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 23 COVID-19 Pandemic 23 Financial Details 25 Business Outlook 25 How We Assess the Performance of Our Business 27 Results of Operations 30 Liquidity and Capital Resources 36 Contractual Obligations 38 Critical Accounting Policies 38 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 592 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 a 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 third quarter of 2020, even after all of our stores re-opened, as customer traffic continues to be pressured, especially in our retail stores. 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; ?Designated a maximum capacity for each store;EXPRESS, INC. | Q3 2020 Form 10-Q | 23 -------------------------------------------------------------------------------- Table of Contents ?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 our retail stores.
In response to COVID-19, we enhanced our liquidity position through several
actions. In
To further improve our liquidity, we have also significantly reduced expenses,
capital expenditures and working capital; this included inventory reductions,
furloughing most store associates while stores were closed, suspending merit pay
increases and reducing home office headcount. See " Liquidity and Capital
Resources " included elsewhere in this Quarterly Report for more information.
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.
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FINANCIAL DETAILS FOR THE THIRD QUARTER 2020
?Net sales decreased 34% to$322.1 million ?Comparable sales decreased 30% ?Comparable retail sales (includes both retail stores and eCommerce sales) decreased 33% ?Comparable outlet sales decreased 20% ?Gross margin percentage decreased 2,390 basis points to 4.3% ?Operating loss increased$104.2 million to a loss of$110.9 million ?Net loss increased$87.2 million to a loss of$90.3 million ?Diluted loss per share increased$1.34 to a loss of$1.39 The following charts show key performance metrics for the third quarter of 2020 compared to the third quarter of 2019. [[Image Removed: expr-20201031_g1.jpg]] [[Image Removed: expr-20201031_g2.jpg]] [[Image Removed: expr-20201031_g3.jpg]] [[Image Removed: expr-20201031_g4.jpg]] OUTLOOK & THIRD QUARTER UPDATE As previously mentioned, COVID-19 led to the temporary closure of all Express stores in mid-March and into the second quarter, as over 30% of our stores were closed for more than half of the second quarter. Even after re-opening, our stores continued to be impacted by COVID-19 with reduced hours and temporary re-closures. These factors led to significant decreases in customer traffic and reduced consumer spending, which negatively impacted our third 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, aEXPRESS, INC. | Q3 2020 Form 10-Q | 25 -------------------------------------------------------------------------------- Table of Contents great deal had been accomplished. We had completed a comprehensive restructuring 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 the potential of additional store closures, decreased customer traffic, and changing customer shopping patterns, 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. Our 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. One of our historical strengths has been in occasion-based dressing, and as a result, we have been more disproportionately impacted these last several months, as occasions and celebrations have been cancelled or delayed and our customers continue to work from home. As a result, during the third quarter, we pulled back on our investment in occasion-based categories and increased our investment in more casual, versatile categories, significantly changing their penetration in our product mix versus a year ago. These new deliveries have performed well, including our new denim, women's tops, and graphic t-shirts, and while we are pleased with this performance, it did not fully offset the decreases we saw in occasion-based categories, such as men's suits and dress shirts and women's dresses and suits, that resulted from the prolonged pandemic. However, we expect that occasions and celebrations of all kinds will come back and these occasion-based categories will represent an opportunity for us going forward. In addition, another one of our future focus areas will be denim, and we have seen great results from our new denim strategy, which focuses on premium quality denim at very compelling price points.
Brand
Our brand purpose is to create confidence and inspire self-expression and is based on the belief that clothing can serve a higher purpose in people's lives. In the first nine months of the year, we presented our brand and engaged with our customers in new and more creative ways and as a result we have seen increased engagement with our marketing, increased followers on our social media platforms, and a stronger sense of connectivity between our customers and our messaging. To bring another dimension to our brand positioning, and to reflect the importance of the purpose-driven view of many of our customers, we launched theExpress Dream Big Project ("Dream Big") in the third quarter of 2020. Dream Big is a fundraising initiative created to champion organizations that empower people to believe in themselves, and follow their dreams. To introduce the program we had a virtual event hosted by fashion expert and TV personality TanFrance . This program strives to unify and align our corporate philanthropy and employee giving in a way that is tightly connected to our brand purpose.
Customer
InAugust 2020 , we completed the soft relaunch of our loyalty program, now called Express Insider. Our loyalty program members have the greatest lifetime value to Express. This program is a critical factor in gaining additional share of existing customers' spend and bringing new customers into the brand. We anticipate implementing additional enhancements to our Express Insider program in the first quarter of 2021, including the expansion of loyalty tiers to incentivize and reward our best customers in a more timely, and engaging manner.EXPRESS, INC. | Q3 2020 Form 10-Q | 26 -------------------------------------------------------------------------------- Table of Contents Execution Execution is the through line across all of our initiatives, and both within, and across functions we have improved the efficiency of our operating and decision-making processes. During the third quarter of 2020, we were focused on advancing our eCommerce and omnichannel capabilities. We did this with enhanced and expanded buy-online-pick-up-in-store and ship-from-store functionalities, both of which contribute to more efficient, and effective inventory management. Additionally, we enhanced the way we engage and service our customers in the digital channel. We expanded our Digital Stylist program by increasing the resources available, to provide more real-time, virtual assistance to express.com customers. We plan to expand this program as we move into 2021 by shifting some of our physical store associates into these Digital Stylist roles. Another aspect of execution is our physical stores. We still intend to close the 100 stores we previously announced as part of our fleet rationalization plan. While that fleet rationalization plan focuses on our number of stores, our current focus-fleet optimization-concerns where our stores should be located, the type of store that is optimal for each location, and the role each store plays in our customers' lives. As part of this plan, we are testing smaller footprints in our mall-based stores and also testing new store concepts, such as pop up stores.
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, transactions, cost of goods sold, buying and
occupancy costs, gross profit/(loss)/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, Ourbusiness is seasonal, and we have
less returns and discounts, as well as historically realized a higher portion of
shipping and handling revenue related to our net sales in the third and fourth
eCommerce, revenue from the rental of our quarters, due primarily to the impact of
LED sign in Times Square , gift card the holiday season. Generally,
breakage, revenue earned from our private approximately 46% of our annual net sales
label credit card agreement, and revenue occur in the Spring season (first and
earned from our 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.
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Financial Measures Description Discussion
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 the third quarter of
Easter,
2020 was calculated using the 13-week regional fluctuations for events such as
period ended October 31, 2020 as compared sales tax holidays. We believe comparable
to the 13-week period ended November 2 , sales provides a useful measure for
2019. investors by removing the impact of new
stores and closed stores. Management
Comparable retail sales includes: considers comparable sales a useful
•Sales from retail stores that were open measure in evaluating continuing store
12 months or more as of the end of the performance.
reporting period
•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.
Transactions Transactions are defined as the number of We believe this metric is useful as it
units sold as compared to the dollar removes the impact of promotions and
amount of sales. provides a better indicator of the
acceptance of our product.
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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.
Extended periods of declined business and
sales could result in additional impairment of
our assets. Gross Profit/(Loss)/Gross Margin Gross profit/(loss) is net sales minus cost of Gross profit/(loss)/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 profit/(loss) 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. | Q3 2020 Form 10-Q | 29-------------------------------------------------------------------------------- Table of Contents RESULTS OF OPERATIONS The Third Quarter of 2020 compared to the Third Quarter of 2019Net Sales Thirteen Weeks Ended October 31, 2020 November 2, 2019 Net sales (in thousands)$ 322,061 $ 488,483 Comparable retail sales (33) % (5) % Comparable outlet sales (20) % (5) % Total comparable sales percentage change (30) % (5) % Gross square footage at end of period (in thousands) 5,031 5,319 Number of: Stores open at beginning of period 593 626 New retail stores 1 - New outlet stores - 6 Retail stores converted to outlets - (3) Closed stores (2) (3) Stores open at end of period 592 626 Net sales in the third quarter of 2020 decreased approximately$166.4 million compared to the third quarter of 2019. Our sales continued to be materially impacted by COVID-19 in the third quarter, as customer traffic continues to be pressured, especially in our retail stores and our customers have shifted away from purchasing products in our occasion-based categories such as suits, dress shirts and dresses, which have previously made up a large portion of our sales. Gross Profit The following table shows cost of goods sold, buying and occupancy costs, gross profit in dollars, and gross margin percentage for the stated periods:
Thirteen Weeks Ended
October
31, 2020
(in thousands, except percentages)
Cost of goods sold, buying and occupancy costs $ 308,115 $ 350,810
Gross profit $ 13,946 $ 137,673
Gross margin percentage 4.3 % 28.2 %
The 2,390 basis point decrease in gross margin percentage, or gross profit as a
percentage of net sales, in the third quarter of 2020 compared to the third
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 higher levels of
promotions compared to last year as a result of the promotional retail
environment. Buying and occupancy costs deleveraged as a result of the reduction
in sales. In addition, buying and occupancy was also impacted by $8.4 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 October 31, 2020 .
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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
October 31, 2020 November 2, 2019
(in thousands, except percentages)
Selling, general, and administrative expenses $
124,863
38.8 % 29.5 %
The $19.4 million decrease in selling, general, and administrative expenses in
the third quarter of 2020 as compared to the third 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 announced in the fourth quarter of 2019.
Interest Expense/(Income), Net
The following table shows interest expense/(income) in dollars for the stated
periods:
Thirteen Weeks Ended
October 31, 2020 November 2, 2019
(in thousands)
Interest expense/(income), net $ 936 $ (690)
The
Note 7 in our unaudited Consolidated Financial Statements included elsewhere in this Quarterly Report for further discussion regarding our borrowings during the thirteen weeks endedOctober 31, 2020 . Income Tax Benefit The following table shows income tax benefit in dollars for the stated periods: Thirteen Weeks EndedOctober 31, 2020 November 2, 2019 (in thousands)
Income tax benefit $ (21,503) $ (2,880)
The effective tax rate was 19.2% in the third quarter of 2020 compared to 48.1% in the third quarter of 2019. The effective tax rate for the thirteen weeks endedOctober 31, 2020 reflects the impact of recording an additional valuation allowance of$16.0 million against estimated 2020 U.S. federal and state deferred tax assets and other tax credits of which a portion relates to 2020U.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$8.0 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 endedNovember 2, 2019 reflects a$1.4 million change in estimate from the second quarter provision due to an increase from the previously forecasted annual effective tax rate. The effective tax rate, excluding discrete items, was 17.9% and 44.0% for the thirteen weeks endedOctober 31, 2020 andNovember 2, 2019 , respectively. The effective tax rate, excluding discrete items, is higher for the prior year due to the previously mentioned change in estimate from the second quarter provision. EXPRESS, INC. | Q3 2020 Form 10-Q | 31 -------------------------------------------------------------------------------- Table of Contents The Thirty-Nine Weeks EndedOctober 31, 2020 compared to the Thirty-Nine Weeks EndedNovember 2, 2019 Net Sales Thirty-Nine Weeks Ended October 31, 2020 November 2, 2019 Net sales (in thousands)$ 778,039 $ 1,412,469 Comparable retail sales (30) % (7) % Comparable outlet sales (17) % (3) % Total comparable sales percentage change (27) % (6) % Gross square footage at end of period (in thousands) 5,031 5,319 Number of: Stores open at beginning of period 595 631 New retail stores 1 - New outlet stores 1 31 Retail stores converted to outlets - (27) Closed stores (5) (9) Stores open at end of period 592 626 Net sales for the thirty-nine weeks endedOctober 31, 2020 decreased approximately$634.4 million compared to the thirty-nine weeks endedNovember 2, 2019 . The sales decrease is primarily attributed to the temporary closure of all Express stores from mid-March into the second quarter of 2020 due to the COVID-19 pandemic and the continued material impact of COVID-19 in the third quarter, as customer traffic continues to be pressured, especially in our retail stores and our customers have shifted away from purchasing products in our occasion-based categories, such as suits, dress shirts and dresses, which have previously made up a large portion of our sales. 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: Thirty-Nine Weeks Ended October
31, 2020
(in thousands, except percentages)
Cost of goods sold, buying and occupancy costs $ 854,357 $ 1,025,795
Gross (loss)/profit $ (76,318) $ 386,674
Gross margin percentage (9.8) % 27.4 %
The 3,720 basis point decrease in gross margin percentage, or gross
(loss)/profit as a percentage of net sales, for the thirty-nine weeks ended
October 31, 2020 compared to the thirty-nine weeks ended November 2, 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 half of
2020. 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 and was also impacted by $29.9 million in impairment charges related to
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 thirty-nine weeks ended October 31, 2020 .
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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:
Thirty-Nine Weeks Ended
(in thousands, except percentages)
Selling, general, and administrative expenses $
316,833
40.7 % 29.4 %
The $98.6 million decrease in selling, general, and administrative expenses for
the thirty-nine weeks ended October 31, 2020 as compared to the thirty-nine
weeks ended November 2, 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 announced
in the fourth quarter of 2019.
Interest Expense/(Income), Net
The following table shows interest expense/(income) in dollars for the stated
periods:
Thirty-Nine Weeks Ended
October 31, 2020 November 2, 2019
(in thousands)
Interest expense/(income), net $ 2,015 $ (2,185)
The$4.2 million increase in interest expense for the thirty-nine weeks endedOctober 31, 2020 as compared to the thirty-nine weeks endedNovember 2, 2019 was the result of borrowing under our Revolving Credit Facility, which bears interest at variable rates. Refer to Note 7 in our unaudited Consolidated Financial Statements included elsewhere in this Quarterly Report for further discussion regarding our borrowings during the thirty-nine weeks endedOctober 31, 2020 . Other Expense, Net The following table shows other expense in dollars for the stated periods: Thirty-Nine Weeks Ended October 31, 2020 November 2, 2019 (in thousands) Other expense, net $ 2,733 $ -
The
Note 10 in our unaudited Consolidated Financial Statements included
elsewhere in this Quarterly Report for further discussion regarding the
write-off during the thirty-nine weeks ended
Thirty-Nine Weeks Ended
October 31, 2020 November 2, 2019
(in thousands)
Income tax benefit $ (45,068) $ (3,062)
The effective tax rate was 11.3% for the thirty-nine weeks ended October 31,
2020 compared to 11.9% for the thirty-nine weeks ended November 2, 2019 . The
effective tax rate for the thirty-nine weeks ended October 31, 2020 was less
than the statutory rate due to the impact of establishing a valuation allowance
against our net deferred tax
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assets, which includes $54.2 million of discrete tax expense from a valuation
allowance against previously recognized deferred tax assets and $39.1 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 $36.6 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 thirty-nine weeks ended November 2, 2019 reflects a
tax benefit from a pre-tax loss offset by $2.6 million of discrete tax expense
related to a tax shortfall for share-based compensation. The effective tax rate,
excluding discrete items, was 25.1% and 20.5% for the thirty-nine weeks ended
October 31, 2020 and November 2, 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 thirty-nine weeks ended October 31, 2020 and
November 2, 2019 , respectively. We supplement the reporting of our financial
information determined under United 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
October 31, 2020 November 2, 2019
(in thousands, except per share amounts)
Operating loss $ (110,916) $ (6,675)
Adjusted operating loss (Non-GAAP) $ (102,546) $ (4,959)
Net loss $ (90,349) $ (3,105)
Adjusted net loss (Non-GAAP) $ (76,192) $ (1,790)
Diluted earnings per share $ (1.39) $ (0.05)
Adjusted diluted earnings per share (Non-GAAP) $ (1.17) $ (0.03)
Thirty-Nine Weeks Ended
October 31, 2020 November 2, 2019
(in thousands, except per share amounts)
Operating loss $ (392,489) $ (27,989)
Adjusted operating loss (Non-GAAP) $ (362,636) $ (23,991)
Net loss $ (352,169) $ (22,742)
Adjusted net loss (Non-GAAP) $ (271,251) $ (18,916)
Diluted earnings per share $ (5.46) $ (0.34)
Adjusted diluted earnings per share (Non-GAAP) $ (4.20) $ (0.28)
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 was
previously 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 in isolation or as a substitute for reported operating
loss, net loss or diluted earnings per share. These
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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, respectively) for the thirteen and thirty-nine
weeks ended October 31, 2020 and November 2, 2019 , respectively.
Thirteen Weeks Ended
Diluted Weighted Average
(in thousands, except per share Operating Loss Income Tax Impact Net Loss Earnings per Diluted Shares
amounts) Share Outstanding
Reported GAAP Measure $ (110,916) $ (90,349) $ (1.39) 64,868
Impairment of property, equipment and
lease assets 8,370 (2,215) 6,155 0.09
Valuation allowance on deferred taxes
(a) - 15,998 15,998 0.25
Tax impact of the CARES Act (b) - (7,996) (7,996) (0.12)
Adjusted Non-GAAP Measure $ (102,546) $ (76,192) $ (1.17)
a.Valuation allowance provided against incurred and forecasted 2020 losses and
previously recognized deferred tax assets, less net operating losses utilized
under the CARES Act
b.Income tax benefit primarily due to a net operating loss carryback under the
CARES Act.
Thirteen Weeks Ended
Diluted Weighted Average
(in thousands, except per share Operating Loss Income Tax Impact Net Loss Earnings per Diluted Shares
amounts) Share Outstanding
Reported GAAP Measure $ (6,675) $ (3,105) $ (0.05) 66,438
Impact of executive departures 1,716 (401) 1,315 0.02
Adjusted Non-GAAP Measure $ (4,959) $ (1,790) $ (0.03) Thirty-Nine Weeks Ended
Diluted Weighted Average
(in thousands, except per share Operating Loss Income Tax Impact Net Loss Earnings per Diluted Shares
amounts) Share Outstanding
Reported GAAP Measure $ (392,489) $ (352,169) $ (5.46) 64,515
Impairment of property, equipment and
lease assets 29,853 (7,901) 21,952 0.34
Equity method investment impairment
(a) - (642) 2,091 0.03
Valuation allowance on deferred taxes
(b) - 93,317 93,317 1.45
Tax impact of the CARES Act (c) - (36,553) (36,553) (0.57)
Tax impact of executive departures
(d) - 111 111 -
Adjusted Non-GAAP Measure $ (362,636) $ (271,251) $ (4.20)
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
under the CARES Act.
c.Income tax benefit 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. | Q3 2020 Form 10-Q | 35--------------------------------------------------------------------------------
Table of Contents
Thirty-Nine Weeks Ended
Diluted Weighted Average
(in thousands, except per share Operating Loss Income Tax Impact Net Loss Earnings per Diluted Shares
amounts) Share Outstanding
Reported GAAP Measure $ (27,989) $ (22,742) $ (0.34) 66,845
Impairment of property, equipment
and lease assets 2,282 (593) 1,689 0.03
Impact of CEO departure - 822 (a) 822 0.01
Impact of executive departures 1,716 (401) 1,315 0.02
Adjusted Non-GAAP Measure $ (23,991) $ (18,916) $ (0.28) a.Represents the tax impact of the expiration of our former CEO's non-qualified stock options.
LIQUIDITY AND CAPITAL RESOURCES
We continued to aggressively pursue additional liquidity measures in the third quarter of 2020 and now expects to realize approximately$550.0 million in liquidity benefits, of which approximately$440.0 million are expected to be realized in 2020. This is an increase from the previously announced$425.0 million . Approximately$280.0 million of liquidity benefits were realized in the first half of 2020 and approximately$115.0 million were realized in the third quarter of 2020. These benefits are incremental to the previously announced cost savings associated with The EXPRESSway Forward strategy.
These benefits are the result of a number of actions taken to maintain liquidity throughout the COVID-19 pandemic. Examples of these actions include:
?Accessed$165.0 million from our$250.0 million asset based credit facility; ?Identified cost savings of approximately$105.0 million to be realized in 2020, including the impact from our previously announced COVID-19 mitigation actions inclusive of a decrease in our variable costs as a result of the decline in sales; ?Cut second quarter inventory receipts by over$100.0 million ; ?Lowered expected annual capital expenditures by approximately$27.0 million ; ?Negotiated$25.0 million in rent abatements with a number of landlords; and ?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. We also announced an additional 10% workforce reduction at ourColumbus, Ohio corporate office that is expected to result in$13.0 million in cost savings in 2021. Additionally, as previously communicated, we expect to receive a cash tax refund of approximately$95.0 million in the second quarter of 2021 as part of the CARES Act. 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 Revolving Credit Facility), projected cash generated from future operations, and the actions we have taken in response to COVID-19, including pursuing rent reductions and additional financing will be sufficient to fund our operating lease obligations, capital expenditures and working capital needs for at least the next 12 months. The incurrence of additional indebtedness would result in increased debt service obligations and could require us to agree to operating and financial covenants that would restrict our operations. Financing may not be available in amounts or on terms acceptable to us, if at all. Any failure by usto EXPRESS, INC. | Q3 2020 Form 10-Q | 36
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Table of Contents raise additional funds on terms favorable to us, or at all, could limit our ability to continue our current business operations or make the necessary investments in our business.
Analysis of Cash Flows
A summary of cash provided by or used in operating, investing, and financing
activities is shown in the following table:
Thirty-Nine Weeks Ended
October 31, 2020 November 2, 2019
(in thousands)
(Used in) provided by operating activities $ (251,602) $ 32,834
Used in investing activities (13,550) (20,503)
Provided by (used in) financing activities 165,360 (16,086)
Decrease in cash and cash equivalents (99,792) (3,755)
Cash and cash equivalents at end of period $ 107,347 $ 167,915
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 thirty-nine weeks ended
October 31, 2020 , our cash flows used in operating activities were $251.6
million compared to $32.8 million provided by operating activities for the
thirty-nine weeks ended November 2, 2019 . This $284.4 million decrease in cash
flows from operating activities for the thirty-nine weeks ended October 31, 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 or June 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 and are reflected in the
cash flows from operations.
Investing Activities
We also use cash for capital expenditures and financing transactions. For the
thirty-nine weeks ended October 31, 2020 , we had capital expenditures of
approximately $13.6 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 $6.0 million
to $9.0 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 $0.3
million for the remainder of 2020.
Financing Activities
On March 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 our Express and
Express Factory Outlet stores. As of October 31, 2020 , the amount outstanding
under our Revolving Credit Facility was $165.0 million , which is classified as
long-term debt on the unaudited Consolidated Balance Sheet, and approximately
$63.9 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 $21.1 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.
On November 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 thirty-nine weeks ended October 31, 2020 , we
did not repurchase shares under the stock repurchase program. During the
thirty-nine weeks ended November 2, 2019 , the Company repurchased 3.7 million
shares of its common stock under the 2017 Repurchase Program for an aggregate
amount equal to $13.6 million , including commissions.
EXPRESS, INC. | Q3 2020 Form 10-Q | 37--------------------------------------------------------------------------------
Table of Contents CONTRACTUAL OBLIGATIONS
Our contractual obligations and other commercial commitments did not change
materially between
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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