Categories Earnings Call Transcripts, Retail

Express Inc. (EXPR) Q4 2020 Earnings Call Transcript

EXPR Earnings Call - Final Transcript

Express Inc  (NYSE: EXPR) Q4 2020 earnings call dated Mar. 10, 2021.

Corporate Participants:

Dan AldridgeVice President, Investor Relations

Tim BaxterChief Executive Officer

Perry PericleousSenior Vice President, Chief Financial Officer and Treasurer

Analysts:

Susan AndersonB. Riley Securities — Analyst

Marni ShapiroThe Retail Tracker — Analyst

Roxanne MeyerMKM Partners — Analyst

Jen ReddingWedbush Securities — Analyst

Presentation:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Express Inc. Q4 2020 Earnings Call.

[Operator Instructions]

It is now my pleasure to turn the call over to your speaker today, Mr. Dan Aldridge, VP, Investor Relations. Please go ahead.

Dan AldridgeVice President, Investor Relations

Thank you, and 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.

Our comments today will supplement the detailed information provided in both the press release and the investor presentation available on the company’s Investor Relations website. 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, Perry Pericleous, Chief Financial Officer, and Matt Moellering, President and Chief Operating Officer.

I will now turn the call over to Tim.

Tim BaxterChief Executive Officer

Thank you, Dan, and good morning, everyone.

In the fourth quarter and throughout 2020, we have successfully advanced the EXPRESSway Forward strategy and taken decisive appropriate actions to effectively manage our liquidity. We intensified our focus on eCommerce demand and traffic, transactions and conversion have all increased. We shifted gears on product, driving down high penetrations in occasion-based categories and driving up the percentage of more versatile ones, and they outpaced our overall performance. We completed the first phase of our loyalty program relaunch and added 8% more new members than last year, who we expect will generate meaningful incremental value because they generally spend at two times the rate of nonmembers.

We reallocated our marketing dollars to drive greater brand awareness and saw a 54% increase in engagement across our paid social channels. We responded to significant declines in mall traffic by sharpening our focus on conversion and saw increases across all of our channels. We reduced $250 million in cost through expense reductions, capital reductions and inventory cuts. We secured $140 million in additional financing. And we negotiated $85 million in savings through rent abatements, deferrals and reductions.

Our strategy is the right one. And we will continue to advance its four foundational pillars while being agile in response to the accelerated pace of consumer and marketplace change. Our fourth quarter results do not reflect where our business is headed. Store traffic continues to be materially affected by the pandemic. However, our comp sales did improve sequentially from the third quarter to the fourth quarter, our gross margin improved significantly from the third quarter and I expect these trends to continue in the first quarter and throughout 2021.

We also saw encouraging trends in the southeast where coronavirus guidelines were less restrictive. Comps were, on average, 20 points better than in the more restrictive Northeast and California markets. Controlling the controllables was absolutely essential in 2020, and we are back on the EXPRESSway, advancing our transformation in 2021. I expect that sales and gross margins will continue to improve throughout the year and that we will achieve positive EBITDA in the back half of the year and positive operating cash flow for the full year.

In 2020, we began transforming from a mall-based specialty retailer to a modern, relevant and compelling multichannel brand, and now we are well positioned for the post pandemic world. Our product strategy was already focused on versatility and comfort. We were already bringing newness and innovation to our wear-to-work and occasion product. We were already leveraging the authenticity and input of our influencer and customer communities to bring a new dimension to our brand message. And we were already investing more to accelerate our digital business.

Let me share the progress we have made in each of our channels, starting with the biggest one, which is eCommerce. All of you and all of our customers have known Express as a store in the mall. And at the top of 2020, most people still met our brand that way, but we knew that meaningful digital advancement needed to be a part of our strategy. We will drive increases in traffic, conversion and average order value by continuing to invest in our omnichannel capabilities. We have built a plan to grow our digital channel to deliver $1 billion in demand in 2024. The plan is based on our four foundational pillars of product, brand, customer and execution.

Moving forward, we will optimize our product assortment through product extensions and expansions, and robust growth of our Marketplace business with the addition of new categories, such as active, swimwear and intimates. We will foster brand preference, loyalty and advocacy through greater personalization, such as real-time product recommendations and a new buildable wardrobe feature. We will drive customer acquisition and retention through enhanced service offerings, such as our digital stylists program.

We will enhance and streamline the checkout process, improve search and navigation functionality, and apply features we launch with our site replatform to our mobile app experience. We will generate sales to our social media channels and take our customer co-creation to the next level by building a more expansive and involved Express community, where all who participate have the opportunity to create confidence and inspire self-expression.

With strong digital and multichannel thinking already a part of our future strategy, we brought forward into 2020 many of the enhancements that we have planned for further down the road because the pandemic made driving greater conversion online, mission-critical. We accelerated an enhanced buy online pick up in store, ship from store, curbside pickup, product detail pages and user-generated content, all of which resulted in consistent increases in digital traffic, transactions and conversion.

To provide order of magnitude perspective, digital sales now represent over 50% of our total retail business. However, revenue did not keep pace with transactions as customers shifted to categories that drove lower average order values. Influencer-driven traffic to our digital properties is up 3%, and demand driven through our website is up 34%. Engagement across our paid social channels is up 54%, with a 130% increase in traffic and a 150% increase in demand.

We leveraged learning from our digital start-up UpWest and the day-to-day knowledge from patterns emerging on express.com. Customer feedback and sales results continued to inform our thought process and certainly validate the importance of a fulsome multichannel approach to effectively reach customers when, where and how they want to shop. Although UpWest is not yet material to our overall results, the brand has resonated and the business has performed ahead of our expectations. In fact, UpWest has outperformed a number of other digitally native brands on a first year revenue basis, including brands that have gone on to have extremely high valuations.

UpWest launched at the end of 2019 as a direct-to-consumer brand with product and purpose focused on comfort, and managed as a completely separate entity from Express, led by fully dedicated design, merchandising and marketing teams. upwest.com experienced strong traffic and increases in conversion throughout the first year. Its customer database and social media following are growing nicely, as is the customer’s response to the brand sustainability message. We have seen good success with UpWest pop-ups as well as the offering within multi-brand retailer neighborhood goods in Manhattan and Austin. We plan to open additional pop-ups in 2021, which will continue building brand awareness and driving customer acquisition. UpWest is a catalyst for growth that I expect will deliver long-term shareholder value for Express.

Turning to our second channel, our retail stores. The strength in our online business was not enough to offset the declines in our physical stores, which, of course, continued to be impacted by significantly reduced mall traffic. As I said, this channel is still where most people meet our brand. And in fact, the majority of our customer acquisition still comes through this channel. So physical stores will continue to be an important part of the EXPRESSway Forward strategy. And having already announced our fleet rationalization plan to close 100 stores, our focus has now shifted to fleet optimization.

Fleet rationalization is about the number of stores. Fleet optimization is about the store location, size, concept, format and most importantly, the role physical stores will play in customers post pandemic lives. Our mall-based stores can be more productive, and we must also expand beyond the mall. We introduced a reduced square footage concept at the King of Prussia mall, decreasing the amount of space by 45%. And the results are outstanding, with productivity double that of the balance of our fleet. This has been and will continue to be an important testing ground for us to determine the optimal size of our mall-based stores. And we will be able to act on that learning because we have tremendous flexibility with approximately two-thirds of our leases actionable over the next three years.

We also see an opportunity to diversify our fleet, which is today predominantly mall based. So we opened two Express Edit concept stores, one in Columbus and another in Nashville. These are street locations, with strong foot traffic. These stores have a smaller footprint at 1,400 to 4,000 square feet and a product mix curated to reflect local styles and trends within a particular market and even neighborhood. We have already seen a higher penetration of new and reactivated customers, with 45% new customers in the Nashville location and over 20% reactivated customers in both stores. We plan to add eight more Express Edit concept stores in 2021, which are short-term leases to allow us maximum flexibility as we learn about this new format.

Our outlet channel outperformed our retail stores in the fourth quarter and the full year, and that was before the product reflected the Express Edit design philosophy. Because our outlet customer is just as focused on fashion as our retail customer, we have begun to apply this approach to this assortment and are bringing styles from retail to outlet much more quickly, which is already generating strong response. eCommerce, optimized retail, outlet. A solid sustainable retail strategy must be holistic and therefore, must include a value component. So as we continue to move away from deep, site-wide and storewide promotions because it is the right thing to do for our brand, we will ensure that our outlet assortments are fully reflective of the Express Edit approach to put our best foot forward in this important value channel.

Across each of our four foundational pillars, product, brand, customer and execution, we have made significant progress. Let me take you through what we’ve done, the results we’ve achieved to date and what is still to come across each one.

I’ll start with product. Versatility adds value is one of the core ideas within the Express Edit design philosophy. We have been known primarily for wear-to-work and occasion-based categories, where we have held strong market share positions. Today, we are seeing tremendous strength in our most versatile product categories, especially what is quickly becoming our new core, which is denim bottoms and Express essential tops. In denim, we saw continued strength in our newest fabric platforms, Luxe Comfort Knit and Temp Control Hyper Stretch rolled out in the third quarter. Supersoft and 4-Way Hyper Stretch launched in the fourth quarter, and these drove 25% of our denim business. In total denim, we sold over 1.6 million units.

For spring, in women’s, we will launch more leg shapes. And for summer, we will have ankle length, cropped and an entirely new assortment of shorts. We will also have a new curvy fit that was developed through a dialogue between our designers and our customers. Optimizing denim inventory is also essential to our success, and we identify key fits, washes and sizes that are the core of our business and have committed to being in stock, online and in stores. Denim was also a key driver of new customer acquisition. We signed up more than 240,000 new denim customers in the fourth quarter and have since added more than 40,000 in February. Going forward, denim will play an outsized role in expanding our customer base.

Today, one in four of our customers buy denim, which is a record high for us in terms of customer penetration. And our denim customer is among our most valuable, spending generally three times more with a 22% higher spend per transaction compared to a non-denim customer. As we move forward, I expect this category to significantly accelerate for both women and men.

Express Essentials, our new foundational knit tops for women and men, are represented across all of our channels. These styles performed exceptionally well in the fourth quarter, selling over 500,000 units. This product is modern, relevant and versatile, and meets weekday and weekend wardrobe needs. Express Essentials will be our new core, but never basic because we know that people come to Express for elevated fashion details. In women’s, Express Essentials are offered across four fit platforms, body contour which slims in shapes or silhouette, fitted, skimming and relaxed. In the fourth quarter, we sold over 400,000 units and we launched body contour in February, selling over 40,000 units.

In men’s, Express Essentials include polos, henleys and tees in elevated fabrics, great colors, and with those fashion details our customer appreciates. Polos, the most versatile men’s shirt, were up 6% to last year and up 61% online in the fourth quarter. Men’s graphic tees were also up 6% to last year and up 120% online, driven by continued success of the X [Phonetic] logo program we introduced last year. Going forward, we see significant upside in our Express Essentials knit business and plan to deliver over $125 million in sales this year, which speaks to the relevance and appeal of this offering.

Our product strategy is working. And as we grow these programs in 2021, we will continue to dimensionalize versatility and comfort in our assortments. We are also very well positioned to meet the wardrobe needs of people returning to offices, social gatherings and occasions of all kinds because of our strength in wear-to-work and dress apparel. We will seize every opportunity to regain market leadership in these categories where we have historical strength and develop new market leadership in denim and knits.

Our second foundational pillar is brand. We introduced a new brand purpose to create confidence and inspire self-expression and a new brand promise to edit the best of now for real-life versatility. Today, we fulfill our purpose and promise through social engagement, influencer relationships and customer co-creation, and with a wide variety of initiatives and activations that create deeper, more meaningful connections with our most loyal and our newest Express fans.

Our goal is for Express customers to see themselves as a part of a styling community to feel connected to our brand, our physical and digital stores, our sales associates. And we will fuel those connections through a shared appreciation for the inspiration and power of fashion and a shared belief that clothes can serve a higher purpose. This work is already in progress, and we’re seeing great results, with increases in engagement and conversion across all of our channels. In fact, we just learned last week that we were named one of the Influencer Marketers of the Year by rewardStyle for outstanding influencer marketing strategy, the criteria being engagement, brand sentiment and ROI.

The Express Digital Stylist program is exceeding our expectations, showing a 52% conversion for those who interact with a stylist, and we still have tremendous opportunity with this program. Restoring the relevance of the Express brand as a key priority. And as evidenced by brand tracking measures, social media engagement and customer feedback, we’ve made good progress in a relatively short period of time. In 2020, we laid the foundation for this transformation, and in 2021, we will build on this momentum. We will evolve our customer experience model in our physical and digital stores, expand and enhance our styling capabilities and offer more localized assortments and more personalized selling.

Customer. We remain focused on engaging existing customers and acquiring new ones. So in 2020, we refined our approach to identifying and connecting with customers, sharpened our digital spend and drove greater personalization of messages through owned and paid media channels. The Express Insider loyalty program is one of the most impactful ways we acquire and engage customers. So we developed a more compelling customer value proposition and enhanced and rebranded the experience. This led to a fourth quarter increase in loyalty sign-ups of 8% over the prior year, despite significantly reduced store traffic. We have also seen a 3% higher spend per new customer versus last year, driven by a 4% increase in visits and a 3% increase in units per transaction, despite the decline in sales of higher ticket, wear-to-work and occasion-based product.

Our Express Insider members have tremendous lifetime value. They spend on average two times more than nonmembers annually. Their retention rate is seven times greater and new members are nearly two times more likely to make a second visit within the first 90 days. In a few weeks, we will enter the next phase of our relaunch, which includes new participation tiers, new benefits, a digital wallet feature and an easier way for customers to earn, track and redeem their benefits. And we will also reissue the Express private label credit card which should drive incremental sales through additional trips and improved retention.

Over the last year, we have not only increased our engagement with customers, but we have done so in new and creative ways. We began a dialogue with our top loyalty members to understand their wardrobe needs and style preferences, which led to our first ever Express designer and Express customer co-created product capsule in the fourth quarter, our Live in Luxe holiday assortment. This was one of our fastest-selling collections for the quarter, moving over 230,000 units and attracting over 50,000 new customers. Our second customer co-creation focused on men’s and women’s denim. It was launched in February, and we’ve seen great success selling over 40,000 units in February alone.

And our final pillar, execution, which is both a true line across product, brand and customer, and the evolution of our operating model as a result of more streamlined and disciplined systems and processes. Conversion is a key component of execution. And we have successfully driven increases across all of our channels. In stores, this was driven by a new customer experience model, new associate training programs and a continued focus on loyalty sign-ups. Higher conversion will also help us improve our inventory position, which is up 20% versus last year’s levels, but is down 1% compared to 2018. And while the level is higher than we planned, a large portion of this inventory is in core seasonless product with low markdown risk, and we are managing through the balance of the inventory appropriately and delivering significantly improved margins on our clearance. I expect our inventory will be more aligned with our sales trends as we move into the back half of the year and business continues to recover.

One of the most important aspects of execution in 2020 was effectively managing our liquidity. We finalized discussions with nearly all of our landlords, negotiating a total of $85 million in abatements, deferrals and future rent reductions, and we reduced expenses in the fourth quarter by $35 million. We then secured an additional $140 million in financing to support business continuity and allow us to emerge from the pandemic with the means to keep driving our strategy and accelerating our business. Product, brand, customer and execution, across each one of these pillars, we have focused on what we expect will drive long-term value for our company. And despite the many challenges of 2020, we have meaningfully advanced the EXPRESSway Forward strategy.

As we move through 2021, I expect revenue to improve as vaccines continue to roll out and as more people return to work in offices and resume social gatherings and occasions. I also expect that we will deliver positive EBITDA in the back half of the year and finish the year with positive operating cash flow.

Perry will provide detail on our fourth quarter and full year results, give an update on our liquidity actions and share our view for the balance of the year.

Perry PericleousSenior Vice President, Chief Financial Officer and Treasurer

Thank you, Tim.

In 2020, we focused on controlling the controllable in order to build a strong foundation and maintain liquidity throughout an unusually difficult year. As Tim just said, we finalized negotiations with the maturity of our landlords and negotiated $85 million in rent abatements, deferral and future rent reductions. We reduced expenses by $35 million and secured $140 million in additional financing. So our foundation is stronger, and we are back on the EXPRESSway Forward.

I will now discuss our fourth quarter and full year results, provide details on our liquidity action and then provide a high level outlook for 2021. My comments today will refer to the usual year-over-year comparisons and I will also make some quarter-over-quarter comparisons where those are relevant and meaningful. Fourth quarter net sales were $430 million, a 29% decrease as compared to $607 million last year. Consolidated comparable sales were negative 27%, retail comps were negative 28% and Express factory outlet store comps were negative 27%.

Our sales continued to be materially impacted by COVID-19 in the fourth quarter as traffic remained pressured compared to last year. While our merchandise margin contracted by approximately 600 basis points versus last year, on a relative year-over-year basis, we saw sequential improvement compared to our third quarter results and we expect merchandise margin to continue to improve into the first quarter of 2021 and begin to normalize as we move throughout the balance of the year.

Buying and occupancy expenses were down $21 million on an absolute dollar basis, but deleveraged by approximately 400 basis points due to the decline in sales. The overall dollar reduction in buying and occupancy was driven by fleet rationalization activity, rent savings, the organizational restructures we announced in January and November of 2020 and the incremental actions we took to manage liquidity, including significant rent abatements we negotiated with our labors. The year-over-year dollar reduction in buying and occupancy was significantly greater in Q4 than Q2 and Q3 as we recognized a $7 million P&L benefit from our executed rent abatements. It should be noted that buying and occupancy was negatively impacted by $4.5 million non-cash impairment charge related to certain stores and store assets.

During the fourth quarter, we had a gross profit of $71 million, with a gross margin rate of 16.6%, down approximately 1,000 basis points as compared to the prior year, driven by the soft decline. However, compared to the third quarter, our gross margin rate improved on an absolute basis and also on a relative year-over-year basis due to higher total sales, the formation improvement in merchandise margin, and our improved buying and occupancy rate. We expect gross margin rate to continue to improve in 2021 through sales improvement, markdown management and expense leverage.

SG&A expenses were $134 million, a decrease of $15 million compared to last year. Similar to the buying and occupancy reduction, the reductions in SG&A expenses were driven by fleet rationalization, the previously announced cost reductions associated with our corporate restructuring and the actions we took as part of our COVID-19 savings. As a percentage of sales, SG&A came in at 31.1%, deleveraging approximately 700 basis points as a result of the significant decline in sales.

On a GAAP basis, our operating loss was $63 million as compared to last year’s operating loss of $190 million. The loss from the prior year includes approximately $205 million in non-core operating expenses. Excluding the impact of the previously mentioned non-cash impairment charges, our adjusted operating loss for the fourth quarter was $58 million as compared to last year’s adjusted operating income of $17 million.

Fourth quarter diluted loss per share was $0.82 on a GAAP basis compared to a loss of $2.21 per diluted share in the fourth quarter of 2019. On an adjusted basis, diluted loss per share was $0.66 compared with last year’s adjusted earnings of $0.21 per diluted share. Our effective tax rate for the fourth quarter was 16.9%. This reflects the valuation allowance recorded against our deferred tax assets. For the full year 2020, net sales totaled $1.2 billion, a decrease of 40% compared with the full year of 2019. Consolidated comparable sales were negative 27%, retail comps were negative 29% and Express factory outlet store comps were negative 21%. For the full year 2020, loss per share was $6.27 on a GAAP basis, which compares with a loss per share of $2.49 in 2019. Adjusted diluted loss per share was $4.86 compared to last year’s adjusted diluted loss per share of $0.08. The full year results were also impacted by the previously mentioned restructuring charge and the non-cash write-off of our intangible assets.

Now let me discuss our liquidity position and review our balance sheet and cash flow. Over the past year, we have taken a number of steps to reduce cost and improved liquidity. We drew down on our existing ABL credit facility. We secured $140 million of incremental financing through a $90 million FILO Term Loan that was outstanding at year-end and an additional $50 million delayed draw term loan for which we have satisfied the requirements and provided notice to the lenders of our intent to borrow. We negotiated $85 million of rent abatements, deferral and rent reductions. We reduced $250 million of cost through expense reductions, capital reductions and inventory cuts. And we expect a CARES Act benefit of approximately $120 million, of which $95 million is expected at the end of the second quarter.

As a result of these actions, our cash position at the end of the fourth quarter was $56 million, and our long-term borrowings were $196 million, of which $106 million is drawn on our $215 million ABL and the remaining $90 million is from the new FILO Term Loan. Inventories at year-end were $264 million, a 20% increase as compared to last year’s $220 million. As a reminder, we ended 2019 with inventory down 18% versus 2018, after making considerable efforts to optimize our inventory levels and composition. Therefore, on a two-year basis, our inventory is down 1%. Additionally, almost 40% of our assortment consisted of wear-to-work and occasion-based categories, which were disproportionately impacted by the pandemic. However, the majority of this inventory is where we consider core items with low markdown risk. And as we move through the year, we expect our inventory to be more in line with our sales expectations.

Moving on to our high level outlook. Our assumptions are dependent upon the duration and intensity of the pandemic. We expect the following for the full year of 2021. The sequential comp sales improvement throughout the year, significant gross margin improvement for the year, buying and occupancy expense dollars to decrease double digits as a percent to 2019, SG&A expense dollars to decrease high single digits as a percent to 2019, positive EBITDA for the second half of the year, positive operating cash flow for the year, including the receipt of our CARES Act refund, and capital expenditures of approximately $35 million. In addition, we’re monitoring and managing potential headwind.

From an inventory standpoint, we’re tracking port [Phonetic] delays [Phonetic] and freight cost increases due to the pandemic. We have adjusted our floor set timing to ensure the Express Edit is appropriately reflected. And while the freight increases could have an impact on our gross margin in the back half of the year, we are working with vendors and our supply chain to mitigate parts of these increases. We continue to review potential tariff increases. And while there is no expected impact at this time, the flexibility of the vendor base allows us to adjust countries and factories, if necessary. It should also be noted that our expectations for gross margin includes shipping and handling rate increases and surcharges that are continuing from the fourth quarter of 2020.

And finally, our store labor costs continue to be affected by state minimum wage increases. We’re actively managing our store labor model to balance its cost with our desired level of customer engagement and our vision for the customer experience.

Turning to real estate. We expect to close an additional 25 stores. This will bring our overall closures to 93 since the beginning of 2019. We expect to open one new Express factory outlet location, nine Express Edit concept stores and four UpWest pop-up stores during 2021. As a result, we expect to end the year with 559 stores, 339 retail stores, 10 Express Edit concept stores, 206 outlets and four UpWest pop-up stores.

In summary, based on the actions we have already taken and will continue to take to offset the impact of the pandemic as well as the relative strength of our e-commerce business and the continued strong response to our fashion retail, we are well positioned for improved results going forward and to achieve our long-term goal of a mid-single-digit operating margin.

We look forward to updating you on our progress, and I will now turn the call back to Tim.

Tim BaxterChief Executive Officer

Thanks, Perry.

When I think about what will most sharply distinguish 2021 from 2020, I return to that framed quote on my desk that the word crisis when written in Chinese consists of two characters, one for danger and the other for opportunity. Everything that we accomplished in 2020 from operational improvements and the streamlining of our store fleet, to the reinvention of our product and the repositioning of our brand, from the reduction in our cost base to the bolstering of our finances are the reasons that we were able to mitigate the dangers of the pandemic.

In the face of exceptionally difficult circumstances, we continue to advance with clarity and purpose. We built a solid foundation, advanced the EXPRESSway Forward strategy, deepened our engagement with our community and made investments in our e-commerce business. I expect us to return to positive EBITDA in the back half of this year, and we are well positioned to seize every opportunity in 2021.

Thank you for your interest in Express, and we’ll take your questions.

Questions and Answers:

Operator

[Operator Instructions]

Your first question comes from Susan Anderson from B. Riley Securities. Your line is open.

Susan AndersonB. Riley Securities — Analyst

Hi, good morning. Thanks for taking my question. I’m curious just if there’s any thoughts on the consumer coming back to fashion yet, or is it still really heavily trended more towards casual and lounge wear? And I guess within that fashion component, any trends yet of consumers coming back to workwear? And then also, I’m curious, are you seeing any differences in performance by geography, maybe from the south to north, where things may more open already in this south? Thanks.

Tim BaxterChief Executive Officer

Hey. Good morning, Susan. I’ll start with the latter part of your question. Yes, we are seeing differences by geography. In fact, the Southeast, performed at about 20 points better than the Northeast and California. As there have been many announcements made over the past week or so about the loosening up of restrictions in places like Texas, we have also seen changes in our trends in those locations. So seems to be light at the end of that tunnel. And as restrictions loosen up or in places where restrictions have been looser, we are seeing much, much better trends than in places where the restrictions are more restrictive, I guess would be the way to say that.

The first part of your question about fashion. The answer is yes. People are buying fashion. I think that the only caveat I would put on that is that the consumers’ expectation, I believe, has changed forever in terms of comfort. So while we are seeing a return to fashion and a return — somewhat of a return to what we would have considered wear-to-work categories, the most critical thing is that those categories have become more and more comfortable. So we launched men’s knit suits last year, and we have continued to see incredible results in spite of the fact that, that category is obviously very challenged. The fastest turning component of that category is actually fashion and comfort in our soft stretch suits.

In women’s, for example, we’ve introduced an entirely new range of modular suiting, much of which is knit, including tailored looking bottoms that are actually just as stretchy and just as comfortable as your favorite sweat pants. So we are beginning to see people returning to those categories, beginning to see a little bit of energy around those categories, and I expect that we’ll continue to see that as people return to work in offices and perhaps more importantly, return to occasions.

Susan AndersonB. Riley Securities — Analyst

Great. That’s really helpful. That sounds positive. And then maybe if I could just add a follow-up on the store closures. I think you’re looking to close 20 retail stores, five outlets. And then you have the smaller Express Edit store, which you’re testing. I guess any thoughts on moving some of those other stores to the smaller format? And I guess, how quickly could you do that if this Express Edit store comes back with positive results? And then maybe also if you could talk about the cost to relocate or redo a store.

Tim BaxterChief Executive Officer

Sure. I think fleet optimization, as I said, is our focus. And we have the opportunity to do quite a few things. And we have tremendous lease flexibility. So as we continue to learn what consumers are going to expect from our physical locations in a post-pandemic world, we’ll be able to apply those learnings to the vast majority of our fleet over the next few years. I talked a little bit about the King of Prussia store, and that was a test. We took a mall-based store, we reduced its square footage by 45%. And as I said, our productivity in that location is double the balance of our fleet. So we know that we have the opportunity to shrink much of our mall-based square footage and be significantly more productive.

The Express Edit concept stores are even smaller in terms of square footage. So the two that we have now, one is 1,400 square feet and one is 4,000 square feet. And as we open the remainder of them, we expect to stay within that range. So these are — for example, the 4,000 square foot store in Nashville is half the size of the King of Prussia store that we reduced by 45%. So we definitely have an opportunity to be much more productive in our physical spaces. We have the flexibility in our leases to affect our mall-based fleet appropriately over the next few years. And as we continue to learn what the street side smaller Express Edit locations could do, we actually have the opportunity to potentially expand that fleet.

Susan AndersonB. Riley Securities — Analyst

Great. That sounds positive. And then if I could add in there, the new UpWest stores. I’m just curious what the response has been from the consumer? And how are you marketing that new concept to the consumer to let her know that it’s out there?

Tim BaxterChief Executive Officer

Yeah, UpWest, as I said, operated as its own entity. And so it truly is operating out of separate space here in Columbus as a digital start-up. As a part of their strategy, like many digital brands, they recognize that one of the greatest ways to drive brand awareness and acquire new customers was in physical locations. So they have executed several pop-ups in 2020. And as we said, expect to execute quite a few more in 2021. The purpose of those stores really is customer acquisition and brand awareness. So they are short-term leases. But we’ll also continue to see what the customers’ appetite is for that product in a physical space. So that may become a permanent part of the strategy, likely will become a permanent part of the strategy. But UpWest is a digitally-native brand, and we intend to keep it minimally, even our longer-term plans have it at 75% digital demand. So very, very excited about the results. And very excited about the future there.

Susan AndersonB. Riley Securities — Analyst

Great. Thanks so much. I’ll let someone else hop on. Good luck this year.

Tim BaxterChief Executive Officer

Thanks, Susan.

Operator

Your next question comes from Marni Shapiro from Retail Tracker. Your line is open.

Marni ShapiroThe Retail Tracker — Analyst

Hey guys, good morning.

Tim BaxterChief Executive Officer

Good morning, Marni.

Marni ShapiroThe Retail Tracker — Analyst

So Perry, if you could just first clarify your comment, I think you said SG&A for the year, you’re looking at it to be down high single digits versus 2019. And was that — did you say that was a dollar basis or as a percent of sales? I think I missed that part.

Perry PericleousSenior Vice President, Chief Financial Officer and Treasurer

On a dollar basis, when you look at it compared to 2019, we expect it to be down on the high single digits.

Marni ShapiroThe Retail Tracker — Analyst

Okay. Fantastic. And then just could you talk a little bit about the marketplace opportunity and what you’re seeing there? You’ve had a growing breadth of brands there that look really fantastic and brands that I’m used to seeing in specialty stores that seem to be disappearing quickly. So could you just talk a little bit about that? And is there any thought as to bring any of these brands into some of your bigger and best stores?

Tim BaxterChief Executive Officer

Yes, Marni. The answer is yes on the second part of that. Let me talk about Marketplace, though. We do see, as I said, Marketplace as being a key part of our $1 billion eCommerce demand plan that we’ll share in much greater detail with you all in the second quarter. But we’ve had great success in Marketplace. The customer has responded extraordinarily well to — particularly to product outside of our apparel and accessories categories, but also two products within those categories where we are augmenting our existing assortments. So across the board, it’s really been very exciting to see how the customer has responded to our edit within the Marketplace.

I also believe that there is an opportunity for us to bring some of those brands, most successful brands into our larger physical stores. As I said, we have the opportunity to make the stores more productive by shrinking the square footage but in the meantime, we can also make the stores much more productive by bringing new concepts and new product categories in. So yes, more to come on the Marketplace strategy, a very exciting part of the eCommerce strategy, but also potentially a powerful part of our physical strategy.

Marni ShapiroThe Retail Tracker — Analyst

That’s great. And can I ask one more follow-up?

Tim BaxterChief Executive Officer

Sure.

Marni ShapiroThe Retail Tracker — Analyst

I’m curious — I know your inventory is up, and you hold a lot of that in the core and basic stuff, but — and, so this question might sound strange, but do you think you have enough inventory, or do you feel you have enough inventory to drive the sales on the fashion side? I’m watching your customers come into the stores and they are blind to basics right now, and they’re going right for every top of the shoulder details. I’m curious what your balance looks like and how you feel about that for spring?

Tim BaxterChief Executive Officer

I feel good about that going forward. I don’t feel good about it right now. Perry mentioned that we have experienced some delays in shipments. And so our first spring deliveries have been delayed. And so we have not executed our March product launch yet. We are executing that next week, which is two weeks later than a year ago and three weeks later than 2019. So the percentage of our inventory right now that’s in new fresh spring fashion product is lower than I’d like it to be, but that will correct itself over the next couple of weeks. And we agree with you, the response to our fashion product has been outstanding. And the agreed — the core pieces of the business have been more challenged. But actually, our Body Contour, which we just launched in February, which is a part of Express Essentials, which is core, but it’s fashion core has been — it’s been explosive. I mean, it’s been really, really good. So I’m excited about our ability to continue to drive fashion and also develop these new core businesses that appeal to the fashion consumer.

Marni ShapiroThe Retail Tracker — Analyst

That’s fantastic. The fashion is looking good. I am excited to see the new set. Good luck to you guys.

Tim BaxterChief Executive Officer

Thanks, Marni.

Operator

Your next question comes from Roxanne Meyer from MKM Partners. Your line is open.

Roxanne MeyerMKM Partners — Analyst

Great. Good morning. A couple of questions for you. First, knowing on the inventory, knowing that you’ve got a focus on increasing denim fits and styles, and also in your new knit assortment where you’ve got four different fits, it sounds like you’re going to need to significantly increase SKU count and breadth. So how are you thinking about that in the context of market risk overall for these categories, or are these categories in a way part of what you would consider having a longer shelf life and therefore, aren’t exposed to risk?

Tim BaxterChief Executive Officer

They definitely have a longer shelf life, so much less exposure to risk. And as I said, it’s important. It’s actually critical for us to develop these new core categories. We have, as you all know, been historically very, very well-known for occasion and wear-to-work. And I think the past year, we talked about dimensionalizing our assortment outside of those categories, pre-pandemic. And obviously, the pandemic has accelerated the need and also demonstrated just how important it is to have a broader assortment that services all of a customer’s needs. So I feel really good actually about the way we are building the assortment. And we have been over-SKU-ed in many categories in the past. So in total, you’ll actually see a lower SKU count than previously. It’s just going to be much more focused and therefore, should be a much more powerful assortment.

Roxanne MeyerMKM Partners — Analyst

Okay. Great. And then moving on to your comments about moving more quickly from — to have an assortment move from retail to outlet. I was wondering if you could expand on that a bit? And just overall, I guess, remind us how much of the outlet product is made for outlet versus coming from retail? And are you just talking about kind of adopting the styles from retail to outlet or actually transferring some of that product? And just how you think about the strategy in the context of the potential for increased cannibalization?

Tim BaxterChief Executive Officer

Sure. So our outlet strategy previously was 100% made for outlet product. Over the past year, we have transferred some product that was intended for retail into our outlet channel and seen great success in our outlet channel with that product. As we move into 2021, we adopted a very different philosophy. And that — so the product was still — it’s still — the vast majority of the products will still be made for outlet, but the product will reflect the same aesthetic as the mainline. So that’s a huge change from where we’ve been, and we’re already seeing great success with that as well.

We will — to the other part of your question, we previously might have taken a best seller from spring of 2020 and put it into our outlet assortment in spring of 2021. So literally a full year later. What you’ll begin to see is trends and ideas, and in some cases, styles appear in our full-price retail channels, in stores and online, and then 60 to 90 days later actually appear with a strong value proposition in our outlet channel. So the takedown from retail to outlet will go from what was historically a year to, in some cases, 60 to 90 days.

Roxanne MeyerMKM Partners — Analyst

Okay. Great. That’s helpful. And certainly, I can appreciate how it can make that channel that much more current and relevant. And then as it relates to — I know it sounds like there’s more details coming on your eCommerce strategy, but just wondering, when you think about that $1 billion target for eCommerce, do you see that as incremental to your total business, or does some of that assume a transition of demand in part from stores to online? And how — I guess, how are you factoring in what’s going on at stores? I know you talked about your store base and, obviously, a move to smaller stores. And I imagine it’s all part of a larger strategy.

Tim BaxterChief Executive Officer

Yeah, absolutely. I think — I would love to tell you that I think it’s going to be all incremental. But I would stop short of saying that at this point because we simply don’t know what consumers post-pandemic behavior is going to be in physical locations. So it’s mission-critical because it may just be that, that is how the consumer is going to choose to shop more and more in a post-pandemic world. But we are going to continue, as I said, to learn about what the consumers’ expectations are in physical stores. And our hope is that we’ll obviously be able to return to growth in that channel as well. I know that’s not an answer to your question, but the answer is, could be incremental or it could be a shift in consumer behavior. All I know is that we can drive $1 billion in eCommerce and we must drive $1 billion in eCommerce, and that’s what we’re going to do.

Roxanne MeyerMKM Partners — Analyst

Excellent. Looking forward to hearing more details, and best of luck.

Tim BaxterChief Executive Officer

Thank you.

Operator

Your next question comes from Jen Redding from Wedbush Securities. Your line is open.

Jen ReddingWedbush Securities — Analyst

Yeah. Great job, guys, now getting to the light at end of the tunnel. And just a few questions for you. One, are you guys seeing any kind of transfer to stores from digital as location restrictions loosen? And also, just if you can give any color on kind of high-level trends, like just any big changes you’re seeing, you’ve heard a lot about the shift between tops and bottoms and newness and bottoms? And then any category trends that you can see that are new? And then just third, our data shows some very, very strong first-quarter-to-date gross margin trends. And I’m just kind of wondering, as you guys see, I would think the stimulus for $1,400 would kind of come as a nice pleasant surprise opportunity? And if there are any other kind of surprise upside opportunities that you guys see as you can potentially take advantage and capitalize on it as we are at the light at end of the tunnel? Thanks.

Tim BaxterChief Executive Officer

Hi Jen. So there’s a lot to unpack there, but I’m going to try to hit all of it.

Jen ReddingWedbush Securities — Analyst

Thank you.

Tim BaxterChief Executive Officer

We are not seeing a shift away from eCommerce in geographies where we are seeing an increase in-store traffic. Our eCommerce demand continues to be strong. We’re still seeing increases in traffic and conversion. And so we’re not seeing that. I think that was the first part of the question. The second part of the question, in terms of product categories that are working. As I said, we are well positioned to take advantage of every opportunity and recapture our market leadership position in occasion-based categories and wear-to-work based categories as people return to offices and return to celebrations and occasions of all time. We are also developing new core categories like denim and like Express Essential knits, so that we have a great balance and that so when he or she comes to our store or our website, they’re going to be able to build a powerful wardrobe that fulfills all of their needs.

And so I’m very confident that the success we’re seeing and the new core that we’re building will continue and that we will recapture and regain our market leadership position in those wear-to-work and occasion-based categories.

Jen ReddingWedbush Securities — Analyst

Great. Thanks. And then any kind of insight into just kind of potential upside opportunities just near term or thoughts on the stimulus or anything else off the first quarter trends?

Tim BaxterChief Executive Officer

Well, I do — I think we all believe that the stimulus will encourage people who — many of whom haven’t shopped to a great extent in the past year, and many of whom are going to be emerging from an extended quarantine. We do expect that the stimulus check could be a positive tailwind for us, and that that could help drive business as we move into the second quarter. Obviously, vaccinations. And as vaccinations continue to roll out across the country, we believe that is a tailwind. We’re also reissuing our private label credit card, which we believe will be a huge opportunity for us. And we’re, as I said, enhancing our loyalty program and expanding to four tiers and making it much easier for customers to earn rewards. So all of those, I think, are very immediate opportunities for us as we move through the balance of the first quarter and into the second quarter.

Jen ReddingWedbush Securities — Analyst

Great. And just one more, if you have a second, on the — I know you guys did a payments program online. How did that work? I can’t remember if it was Klarna or Afterpay, sorry. But can you comment on that and how your — how you feel about that kind of opportunity and what you’re seeing so far?

Perry PericleousSenior Vice President, Chief Financial Officer and Treasurer

Yeah. From a Klarna standpoint, we’ve seen an increase in the AOV for the customers that are using Klarna. So we’re very pleased. We’re still in the initial stages of this program. But what we’ve seen so far is very encouraging from an AOV and the adoption of the Klarna.

Jen ReddingWedbush Securities — Analyst

Okay. Great. And this fourth quarter was the first quarter that you guys had that live on the platform?

Perry PericleousSenior Vice President, Chief Financial Officer and Treasurer

Yes.

Jen ReddingWedbush Securities — Analyst

Okay. Great. Awesome. Okay. Thanks so much, and great job. Like I said, you guys had a little bit tougher [Indecipherable] just given the nature of your products. So great job navigating to where we are. Thanks a lot.

Tim BaxterChief Executive Officer

Thank you, Jen.

Operator

I would now like to turn the call over back to the management for closing remarks.

Tim BaxterChief Executive Officer

Great. Thank you for joining us, everyone, and we look forward to updating you on the progress of our strategy.

Perry PericleousSenior Vice President, Chief Financial Officer and Treasurer

Thank you.

Operator

[Operator Closing Remarks]

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