EXPRESS, INC. The following discussion summarizes the significant factors affecting the consolidated operating results, financial condition, liquidity, and cash flows of the Company as of the dates and for the periods presented below. The following discussion and analysis should be read in conjunction with our Annual Report on Form 10-K for the year endedFebruary 1, 2020 and our unaudited Consolidated Financial Statements and the related notes included in Item 1 of this Quarterly Report on Form 10-Q ("Quarterly Report"). This discussion contains forward-looking statements that are based on the beliefs of our management, as well as assumptions made by, and information currently available to, our management. Actual results could differ materially from those discussed in or implied by forward-looking statements as a result of various factors. See " Forward-Looking Statements ." Our management's discussion and analysis of financial condition and results of operations is presented in the following sections: Page Overview 22 COVID-19 Pandemic 22 Financial Details 24 Business Outlook 24 How We Assess the Performance of Our Business 26 Results of Operations 28 Liquidity and Capital Resources 34 Contractual Obligations 36 Critical Accounting Policies 36 OVERVIEW Express is a modern, versatile, dual gender apparel and accessories brand that helps people get dressed for every day and any occasion. Launched in 1980 with the idea that style, quality and value should all be found in one place, Express has always been a brand of the now, offering some of the most important and enduring fashion trends. Express aims to Create Confidence and Inspire Self-Expression through a design and merchandising view that brings forward The Best of Now for Real Life Versatility. The Company operates 593 retail and factory outlet stores inthe United States andPuerto Rico , as well as an online destination. COVID-19 PANDEMIC InMarch 2020 , theWorld Health Organization declared the novel strain of coronavirus ("COVID-19") a global pandemic and recommended containment and mitigation measures. In response to the pandemic, many states and localities in which we operate issued stay-at-home orders and other social distancing measures. EffectiveMarch 17, 2020 , we temporarily closed all of our retail and factory outlet stores and offices, and as a result all store associates and a number of home office employees were furloughed. As mandated shutdowns and stay-at-home orders went into effect across the country, we experienced an immediate reduction in sales levels compared to the prior year. We continued to be materially impacted by COVID-19 in the second quarter, as over 30% of our stores were closed for more than half of the second quarter, and some stores inCalifornia andNew York remained closed as ofAugust 26, 2020 . In response to the uncertainty of the circumstances described above, and in accordance with the latest federal and state guidelines, we took the following actions to provide a safe and comfortable environment for our associates and customers: ?Trained associates on a wide range of health and safety protocols; ?Practiced proper social distancing, and provided contact-free customer service and payment options; ?Implemented enhanced cleaning and sanitizing procedures across all stores; EXPRESS, INC. | Q2 2020 Form 10-Q | 22 -------------------------------------------------------------------------------- Table of Contents ?Designated a maximum capacity for each store; ?Installed plexiglass shields at all checkout counters; ?Required all associates in all stores to wear face coverings; ?Enabled curbside pickup at key locations; and ?Introduced enhanced ship from store and buy online pick-up in store ("BOPIS") capabilities in the vast majority of retail stores. We took a phased approach with respect to store re-openings, with the pace and staffing calibrated to mall traffic and consumer demand, and the overall plan may be accelerated or modified based on updated guidance from local, state and federal government officials or new measures to ensure associate and customer safety. We began reopening our stores in early May, following closures across our entire fleet due to the pandemic, and saw consistent acceleration in traffic and sales in our stores through the third week of June, with comparable sales down approximately 15%, as compared to down over 50% in early May. As new hot spots emerged in several states in the fourth week of June, we saw an immediate impact, which was exacerbated by prolonged closures inNew York and the re-closing of a number of stores inCalifornia . However, traffic and sales appeared to stabilize in July, with total comparable sales, including eCommerce, at approximately negative 20% for the month. Contributing to this improvement was the second consecutive month of positive demand for our eCommerce business. As ofAugust 26, 2020 , we have re-opened approximately 538 stores in theU.S. , in accordance with the latest federal and state guidelines. We are continuously monitoring the performance of our stores to ensure the locations are sustainable during the pandemic. We also enhanced our liquidity position through several actions. InMarch 2020 , we accessed$165.0 million available to us under our Revolving Credit Facility. See Note 7 of our unaudited Consolidated Financial Statements included elsewhere in this Quarterly Report for more information. To further improve our liquidity, we have also significantly reduced expenses, capital expenditures and working capital; this included inventory reductions, furloughing most store associates and a number of corporate associates while stores were closed, suspending merit pay increases, and freezing hiring. See " Liquidity and Capital Resources " included elsewhere in this Quarterly Report for more information. As we move through this transition, we expect to incur some labor inefficiencies as we adjust to new protocols and operating models with a goal to remain as efficient as possible while still offering safe and high quality service to our communities. The further spread of COVID-19, and the requirements to take action to help limit the spread of the illness, will impact our ability to carry out our business as usual and may materially adversely impact global economic conditions, our business, results of operations, cash flows and financial condition. The extent of the impact of COVID-19 on our business and financial results will depend on future developments, including the duration and spread of the outbreak within the markets in which we operate, the related impact on consumer confidence and spending, any disruptions in our supply chain, and the effect of governmental regulations imposed in response to the pandemic, all of which are highly uncertain and ever-changing. The sweeping nature of the COVID-19 pandemic makes it extremely difficult to predict how our business and operations will be affected in the long run. However, the likely overall economic impact of the pandemic is viewed as highly negative to the general economy. Any of the foregoing factors, or other cascading effects of the COVID-19 pandemic, could materially increase our costs, negatively impact our sales and damage our results of operations and liquidity, possibly to a significant degree. The duration of any such impacts cannot be predicted with certainty. Given the dynamic and unpredictable nature of this situation, we cannot reasonably estimate with certainty the impacts of COVID-19 on our financial condition, results of operations or cash flows in the future. We will continue to monitor the rapidly evolving situation and guidance from domestic authorities. EXPRESS, INC. | Q2 2020 Form 10-Q | 23
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FINANCIAL DETAILS FOR THE SECOND QUARTER 2020
?Net sales decreased 48% to$245.7 million ?Comparable sales decreased 24% ?Comparable retail sales (includes both retail stores and eCommerce sales) decreased 28% ?Comparable outlet sales decreased 15% ?Gross margin percentage decreased 4,470 basis points to (17.9)% ?Operating loss increased$126.5 million to a loss of$136.3 million ?Net loss increased$98.1 million to a loss of$107.8 million ?Diluted loss per share increased$1.53 to a loss of$1.67 The following charts show key performance metrics for the second quarter of 2020 compared to the second quarter of 2019. [[Image Removed: expr-20200801_g1.jpg]] [[Image Removed: expr-20200801_g2.jpg]] [[Image Removed: expr-20200801_g3.jpg]] [[Image Removed: expr-20200801_g4.jpg]] OUTLOOK & SECOND QUARTER UPDATE As previously mentioned, COVID-19 led to the temporary closure of all Express stores in mid-March through the remainder of the first quarter and continued to impact our stores through the second quarter, as over 30% of our stores were closed for more than half of the second quarter, and some stores inCalifornia andNew York remained closed as ofAugust 26, 2020 . These closures and reduced consumer spending negatively impacted our second quarter results. The pandemic began while we were in the early stages of a transformation. Our new corporate strategy, the EXPRESSway Forward, had been set in motion, and while much work was ahead of us, a great dealEXPRESS, INC. | Q2 2020 Form 10-Q | 24 -------------------------------------------------------------------------------- Table of Contents had been accomplished. We had completed a comprehensive restructure of our organization, in order to better align our teams with our objective. We had implemented a more streamlined and efficient go-to-market process, established a new design and merchandising vision, called Express Edit, and developed a new brand positioning to stake our claim to territory our customers told us would be relevant and compelling to them. We had also identified a total of$80.0 million in cost savings opportunities that we expect to achieve over a three-year period. While we expect our results to remain challenging in the near-term as a result of COVID-19 and changes in the retail environment, including store closures, decreased traffic, and promotional activities, we believe that by focusing on our foundational elements we have a significant opportunity to improve the trend of the business and return the business to long term profitable growth. The following defines each foundational element of the EXPRESSway Forward: ?Product ?Brand ?Customer ?Execution Product We will put product first. The new product vision is called the Express Edit. This vision is about standing for certain elements of fashion and style that we know matter to our customers. This includes providing the customer with a wardrobe that has the functionality to cover multiple needs and wearing occasions. Our focus areas for the third quarter are those categories where we believe we can make market share gains now, and into 2021, specifically Denim, Men's and Women's Tops, andModern Tailoring . We will apply our Express Edit design philosophy to each of these opportunities, and our Fall and Holiday receipts reflect this.
Brand
We believe we have an opportunity to reinvigorate our brand. To accomplish this we have clarified our new brand purpose: Creating Confidence and Inspiring Self Expression. In the first half of the year, we presented our brand, and engaged with our customers in new, and more creative ways. We expanded our digital stylist program and held virtual influencer events. We plan to continue these activities through the back half of the year, and into 2021. In addition, the combination of a reallocation of media spend, and a new approach to messaging, is showing both customers and prospects just how much there is to discover at Express.
Customer
We need to be more effective at engaging our customers and attracting new ones. We are building strategies and developing tactics to communicate with customers differently. We are using a marketing mix model tool to assess where we are spending our marketing dollars and which channels deliver the best return on investment. We are also using a multi-touch attribution tool to evaluate the real-time performance of our in-market messages and track the customer's journey to purchase, both online and offline. In the third quarter, we will enter phase one of our customer loyalty program relaunch. The relaunched program, now called Express Insider, will include a more robust portfolio of benefits, and a more compelling customer value proposition.
Execution
We will execute with precision to accelerate sales and profitability. To this
end, we implemented a new go to market process that reduces lead times, and
completed the implementation of new assortment planning and product life cycle
systems. The combined result of these systems will be greater visibility, better
decision making, and the ability to be more nimble. We also expanded ship from
store and buy online pick-up in store, and both are now available in the
majority of our retail stores with refinements and enhancements to come by the
end of third quarter. In addition, we reallocated our capital investments in
order to support our digital business. This allowed us to complete the
replatform of our website and further support the critical elements of our
omnichannel infrastructure.
EXPRESS, INC. | Q2 2020 Form 10-Q | 25--------------------------------------------------------------------------------
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HOW WE ASSESS THE PERFORMANCE OF OUR BUSINESS
In assessing the performance of our business, we consider a variety of performance and financial measures. These key measures include net sales, comparable sales, eCommerce demand, cost of goods sold, buying and occupancy costs, gross (loss)/profit/gross margin, and selling, general, and administrative expenses. The following table describes and discusses these measures.
Financial Measures Description Discussion
Net Sales Revenue from the sale of merchandise, less Our business is seasonal, and we have
returns and discounts, as well as shipping historically realized a higher portion of
and handling revenue related to eCommerce, our net sales in the third and fourth
revenue from the rental of our LED sign in quarters, due primarily to the impact of
Times Square , gift card breakage, revenue the
holiday season. Generally,
earned from our private label credit card approximately 46% of our annual net sales
agreement, and revenue earned from our occur in the Spring season (first and
franchise agreements. second quarters) and 54% occur in the
Fall season (third and fourth quarters).
We expect this ratio to be higher in the
Fall season in 2020 due to COVID-19.
Comparable Sales Comparable sales is a measure of the Our business and our comparable sales are
amount of sales generated in a period subject, at certain times, to calendar
relative to the amount of sales generated shifts, which may occur during key
in the comparable prior year period. selling periods close to holidays such as
Comparable sales for second quarter of
Easter,
2020 was calculated using the 13-week regional fluctuations for events such as
period ended August 1, 2020 as compared to sales tax holidays. We believe comparable
the 13-week period ended August 3, 2019 . sales provides a useful measure for
investors by removing the impact of new
Comparable retail sales includes: stores and closed stores. Management
•Sales from retail stores that were open considers comparable sales a useful
12 months or more as of the end of the measure in evaluating continuing store
reporting period performance.
•eCommerce shipped sales
Comparable outlet sales includes:
•Sales from outlet stores that were open
12 months or more as of the end of the
reporting period, including conversions
Comparable sales excludes:
•Sales from stores where the square
footage has changed by more than 20% due
to remodel or relocation activity
•Sales from stores in a phased remodel
where a portion of the store is under
construction and therefore not productive
selling space
•Sales from stores where the store cannot
open due to weather damage or other
catastrophes, including pandemics
eCommerce Demand eCommerce demand is defined as gross Webelieve eCommerce demand is a useful
orders for Express and/or third party measure for investors and management as
merchandise that originate through our it provides visibility for orders placed
eCommerce platform, including the website, but not yet shipped.
app, and buy online pick-up in store.
EXPRESS, INC. | Q2 2020 Form 10-Q | 26--------------------------------------------------------------------------------
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Financial Measures Description Discussion
Cost of goods sold, buying and Includes the following: Our cost of goods sold typically increases in occupancy costs
•Direct cost of purchased merchandise higher volume quarters because the direct cost
•Inventory shrink and other adjustments of purchased merchandise is tied to sales.
•Inbound and outbound freight
•Merchandising, design, planning andallocation, The primary drivers of the costs of individual
and manufacturing/production costs goods are raw materials, labor in the
•Occupancy costs related to store operations countries where our merchandise is sourced,
(such as rent and common area maintenance, and logistics costs associated with
utilities, and depreciation on assets) transporting our merchandise.
•Logistics costs associated with oureCommerce
business Buying and occupancy costs related to stores
•Impairments on long-lived assets and right of are largely fixed and do not necessarily
use lease assets increase as volume increases.
Changes in the mix of products sold by type of
product or by channel may also impact our
overall cost of goods sold, buying and
occupancy costs. Gross (Loss)/Profit/Gross Margin Gross (loss)/profit is net sales minus cost of Gross (loss)/profit/gross margin is impacted
goods sold, buying and occupancy costs. Gross by the price at which we are able to sell our
margin measures gross (loss)/profit as a merchandise and the cost of our product.
percentage of net sales.
We review our inventory levels on an on-going
basis in order to identify slow-moving
merchandise and generally use markdowns to
clear such merchandise. The timing and level
of markdowns are driven primarily by
seasonality and customer acceptance of our
merchandise and have a direct effect on our
gross margin.
Any marked down merchandise that is not sold
is marked-out-of-stock. We use third-party
vendors to dispose of this marked-out-of-stock
merchandise.
Selling, General, and Includes operating costs not included in cost of With the exception of store payroll, certain Administrative Expenses goods sold, buying and occupancy costs such as: marketing expenses, and incentive
•Payroll and other expenses related to operations compensation, selling, general, and
at our corporate offices administrative expenses generally do not vary
•Store expenses other than occupancy costs proportionally with net sales. As a result,
•Marketing expenses, includingproduction, selling, general, and administrative expenses
mailing, print, and digital advertising costs, as a percentage of net sales are usually
among other things higher in lower volume quarters and lower in
higher volume quarters.
EXPRESS, INC. | Q2 2020 Form 10-Q | 27-------------------------------------------------------------------------------- Table of Contents RESULTS OF OPERATIONS
The Second Quarter of 2020 compared to the Second Quarter of 2019
Thirteen Weeks Ended
August 1, 2020 August 3, 2019
Net sales (in thousands) $ 245,703 $ 472,715
Comparable retail sales (28) % (7) %
Comparable outlet sales (15) % (2) %
Total comparable sales percentage change (24) % (6) %
Gross square footage at end of period (in thousands) 5,031 5,325
Number of:
Stores open at beginning of period 594 629
New retail stores - -
New outlet stores 1 10
Retail stores converted to outlets - (9)
Closed stores (2) (4)
Stores open at end of period 593 626
Net sales in the second quarter of 2020 decreased approximately $227.0 million
compared to the second quarter of 2019. Our sales continued to be materially
impacted by COVID-19 in the second quarter, as we had over 30% of our stores
closed for more than half the quarter.
Gross (Loss)/Profit
The following table shows cost of goods sold, buying and occupancy costs, gross
(loss)/profit in dollars, and gross margin percentage for the stated periods:
Thirteen Weeks Ended
August 1, 2020 August 3, 2019
(in thousands, except percentages)
Cost of goods sold, buying and occupancy costs $ 289,760 $ 346,217
Gross (loss)/profit $ (44,057) $ 126,498
Gross margin percentage (17.9) % 26.8 %
The 4,470 basis point decrease in gross margin percentage, or gross
(loss)/profit as a percentage of net sales, in the second quarter of 2020
compared to the second quarter of 2019 was comprised of a decrease in
merchandise margin and an increase in buying and occupancy costs as a percentage
of net sales. The decrease in merchandise margin was primarily driven by high
levels of liquidations as we sold through existing inventory that accumulated as
a result of store closures in the first and second quarters. These promotions
allowed us to liquidate a significant amount of clearance inventory. In
addition, we recorded higher valuation reserves related to our inventory in the
second quarter of 2020. Buying and occupancy costs deleveraged as a result of
the reduction in sales. In addition, buying and occupancy was also impacted by
$6.8 million due to an impairment charge of certain long-lived store related
assets and right of use assets. Refer to Note 4 in our unaudited
Consolidated Financial Statements included elsewhere in this Quarterly Report
for further discussion regarding the impairment charges for the thirteen weeks
ended August 1, 2020 .
EXPRESS, INC. | Q2 2020 Form 10-Q | 28
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Selling, General, and Administrative Expenses
The following table shows selling, general, and administrative expenses in
dollars and as a percentage of net sales for the stated periods:
Thirteen Weeks Ended
August 1, 2020 August 3, 2019
(in thousands, except percentages)
Selling, general, and administrative expenses $ 92,805 $ 135,723 Selling, general, and administrative expenses, as a percentage of net sales
37.8 % 28.7 %
The $42.9 million decrease in selling, general, and administrative expenses in
the second quarter of 2020 as compared to the second quarter of 2019 was the
result of COVID-19 mitigation actions, a reduction in variable costs driven by
the sales decline, and the previously announced cost reductions associated with
our corporate restructuring.
Interest Expense/(Income), Net
The following table shows interest expense/(income) in dollars for the stated
periods:
Thirteen Weeks Ended
August 1, 2020 August 3, 2019
(in thousands)
Interest expense/(income), net $ 1,023 $ (783)
The$1.8 million increase in interest expense for the thirteen weeks endedAugust 1, 2020 as compared to the thirteen weeks endedAugust 3, 2019 was the result of borrowing under our Revolving Credit Facility, which bears interest at variable rates, in order to strengthen our liquidity position and preserve financial flexibility in response to the COVID-19 pandemic. Refer to Note 7 in our unaudited Consolidated Financial Statements included elsewhere in this Quarterly Report for further discussion regarding our borrowings during the thirteen weeks endedAugust 1, 2020 . Income Tax (Benefit)/Expense The following table shows income tax (benefit)/expense in dollars for the stated periods: Thirteen Weeks Ended August 1, 2020 August 3, 2019 (in thousands) Income tax (benefit)/expense$ (29,547) $ 726 The effective tax rate was 21.5% for the thirteen weeks endedAugust 1, 2020 compared to (8.1)% for the thirteen weeks endedAugust 3, 2019 . The effective tax rate for the thirteen weeks endedAugust 1, 2020 reflects the impact of recording an additional valuation allowance of$16.2 million against estimated 2020 U.S. federal and state deferred tax assets and other tax credits of which a portion relates to 2020 U.S. federal net operating losses that could not be carried back to offset taxable income in the five-year carryback period as part of the Coronavirus Aid Relief and Economic Security ("CARES") Act. This was partially offset by$9.1 million of tax benefit related to the portion of the estimated 2020 U.S. federal net operating losses that are able to be carried back to years with a higher federal statutory tax rate than is currently enacted. The effective tax rate for the thirteen weeks endedAugust 3, 2019 reflects a tax benefit from a pre-tax loss offset by$1.1 million of discrete tax expense related to a tax shortfall for share-based compensation. The effective tax rate, excluding discrete items, was 22.0% and 2.9% for the thirteen weeks endedAugust 1, 2020 andAugust 3, 2019 , respectively. The effective tax rate, excluding discrete items, is higher for the current year due to the ability to carryback current year net operating losses allowed under the CARES Act to tax years with higher statutory tax rates. EXPRESS, INC. | Q2 2020 Form 10-Q | 29 -------------------------------------------------------------------------------- Table of Contents The Twenty-Six Weeks EndedAugust 1, 2020 compared to the Twenty-Six Weeks EndedAugust 3, 2019 Net Sales Twenty-Six Weeks Ended August 1, 2020 August 3, 2019 Net sales (in thousands)$ 455,978 $ 923,986 Comparable retail sales (27) % (8) % Comparable outlet sales (14) % (2) % Total comparable sales percentage change (24) % (7) % Gross square footage at end of period (in thousands) 5,031 5,325 Number of: Stores open at beginning of period 595 631 New retail stores - - New outlet stores 1 25 Retail stores converted to outlets - (24) Closed stores (3) (6) Stores open at end of period 593 626 Net sales for the twenty-six weeks endedAugust 1, 2020 decreased approximately$468.0 million compared to the twenty-six weeks endedAugust 3, 2019 . The sales decrease is primarily attributed to the temporary closure of all Express stores from mid-March through the end of the first quarter of 2020 due to the COVID-19 pandemic and the continued material impact of COVID-19 in the second quarter, as we had over 30% of our stores closed for more than half the quarter. Gross (Loss)/Profit The following table shows cost of goods sold, buying and occupancy costs, gross (loss)/profit in dollars, and gross margin percentage for the stated periods: Twenty-Six Weeks Ended August 1, 2020 August 3, 2019 (in thousands, except percentages) Cost of goods sold, buying and occupancy costs $ 546,242$ 674,985 Gross (loss)/profit $ (90,264)$ 249,001 Gross margin percentage (19.8) % 26.9 % The 4,670 basis point decrease in gross margin percentage, or gross (loss)/profit as a percentage of net sales, for the twenty-six weeks endedAugust 1, 2020 compared to the twenty-six weeks endedAugust 3, 2019 was comprised of a decrease in merchandise margin and an increase in buying and occupancy costs as a percentage of net sales. The decrease in merchandise margin was primarily driven by high levels of promotions as we sold through existing inventory that accumulated as a result of store closures in the first and second quarters. These promotions allowed us to liquidate a significant amount of clearance inventory. In addition, we recorded higher valuation reserves related to our inventory as well as higher levels of reserves against certain fabric commitments. Buying and occupancy costs deleveraged as a result of the reduction in sales. In addition, Buying and occupancy was also impacted by$21.5 million due to an impairment charge of certain long-lived store related assets and right of use assets. Refer to Note 4 in our unaudited Consolidated Financial Statements included elsewhere in this Quarterly Report for further discussion regarding the impairment charges for the twenty-six weeks endedAugust 1, 2020 . EXPRESS, INC. | Q2 2020 Form 10-Q | 30 -------------------------------------------------------------------------------- Table of Contents Selling, General, and Administrative Expenses The following table shows selling, general, and administrative expenses in dollars and as a percentage of net sales for the stated periods:
Twenty-Six Weeks Ended
August 1, 2020 August 3, 2019
(in thousands, except percentages)
Selling, general, and administrative expenses $ 191,970 $ 271,090 Selling, general, and administrative expenses, as a percentage of net sales
42.1 % 29.3 %
The $79.1 million decrease in selling, general, and administrative expenses for
the twenty-six weeks ended August 1, 2020 as compared to the twenty-six weeks
ended August 3, 2019 was the result of our COVID-19 mitigation actions, a
reduction in variable costs driven by the sales decline, and the previously
announced cost reductions associated with our corporate restructuring.
Interest Expense/(Income), Net
The following table shows interest expense/(income) in dollars for the stated
periods:
Twenty-Six Weeks Ended
August 1, 2020 August 3, 2019
(in thousands)
Interest expense/(income), net $ 1,079 $ (1,495)
The$2.6 million increase in interest expense for the twenty-six weeks endedAugust 1, 2020 as compared to the twenty-six weeks endedAugust 3, 2019 was the result of borrowing under our Revolving Credit Facility, which bears interest at variable rates, in order to strengthen our liquidity position and preserve financial flexibility in response to the COVID-19 pandemic. Refer to Note 7 in our unaudited Consolidated Financial Statements included elsewhere in this Quarterly Report for further discussion regarding our borrowings during the twenty-six weeks endedAugust 1, 2020 . Other Expense, Net The following table shows other expense in dollars for the stated periods: Twenty-Six Weeks Ended August 1, 2020 August 3, 2019 (in thousands) Other expense, net $ 2,733 $ - The$2.7 million increase in other expense for the twenty-six weeks endedAugust 1, 2020 as compared to the twenty-six weeks endedAugust 3, 2019 was the result of a pretax write-off of our 2016 investment in Homage, LLC. Refer to Note 10 in our unaudited Consolidated Financial Statements included elsewhere in this Quarterly Report for further discussion regarding the write-off during the twenty-six weeks endedAugust 1, 2020 . Income Tax Benefit The following table shows income tax benefit in dollars for the stated periods: Twenty-Six Weeks Ended August 1, 2020 August 3, 2019 (in thousands) Income tax benefit$ (23,565) $ (182) The effective tax rate was 8.3% for the twenty-six weeks endedAugust 1, 2020 compared to 0.9% for the twenty-six weeks endedAugust 3, 2019 . The effective tax rate for the twenty-six weeks endedAugust 1, 2020 was less than EXPRESS, INC. | Q2 2020 Form 10-Q | 31 -------------------------------------------------------------------------------- Table of Contents the statutory rate due to the impact of establishing a valuation allowance against our net deferred tax assets, which includes$55.0 million of discrete tax expense from a valuation allowance against previously recognized deferred tax assets and$22.3 million valuation allowance against estimated 2020 U.S. federal and state deferred tax assets and other tax credits of which a portion relates to 2020 U.S. federal net operating losses that could not be carried back to offset taxable income in the five-year carryback period as part of the CARES Act. This was partially offset by a$28.6 million tax benefit related to the portion of the estimated 2019 and 2020 U.S. federal net operating losses that are able to be carried back to years with a higher federal statutory tax rate than is currently enacted. The effective tax rate for the twenty-six weeks endedAugust 3, 2019 reflects a tax benefit from a pre-tax loss offset by$2.5 million of discrete tax expense related to a tax shortfall for share-based compensation. The effective tax rate, excluding discrete items, was 27.9% and 13.4% for the twenty-six weeks endedAugust 1, 2020 andAugust 3, 2019 , respectively. The effective tax rate, excluding discrete items, is higher for the current year due to the ability to carryback current year net operating losses allowed under the CARES Act to tax years with higher statutory tax rates. Operating Loss, Net Loss and Diluted Earnings Per Share Included in the table below is operating loss, net loss and diluted earnings per share for the thirteen and twenty-six weeks endedAugust 1, 2020 andAugust 3, 2019 , respectively. We supplement the reporting of our financial information determined underUnited States generally accepted accounting principles ("GAAP") with certain non-GAAP financial measures: adjusted operating loss, adjusted net loss, and adjusted diluted earnings per share. The following table presents these financial measures, each a non-GAAP financial measure, for the stated periods which eliminate certain non-core operating costs: Thirteen Weeks Ended August 1, 2020 August 3, 2019 (in thousands, except per share amounts) Operating loss$ (136,294) $ (9,760) Adjusted operating loss (Non-GAAP)$ (129,489) $ (7,479) Net loss$ (107,770) $ (9,703) Adjusted net loss (Non-GAAP)$ (95,635) $ (7,193) Diluted earnings per share$ (1.67) $ (0.14) Adjusted diluted earnings per share (Non-GAAP)$ (1.48) $ (0.11) Twenty-Six Weeks Ended August 1, 2020 August 3, 2019 (in thousands, except per share amounts) Operating loss$ (281,573) $ (21,314) Adjusted operating loss (Non-GAAP)$ (260,090) $ (19,033) Net loss$ (261,820) $ (19,637) Adjusted net loss (Non-GAAP)$ (195,059) $ (17,127) Diluted earnings per share $ (4.07) $ (0.29) Adjusted diluted earnings per share (Non-GAAP) $ (3.03)
$ (0.26)
We believe that these non-GAAP measures provide additional useful information to
assist stockholders in understanding our financial results and assessing our
prospects for future performance. Management believes adjusted operating loss,
adjusted net loss, and adjusted diluted earnings per share are important
indicators of our business performance because they exclude items that may not
be indicative of, or are unrelated to, our underlying operating results, and
provide a better baseline for analyzing trends in our business. In addition,
adjusted diluted earnings per share is used as a performance measure in our
long-term executive compensation program for purposes of determining the number
of equity awards that are ultimately earned, and adjusted operating loss is a
metric used in our short-term cash incentive compensation plan. 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
EXPRESS, INC. | Q2 2020 Form 10-Q | 32
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in isolation or as a substitute for reported operating loss, net loss or diluted
earnings per share. These non-GAAP financial measures reflect an additional way
of viewing our operations that, when viewed with the GAAP results and the below
reconciliations to the corresponding GAAP financial measures, provide a more
complete understanding of our business. Management strongly encourages investors
and stockholders to review our financial statements and publicly-filed reports
in their entirety and not to rely on any single financial measure.
The following table reconciles the non-GAAP financial measures, adjusted
operating loss, adjusted net loss, and adjusted diluted earnings per share, with
the most directly comparable GAAP financial measures, operating loss, net loss,
and diluted earnings per share for the thirteen and twenty-six weeks ended
August 1, 2020 and August 3, 2019 , respectively.
Thirteen Weeks Ended
Diluted Weighted Average
(in thousands, except per share Earnings per Diluted Shares
amounts) Operating Loss Income Tax Impact Net Loss Share Outstanding
Reported GAAP Measure $ (136,294) $ (107,770) $ (1.67) 64,645
Impairment of property, equipment and
lease assets 6,805 (1,830) 4,975 0.08
Valuation allowance on deferred taxes
(a) - 16,244 16,244 0.25
Tax impact of the CARES Act (b) - (9,084) (9,084) (0.14)
Adjusted Non-GAAP Measure $ (129,489) $ (95,635) $ (1.48)
a.Valuation allowance provided against incurred and forecasted 2020 losses and
previously recognized deferred tax assets, less net operating losses utilized
within the CARES Act
b.The Company recognized an income tax benefit of $9.1 million primarily due to
a net operating loss carryback under the CARES Act.
Thirteen Weeks Ended
Diluted Weighted Average
(in thousands, except per share Earnings per Diluted Shares
amounts) Operating Loss Income Tax Impact Net Loss Share Outstanding
Reported GAAP Measure $ (9,760) $ (9,703) $ (0.14) 67,253
Impairment of property, equipment
and lease assets 2,281 (593) 1,688 0.03
Impact of CEO departure - 822 (a) 822 0.01
Adjusted Non-GAAP Measure $ (7,479) $ (7,193) $ (0.11) a.Represents the tax impact of the expiration of our former CEO's non-qualified stock options.
Twenty-Six Weeks Ended
Diluted Weighted Average
(in thousands, except per share Earnings per Diluted Shares
amounts) Operating Loss Income Tax Impact Net Loss Share Outstanding
Reported GAAP Measure $ (281,573) $ (261,820) $ (4.07) 64,338
Impairment of property, equipment and
lease assets 21,483 (5,686) 15,797 0.25
Equity method investment impairment
(a) - (642) 2,091 0.03
Valuation allowance on deferred taxes
(b) - 77,319 77,319 1.20
Tax impact of the CARES Act (c) - (28,557) (28,557) (0.44)
Tax impact of executive departures
(d) - 111 111 -
Adjusted Non-GAAP Measure $ (260,090) $ (195,059) $ (3.03)
a.Impairment before tax was $2.7 million and was recorded in other expense, net.
b.Valuation allowance provided against incurred and forecasted 2020 losses and
previously recognized deferred tax assets, less net operating losses utilized
within the CARES Act.
c.The Company recognized an income tax benefit of $28.6 million primarily due to
a net operating loss carryback under the CARES Act.
d.Represents the tax impact related to the expiration of former executive
non-qualified stock options.
EXPRESS, INC. | Q2 2020 Form 10-Q | 33--------------------------------------------------------------------------------
Table of Contents
Twenty-Six Weeks Ended
Diluted Weighted Average
(in thousands, except per share Earnings per Diluted Shares
amounts) Operating Loss Income Tax Impact Net Loss Share Outstanding
Reported GAAP Measure $ (21,314) $ (19,637) $ (0.29) 67,049
Impairment of property, equipment
and lease assets 2,281 (593) 1,688 0.03
Impact of CEO departure - 822 (a) 822 0.01
Adjusted Non-GAAP Measure $ (19,033) $ (17,127) $ (0.26) a.Represents the tax impact of the expiration of our former CEO's non-qualified stock options.
LIQUIDITY AND CAPITAL RESOURCES
COVID-19 Pandemic As previously announced, we took a number of actions to maintain liquidity throughout the COVID-19 pandemic and have continued to aggressively pursue additional liquidity measures. Examples of these actions and steps taken include:
?Accessed$165.0 million from our$250.0 million asset based credit facility ?Cut second quarter inventory receipts by over$100.0 million ?Lowered expected annual capital expenditures by approximately$25.0 million ?Identified cost savings of approximately$95.0 million to be realized in 2020, including the impact from our previously announced COVID-19 mitigation actions, and a decrease in our variable costs as a result of the decline in sales ?Negotiated$20.0 million in rent abatements with a number of landlords ?Anticipated cash benefits in 2020 from the CARES Act of approximately$20.0 million , including the expanded operating loss carry back, employer payroll tax credit and deferral provisions. Additional significant cash benefits from the CARES Act are also expected to be realized in 2021 due to our forecasted 2020 taxable loss. Liquidity benefits from these actions in 2020 are now expected to be approximately$425.0 million , which is an increase from the previously announced$385.0 million , of which$195.0 million were realized in the first quarter of 2020 and$85.0 million were realized in the second quarter of 2020. These benefits are incremental to the previously announced cost savings associated with the EXPRESSway Forward strategy. In addition to the actions above, we have incremental liquidity levers we can pull if we deem necessary as we continue to navigate the pandemic, including, but not limited to, certain additional cost savings measures as well as potential access to capital markets. Forward-Looking Liquidity Discussion Our liquidity position benefits from the fact that we generally collect cash from sales to customers the same day or, in the case of credit or debit card transactions, within three to five days of the related sale, and we have up to 75 days to pay certain merchandise vendors and 45 days to pay the majority of our non-merchandise vendors. We believe our existing capital resources (cash on hand and committed credit facility), projected cash generated from future operations, and the actions we have taken in response to COVID-19 will be sufficient to fund our operating lease obligations, capital expenditures and working capital needs for at least the next 12 months and the foreseeable future.EXPRESS, INC. | Q2 2020 Form 10-Q | 34 -------------------------------------------------------------------------------- Table of Contents Analysis of Cash Flows A summary of cash provided by or used in operating, investing, and financing activities is shown in the following table: Twenty-Six Weeks EndedAugust 1, 2020 August 3, 2019 (in thousands)
(Used in) provided by operating activities
1,728
Used in investing activities (10,130) (12,145)
Provided by (used in) financing activities 166,268 (7,294)
Decrease in cash and cash equivalents (14,245) (17,711)
Cash and cash equivalents at end of period
153,959
Operating Activities Our business relies on cash flows from operations as our primary source of liquidity, with the majority of those cash flows being generated in the fourth quarter of the year. Our primary operating cash needs are for merchandise inventories, payroll, store rent and marketing. For the twenty-six weeks endedAugust 1, 2020 , our cash flows used in operating activities were$170.4 million compared to$1.7 million provided by operating activities for the twenty-six weeks endedAugust 3, 2019 . This$172.1 million decrease in cash flows from operating activities for the twenty-six weeks endedAugust 1, 2020 was primarily driven by the temporary closure of our stores as a result of COVID-19. This was partially offset by the fact that we did not initially make our store rent payments for April, May orJune 2020 , as a result of the COVID-19 store closures. We established an accrual for the rent payments that were not made and have continued to recognize accrued rent expense. As a result of negotiations with certain landlords, we have since made rent payments for certain stores and some landlords have agreed to abate certain rent payments. The appropriate adjustments were made to accrued rent. Investing Activities We also use cash for capital expenditures and financing transactions. For the twenty-six weeks endedAugust 1, 2020 , we had capital expenditures of approximately$10.1 million . These relate primarily to new and remodeled store construction and fixtures and investments in information technology. We expect capital expenditures for the remainder of 2020 to be approximately$10.0 million to$15.0 million , primarily driven by new and remodeled store construction and investments in information technology. These capital expenditures do not include the impact of landlord allowances, which are expected to be approximately$2.0 million for the remainder of 2020. Financing Activities OnMarch 17, 2020 , we provided notice to the lenders under our Revolving Credit Facility of our request to borrow$165.0 million in order to strengthen our liquidity position and preserve financial flexibility in response to the COVID-19 outbreak that led to the temporary closure of all of ourExpress and Express Factory Outlet stores. As ofAugust 1, 2020 , amounts outstanding under our Revolving Credit Facility were$165.0 million , which is classified as long-term debt on the unaudited Consolidated Balance Sheet, and approximately$51.5 million was available for borrowing under the Revolving Credit Facility subject to certain borrowing base limitations and after outstanding letters of credit in the amount of$18.8 million , primarily related to our third party logistics contract. Refer to Note 7 to our unaudited Consolidated Financial Statements included elsewhere in this Quarterly Report for additional information on our Revolving Credit Facility. OnNovember 28, 2017 , the Board approved a share repurchase program that authorizes us to repurchase up to$150.0 million of our outstanding common stock using available cash. During the twenty-six weeks endedAugust 1, 2020 , we did not repurchase shares under the stock repurchase program. During the twenty-six weeks endedAugust 3, 2019 , the Company repurchased 0.9 million shares of its common stock under the 2017 Repurchase Program for an aggregate amount equal to$4.9 million , including commissions. EXPRESS, INC. | Q2 2020 Form 10-Q | 35
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Table of Contents CONTRACTUAL OBLIGATIONS Our contractual obligations and other commercial commitments did not change materially betweenFebruary 1, 2020 andAugust 1, 2020 , except for the borrowing of the$165.0 million under our Revolving Credit Facility. Refer to Note 7 to our unaudited Consolidated Financial Statements included elsewhere in this Quarterly Report for additional information on our Revolving Credit Facility. For additional information regarding our contractual obligations as ofFebruary 1, 2020 , see "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year endedFebruary 1, 2020 . CRITICAL ACCOUNTING POLICIES Management has determined that our most critical accounting policies are those related to revenue recognition, merchandise inventory valuation, long-lived asset valuation, claims and contingencies, and income taxes. We continue to monitor our accounting policies to ensure proper application of current rules and regulations. There have been no significant changes to the policies discussed in our Annual Report on Form 10-K for the year endedFebruary 1, 2020 .
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