Market Overview

Express, Inc. Exceeds Second Quarter 2018 EPS Guidance; Introduces Third Quarter Guidance and Raises Full Year 2018 Outlook

Share:
  • Second quarter comparable sales increased by 1%
  • Second quarter diluted earnings per share (EPS) of $0.03
  • E-commerce sales increased 37%, accounting for 25% of net sales
  • Gross and operating margins expanded in the second quarter relative
    to the prior year
  • Further optimized store footprint by converting 27 retail stores to
    outlets during second quarter
  • Strong balance sheet maintained with $191 million in cash and no
    debt
  • Repurchased 6.1 million shares for $49 million to date under
    existing $150 million share repurchase program

Express, Inc. (NYSE:EXPR), a specialty retail apparel company,
announced its financial results for the second quarter of 2018. These
results, which cover the thirteen weeks ended August 4, 2018, are
compared to the thirteen weeks ended July 29, 2017. Comparable sales for
the second quarter of 2018 were calculated using the 13-week period
ended August 4, 2018, as compared to the 13-week period ended August 5,
2017.

David Kornberg, the Company's president and chief executive officer,
stated: "Our second quarter performance represents another step forward
in our pursuit of returning Express to sustainable and profitable
long-term growth. Comparable sales grew for the second consecutive
quarter, and for the third consecutive quarter we increased earnings
relative to the prior year. E-commerce had another exceptional quarter,
with sales increasing 37%, on top of 28% growth achieved in the prior
year period."

Mr. Kornberg continued, "As we look to the balance of the year, we are
focused on continuing to drive growth through important initiatives
across product, brand, and customer experience. We are excited about our
fall and holiday assortments and expect continued strong sales momentum
in our e-commerce business. Our launch of extended sizes is performing
well and we are seeing success build from our expanded omni-channel
capabilities, both of which are expected to deliver more benefit in the
second half of 2018 and into 2019. Our financial position remains strong
with $191 million in cash at quarter end and no debt. Under our $150
million share repurchase program, we have repurchased $49 million, or
6.1 million shares to date, underscoring our confidence in the business
and commitment to driving shareholder value."

Second Quarter 2018 Operating Results:

  • Net sales increased 3% to $493.6 million from $481.2 million in the
    second quarter of 2017.
  • Comparable sales (including e-commerce sales) increased 1%, compared
    to a 4% decrease in the second quarter of 2017.
  • E-commerce sales increased 37% year over year to $123.9 million.
  • Gross margin improved 60 basis points to 28.4% of net sales compared
    to 27.8% in last year's second quarter. The improvement was driven by
    a 70 basis point decrease in buying and occupancy costs as a
    percentage of net sales, partially offset by a 10 basis point decrease
    in merchandise margin. In the second quarter of 2017, gross profit was
    negatively impacted by a $1.3 million inventory adjustment related to
    the exit of Canada.
  • Selling, general, and administrative (SG&A) expenses were $137.7
    million versus $134.2 million in last year's second quarter. As a
    percentage of net sales, SG&A expenses were flat at 27.9%.
  • Operating income was $2.7 million. This compares to an operating loss
    of $16.0 million in the second quarter of 2017. The operating loss in
    the second quarter of 2017 included a $17.6 million impact related to
    the exit of Canada.
  • Income tax expense was $1.0 million, at an effective tax rate of
    30.5%, compared to an income tax benefit of $4.3 million, at an
    effective tax rate of 26.6% in last year's second quarter. The
    effective tax rate for the second quarter of 2017 included a benefit
    of $5.1 million related to the exit of Canada.
  • Net income was $2.2 million, or $0.03 per diluted share. This compares
    to a net loss of $11.9 million, or $(0.15) per diluted share, in the
    second quarter of 2017. Adjusted Net Income (a non-GAAP financial
    measure) in the second quarter of 2017 was $0.7 million, or $0.01 per
    diluted share. Refer to Schedule 4 for a reconciliation of GAAP to
    non-GAAP net income.
  • Real estate activity for the second quarter of 2018 is presented in
    Schedule 5.

Second Quarter 2018 Balance Sheet Highlights:

  • Cash and cash equivalents totaled $190.8 million versus $173.3 million
    at the end of the second quarter of 2017.
  • Capital expenditures totaled $17.4 million for the twenty-six weeks
    ended August 4, 2018, compared to $30.2 million for the twenty-six
    weeks ended July 29, 2017.
  • Inventory was $270.4 million compared to $256.0 million at the end of
    the prior year's second quarter.

Share Repurchase Program:

On November 28, 2017, the Company's Board of Directors approved a new
share repurchase program that authorized the Company to repurchase up
to $150 million of the Company's outstanding common stock using
available cash. Under this program, the Company has repurchased 6.1
million shares for $49.3 million, including 1.8 million shares for $16.4
million during the second quarter of 2018. Approximately $101
million remains available under the share repurchase program. The
Company's third quarter and full year 2018 guidance reflects share
repurchases made to date, however does not contemplate any future share
repurchases.

Revenue Recognition:

Effective February 4, 2018, the Company adopted the new revenue
recognition standard ("ASC 606") on a full retrospective basis. As a
result, the condensed consolidated financial statements as of February
3, 2018 and for the thirteen and twenty-six weeks ended July 29, 2017,
have been recast. For additional information, regarding the adjustments
see Exhibit 99.3 to the Company's Form 8-K filed with the SEC on March
14, 2018.

2018 Guidance:

The Company notes that 2018 is a fifty-two week period as compared to a
fifty-three week period in 2017. The fifty-third week was in the fourth
quarter and contributed approximately $0.04 in diluted EPS in 2017. The
table below compares the Company's projected results for the thirteen
week period ended November 3, 2018 to the actual results for the
thirteen week period ended October 28, 2017.

   
Third Quarter 2017
Third Quarter 2018 Guidance Actual Results
Comparable Sales -1% to 1% -1%
Effective Tax Rate Approximately 29% 40.9%(1)
Interest Income/(Expense), Net $0.1 million $(0.6) million
Net Income $6.0 to $8.0 million $6.0 million(1)
Diluted EPS $0.08 to $0.11 $0.08 (1)
Weighted Average Diluted Shares Outstanding 74.4 million 78.9 million
 

(1)

 

Retrospectively adjusted to reflect adoption of the new revenue
recognition accounting standard. For additional information
regarding the adjustments see Exhibit 99.3 to the Company's Form
8-K filed with the SEC on March 14, 2018.

 

The table below compares the Company's projected results for the
fifty-two week period ended February 2, 2019 to the actual results for
the fifty-three week period ended February 3, 2018.

   
Full Year 2017
Full Year 2018 Guidance Actual Results
Comparable Sales 0% to 1% -3%
Effective Tax Rate Approximately 32%(1) 34.6%(2,4)
Interest Income/(Expense), Net $0.6 million $(2.2) Million
Net Income $32.5 to $36.5 million $18.9 million(2,3,4)
Adjusted Net Income N/A $28.9 million (4,5)
Diluted EPS $0.43 to $0.49 $0.24 (2,3,4)
Adjusted Diluted EPS N/A $0.37 (4,5)
Weighted Average Diluted Shares Outstanding 75.0 million 78.9 million
Capital Expenditures $58 to $63 million $57.4 million
 
(1)   The Company's effective tax rate for the full year is expected to be
above its operating tax rate of approximately 28% due to certain
discrete tax items.
(2) Includes a net $12.1 million tax benefit related to the exit of
Canada, as well as a $2.1 million net tax benefit related to tax
reform, specifically the re-measurement of the Company's deferred
taxes.
(3) Includes $24.2 million in restructuring costs and inventory
adjustments related to the exit of Canada.
(4) Retrospectively adjusted to reflect adoption of the new revenue
recognition accounting standard. For additional information
regarding the adjustments see Exhibit 99.3 to the Company's Form 8-K
filed with the SEC on March 14, 2018.
(5) Adjusted Net Income and Adjusted Diluted EPS are non-GAAP financial
measures. Refer to Schedule 4 for a reconciliation of GAAP to
Non-GAAP financial measures.
 

This guidance does not take into account any additional non-core items
that may occur.

See Schedule 5 for a discussion of projected real estate activity.

Conference Call Information:

A conference call to discuss second quarter 2018 results is scheduled
for August 29, 2018 at 9:00 a.m. Eastern Time (ET). Investors and
analysts interested in participating in the call are invited to dial
(877) 705-6003 approximately ten minutes prior to the start of the call.
The conference call will also be webcast live at: investors.express.com
and remain available for 90 days. A telephone replay of this call will
be available at 12:00 p.m. ET on August 29, 2018 until 11:59 p.m. ET on
September 5, 2018 and can be accessed by dialing (844) 512-2921 and
entering replay pin number 13681535.

About Express, Inc.:

Express is a specialty retailer of women's and men's apparel and
accessories, targeting the 20 to 30-year-old customer. Express has more
than 35 years of experience offering a distinct combination of fashion
and quality for multiple lifestyle occasions at an attractive value
addressing fashion needs across work, casual, jeanswear, and going-out
occasions. The Company currently operates more than 600 retail and
factory outlet stores, located primarily in high-traffic shopping malls,
lifestyle centers, and street locations across the United States and
Puerto Rico. Express merchandise is also available at franchise
locations and online in Latin America. Express also markets and sells
its products through its e-commerce website, www.express.com,
as well as on its mobile app.

Forward-Looking Statements:

Certain statements are "forward-looking statements" made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act
of 1995. Forward-looking statements include any statement that does not
directly relate to any historical or current fact and include, but are
not limited to, (1) guidance and expectations for the third quarter and
full year 2018 and 2019, including statements regarding expected
comparable sales, effective tax rates, interest expense, net income,
diluted earnings per share, and capital expenditures, (2) statements
regarding expected store openings, store closures, store conversions,
and gross square footage, and (3) statements regarding the Company's
strategy, plans, and initiatives, including, but not limited to, results
expected from such strategy, plans, and initiatives. Forward-looking
statements are based on our current expectations and assumptions, which
may not prove to be accurate. These statements are not guarantees and
are subject to risks, uncertainties, and changes in circumstances that
are difficult to predict, and significant contingencies, many of which
are beyond the Company's control. Many factors could cause actual
results to differ materially and adversely from these forward-looking
statements. Among these factors are (1) changes in consumer spending and
general economic conditions; (2) our ability to identify and respond to
new and changing fashion trends, customer preferences, and other related
factors; (3) fluctuations in our sales, results of operations, and cash
levels on a seasonal basis and due to a variety of other factors,
including our product offerings relative to customer demand, the mix of
merchandise we sell, promotions, and inventory levels; (4) customer
traffic at malls, shopping centers, and at our stores; (5) competition
from other retailers; (6) our dependence on a strong brand image; (7)
our ability to adapt to changing consumer behavior and develop and
maintain a relevant and reliable omni-channel experience for our
customers; (8) the failure or breach of information systems upon which
we rely; (9) our ability to protect customer data from fraud and theft;
(10) our dependence upon third parties to manufacture all of our
merchandise; (11) changes in the cost of raw materials, labor, and
freight; (12) supply chain or other business disruption; (13) our
dependence upon key executive management; (14) our ability to execute
our growth strategy, including improving profitability, providing an
exceptional brand and customer experience, transforming and leveraging
our systems and processes, and cultivating a strong company culture, and
achieving our strategic objectives, including delivering compelling
merchandise at an attractive value, investing in growing brand awareness
and retaining and acquiring new customers to the Express brand, growing
e-commerce sales and expanding our omni-channel capabilities, optimizing
our store footprint, and managing our overall cost structure; (15) our
substantial lease obligations; (16) our reliance on third parties to
provide us with certain key services for our business; (17) impairment
charges on long-lived assets; (18) claims made against us resulting in
litigation or changes in laws and regulations applicable to our
business; (19) our inability to protect our trademarks or other
intellectual property rights which may preclude the use of our
trademarks or other intellectual property around the world; (20)
restrictions imposed on us under the terms of our asset-based loan
facility, including restrictions on the ability to effect share
repurchases; and (21) changes in tax requirements, results of tax
audits, and other factors that may cause fluctuations in our effective
tax rate. Additional information concerning these and other factors can
be found in Express, Inc.'s filings with the Securities and Exchange
Commission. We undertake no obligation to publicly update or revise any
forward-looking statement as a result of new information, future events,
or otherwise, except as required by law.

     
Schedule 1

Express, Inc.

Consolidated Balance Sheets

(In thousands)

(Unaudited)

 
August 4, 2018 February 3, 2018 (1) July 29, 2017 (1)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 190,845 $ 236,222 $ 173,314
Receivables, net 11,278 12,084 14,948
Inventories 270,445 260,728 255,998
Prepaid minimum rent 30,734 30,779 30,187
Other 23,998   24,319   35,691  
Total current assets 527,300 564,132 510,138
 
PROPERTY AND EQUIPMENT 1,058,171 1,047,447 1,029,902
Less: accumulated depreciation (677,611 ) (642,434 ) (598,262 )
Property and equipment, net 380,560 405,013 431,640
 
TRADENAME/DOMAIN NAMES/TRADEMARKS 197,618 197,618 197,618
DEFERRED TAX ASSETS 7,372 7,346 8,011
OTHER ASSETS 13,407   12,815   13,100  
Total assets $ 1,126,257   $ 1,186,924   $ 1,160,507  
 
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 143,727 $ 145,589 $ 166,479
Deferred revenue 38,946 41,240 31,885
Accrued expenses 86,368   110,563   108,146  
Total current liabilities 269,041 297,392 306,510
 
DEFERRED LEASE CREDITS 132,181 137,618 140,321
OTHER LONG-TERM LIABILITIES 101,345   103,600   88,040  
Total liabilities 502,567 538,610 534,871
 
COMMITMENTS AND CONTINGENCIES
 
Total stockholders' equity 623,690   648,314   625,636  
Total liabilities and stockholders' equity $ 1,126,257   $ 1,186,924   $ 1,160,507  
 
(1)   The Company's balance sheet as of February 3, 2018 and July 29, 2017
have been updated to reflect the adoption of Accounting Standards
Update No. 2014-09, Revenue From Contracts with Customers (ASC 606)
under the full retrospective method on February 4, 2018.
 
   
Schedule 2
Express, Inc.
Consolidated Statements of Income

(In thousands, except per share amounts)

(Unaudited)

 
Thirteen Weeks Ended Twenty-Six Weeks Ended
August 4, 2018   July 29, 2017 (1) August 4, 2018   July 29, 2017 (1)
NET SALES $ 493,605 $ 481,209 $ 972,957 $ 955,401

COST OF GOODS SOLD, BUYING AND OCCUPANCY COSTS

353,202   347,452   689,392   689,363  
Gross profit 140,403 133,757 283,565 266,038
OPERATING EXPENSES:
Selling, general, and administrative expenses 137,655 134,169 278,289 266,508
Restructuring costs 16,340 22,611
Other operating (income) expense, net 71   (724 ) (176 ) (323 )
Total operating expenses 137,726 149,785 278,113 288,796
 
OPERATING INCOME/(LOSS) 2,677 (16,028 ) 5,452 (22,758 )
 
INTEREST (INCOME)/EXPENSE, NET (38 ) 696 136 1,493
OTHER INCOME, NET (500 ) (525 ) (500 ) (537 )
INCOME/(LOSS) BEFORE INCOME TAXES 3,215 (16,199 ) 5,816 (23,714 )
INCOME TAX EXPENSE/(BENEFIT) 981   (4,308 ) 3,065   (9,155 )
NET INCOME/(LOSS) $ 2,234   $ (11,891 ) $ 2,751   $ (14,559 )
 
EARNINGS PER SHARE:
Basic $ 0.03 $ (0.15 ) $ 0.04 $ (0.19 )
Diluted $ 0.03 $ (0.15 ) $ 0.04 $ (0.19 )
 
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 73,958 78,786 74,683 78,616
Diluted 74,675 78,786 75,399 78,616
 
(1)   The Company's income statement for the thirteen and twenty-six weeks
ended July 29, 2017 has been updated to reflect the adoption of
Accounting Standards Update No. 2014-09, Revenue From Contracts with
Customers (ASC 606) under the full retrospective method on February
4, 2018.
 
 

Schedule 3

Express, Inc.
Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 
Twenty-Six Weeks Ended
August 4, 2018   July 29, 2017(1)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income/(loss) $ 2,751 $ (14,559 )
Adjustments to reconcile net income/(loss) to net cash provided by
operating activities:
Depreciation and amortization 42,434 45,258
Loss on disposal of property and equipment 301 1,256
Impairment charge 5,479
Loss on deconsolidation of Canada 10,672
Share-based compensation 7,266 7,460
Deferred taxes (25 ) 2,264
Landlord allowance amortization (5,970 ) (6,537 )
Other non-cash adjustments (500 ) (500 )
Changes in operating assets and liabilities:
Receivables, net 806 415
Inventories (9,717 ) (23,549 )
Accounts payable, deferred revenue, and accrued expenses (30,379 ) (8,560 )
Other assets and liabilities 906   (8,898 )
Net cash provided by operating activities 7,873 10,201
 
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (17,389 ) (30,154 )
Decrease in cash and cash equivalents resulting from deconsolidation
of Canada
  (9,232 )
Net cash used in investing activities (17,389 ) (39,386 )
 
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on lease financing obligations (916 ) (835 )
Repayments of financing arrangements (303 ) (2,040 )
Repurchase of common stock under share repurchase program (32,000 )
Repurchase of common stock for tax withholding obligations (2,642 ) (1,562 )
Net cash used in financing activities (35,861 ) (4,437 )
 
EFFECT OF EXCHANGE RATE ON CASH (437 )
 
NET DECREASE IN CASH AND CASH EQUIVALENTS (45,377 ) (34,059 )
CASH AND CASH EQUIVALENTS, Beginning of period 236,222   207,373  
CASH AND CASH EQUIVALENTS, End of period $ 190,845   $ 173,314  
 
(1)   The Company's cash flow statement for the twenty-six weeks ended
July 29, 2017 has been updated to reflect the adoption of Accounting
Standards Update No. 2014-09, Revenue From Contracts with Customers
(ASC 606) under the full retrospective method on February 4, 2018.
 

Schedule 4

Supplemental Information - Consolidated Statements of Income
Reconciliation
of GAAP to Non-GAAP Financial Measures

(Unaudited)

The Company supplements the reporting of its financial information
determined under United States generally accepted accounting principles
(GAAP) with certain non-GAAP financial measures: adjusted operating
income, adjusted net income, and adjusted diluted earnings per share.
The Company believes that these non-GAAP measures provide additional
useful information to assist stockholders in understanding its financial
results and assessing its prospects for future performance. Management
believes adjusted operating income, adjusted net income, and adjusted
diluted earnings per share are important indicators of the Company's
business performance because they exclude items that may not be
indicative of, or are unrelated to, the Company's underlying operating
results, and provide a better baseline for analyzing trends in the
business. In addition, adjusted operating income is used as a
performance measure in the Company's seasonal cash incentive
compensation program and adjusted diluted earnings per share is used as
a performance measure in the Company's executive compensation program
for purposes of determining the number of equity awards that are
ultimately earned. Because non-GAAP financial measures are not
standardized, it may not be possible to compare these financial measures
with other companies' non-GAAP financial measures having the same or
similar names. These adjusted financial measures should not be
considered in isolation or as a substitute for reported operating
income, reported net income, or reported diluted earnings per share.
These non-GAAP financial measures reflect an additional way of viewing
the Company's operations that, when viewed with the GAAP results and the
below reconciliations to the corresponding GAAP financial measures,
provide a more complete understanding of the Company's business.
Management strongly encourages investors and stockholders to review the
Company's financial statements and publicly-filed reports in their
entirety and not to rely on any single financial measure.

 
Thirteen Weeks Ended July 29, 2017
      Weighted
Diluted Average

 

Operating Net Earnings per Diluted Shares

(in thousands, except per share amounts)

Income/(Loss)

Income/(Loss)

Share

Outstanding

Recast GAAP Measure (a) $ (16,028 ) $ (11,891 ) $ (0.15 ) 78,786
Impact of Canadian Exit (b) 17,622 17,622 0.22
Income Tax Benefit - Canadian Exit   (5,074 ) (0.06 )
Adjusted Non-GAAP Measure $ 1,594   $ 657   $ 0.01   78,810 (c)
 
(a)   Retrospectively adjusted to reflect adoption of the new revenue
recognition accounting standard.
(b) Includes $16.3 million in restructuring costs and an additional $1.3
million in inventory adjustments related to the Canadian exit.
(c) Weighted average diluted shares outstanding for purpose of
calculating adjusted diluted earnings per share includes the
dilutive effect of share-based awards as determined under the
treasury stock method.
 
  Fifty-Three Weeks Ended February 3, 2018
    Weighted
Diluted Average

 

Earnings per Diluted Shares

(in thousands, except per share amounts)

Net Income Share Outstanding
Recast GAAP Measure (a) $ 18,873 $ 0.24 78,870
Impact of Canadian Exit 24,151 0.31
Income Tax Benefit - Canadian Exit (12,067 ) (0.15 )
Impact of Tax Reform (a) (2,050 ) (0.03 )
Recast Non-GAAP Measure (a) $ 28,907   $ 0.37  
(a)   Retrospectively adjusted to reflect adoption of the new revenue
recognition accounting standard.
 
         
Schedule 5
Express, Inc.
Real Estate Activity

(Unaudited)

 
Second Quarter 2018 - Actual August 4, 2018 - Actual
    Store Gross Square
Company-Operated Stores   Opened   Closed   Conversion Count   Footage
United States - Retail Stores (3) (27) 455
United States - Outlet Stores   3     27 176    
Total 3 (3) 631 5.4 million
 
Third Quarter 2018 - Projected November 3, 2018 - Projected
Store Gross Square
Company-Operated Stores   Opened   Closed   Conversion Count   Footage
United States - Retail Stores (2) 453
United States - Outlet Stores   3     2 181    
Total 3 634 5.4 million
 
Full Year 2018 - Projected February 2, 2019 - Projected
Store Gross Square
Company-Operated Stores   Opened   Closed   Conversion Count   Footage
United States - Retail Stores (11) (29) 450
United States - Outlet Stores   10     29 184    
Total 10 (11) 634 5.4 million

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