Market Overview

Express, Inc. Reports Fourth Quarter and Full Year 2018 Results; Introduces First Quarter 2019 Outlook

Share:
  • Fourth quarter comparable sales decreased 6%
  • Fourth quarter loss of $0.02 per share, or income of $0.19 on an
    adjusted basis excluding costs related to the CEO departure and
    non-cash impairment of an equity method investment
  • E-commerce comparable sales increased 5%
  • Achieved target of $12 million in cost savings in 2018
  • Strong balance sheet maintained with $172 million in cash and no
    debt at year end
  • Repurchased 13.0 million shares for $105 million life to date under
    existing $150 million share repurchase program
  • CEO search progressing well

Express, Inc. (NYSE:EXPR), a leading fashion apparel retailer,
announced its financial results for the fourth quarter and full year
2018. These results, which cover the thirteen and fifty-two weeks ended
February 2, 2019, are compared to the fourteen and fifty-three weeks
ended February 3, 2018. Comparable sales for the fourth quarter and full
year 2018 were calculated using the thirteen and fifty-two week periods
ended February 2, 2019, as compared to the thirteen and fifty-two week
periods ended February 3, 2018.

Matthew Moellering, the Company's interim CEO and interim president and
EVP and COO, noted that, "Despite our fourth quarter results being in
line with the guidance we provided on November 29, 2018, our overall
performance in the period was disappointing. While we expect our results
to remain challenging in the near-term, we are focusing on three key
areas including product, brand and product clarity, and customer
acquisition and retention to reposition the business for future growth
and improved profitability."

Mr. Moellering continued, "Express is a resilient and relevant brand and
we continue to believe strongly in its long-term opportunity. Our
financial position remains strong with $172 million in cash and cash
equivalents and no long-term debt."

CEO Search Update

Mylle Mangum, the Company's Chairwoman of the Board, stated, "The Board
is making good progress on the CEO search. We are pleased with the
quality of the candidates that have shown interest and we are actively
interviewing multiple individuals. This is a very attractive role that
provides the new CEO ample strategic flexibility given the company's
strong brand and solid financial position. The Board's top priority is
finding the right candidate to return Express to growth and we are
confident that we will appoint a strong leader in the near future."

Fourth Quarter 2018 Operating Results:

  • Net sales decreased 10% to $628.4 million from $699.7 million in the
    fourth quarter of 2017. Fourth quarter 2017 net sales benefited from
    an extra week, which was worth $26 million.
  • Comparable sales (including e-commerce sales) decreased 6%, compared
    to a 1% decrease in the fourth quarter of 2017.
  • E-commerce sales were $203.3 million. On a comparable sales basis,
    e-commerce sales increased 5%.
  • Merchandise margin decreased by 150 basis points driven by increased
    promotional activity. Buying and occupancy as a percentage of net
    sales increased by 100 basis points. In combination, this resulted in
    a 250 basis point decrease in gross margin, representing 27.6% of net
    sales compared to 30.1% in last year's fourth quarter.
  • Selling, general, and administrative (SG&A) expenses were $160.8
    million versus $166.5 million in last year's fourth quarter, a
    decrease principally due to the extra week in the fourth quarter of
    2017. SG&A expenses in the fourth quarter of 2018 included $5.4
    million of costs related to the CEO departure. As a percentage of net
    sales, SG&A expenses increased by 180 basis points to 25.6%.
  • Operating income was $12.6 million, and included $5.4 million of costs
    related to the CEO departure. On an adjusted basis, operating income
    was $18.0 million, or 2.9% of net sales in the fourth quarter of 2018,
    compared to $42.5 million, or 6.1% of net sales in the fourth quarter
    of 2017.
  • Other expense of $8.4 million represents a non-cash impairment charge
    related to our equity method investment in Homage ("Homage
    investment").
  • Income tax expense was $5.4 million, at an effective tax rate of
    125.3%, compared to $15.0 million, at an effective tax rate of 35.3%
    in last year's fourth quarter. The effective tax rate during the
    fourth quarter of 2018 was negatively impacted by the CEO departure
    and the impairment of our Homage investment.
  • Net loss was $1.1 million, or $0.02 per diluted share, compared to net
    income of $27.4 million, or $0.35 per diluted share in last year's
    fourth quarter. Excluding costs related to the CEO departure and
    impairment of our Homage investment, adjusted net income was $12.8
    million, or $0.19 per diluted share in the fourth quarter of 2018,
    compared to adjusted net income of $25.8 million, or $0.33 per diluted
    share, in the fourth quarter of 2017. Fourth quarter of 2017 EPS
    benefited from an extra week which was worth $0.04 per diluted share.
  • Real estate activity for the fourth quarter of 2018 is presented in
    Schedule 5.

Full Year 2018 Operating Results:

  • Net sales decreased 2.0% to $2,116 million from $2,159 million in
    2017. In 2017, net sales benefited from an extra week which was worth
    $26 million.
  • Comparable sales (including e-commerce sales) decreased 1%, compared
    to a 3% decrease in 2017.
  • E-commerce sales increased 20% to $609 million from $509 million in
    2017. On a comparable sales basis, e-commerce sales increased 21% in
    2018 as compared to 2017.
  • Operating income was $28.2 million, and on an adjusted basis was $33.7
    million in 2018. This compares to $30.6 million, and $54.7 million on
    an adjusted basis in 2017.
  • Net income was $9.6 million, or $0.13 per diluted share, compared to
    $18.9 million, or $0.24 per diluted share in 2017. Adjusted net income
    was $23.6 million, or $0.32 per diluted share, compared to $28.9
    million, or $0.37 per diluted share in 2017. In 2017, EPS benefited
    from an extra week which was worth $0.04 per diluted share.

Balance Sheet And Cash Flow Highlights:

  • Cash and cash equivalents totaled $171.7 million at the end of 2018
    versus $236.2 million at the end of 2017.
  • During the fifty-two weeks ended February 2, 2019, approximately $83.2
    million was used to repurchase approximately 10.0 million shares of
    the Company's outstanding common stock.
  • Capital expenditures totaled $49.8 million for 2018 compared to $57.4
    million for 2017.
  • Inventory was $267.8 million at the end of 2018 compared to $260.7
    million at the end of 2017.

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 13.0
million shares for $105 million, including 3.5 million shares for $27.0
million during the fourth quarter of 2018. Subsequent to the end of the
fourth quarter, the Company has repurchased an additional 0.9 million
shares for $4.9 million and currently has approximately $45
million remaining under its authorization. The Company's 2019 guidance
reflects share repurchases made to date, however does not contemplate
any future share repurchases.

First Quarter 2019 Guidance:

The table below compares the Company's projected results for the
thirteen week period ended May 4, 2019 to the actual results for the
thirteen week period ended May 5, 2018.

   
First Quarter 2019 First Quarter 2018
Guidance Results
Comparable Sales (9%) to (11%) 1%
Effective Tax Rate Approximately 19%(1) 80.1%(2)
Interest Income/(Expense), Net $0.6 million ($0.2) million
Net (Loss)/Income ($18) to ($23) million $0.5 million(2)
Diluted Earnings Per Share (EPS) ($0.27) to ($0.34) $0.01(2)
Weighted Average Diluted Shares Outstanding 66.7 million 76.1 million
(1)   The Company's effective tax rate for the first quarter of 2019 is
expected to be impacted by certain discrete tax items.
 
(2) Includes a negative impact of $1.3 million related to certain
discrete items in the first quarter of 2018.
 

This guidance does not take into account any additional non-core items
that may occur and excludes the impact of future share repurchases.

Full Year 2019 Guidance:

The Company is not issuing full year guidance given the ongoing CEO
leadership transition and the current variability in comparable sales
trends. The Company is providing the following information based on
current expectations:

  • Capital expenditures of $40 to $45 million

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

Conference Call Information:

A conference call to discuss fourth quarter and full year 2018 results
is scheduled for Wednesday, March 13, 2019 at 9:00 a.m. Eastern Time
(ET). Investors and analysts interested in participating in the call are
invited to dial (877) 683-0508 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 2:00 p.m. ET on March 13, 2019 until 11:59 p.m. ET on
March 20, 2019 and can be accessed by dialing (800) 585-8367 and
entering replay pin number 6998184.

An investor presentation with information regarding the fourth quarter
and fiscal year 2018 results and outlook for 2019 will also be available
at: http://www.express.com/investor
at approximately 7:00 a.m. ET on Wednesday, March 13, 2019.

About Express, Inc.:

Express is a leading fashion destination and apparel brand for both
women and men. Since 1980, Express has provided the latest apparel and
accessories for work, casual, jeanswear, and going-out, offering a
distinct combination of fashion and quality at an attractive value. The
company operates more than 600 retail and factory outlet stores in the
United States and Puerto Rico, as well as a best-in-class shopping
experience through its website and mobile app. In addition, Express
merchandise is available at franchise locations and online in Latin
America. For more information, please visit www.express.com.

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 first quarter and
full year 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, (3) statements regarding the Company's strategy, plans,
and initiatives, including, but not limited to, results expected from
such strategy, plans, and initiatives, and (4) statements regarding the
search for a CEO or any other senior management position.
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)

 
February 2, 2019 February 3, 2018
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 171,670 $ 236,222
Receivables, net 17,369 12,084
Inventories 267,766 260,728
Prepaid minimum rent 30,047 30,779
Other 25,176   24,319  
Total current assets 512,028 564,132
 
PROPERTY AND EQUIPMENT 1,083,347 1,047,447
Less: accumulated depreciation (719,068 ) (642,434 )
Property and equipment, net 364,279 405,013
 
TRADENAME/DOMAIN NAMES/TRADEMARKS 197,618 197,618
DEFERRED TAX ASSETS 5,442 7,346
OTHER ASSETS 7,260   12,815  
Total assets $ 1,086,627   $ 1,186,924  
 
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 155,913 $ 145,589
Deferred revenue 40,466 41,240
Accrued expenses 78,313   110,563  
Total current liabilities 274,692 297,392
 
DEFERRED LEASE CREDITS 129,505 137,618
OTHER LONG-TERM LIABILITIES 97,252   103,600  
Total liabilities 501,449 538,610
 
COMMITMENTS AND CONTINGENCIES
 
Total stockholders' equity 585,178   648,314  
Total liabilities and stockholders' equity $ 1,086,627   $ 1,186,924  
 
       
Schedule 2
Express, Inc.
Consolidated Statements of Income

(In thousands, except per share amounts)

(Unaudited)

 
Thirteen Fourteen Fifty-Two Fifty-Three
Weeks Ended   Weeks Ended Weeks Ended   Weeks Ended
February 2, February 3, February 2, February 3,
2019 2018 2019 2018
NET SALES $ 628,426 $ 699,682 $ 2,116,344 $ 2,158,502
COST OF GOODS SOLD, BUYING AND OCCUPANCY COSTS 455,229   489,401   1,501,433   1,530,991  
Gross profit 173,197 210,281 614,911 627,511
OPERATING EXPENSES:
Selling, general, and administrative expenses 160,765 166,549 587,348 573,550
Restructuring costs 166 22,869
Other operating (income)/expense, net (129 ) 1,200   (818 ) 536  
Total operating expenses 160,636 167,749 586,696 596,955
 
OPERATING INCOME 12,561 42,532 28,215 30,556
 
INTEREST (INCOME)/EXPENSE, NET (143 ) 172 25 2,242
OTHER EXPENSE/(INCOME), NET 8,400     7,900   (537 )
INCOME BEFORE INCOME TAXES 4,304 42,360 20,290 28,851
INCOME TAX EXPENSE 5,392   14,959   10,660   9,978  
NET (LOSS)/INCOME $ (1,088 ) $ 27,401 $ 9,630 $ 18,873
 
EARNINGS PER SHARE:
Basic $ (0.02 ) $ 0.35 $ 0.13 $ 0.24
Diluted $ (0.02 ) $ 0.35 $ 0.13 $ 0.24
 
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 68,196 78,333 72,518 78,592
Diluted 68,196 78,927 73,239 78,870
 
   
Schedule 3
Express, Inc.
Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 
Fifty-Two Fifty-Three
Weeks Ended   Weeks Ended
February 2, 2019 February 3, 2018
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 9,630 $ 18,873
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 85,853 90,221
Loss on disposal of property and equipment 368 2,891
Impairment charge 818 9,850
Equity method investment impairment 8,400
Loss on deconsolidation of Canada 10,672
Share-based compensation 13,114 14,008
Deferred taxes 536 396
Landlord allowance amortization (11,606 ) (13,183 )
Other non-cash adjustments (500 ) (500 )
Changes in operating assets and liabilities:
Receivables, net (5,284 ) 3,279
Inventories (7,038 ) (28,279 )
Accounts payable, deferred revenue, and accrued expenses (21,097 ) (14,166 )
Other assets and liabilities 523   24,505  
Net cash provided by operating activities 73,717 118,567
 
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (49,778 ) (57,435 )
Decrease in cash and cash equivalents resulting from deconsolidation
of Canada
  (9,232 )
Net cash used in investing activities (49,778 ) (66,667 )
 
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on lease financing obligations (1,860 ) (1,710 )
Repayments of financing arrangements (750 ) (2,040 )
Repurchase of common stock under share repurchase program (83,172 ) (17,264 )
Repurchase of common stock for tax withholding obligations (2,709 ) (1,599 )
Net cash used in financing activities (88,491 ) (22,613 )
 
EFFECT OF EXCHANGE RATE ON CASH (438 )
 
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (64,552 ) 28,849
CASH AND CASH EQUIVALENTS, Beginning of period 236,222   207,373  
CASH AND CASH EQUIVALENTS, End of period $ 171,670   $ 236,222  
 

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 short-term cash incentive
compensation program and adjusted diluted earnings per share is used as
a performance measure in the Company's long-term 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 and 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 February 2, 2019
        Weighted
Average
Diluted Diluted

 

Operating Income Net (Loss) Earnings Shares

(in thousands, except per share amounts)

Income Tax Impact / Income per Share Outstanding  
Reported GAAP Measure $ 12,561 $ (1,088 ) $ (0.02 ) 68,196
Impact of CEO Departure 5,436 (1,386 ) 4,050 0.06
162(m) impact as a result of CEO departure 1,473 1,473 0.02
Equity method investment impairment (a)   8,400   0.12  
Adjusted Non-GAAP Measure $ 17,997   $ 12,835   $ 0.19   68,686 (b)
(a)   The tax effect of the $8.4 million impairment of our equity method
investment is $2.1 million, which is offset by a full valuation
allowance against the related deferred tax assets.
 
(b) 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-Two Weeks Ended February 2, 2019
        Weighted
Average
Diluted Diluted

 

Operating Income

Net

Earnings Shares

(in thousands, except per share amounts)

Income Tax Impact

Income

per Share Outstanding
Reported GAAP Measure $ 28,215 $ 9,630 $ 0.13 73,239
Impact of CEO Departure 5,436 (1,386 ) 4,050 0.06
162(m) impact as a result of CEO departure 1,473 1,473 0.02
Equity method investment impairment (a)   8,400   0.11  
Adjusted Non-GAAP Measure $ 33,651   $ 23,553   $ 0.32  
(a)   The tax effect of the $8.4 million impairment of our equity method
investment is $2.1 million, which is offset by a full valuation
allowance against the related deferred tax assets.
 

The following reconciliations have been 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.

 
Fourteen Weeks Ended February 3, 2018
    Weighted
Average
Diluted Diluted

Net

Earnings Shares
(in thousands, except per share amounts)

Income

per Share Outstanding
Reported GAAP Measure $ 27,401 $ 0.35 78,927
Income Tax Expense - Canadian Exit 402 0.01
Impact of Tax Reform (2,050 ) (0.03 )
Adjusted Non-GAAP Measure $ 25,753   $ 0.33  
 
 
Fifty-Three Weeks Ended February 3, 2018
        Weighted
Average
Diluted Diluted

 

Operating Income

Net

Earnings Shares

(in thousands, except per share amounts)

Income Tax Impact

Income

per Share Outstanding
Reported GAAP Measure $ 30,556 $ 18,873 $ 0.24 78,870
Impact of Canadian Exit 24,151 (12,067 ) 12,084 0.15
Impact of Tax Reform   (2,050 ) (2,050 ) (0.03 )
Adjusted Non-GAAP Measure $ 54,707   $ 28,907   $ 0.37  
 
     
Schedule 5
Express, Inc.
Real Estate Activity

(Unaudited)

 

Fourth Quarter 2018 - Actual February 2, 2019 - Actual
    Gross Square
Company-Operated Stores   Opened   Closed   Conversion Store Count   Footage
United States - Retail Stores (6) 447
United States - Outlet Stores 3     184
Total 3 (6) 631 5.4 million
 
First Quarter 2019 - Projected May 4, 2019 - Projected
Gross Square
Company-Operated Stores   Opened   Closed   Conversion Store Count   Footage
United States - Retail Stores (1) (15) 431
United States - Outlet Stores     15 199
Total (1) 630 5.4 million
 
Full Year 2019 - Projected February 1, 2020 - Projected
Gross Square
Company-Operated Stores   Opened   Closed   Conversion Store Count   Footage
United States - Retail Stores (6) (24) 417
United States - Outlet Stores 5     24 213
Total 5 (6) 630 5.4 million

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