewide and sitewide promotions, and we expect this sales trend to accelerate in the fourth quarter. Diluted earnings per share were negative $0.05, and adjusted diluted earnings per share were negative $0.03, which also came in above our previously issued guidance.

Perry will review the results in greater detail and discuss our fourth quarter guidance. I will make some closing comments, and then we will take your questions. But before you hear from Perry, I have asked Malissa, Sara and Matt to share some remarks on this earnings call, so you can hear directly from these leaders about the work they and their teams are doing to shape and drive each of the four pillars of our corporate strategy. As we set our sights on the future of Express, everything we do will be to advance those four pillars, product, brand, customer and execution. Each one is important, and as we make improvements to each and align across all, we will drive results and create value for our shareholders.

I'm committed to leading this Company to a bright and profitable future, and I'm confident that we can restore Express to the fashion authority that it once was. The recent work we have done and the engagement and determination of our executives and associates have only made me more committed and more confident.

Now, let me turn the call over to Malissa Akay, who will tell you about our product strategies and initiatives.

Malissa Akay -- Executive Vice President and Chief Merchandising Officer

Thank you, Tim. Since joining Express about 90 days ago, our design and merchandising team have coalesced around the idea of product first which is the recognition that we can do everything else right, but if we do not offer the customer high quality, relevant and compelling product, we will not succeed. I joined Express because I saw so much opportunity to restore its relevance and appeal, and so much potential to elevate, differentiate and create clarity for Express through products. With such fantastic breadth of product offering and such historical strength across the number of key categories, I know that Express can and will become a fashion authority once again.

In my first few weeks, I dug into the Company's design archives and immersed myself in product messages from the past four decades. As we struck by the relevance of the product over such a long period of time, Express had not only been on trend for so many years, but in fact, Express had set some of the most significant fashion trends. The brand was what I would call, of the now, for decades. So I thought about what had changed, and for the last several years, Express had really held on to trends and ideas past their points of relevance and appeal, so the assortment felt tired and outdated.

Then I begin to review selling data and customer feedback and to engage with our associates, and the message was consistent and encouraging. When Express offers a sharp edit of modern, trend right product, the customer responds. I believe that our breadth of offering and our credibility across so many categories from denim short to sequin dresses, from jeans to tuxedos, can once again be a strategic differentiator for Express. We need to infuse more newness, and then make sure that all of this fresh exciting product reaches the selling floor and the customer faster. In order to do that, we have made changes to help our design and merchandising teams to move with greater speed.

We have reengineered our product development calendar to ensure that we can deliver more fashions and more newness more often. This accelerated cycle will work in concert with the InstaBuy process Tim talked about last quarter, so that we can move with greater speed at the front and the back end of the process. We are also making changes based on the way people think about getting dressed today. Women and men are looking for versatile wardrobes made up of pieces they can wear across multiple occasions. The lines between a work wardrobe and a weekend wardrobe have blurred, and Express had not reflected that in the way the product was assorted or presented. Going forward, we will still capitalize on our core product strength that also offer more versatility which will create more value for our consumers.

As Tim mentioned, significant changes were made to our women's floor set back in August, stepping away from a more traditional way of separating products into four lifestyles based on wearing occasions, letting go of an outdated view of how people get dressed, and making a shift to a more edited, integrated and modern approach. The impact on the floor was dramatic and we heard from sale associates and customers that it was a very positive change. Early results are promising, but we have a lot more to do. We will accelerate and expand this across our entire women's assortment and also bring this approach to the men's assortment in the spring season.

I have a established a clear set of product priorities and aligns the design and merchandising teams around them to address our product opportunities. Sharp consistent focus on these priorities will give our customers what they're looking for, support the new brand positioning, and will drive the business forward, and the work has already begun.

In the third quarter, with newness and versatility top of mind, I'm pleased to report that our tops and dress categories gain momentum. We balance the core product with newer ideas that brought greater diversity to the assortment and the customer responded. In men's, our denim business continues to be strong, and the customer appreciate our performance stretch fabric and the dress down or dress up possibilities of our jeans. Our suiting business also remains strong and we have an opportunity to expand upon our equity in this category. For the fourth quarter, newness will remain a focus as we turn to both modern holiday dressing and casual cozy elements and offer the customer great options.

On the last earnings call, Tim shared his decision to house all product strategies across stores, online and outlet under a single leader of design and merchandising, which was an important structural change for Express. And I can tell you from my own experience that when design and merchandising teams are aligned, it absolutely shows in the product and the assortment and the customer response.

I'm so thrilled to be here at Express to have the opportunity to lead the design and merchandising teams to drive a modern on trend point of view across our assortment, and to help realize Tim's vision and strategy through product that our customers will absolutely recognize as of the now.

And now to tell you more about our brand and customer strategies, let me turn the call over to Sara.

Sara Tervo -- Executive Vice President and Chief Marketing Officer

Thank you, and good morning. I joined Express on the same day as Malissa, and we've been working closely together ever since. As Tim said, on the second quarter call, 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 by telling our story in a more powerful and consistent way.

While Malissa was delving into the Express design and image archives. I spent my first few weeks, learning about the history and current state of the brand, and getting to know the patterns and preferences of our customers. Let me share a few things that became clear. The Express brand must restore its luster in order to regain its place as a fashion authority and a go-to-wardrobe resource. In fact, the customer expects this from us.

Our customer see themselves as dynamic expressive individuals looking to show their best self to the world and they believe their wardrobe can help them do just that. In recent years, Express has become more of a store than a brand, and we have both a need and an opportunity to clarify the Express brand purpose and promise. So how do we get there?

In the last 60 days, we have done research among both customers and prospects, women and men, across multiple age groups. We learned a great deal about what resonates with them and what they want from Express. Those insights have informed our thought process around a redefinition of the brand purpose and a rearticulation of the brand's promise. We will share much more about this in January. We need to apply both art and science to our marketing.

First, a brand revolution that is grounded in customer insights, so we make decisions and take actions based not on what we think but on what we know. Second, our brand and customer strategies must align with our product strategy. So the product messages, Malissa and her teams are creating are brought to life through the most connected and most compelling marketing stories and brand imagery. This may sound obvious, but there hasn't been this alignment in recent years. And third, we must engage customers in different and more impactful ways in order to gain greater share of wallet from the people who already shop with us and to entice the ones who don't.

Let me give you some examples. We recently launched a number of new capabilities that will enhance our customer contact strategy. These include a more personalized approach to email, a new media attribution tool to further optimize our marketing investment and allocation and a number of advanced analytics models to help drive customer retention. Policies offer customer possibilities that will allow us to explore hypothesis and quickly scale what works. The result will be improved customer retention and acquisition. We will also be making significant changes to our next customer loyalty program to offer more value to the membership, with a planned relaunch in the back half of 2020. Through smart use of data, we will make better and more nuance decisions about the targeting of our marketing and the allocation of our spend. We now have the analytical tools to do this and the team is working to accelerate how we use them to be more effective with both customer retentions and acquisition.

In today's world, our thinking about the brand and the customer must be seamlessly integrated. Our teams are already embracing this and fully realize that everything we do to reposition the Express brand must be done and will be more successful with the customer at the center of our thought process. I'm very proud to lead this work. We look forward to sharing our future brand positioning at the investor event, and I will now turn things over to Matt to talk about the fourth pillar of our corporate strategy which is execution.

Matt Moellering -- President and Chief Operating Officer

Thank you, Sara, and good morning everyone. Execution is the connective tissue across everything we do. As you just heard, we've built a solid plan to address our product, our brand, and our customers, and the critical through line is the fourth pillar, strong consistent execution across all channels, all strategic initiatives and all programs. While we do the necessary work to improve our execution overall, there are a few areas in particular that will receive especially sharp focus, our brick-and-mortar store performance, our go-to-market process and our inventory productivity.

Let me start with our stores. The biggest opportunity in our bricks-and-mortar store performance is to meaningfully improve our conversion rate. Today, we have a lot of variance in conversion across the store fleet, and to address this, we will be rolling out a new customer experience model this spring that will allow our sales associate to spend more time with customers and less time on non-selling activities. And through improve store scheduling, we will be able to maximize every hour of sales associate works and also staff more precisely, so we have the right coverage at the right time. And finally, we are launching a new customer feedback tool to capture and share what our sales associates are doing well and allow us to act quickly in response to any customer issues. These initiatives will have a positive impact on our store performance.

Second, we thoroughly assessed our go-to-market process, identified a number of opportunities for improvement, and beginning in the spring season, our teams will be working in a new way. This transform process will begin with clear focus product strategies, continue with the aligned brand stories and marketing messages, and conclude with a stronger customer experience. We will be more efficient, more effective, more connected across functions and faster the market at a reduced cost.

Third, we are taking steps to right size our inventory and speed up our turn. We have dramatically improved our inventory position over the last 90 days, driven by better product, faster liquidation of underperforming goods and elimination of non-productive inventory. Continued efforts in this area will allow us to reduce inventory levels and significantly reduce markdowns over time. As Tim mentioned, we still have a lot of work to do in order to better and more consistently calibrate our inventory to our sales trends, but we are encouraged that the work we've done to-date has already achieved results ahead of where we expect it to be at this point.

Finally, as you've heard from Tim in the last earnings call, we are in the process of identifying meaningful cost savings. These efforts will enable us to take the necessary action to significantly reduce our operating expense in 2020 and set the business on a course to return to profitability. We look forward to sharing more details with you at our investor event in January.

I will now turn the call over to Perry.

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

Thank you, Matt. I'll start by reviewing our third quarter results and then discuss our business outlook. As Tim mentioned, third quarter comps and earnings per diluted share exceeded our guidance and marked sequential improvement versus the prior quarter. Third quarter net sales were $488 million, a 5% decrease as compared to $515 million last year. Consolidated comparable sales were negative 5%. Retail comps which include Express stores and e-commerce were negative 5%, and Express factory outlet store comps were negative 5%.

During the third quarter, sales were impacted by our strategic decision to reduce the level of storewide and sitewide promotion, and be more thoughtful and targeted with our promotional activity. And similar to the second quarter, pulling back from these types of promotions had a negative impact on sales in the short-term, but we believe this will improve the health of the business and the brand over the long-term. The work Sara is leading on the customer front will allow us to do this much more effectively than we have in the past.

Our third quarter gross profit was $138 million, with a gross margin rate of 28.2%, down 250 basis points as compared to the prior year. To break this down, merchandise margin contracted by 140 basis points. While we're more strategic with our approach to storewide and sitewide promotions, this was offset by the actions we took to move through clear inventory, as well as product that wasn't resonating with our customers and didn't align with our go forward product strategy.

Buying and occupancy costs, while down slightly versus last year, as a percentage of net sales de-leveraged by 110 basis points. SG&A expenses were $144 million, a decrease of $4 million compared to last year. As a percentage of sales, SG&A came in at 29.5%, deleveraging 70 basis points driven by the decline in sales. On a GAAP basis, operating loss was $7 million as compared to last year's operating income of $10 million. Consistent with the first two quarters of the year, the third quarter operating loss was negatively impacted by $800,000 related to the new lease accounting standard. However, there was no material impact on our pre-tax loss. Adjusting for non-core operating expenses of $1.7 million, mainly related to the restructuring of the management team, our operating loss was $5 million.

Third quarter loss per share was $0.05 on a GAAP basis, and a loss of $0.03 on an adjusted basis, as compared to last year's EPS of $0.11. At the end of the third quarter, the $44 million to $54 million of cost reductions we committed to in 2016 were substantially complete, and the cost savings we plan to announce at our investor event in January will be incremental to those already achieved and this work is currently in progress.

I will now turn to our balance sheet and cash flow. Our balance sheet remains extremely healthy, and our inventory position has improved dramatically over the last 90 days. Inventories at quarter end were $346 million, a 5% decrease as compared to last year's $363 million. As Matt indicated, the team has made good progress in a short amount of time and our inventory position is now more closely aligned with our comp guidance.

We ended the third quarter with $168 million of cash and cash equivalents as compared to last year's $161 million. This balance reflects $41 million used to repurchase outstanding shares over the past 12 months. We reinitiated our share repurchase program in the third quarter and repurchased 2.8 million shares for $8.7 million during the third quarter and subsequent to quarter end have repurchased an additional 600,000 shares for approximately $2 million. Under our current $160 million share repurchase program, we have repurchased $16.4 million shares for $116 million, and we currently have $34 million remaining available. Our balance sheet reflects no debt. Year-to-date capital expenditures were $21 million as compared to last year's capex of $32 million.

With that, I will now move on to our guidance. For the fourth quarter of 2019, we currently expect comparable sales in the range of negative 1% to negative 3%, net profit in the range of $10.5 million to $13.5 million, and earnings per diluted share in the range of $0.16 to $0.21, this compares to last year's adjusted EPS of $0.19. The fourth quarter guidance reflects our plans to continue our strategic targeted promotional activity. It also reflects our actions to continue to improve the composition of our inventory by clearing through slow moving items faster to free up receipts in order to add more newness to the assortment.

Now let me say a few words about tariffs. Today, approximately 20% of our units are sourced from China. We are on track to bring that down to proximately 8% by the middle of next year. We will accomplish this by further diversifying our sourcing base. For the fourth quarter, we expect approximately $2.5 million of incremental cost. This is included in our fourth quarter guidance. We continue to expect 2019 capital expenditures in the range of $35 million to $38 million. This compares to 2018 capital expenditures of $50 million. We also expect to generate positive cash flow in 2019, while continuing to invest in our business initiatives in a prudent way.

On our second quarter earnings call, we expected that our store count would be 624 at year end, which can be used for Q4 modeling purposes. This does not reflect the details of our fleet rationalization plan that will be provided on January 22nd.

In conclusion, while we are not satisfied with our financial results, we are confident in our ability to return spread to mid single digit operating margin overtime. I'll now turn the call back to Tim for closing remarks.

Tim Baxter -- Chief Executive Officer

Thank you, Perry. My first six months at Express have been both challenging and rewarding. I'm encouraged by the response from our corporate teams in Columbus and New York and our store teams across the country. They believe in the Express brand. They know we have so much to offer today's consumer. They are energized by new product and eager to apply new ways of thinking and new approaches. This organization is up to the challenge.

Our results in the third quarter are only one data point, but our sequential improvement from Q1 to Q3 2019 and sequential improvement within the third quarter are compelling evidence that our early actions are resonating with the customer. Six months ago, I set forth to develop a new corporate strategy for Express to assemble an outstanding leadership team and to take immediate action to change the trajectory of our business. The corporate strategy will be shared at our January investor event. The executive leadership team is almost fully in place, and I'm so pleased with the level of discussion, debate and collaboration among its members.

We are driving to become a culture of ownership and accountability, with the mindset of delivering results, and there has been tremendous receptivity across the entire company to this shift. You heard some details from Malissa, Sara and Matt about how we are addressing the foundational pillars of product, brand, customer and execution with long-term profitable growth in line. Infusing our product with newness and relevance, restoring the strength of our brand, responding to what customers want and expect from us and executing with excellence. That is what will lead Express to long-term financial health and that is exactly what this team is determined to do.

I'm confident and optimistic about the future of Express, and it is my expectation that we will return to a mid-single-digit operating margin through a combination of top line growth, margin expansion, expense reduction and fleet rationalization. This will of course take some time, but our strong balance sheet and free cash flow generation give us the financial flexibility we need to take the necessary actions.

I'm encouraged that the actions we have already taken have started to show in our results and have begun to change the trajectory of our business. At the same time, I am realistic. I am fully aware that the road ahead will be difficult and it will surely have some bumps and curves. But as each element of our strategy is realized, we will add significant value to the Company for our associates and for our shareholders.

Thank you for your interest in Express. I look forward to unveiling our long-term corporate strategy at our investor event on January 22nd at the New York Stock Exchange. I will now ask the operator to begin the question-and-answer portion of the call.

Questions and Answers:

Operator

[Operator Instructions]. Your first question comes from the line of Paul Trussell. Your line is open.

Gabby Carbone -- Deutsche Bank -- Analyst

Hi, good morning. This is Gabby Carbone on for Paul. Thanks for all the color today. I wanted to ask about the 4Q comp guidance. It seems like things probably trended pretty well in November. So I was wondering if you can comment there, and then if you can dig a little bit deeper on the recent changes you have made around product presentation and assortment, and what gives you the confidence you can meet your expectation for the next quarter? Thank you.

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

Hi, Gabby, this is Perry. From a Q4 comp guidance standpoint, what that reflect is what we have seen thus far quarter to-date and what we believe we can achieve in the balance of the quarter and that's what embedded in our guidance currently.

Tim Baxter -- Chief Executive Officer

Hi, Gabby, it's Tim. Just to take the second part of your question. We've talked a lot about the changes we have made to the merchandising strategy, particularly in the women side of the business in our stores. And those changes have had a very positive impact on our results particularly as we moved through the third quarter. We previously, for a very long time, segmented our stores and in fact the Company was organized around four lifestyles. Those lifestyles were actually wearing occasions. They were wear-to-work, casual, denim and party. And the reality is that's just simply not the way people think about their wardrobes today or think about getting dressed.

People have one wardrobe and they want specific pieces that are very, very versatile that fit in that wardrobe. So we dismantled basically all of those locations or those sections of the store and mixed all the products up. And there was also the much, much more modern approach where you see blazers that might traditionally have only been merchandised back to a matching skirt or matching pants. Now with a great sequin tank and a pair of jean that just reflects a much more modern way people are dressing. Those changes have been very positive on the Women's side, and as Malissa said in her comments, we will be moving forward with those changes on the Men's side as we move into the spring season.

Gabby Carbone -- Deutsche Bank -- Analyst

Thanks. And just one more quick question for Perry. I was wondering, if you can discuss the gross margin expectation for the fourth quarter in more detail. And then, could you remind us what comp you need to achieve leverage in B&O and how that has evolved? Thanks.

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

Yeah, absolutely. So, from a gross margin expectation, for Q4, we currently expect gross margins to contract by approximately 70 basis points. That 70 basis points is a combination of merchandised margin contraction of about 50 basis points and B&O contraction of about 20 basis points. As it relates to the second part of the question around, what it takes for B&O to leverage, typically we'd say that B&O can leverage at very, very low single-digit comp, but with our efforts from a rent standpoint in the recent years, B&O can leverage at slightly negative low single-digit comps. And this is what we've seen right now, the guidance that we're providing we're expecting the B&O will be only at 20 basis points of contraction to last year.

Gabby Carbone -- Deutsche Bank -- Analyst

Great. Thank you so much and best of luck for holiday.

Tim Baxter -- Chief Executive Officer

Thank you, Gabby.

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

Thank you.

Operator

Your next question comes from the line of Marni Shapiro. Your line is open.

Marni Shapiro -- The Retail Tracker -- Analyst

Hey guys, congrats on the progress.

Tim Baxter -- Chief Executive Officer

Thank you, Marni. Good morning.

Marni Shapiro -- The Retail Tracker -- Analyst

Good morning. So you have a very well developed bottoms business, I mean, starting from Editor pant on up and your denim. Could you talk a little bit about your tops business, the changes that you're making there? And I guess, how you're going to look at this differently than you -- than you did in the past? It sounds like you're making a lot of changes to the way you think about her apparel and her wardrobe?

Tim Baxter -- Chief Executive Officer

Yes, absolutely, Marni. I'm going to let -- I'm going to let Malissa take that one.

Malissa Akay -- Executive Vice President and Chief Merchandising Officer

Hi, Marni. Yeah, we've introduced -- we've introduced new silhouettes, new fabrics, new ideas like sleeve interests and what we've seen consistently of what's winning is really modern feminine versatile style. So we've been chasing into those themes with new updated ways. The speed-to-market, the go-to-market transformation including an accelerated calendar will help us continue to leverage new learnings and understand what the customer wants faster.

Marni Shapiro -- The Retail Tracker -- Analyst

Fantastic.

Tim Baxter -- Chief Executive Officer

So, I think, Marni, you of all people know very well that we have traditionally relied on some very big key items to drive an our tops business. And as Malissa said in her prepared remarks, we held on to many of those things past their point of relevance. So shift, just a more trend right, on trend tops is -- we're showing significant signs of improvement in the business.

Marni Shapiro -- The Retail Tracker -- Analyst

Well, some of those buys be smaller buys that might just sell out kind of thing?

Malissa Akay -- Executive Vice President and Chief Merchandising Officer

Absolutely Marni. We're really thinking about inventory turns and how we can be more profitable with bringing new ideas and turning the faster to bring in even more new ideas. So absolutely yes.

Marni Shapiro -- The Retail Tracker -- Analyst

Fantastic. Best of luck for the holidays guys.

Tim Baxter -- Chief Executive Officer

Thanks, Marni.

Malissa Akay -- Executive Vice President and Chief Merchandising Officer

Thank you.

Operator

Your next question comes from the line of Roxanne Meyer. Your line is open.

Roxanne Meyer -- MKM Partners -- Analyst

Great. Thanks, and congratulations on the progress, and thanks for all the color today. First, I just wanted to start with a couple follow-ups. I guess as it relates to the progress you're seeing with your new approach to merchandising, are you able to share how much better those stores are doing versus the chain?

Tim Baxter -- Chief Executive Officer

Actually, Roxanne, what's really exciting is that early in the third quarter -- I am sorry, early in the third quarter, we rolled out the strategy to all stores in the chain. So the entire fleet is now merchandised in its way. So I couldn't comment on the differences. When we first began, you guys may recall on our last call, we had just started rolling it out. And the performance in those stores where we had rolled it out was significantly better than in stores where we hadn't. So I think that much of the improvement that we have seen in our sales trends throughout the third quarter is based on the change in the merchandising.

Roxanne Meyer -- MKM Partners -- Analyst

Okay, great. And then, as it relates to your lead times, I know Malissa talked about the idea that you used to be on trend and in setting the trends, one of the key things that is taking place in the industry is that the competition has gotten so much faster with supply chain and speed-to-market. So I'm just wondering, if you can elaborate on what are your lead times now and what are you targeting in terms of how much speed you're going to be able to achieve and by when?

Malissa Akay -- Executive Vice President and Chief Merchandising Officer

So we're significantly reducing the time it takes from conceptualizing an idea and to having that product really ready in customer facing. And part of that accelerated calendar really is part of the bigger go-to-market transformation that Matt talked about. And that go-to-market transformation is really about getting the organization united and aligned against key product and brand strategy, so they are really together, they're sort of together.

Matt Moellering -- President and Chief Operating Officer

Yeah, Roxanne, this is Matt. I've obviously been here for quite a while now. One of the biggest changes associated with this go-to-market transformation, to Malissa's point, much better coordination and alignment upfront across all functions. So we're talking about design, merchandising, planning and allocation, production and sourcing. And also importantly, bringing marketing in the loop at the very, very front end of the process, making sure we have alignment. And this creates clear product strategies, clear and aligned branded marketing messages, and it also enables us to make faster and better decisions. The end result of all this will be better customer experience when they get to stores or online for us.

Roxanne Meyer -- MKM Partners -- Analyst

Okay, great. And then just one follow-up for you, Matt. I know you talked about improving the conversion rate and it sounds like there is a couple of new initiatives there and potential investments, whether it's labor scheduling, the new customer feedback tool, the experience model, and I'm just wondering, if all of these are already in place or is this much more of a multi-year opportunity?

Matt Moellering -- President and Chief Operating Officer

This is -- I wouldn't necessarily call it a multi-year opportunity, but a lot of this we will be rolling out in 2020. So we have spent a lot of time in the last six months or so, taking a look at all of the activities that occur in the stores in particular and we have streamlined a lot of the processes, we are eliminating non-value-added activities, we're going to roll this whole -- we're testing it now in a few stores, we're going to roll this out in early spring. But what we're trying to do here is free up non-productive time of sales associates and making sure that we have more time for the associates to face to face interaction with customers selling on the floor and providing a better customer experience.

Based on benchmarking we have done, we know currently we lag from a conversion standpoint relative to many others in the industry, and we think this is a huge opportunity. So we get the right labor in the right place at the right time, combined with much better eliminating non-value-added activities, getting more time in front of the customer, along with the product and brand work that Malissa and Sara are doing, all of those should significantly improve performance in the stores.

Roxanne Meyer -- MKM Partners -- Analyst

Okay, great. Thanks for the color, and best of luck for holiday.

Matt Moellering -- President and Chief Operating Officer

Thank you.

Tim Baxter -- Chief Executive Officer

Thank you.

Operator

Your next question comes from the line of Susan Anderson. Your line is open.

Susan Anderson -- B. Riley FBR, Inc. -- Analyst

Hi, good morning. Thank you so much for taking my question. Perry, I guess, I want to follow up on the merch margin for the fourth quarter. Is the driver of it being down still clearing through the product that you guys need to get clear through? And so, I guess, when do you guys expect to have kind of a full new set of product where we won't have to clear through the old products anymore? Thanks.

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

Hi, Susan. Yes, the margin expectation for Q4 reflects our approach in terms of the slow moving product that we continue to target and a move through our stores. We do expect as we move throughout Q4 that we're going to see -- continue to see improvements in the inventory composition and by the time we get to that Feb BOM, that our inventory compositions will be in a much, much better shape and even the relationship of sales to inventory will continue to improve and be in more in alignment.

Matt Moellering -- President and Chief Operating Officer

This is Matt. It will pace sometime for sure. Obviously, we've had a lot of change in senior leadership as Tim talked about. Tim came on in June. Malissa came on as the new Head of Merchant of only about 90 days ago. We just announced today that we're hiring a new Men's Head Merchant. All of these activities will change the construct of the merchandise going forward. So while our inventory is getting cleaned up and getting better, it is going to take some time to get to the assortment we really want. And to get to an optimal assortment, we are probably looking closer the back half of 2020.

Susan Anderson -- B. Riley FBR, Inc. -- Analyst

Great. That's helpful.

Tim Baxter -- Chief Executive Officer

When we talk about size -- sorry, this is Tim. I just want to add on. When we talk about being very strategic and targeted in our promotion, one of the things we are doing is targeting promotions on those products that we want to move through at a faster rate, and that we don't believe are relevant as we move into 2020.

Susan Anderson -- B. Riley FBR, Inc. -- Analyst

Great. And then maybe I don't know if you could give some color on the performance of online in the quarter or at least the performance versus the stores in the third quarter?

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

Yeah, Susan, we don't provide separate comps on performance by online versus stores. As you know, we have moved to more of a retail versus outlet comp, which those channels, they have performed at the same level of negative 5%.

Tim Baxter -- Chief Executive Officer

The reality is today that it's very difficult to assign a sale to either e-commerce or store, because the customer is interacting in both channels very regularly. She is shopping online before she may actually go, make a purchase at a store or vice versa. If she is in a store shopping, she sees something she likes, she tries it on, but she goes home and she buys it online later. So there is -- the lines are blurred you know because of the way that consumers behaving. So it's very, very difficult to assign a sale to either e-commerce or store.

Susan Anderson -- B. Riley FBR, Inc. -- Analyst

Yeah. Okay, great. That's true. And then lastly, Tim, and maybe you can talk about this more in January, but how are you looking at potential opportunity left still on the expense side and maybe if you could just talk about the different buckets, where you think there is opportunity there still.

Tim Baxter -- Chief Executive Officer

Well, I think there is definitely opportunity across the board to significantly reduce our expense and we are planning to share the details of that expense reduction plan at the January 22nd investor event in New York City. So a lot more details to come.

Susan Anderson -- B. Riley FBR, Inc. -- Analyst

Okay, great. Thank you so much you guys. Good luck through holidays.

Tim Baxter -- Chief Executive Officer

Thank you.

Matt Moellering -- President and Chief Operating Officer

Thank you.

Operator

Your next question comes from the line of Janet Kloppenburg. Your line is open.

Janet Kloppenburg -- JJK Research -- Analyst

Good morning, everyone. Congrats on the improvements. Just wondering if you could talk a little bit...

Tim Baxter -- Chief Executive Officer

Good morning, Janet.

Janet Kloppenburg -- JJK Research -- Analyst

Hi. A little bit about the women's business versus the men's business and what level of improvement you saw in that category versus the first half of the year, you called out dresses and tops? Just wondering what else you are seeing there and I assume that the men's business continue to really outpace women's, but I could be wrong in that. So I'd love to learn more there.

Also in terms of testing and lead times, if you could talk a little about what's going on right now in terms of testing that would help inform your spring assortment and how good you feel about acceleration in the business based on what you are learning now in terms of fashion trends and customers' response just some of the key items that are working at Express? And importantly, on the lead times, maybe, because you have done a lot of change in your sourcing because of China exposure, what does that look like?

And just lastly, Perry, you talked a little bit about the merchandise margin outlook -- two more questions. The merchandise margin outlook for the fourth quarter clearing through legacy product. Just wondering, should we expect the promotional strategy, the targeted promotions to continue. Can you even ease up further given that your inventory is in better shape and just the opportunity for SG&A to continue to decline on a dollar basis? Thanks so much.

Tim Baxter -- Chief Executive Officer

Okay, Janet, there is a lot to unpack there. So let me try to tackle.

Janet Kloppenburg -- JJK Research -- Analyst

I remember what I asked, so I can come back to it. I apologize.

Tim Baxter -- Chief Executive Officer

I took some notes, but let me see if I -- let me see how I can tackle it. First, on the performance of men's and women's. I would say that our trend change as a total company has been driven by an improvement in the women's trends. The men's trend, as we have mentioned, has been better than the women's trend and the men's trend has stayed very consistent and very stable. So all of the change that we have experienced, as a total company, has come through based on a change in improvement in the women's trend and that's based on all of the things that Malissa shared in her comments and I have shared previously about remerchandising the floor.

The second part of the question was about testing, and what we're testing today and now. You know the way I look at it Janet, every delivery needs to include products that are tests for what may or may not be relevant going forward. So within each of our deliveries, we will be infusing newness across every category, exploring consumer preference, and learning from the customer based on how they vote on those products and initiatives. So we did that in a very targeted way in the third quarter with women's tops, and we've seen great success by getting back into the products that worked well out of that test in a much more meaningful way throughout the entire assortment. So we will be applying that to each one of the categories of business as we move forward.

And finally, the promo strategy. As I have said, we will continue to very strategically pull back on very deep store line and site wide promotions, but we will also be competitive, and we are in an extraordinarily competitive market share time right now in the fourth quarter, particularly over the next several weeks as we head into Christmas. So we -- you will see us pulling back in some cases and pushing harder in other cases, based on what we know or what we believe we know based on where things were competitively a year ago.

Janet Kloppenburg -- JJK Research -- Analyst

Okay. Can I come back with a couple?

Tim Baxter -- Chief Executive Officer

Sure.

Janet Kloppenburg -- JJK Research -- Analyst

Okay, thanks. Just on the testing, I was just wondering, if you have -- if you feel more confident that your testing right now will secure more on target key items for the spring season, typically in women's or if that -- just too early in your stage of testing. So what I'm thinking about, Tim, is the ability for you to deliver consistently improved assortment and some of that rests on what you've learned and how you feel to go forward. And then lastly, if you could just elaborate on the lead time and the opportunity is to shorten lead time particularly in light of the change in your vendor matrix right now?

Tim Baxter -- Chief Executive Officer

So to take the first part of that Janet, I'm very confident that we will be able to continue to improve our assortments going forward, and it will be my expectation that we will always be improving our assortments going forward. We are able to impact -- eliminate amount of the assortment moving into fourth quarter. We will impact a greater percentage of the assortment as we move into spring of 2020 and then will impact an even greater percentage of the assortment as we move throughout 2020.

Matt Moellering -- President and Chief Operating Officer

Yeah, from a lead time standpoint, Janet...

Janet Kloppenburg -- JJK Research -- Analyst

Hi, Matt.

Matt Moellering -- President and Chief Operating Officer

Whenever we put together our -- hi there, hi Janet. Whenever we put together our production and sourcing strategy, we look at a number of things. And as we're moving out of China. We continue to look at, obviously, consistency of product, quality of product, agility and speed and fabric platforming, etc. With this go-to-market strategy change that we are in -- this transformation we're talking about within the business, we are going to significantly reduce the concept to market time within the decision making process. A lot of it frankly is getting better alignment upfront and making faster decisions on the back end, so that we reduce the time to market and have better information to make decisions. So we are not concerned about lead times, even with that 10% to 11% we're shifting out of China, putting into other countries.

Janet Kloppenburg -- JJK Research -- Analyst

But will the lead times -- are you shortening those lead times to support your tests and react strategies and your go-to-market strategy, Matt?

Matt Moellering -- President and Chief Operating Officer

Yes, we are. And what we need to move on. I think we have one more question, Janet. Thank you very much.

Operator

Your last question comes from the line of Steve Marotta. Your line is open.

Steven Marotta -- C.L. King & Associates -- Analyst

Good morning, Tim, Matt, Perry, Malissa, Sara, and Dan. One...

Tim Baxter -- Chief Executive Officer

Good morning.

Matt Moellering -- President and Chief Operating Officer

Good morning, Steve.

Steven Marotta -- C.L. King & Associates -- Analyst

One final point question and then one quick follow-up to just put a fine point on it as far as the planned promotional cadence goes in the fourth quarter, that's expected at this moment on a planned basis to be down year-over-year, but merchandise margin pressures is more directly from the accelerated efforts within the clearance section of your merchandise, correct?

Tim Baxter -- Chief Executive Officer

Yeah, that's right.

Steven Marotta -- C.L. King & Associates -- Analyst

All right. Okay. And also has there been any changes to your website to improve online conversion. In other words, within the stores, there was a major change from a remerchandising standpoint with women's. Have you done anything online in order to increase conversions?

Tim Baxter -- Chief Executive Officer

Absolutely. So we are in the process right now of replatforming the front end of our system, which will give us enhanced functionality for the spring season that will go live in early spring. Along with that, we recently launched a new version of the Express app. Earlier this year, we have done an outside audit of our user experience online and have made some changes, already in early fall, and we're going to be making additional enhancements to the website functionality in spring as well to address some of the gaps that we had. And then, Sara's team is also evolving the editorial content -- content strategy online which should help significantly and will also be adding styling and personalization functionality as well. So all of these things in concert with each other should help drive increased conversion over time?

Steven Marotta -- C.L. King & Associates -- Analyst

Thank you very much. I'll take the balance offline. Thanks.

Tim Baxter -- Chief Executive Officer

Great. Thank you, Steve.

Matt Moellering -- President and Chief Operating Officer

Thank you.

Tim Baxter -- Chief Executive Officer

Thank you all for joining us this morning. We look forward to speaking with you again at our investor event in January. And let me take this opportunity to wish you all a very safe and happy holiday season.

Operator

[Operator Closing Remarks].

Duration: 58 minutes

Call participants:

Dan Aldridge -- Vice President, Investor Relations

Tim Baxter -- Chief Executive Officer

Malissa Akay -- Executive Vice President and Chief Merchandising Officer

Sara Tervo -- Executive Vice President and Chief Marketing Officer

Matt Moellering -- President and Chief Operating Officer

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

Gabby Carbone -- Deutsche Bank -- Analyst

Marni Shapiro -- The Retail Tracker -- Analyst

Roxanne Meyer -- MKM Partners -- Analyst

Susan Anderson -- B. Riley FBR, Inc. -- Analyst

Janet Kloppenburg -- JJK Research -- Analyst

Steven Marotta -- C.L. King & Associates -- Analyst

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