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Express Inc (EXPR)
Q4 2019 Earnings Call
Mar 11, 2020, 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. Fourth Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions].
I would now like to hand the conference over to Mr. Dan Aldridge, Vice President, Investor Relations. Please go ahead.
Dan Aldridge -- Vice President, Investor Relations
Thanks. 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 obligations 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 Baxter -- Chief Executive Officer
Thank you, Dan and good morning everyone. I'll start with highlights from the investor event we held in late January at the New York Stock Exchange, where we unveiled our new corporate strategy, presented where Express is headed and how we are going to get there. Perry will then take you through the fourth quarter results and our guidance for the first quarter, and I'll make brief closing comments.
We held an investor event because Express has begun a transformation. We are rebuilding our organization, our brand, and our business and it was important to me to put the work we are doing in the context of a clear comprehensive corporate strategy. The new corporate strategy is called the Expressway Forward. The reference to an Expressway is intentional, because you do not choose that roadway, if you do not plan to move forward with responsible speed and a watchful eye on what is happening around you.
The Expressway Forward outlines the way in which the four foundational pillars, you've heard me talk about before, will be addressed. So if you remember product, brand, customer, and execution. Each one has been flushed out and dimensionalized to provide clarity to ensure that every Express associate understands that our overriding objective is to return the company to profitable growth. The shorthand version of the Expressway Forward is EXPR, which all of you will of course recognize as the ticker symbol for Express. E, is for engaging our customers and acquiring new ones; X is for executing with precision to accelerate our sales and profitability; P is for putting product first; and R is for reinvigorating our brand. The work we will do in each of these areas will define our focus, guide our decisions and in time return our brand to relevance and our business to health.
Let me highlight just a few of the key strategies and initiatives embedded in each one of these areas. Engaging our customers and acquiring new ones. We are building strategies and developing tactics to communicate with customers in different and more impactful ways and we will be measuring our progress in gaining greater share of wallet from the people who already shop with us and enticing those who don't. We will relaunch our Express loyalty program and intend to reissue our Express credit card this fall. We will continue the work I spoke about last quarter to optimize our marketing spend through analytical tools and predictive models. We will increase our use of personalized email and we expect all of this to drive stronger conversion across our channels.
Executing with precision to accelerate sales and profitability. This is very much in progress with a complete redesign of our go-to-market process and we are already driving stronger alignment and better cross-functional coordination in the field, at our corporate office in Columbus, and our design studio in New York while increasing our speed to market by 20% to 25%. Executing with precision is also about inventory optimization and this too is already in progress. We will right size our inventory and speed up our turn by eliminating unproductive inventory and optimizing the composition of our assortments.
To comment on the progress to-date, we have made a significant reduction in our inventory position over the last several months. And while we still have a lot of work to do in order to more consistently calibrate our inventory to our sales trend, the work to date has already resulted in reduced inventory levels and we exited the fourth quarter with inventory down 18% compared to last year, which will enable us to present more new fresh product to our customers as we go forward.
Better execution also means improving conversion. We have a real opportunity to convert at a much higher rate, both in stores and online. To address this in our stores, we are developing an entirely new customer experience model to make it possible for our associates to spend more time on customer service and less time on operational tasks during store hours. And with our new SVP of e-commerce in place as of mid-January, we will be initiating a replatform of our website, which will improve our online conversion and also add new functionality and capabilities.
Putting product first. You've heard me say before, that if we get everything else right, but do not consistently deliver relevant and compelling product, we will not succeed. The centerpiece of our new product vision is called The Express Edit, and while we are still it early stages of this transformation, it is already driving the approach and mindset of our design and merchandising teams. The Express Edit is about focus and curation, it is about standing for those elements of fashion and style we no matter most to our customers. Some of these elements play to the core strengths of the Express brand and our ideas that we were once known for, but let languish. One example is a concept called mix and match versatility, which is about providing the customer with a wardrobe that has the functionality to cover multiple needs and wearing occasions. Our Chief Merchandising Officer has her teams thinking about each category and item and also about the assortment in its totality. So the customer can more easily build a flexible and harder working wardrobe. This aspect of our merchandising approach will come through in key pieces introduced each month that can be worn in multiple ways. And with marketing and in-store imagery, that will bring the versatility message to life for the customer. We began testing this concept in stores and online in February and the response from customers has been very positive.
The new products we have introduced is resonating with our customers, as is evidenced by a very strong sell-through and we are just getting started. For the fourth quarter, the percentage of new product in the women's assortment was approximately 20% and we saw double-digit growth in choices that reflected this newness. We expect that penetration will increase each month with the first season of product that reflects the full impact of our strategy to come in fall. We've also made progress in our men's business, and expect it to be much improved by fall. This timing is based on the way in which we chose to sequence our product initiatives, the fact that our SVP of Men's Merchandising and Outlet joined us not quite two months ago and that our search for a new men's design lead is currently under way.
Reinvigorating our brand. There is white space for a modern versatile dual gender fashion brand that can help people get dressed for every day and any occasion. For us to effectively capture that position, we must clarify our brand message, more closely connect it to our product strategies, and tell the Express story in a powerful and consistent way. At the investor event, we unveiled our new brand purpose creating confidence and inspiring self-expression. This was developed based on research we conducted to understand our target audience and the roles they see our brand playing in their lives. They believe that Express can help the look -- help them look the way they want to look and feel the way that they want to feel. That clothing can serve a higher purpose and empower them to take on new challenges and we believe that too. Our Chief Marketing Officer and her team are working through the comprehensive plan and tactics that will bring this new brand positioning to life. And we expect to launch a campaign in fall.
Engaging our customers and acquiring new ones, executing with precision to accelerate sales and profitability, putting product first and reinvigorating our brand, EXPR. With a great deal still to be done, I will say that a great deal has already been accomplished since becoming CEO not quite nine months ago, we have assembled an exceptional leadership team and each one of these leaders has done an outstanding job advancing the collaboration, alignment, efficiency and results orientation of their teams. We developed a clear comprehensive corporate strategy to focus the company and move the brand and business forward. And at the same time, we made a number of key decisions and took a number of immediate actions to change the trajectory of our business.
We identified $80 million in cost savings opportunities to be achieved over time. We conducted a significant organizational restructure. We executed the first phase of a comprehensive fleet rationalization plan. We designed and implemented a new go-to-market strategy that will allow us to move faster, it's already in place and making a difference. We created a new SVP of e-commerce role, filled it quickly and have begun the work on a complete replatform of our website. We rolled out the new corporate strategy across the organization and have made sure that all associates at all levels and across all functions understand their role in achieving our objectives.
We developed a new brand positioning and are rolling out new brand imagery, and we gathered our field leaders to ensure that they understand how their teams can most strongly represent and compare this new message. And most recently we articulated the values and behaviors that will foster a culture of ownership, accountability, and results orientation, while also making Express a rewarding and fulfilling place to work.
The feedback to the brand positioning and culture work has been incredibly positive. Our leadership team is aligned, our associates are engaged and energized. This organization is ready to get on the Expressway and move forward.
Let me turn the call over to Perry, who will take you through our financial results and provide first quarter guidance.
Perry Pericleous -- Senior Vice President, Chief Financial Officer and Treasurer
Thank you, Tim. I'll start with our fourth quarter results and then discuss our business outlook. Fourth quarter net sales were $607 million, a 3% decrease as compared to $628 million last year. Consolidated comparable sales were negative 3%, retail comps were negative 5% and Express factory outlet store comps were positive 2%.
As Tim mentioned, the new product we were able to deliver sold well, we just didn't have enough. Sales for the fourth quarter were driven by strength in women's casual pants, jackets, and outerwear and in men's knit tops, [Indecipherable] and suits, but this trend was more than offset by weakness in older legacy items within woven tops and sweaters on the women's side and dress shirts and graphic tees in the men's business.
Our merchandise margin contracted by 60 basis points, while we were more strategic with our approach to promotions this was offset by the actions we continued to take to move through clearance inventory as well as products that did not resonate with our customers and didn't align with our go-forward product strategy. These efforts are reflected in our inventory position at the beginning of February, which was down 18%.
Buying and occupancy was flat as a percent of sales. However, it was down on a relative dollar basis as we continued our efforts around rent reductions and other cost savings initiatives. Our fourth quarter gross profit was $164 million, with a gross margin rate of 27%, down 60 basis points as compared to the prior year. SG&A expenses were $149 million, a decrease of $12 million on a GAAP basis compared to last year. As a percentage of sales SG&A came in at 24.5%, leveraging 110 basis points.
On a GAAP basis, operating loss was $190 million, as compared to last year's operating income of $13 million. On an adjusted basis, our operating income for the fourth quarter was $15.1 million, compared to last year's adjusted operating income of $18 million. Operating profit was negatively impacted by two significant charges recorded in the fourth quarter. The first was a pre-tax restructuring charge of $7.3 million related to the previously announced corporate office and field restructuring activity. This charge is recorded as restructuring on the face of the income statement. The second, is a $198 million write-off of our intangible assets. This is a non-cash cash charge stemming from our annual impairment test. The charge was determined primarily used in a market-based approach due to the decline in market capitalization over the past year, but to be clear this charge has no cash flow implications and does not change our confidence in our strategy or the long-term goal of achieving a mid single-digit operating margin.
Fourth quarter loss per share was $2.21 on a GAAP basis, compared to a net loss of $0.02 per diluted share in the fourth quarter of 2018. Adjusted earnings per diluted share was $0.19, flat compared to the fourth quarter of 2018.
For the full year 2019, net sales totaled $2 billion, a decrease of 5% compared with the full year of 2018. Consolidated comparable sales were negative 5%, retail comps were negative 6% and Express factory outlet store comps were negative 1%. The sales decline was mainly driven by the change in our promotional strategy, partially offset by the early results from our strategic initiatives around product, brand customer, and execution.
For the full year 2019 loss per share was $2.49 on a GAAP basis, which compares to earnings per share of $0.13 in 2018. Adjusted diluted loss per share was $0.13 compared to last year's adjusted EPS of $0.32. The full year result were also impacted by the previously mentioned restructuring charge and the non-cash write-off of our intangible assets.
Now turning to our balance sheet and cash flow. Our balance sheet remains extremely healthy and we ended the year with $207 million of cash and cash equivalents as compared to last year's $172 million. This balance includes the results of our share repurchase activity, which totaled 4.3 million shares during the year for $15.6 million. Under our current $150 million share repurchase program, we have repurchased 16.4 million shares for $116 million and we currently have $34 million remaining available.
Fiscal 2019 operating cash flow was $91 million and capital expenditures were $37 million, resulting in free cash flow of $54 million for 2019. Inventories at year-end were $220 million, an 18% decrease as compared to last year's $268 million. The decrease was mainly driven by faster liquidation of underperforming goods. In addition, we made a decision to not buy certain product until we had our strategy and full leadership team in place. The work over the last seven months has significantly reduced our inventory levels and we continue to improve our inventory composition by increasing the penetration of new items in our assortment. Our balance sheet reflects no debt.
With that, I will now address our guidance. For the first quarter of 2020, we currently expect comparable sales to be in the negative mid single digit range. Net loss in the range of $11.5 million to $14 million and loss per diluted share in the range of $0.18 to $0.22. This compares to last year's diluted loss of $0.15.
Our first quarter guidance is impacted by two non-systemic factors and is not indicative of our expectations for the remainder of the year. First, our inventory levels are too low. This was due in part to an aggressive focus on improving inventory trend, which while important to the long-term health of the business was a bit too aggressive in the short term. At the time first quarter was planned, our strategy was in its early stages of development and we did not yet have key design and merchandising leaders in place. We finished the fourth quarter with inventory down 18% and at the end of February, we're down approximately 25%. We're encouraged that the new product is selling at a faster rate than we had anticipated. The bottom line is, this gives us the flexibility to invest appropriately in new product in response to business trends in the back half of the year.
Second, there is volatility surrounding the coronavirus and its impact. There is a possibility of continued implication for some of our raw materials and finished goods vendors as well as consumer spending and traffic. We will continue to monitor the situation closely and do all we can to mitigate any impacts. Our guidance contemplates what we know today about the impact of these factors will have on our business through the first quarter. However, there could be additional impact that is impossible to predict at this time. With that said, these are not systemic factors, and therefore should not negatively impact our long-term goal of achieving a mid single-digit operating margin.
Turning to the full year 2020. We currently expect capital expenditures in the range of $45 million to $50 million to fund a refresh of our stores to ensure consistent representation of our brand across the fleet, new technology investments, and the ongoing maintenance of technology platforms. As it relates to real estate, we expect to close 35 stores as part of our previously announced fleet rationalization and opened two new store locations, one full price and one outlet, that we expect to end the year with 562 stores, consisting of 356 retail stores and 206 outlets.
We currently expect to realize $50 million of the $80 million in cost reduction opportunities from the previously announced corporate and filled restructuring initiatives and improvements in our go-to-market process in 2020. We expect the remaining $30 million in savings to be realized in 2021 and 2020. We look forward to updating you on our progress.
And I will now turn the call back to Tim.
Tim Baxter -- Chief Executive Officer
Thank you Perry. On my first earnings call back in August, I told you that I was confident the Express brand could be restored to relevance and the Express business could be healthy and profitable again. Today, my confidence in the success of this business and our long-term prospects has not wavered. Our transformation is comprehensive and under way, our organization has undergone a great deal of change over the last several months as we introduced a new corporate strategy, new leaders and reporting lines, streamlined our teams, and designed and implemented a completely new go-to-market process. All of this was certainly a lot for our associates to receive and react to in a very relatively short period of time.
Our new go-to-market process is up and running smoothly and we have aligned the organization for the upcoming fall and winter seasons. This along with all of the other initiatives we spoken about will set us up for improved results as we move throughout this year and head into 2021.
Let me be clear. Our first quarter guidance in no way reflects where this business is headed. The challenges facing us in the first quarter are not systemic and we do not expect them to have an impact on our long-term financial goals, but with what we know today, we felt it was prudent to issue guidance at the level we have provided.
As we begin to implement The Expressway Forward strategy and the transformation of our company, we are building on a very strong foundation. This is a well known brand with almost 300 million customer visits across our channels annually. People know Express and they appreciate the quality and value the brand has always offered. And through our new brand mission promise, and purpose, through our new marketing tools and approaches, we will better articulate and differentiate the Express brand. This is a very large customer base and we will earn a greater share of their wallet and also attract new customers through smarter and more targeted marketing and a more compelling experience. This is a product portfolio with the breadth and depth that cover a wide range of customers across an equally wide range of wardrobe needs and wearing occasions. We are taking some of the core strengths of Express and building upon them, with a more modern versatile sensibility.
This is an organization galvanized around the new corporate strategy and a clear set of objectives and initiatives. This is a company with extremely solid financials and a sharp focus on cost reduction. We have already identified $80 million in cost reduction opportunities and will generate additional profit improvements through the fleet rationalization plans we announced in late January. We have no long-term debt and we ended the year with over $200 million in cash on hand and we continue to generate free cash flow.
I am confident that Express has a very bright future and that we will return the brand to relevance and achieve our goal of a mid single-digit operating margin over time. This will not happen overnight and it will not happen in a single quarter but Expressways are made for going the distance and we will.
As the coronavirus situation continues, our primary concern is for the health and safety of our associates and our customers. So, we are following all of the CDC's recommended protocols in our offices and our stores. Due to the uncertainty of this situation and its implications for consumers and businesses, we will continue to monitor it closely and do our best to mitigate its impact wherever possible.
I'll now turn the call back to the operator, so we can take your questions.
Questions and Answers:
Operator
[Operator Instructions] Your first question comes from Susan Anderson with B. Riley FBR.
Susan Anderson -- B. Riley FBR, Inc. -- Analyst
Hi, good morning. Thanks for taking my question. I guess on the gross margin for first quarter, how are you thinking about the puts and takes? And what are your thoughts around the promotional environment, which I guess could change given the macro uncertainties? I think you said last quarter though you had talked about, you still needed to clear some old product in the first half, the inventory looks very, very clean. So just wondering if that's the case and if not, should we expect a pull back sequentially? Thanks.
Perry Pericleous -- Senior Vice President, Chief Financial Officer and Treasurer
Thank you, Susan. This is Perry. From a gross margin standpoint in the first quarter, we expect there is going to be a contraction of approximately 125 basis points. When you look at the 125 basis contraction, it's booking between merchandise margin and B&O. From a merchandise margin standpoint, we expect a contraction of about 100 basis point and that contraction is coming in the form of one is the air ocean as we are accelerating and pulling forward some receipts into Q1 in the expectation that, that's going to have on our AUC. Two, is the impact on tariffs from last year that we're expecting in Q1. And then number three, is based on the [Indecipherable] that we had from an inventory standpoint in Q1 is the mix of red line to known red line product in Q1.
Having said that when we move to the B&O line item, even though we expect B&O to be down as a percent to outweigh approximately mid single-digits. From a leverage standpoint, we expect that to deleverage at about 25 basis points given the decline in top line sales and looking at the mid-single digit negative comp.
Tim Baxter -- Chief Executive Officer
But Susan, it's Tim. I would just add that, yes, our inventory is very lean and it is still not appropriately balanced though between new and old product. So while it is significantly lower than a year ago the penetration of product that does not reflect our go-forward strategy is still higher than I'd like it to be. So we're still working through some of that product as we move through the first quarter.
Susan Anderson -- B. Riley FBR, Inc. -- Analyst
Great. That's helpful. And then if I could just add a follow-up Tim, on the new product, maybe if you could give some more color of how it's doing in the stores, it sounds like it's selling very well. I thought it looked much improved in the stores and maybe if you could talk about what the percent mix is now of kind of new versus old versus last quarter? And I guess what's selling well and what still needs some work? Thanks.
Tim Baxter -- Chief Executive Officer
Yeah absolutely. So coming out of the fourth quarter, new was about 20% of our inventory. That percentage will increase as we move throughout the year. I don't want to put exact numbers to it, but it will increase obviously as we move throughout the year, but it's important to note that when I -- when I joined the company last June, we were still on nearly -- we were still on our old go-to-market process and much of the first quarter had been put to bed. So we have been scrambling obviously and doing a lot of hard work to change the on order for the first quarter and the new product that we put in -- to your -- to your point and to what I have said is performing very, very well. We started attacking the categories that needed the most work and you've heard me talk a lot about women's tops, that was a category that we were not performing well in at all and our performance in women's tops has improved very dramatically with the introduction of new product in both woven and knits and we also had some success in new sweaters in the fourth quarter. So very, very happy with where we are in women's tops and very confident that our women's tops business is going to continue to accelerate as we move throughout the year.
We also recognize that there are pretty significant opportunity in women's denim. That's another category that's gone through a complete rereinvent we have launched, not only new fabrics, and new fabric platforms, but also new fits moving away from just the skinny and legging fit, which was 100% of our assortment when I joined the company and now having introduced a number of new leg shapes, all of which are resonating with the consumer. So in addition to that we had great success in women's jackets, that's a category that we have always been known for and we've got great success with the jackets we've introduced.
Men's, we've had similar success although as I said in my comments, we are a bit further behind and that was intentional. We attacked the women's business first because it needed the most work, but we have seen also success in men's denim, our men's denim business continues to be very good, very strong. Our men's clothing or tailored clothing suits business very, very strong. We still need to do some work, however in shirts in men's. A lot of work to be done in shirts in men's and we're making progress on that.
Susan Anderson -- B. Riley FBR, Inc. -- Analyst
Great, that's very helpful. Thanks for all the details. Good luck next quarter.
Tim Baxter -- Chief Executive Officer
Thank you, Susan.
Operator
Next question comes from Paul Trussell with Deutsche Bank.
Gabriella Carbone -- Deutsche Bank -- Analyst
Hi, good morning. This is Gabriella Carbone on for Paul, thanks for taking our question. So at the Analyst Day you spoke about reengineering your go-to-market process and you've mentioned that today. I was wondering if you can provide an update there and when we should start to see those benefits?
Matt Moellering -- President and Chief Operating Officer
Sure. Yeah, this is Matt. So we rolled out as we talked in the -- at the investor meeting, we rolled out the go-to-market process to the organization in late January early February. We have now finished two of the key milestone meetings and the associates have really embraced this process, even more so than we originally anticipated. So we are very pleased with where we are from a change management perspective with this process. What will happen is this process we have will impact Q4 as Tim talked about fall/winter seasons will be the first time we see the impact of this new process, but a lot of high level of coordination and alignment upfront and should lead to very strong product offering in the back half of the year.
The three development pathways that go along with the go-to-market process are in-flight, so we will see some impact associated with that, around insta-buys co-creation etc. a little bit in Q2 more in Q3 as well, but in full force in Q4.
Gabriella Carbone -- Deutsche Bank -- Analyst
Got it, thanks. So just a quick follow-up. Want to ask about the outlet channel and what drove that positive comp into 4Q. Are you seeing better traffic trends in that segment or is it more conversion story?
Tim Baxter -- Chief Executive Officer
It's a combination of things. Number one, we have not reduced inventory levels in the outlet channel to the extent we have with the retail channel. So number one, we did pull back a little too far on inventories. We talked about in our prepared remarks, in the retail side of the business, that wasn't the case in outlet. Traffic is a little bit better in that channel as well.
Matt Moellering -- President and Chief Operating Officer
We also have not -- we also have not pulled back on promotion in that channel. In fact, we're going to push forward with that channel being our promotional channel as we continue to pull back on the deep store wide and site wide promotions within our full price business.
Gabriella Carbone -- Deutsche Bank -- Analyst
Thank you so much. That's helpful.
Operator
Next question comes from Marni Shapiro with Retail Tracker.
Marni Shapiro -- The Retail Tracker -- Analyst
Hi guys, congratulations. The stores look really much better.
Tim Baxter -- Chief Executive Officer
Thanks Marni.
Marni Shapiro -- The Retail Tracker -- Analyst
I have two quick questions. First is the collaboration with Tan France, obsessed, I love it, you guys have done collaborations in the past with sports figures and things like that. Could you talk about maybe your thoughts going forward with things like Tan France and the sports figures? And then I just want to follow up on the supply -- on the supply chain question.
Tim Baxter -- Chief Executive Officer
Okay. So you know I'm glad you are obsessed with Tan. He has been a great asset for us. What I would say about collaborations going forward is that they will be very closely aligned with our brand purpose. So when you think about our purpose and promise creating confidence and inspiring self-expression, when we talked to Tan, there are very few people who do a better job of creating confidence and inspiring self-expression in the people that he works with. So he was perfectly aligned with our new brand mission, which is why we chose to work with him for this spring season. The consumer engagement with him has been incredible, his engagement with our brand has been incredible. So very, very excited about that.
So going forward, whatever we do, I've said this over and over, whatever we do is going to be aligned with our Expressway Forward strategy, it will be aligned with our brand purpose and our brand promise. And hopefully you'll be able to see a very close connection between our brand purpose and our brand promise and who we choose to collaborate with going forward.
Marni Shapiro -- The Retail Tracker -- Analyst
Fantastic. And then if I could just follow up, I think Perry, you mentioned that there would be some impact because you put things in the air rather than on the boat, but as factories are now starting to open, we know there are some delays in fabrications and things like that, some port congestion, if you could just give us any idea -- have you had to shift a lot of product for third quarter -- you're dealing with shifting product for third quarter already, sort of any forward look as to how much is going, what kind of impact you are going have as far as shifting product around?
Tim Baxter -- Chief Executive Officer
So we have done a good job of mitigating risk where appropriate. One of the things that has happened though, we did use China for a lot of our chase, it represents a little less than 2% of our total finished product -- production to your point there is a fair amount of fabric created in China, but as we entered Q1, with very lean inventory positions, one of the things that happen coming out of Chinese New Year, we use China for a lot of our chase product, the delay of factories opening two weeks to four weeks created an issue where we weren't able to chase aggressively into the things we thought were working for -- the back half of Q1 and into early Q2. We're monitoring the situation right now. Total finished product, we think less than 5% will be impacted by three weeks to four weeks of delay at this point. To your point, with port congestion, we're watching that carefully both on air and boat, as everybody tries to catch up on product deliveries. So we'll see more about what that looks like in the coming months.
Marni Shapiro -- The Retail Tracker -- Analyst
Fantastic. Thank you guys.
Tim Baxter -- Chief Executive Officer
Thanks, Marni.
Operator
Next question comes from Janet Kloppenburg with JJK Research.
Janet Kloppenburg -- JJK Research -- Analyst
Good morning everyone. I was wondering first if you could talk a little bit about how much of the disruption in supply chain and possible traffic in your domestic stores, we're hearing people are starting to experience slowdowns, is embedded in your guidance or if that is, is a level of uncertainty that could come later. So I'd love you to talk about that.
I'd also love you to talk about where you expect your inventory levels to be at the end of the first quarter and when we should expect them to be where you're most comfortable with? And another question I have is given that the content of the inventory is going to continue to improve, I'm wondering what the outlook is for gross margins as we move throughout the year. If you see a scenario where your quarterly gross margins could begin to improve and I guess there is some uncertainty around airfreight, but if you could talk us through those points I would appreciate it. Thank you.
Tim Baxter -- Chief Executive Officer
Sure. Thank you, Janet. As I said, there is clearly a tremendous amount of volatility and therefore uncertainty around the coronavirus situation. I think like many of my fellow CEOs I'm obviously playing close attention with the entire team here to all of the potential impacts from supply chain to traffic, but I'm also remaining very, very focused and keeping our executive team really focused on controlling what is ours to control. The objectives and the initiatives of our strategy, because that is the work that we need to stay focused on because over time that's the work that's going to return our brand relevance and our business to financial health. So great uncertainty around that.
To your inventory question you know obviously a bit lower right now than where we would like to be, but making progress as we move toward the end of Q1. I think that we'll be most comfortable with where our inventory positions are at by Q3 and that statement applies not just to the level of inventory that we will have, but also the composition of the inventory that we'll have. So Q3 I think is where we will be most comfortable. And I do think that because of the -- because of -- because of that and because the penetration of newness is going to continue to improve and we're going to continue to pull back on the deep store wide and site wide promotions and that gets better as we move throughout the year, that yes there is an outlook. I do have an outlook that our margins will improve as we move throughout the year.
Janet Kloppenburg -- JJK Research -- Analyst
Okay. And if I could just follow up. On the first quarter guidance and the mid-single digit comp decline outlook, is that more reflective of what's happening now or did you embed some outlook or perhaps have some traffic slowdowns because of what's going on with the virus. And maybe I know you don't break out digital, but we're hearing that digital is we think some benefit of the fact that social distancing is coming into play and people aren't going out as much. So maybe if you could talk a little bit about what's in the first quarter guidance with respect to the macro uncertainty that we're learning about? Thank you.
Tim Baxter -- Chief Executive Officer
Yeah. Obviously we are later than many of our peers. So we have had more time to understand the potential impact. So embedded in our guidance -- embedded in our guidance as always is where we are and what we have seen to date and our best estimation of the impact that will have on our strategies going forward. So our guidance is built exactly as it always is, so it includes what has happened over the past several weeks. However, as I said there is tremendous volatility and great uncertainty around the situation. So it's impossible to accurately predict what might happen in the coming weeks and months.
That being said, the second part of your question Janet, on online and the shift to online. What I'm very excited about is that while we don't break out sales, we have a very, very powerful online business and so we are prepared to service our customer in that way, should the customer choose to shop more online than in physical retail stores in the near future.
Janet Kloppenburg -- JJK Research -- Analyst
Okay, great. And then Perry, if you could just talk about the SG&A outlook for the fourth -- for the first quarter, I know you have maybe about $55 million of the $80 million program is going to be incurred this year, at least that's my understanding. And I'm wondering if you could give us an idea of how that looks on a quarterly basis or whether first quarter offsets with respect to those reductions? Thank you.
Perry Pericleous -- Senior Vice President, Chief Financial Officer and Treasurer
Yeah. Hi Janet. We are expecting for Q1 as a percent to [Indecipherable] to be down approximately negative low-single digits and we do expect Q1 from a basis points to contract about 75 basis points and that is a result of the comp guidance. As we look at the expense savings that we announced and which is about $50 million worth of this expense savings, we're expecting them to come in for the year. We're expecting -- and this is just an approximation right now, but we're expecting these savings to be roughly evenly throughout the quarters. I would look for approximately $12 million to $14 million on a range basis by quarter to achieve over the next several quarters. And that's what embedded within Q1. One thing to remind you is that some of the savings are coming both in terms of both SG&A and B&O because the restructuring actions that we have taken as well as the rent reductions, that we're expecting those are heading -- the rent is hitting the B&O while the restructuring is hitting both SG&A and B&O.
The other thing I want to remind you is that we're expecting a certain level of headwinds from an expense standpoint as it relates to expenses and that is in the form of merit increases, minimum wage increases, technology investments that we're making. They're hitting the SG&A and then obviously depending on -- obviously the performance is a short-term and long term goals -- incentive goals.
Janet Kloppenburg -- JJK Research -- Analyst
Okay, great. Stores look a lot better. So let's -- we're watching closely.
Tim Baxter -- Chief Executive Officer
Thanks Janet.
Operator
[Operator Instructions] We have a question from Roxanne Meyer with MKM Partners.
Roxanne Meyer -- MKM Partners -- Analyst
Great. Good morning, thanks for taking my question. First, I just wanted to find out as it relates to your outlet business, how reliant you are on tourism for outlets? And are you embedding a slowdown in outlets in your guidance?
Tim Baxter -- Chief Executive Officer
So we have not disclosed exactly the tourist component. Frankly it's somewhat hard to get out as well. I think it's really centered dependent as well. There are certainly tourist dependent outlet malls in warm weather locations, particularly on the coasts others are much less dependent on tourism. So center of the country and malls that we have converted from outlet or from retail to outlet stores are much less dependent on tourism.
Roxanne Meyer -- MKM Partners -- Analyst
Okay. And then just I guess digging into the merchandise margin outlook a bit more. I know you pointed to three sources of decline. I'm wondering if you're willing to quantify each of those as they roll up to the 125 basis points? And then, specifically as it relates to the mix of red lines and non-red lines. I would assume that that would be more favorable than perhaps you may have expected before, simply because you're entering the quarter with so much less inventory. So I'd love some more color around that. Thank you.
Perry Pericleous -- Senior Vice President, Chief Financial Officer and Treasurer
Yeah, from quantifying the -- kind of a clarification on the merchandise margin expectation is about 100 basis points. The gross margins there is 125. So merchandise margin are 100 basis points, I would say that the vast majority of the impact is the mix of selling between non-red line and red line merchandise. And then the remaining is evenly split between the erosion in the tariffs. Again the tariffs, if you remember better the timing from last year Q1, really didn't have an impact and this is where we're seeing that impact coming through.
There was second part of your question around --.
Roxanne Meyer -- MKM Partners -- Analyst
Just appreciating the mix and you know whether or not it's perhaps more favorable than before just knowing how much you've sold through some of that inventory.
Perry Pericleous -- Senior Vice President, Chief Financial Officer and Treasurer
Well couple of things there. Yes, we sold a lot through over the last few months and the inventory composition is better, but then at the same time though we have entered the quarter with down 18% in inventory and that inventory -- that reduction is also new deliveries and if that impact the units in Q1 in terms of that mix. So yes, we are better positioned from a red line standpoint, but it's still impacting in our mix in Q1.
Tim Baxter -- Chief Executive Officer
And what I would say Roxanne, is that we have been more aggressive in moving through those red lines at a much faster clip than we have historically. So while we certainly own less and I'm very confident in where we're going to be positioned as I said, the composition of the inventory is going to get better and better as we move throughout the year. The penetration of sales and red lines, even though the inventory is significantly down from where we were a year ago in red lines, the sales are actually up. If that makes sense. So we're actually driving through the inventory much, much faster. We're turning through our red lines faster and as well, because we've been more aggressive in liquidating that product.
Matt Moellering -- President and Chief Operating Officer
And the silver line, so we are down as we talked about down, at the end of February, down 25% in inventory. The silver lining here is that while people maybe heavy in inventory given the coronavirus situation, we are very nimble and flexible at this point with our inventory levels. We can infuse newness into our assortment, where a lot of people will probably be more cutting inventory and trying to liquidate what they have, which can potentially put us on a competitive advantage as we head into Q2.
Roxanne Meyer -- MKM Partners -- Analyst
Okay, great. Thanks for all the color and best of luck.
Tim Baxter -- Chief Executive Officer
Thanks, Roxanne.
Operator
At this time, I will turn the call over to the presenters.
Tim Baxter -- Chief Executive Officer
Thank you for joining us this morning, everybody.
Operator
[Operator Closing Remarks]
Duration: 51 minutes
Call participants:
Dan Aldridge -- Vice President, Investor Relations
Tim Baxter -- Chief Executive Officer
Perry Pericleous -- Senior Vice President, Chief Financial Officer and Treasurer
Matt Moellering -- President and Chief Operating Officer
Susan Anderson -- B. Riley FBR, Inc. -- Analyst
Gabriella Carbone -- Deutsche Bank -- Analyst
Marni Shapiro -- The Retail Tracker -- Analyst
Janet Kloppenburg -- JJK Research -- Analyst
Roxanne Meyer -- MKM Partners -- Analyst
