EXPRESS, INC. The following discussion and analysis summarizes the significant factors affecting the consolidated operating results, financial condition, liquidity, and cash flows of the Company as of and for the periods presented below. The following discussion and analysis should be read in conjunction with our Consolidated Financial Statements and the related Notes included elsewhere in this Annual Report on Form 10-K. 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, including those discussed below and elsewhere in this Annual Report on Form 10-K, particularly in the section entitled " Risk Factors ." All references herein to "2020" and "2019" refer to the 52-week periods endedJanuary 30, 2021 andFebruary 1, 2020 , respectively. This section of this Annual Report on Form 10-K generally discusses 2020 and 2019 items and year-to-year comparisons between 2020 and 2019. Discussions of 2018 items and year-to-year comparisons between 2019 and 2018 that are not included in this Form 10-K can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of the Company's Annual Report on Form 10-K for the fiscal year endedFebruary 1, 2020 , which was filed with theSecurities and Exchange Commission onMarch 17, 2020 .
Our management's discussion and analysis of financial condition and results of operations is presented in the following sections:
Page
Overview 31
COVID-19 Pandemic 31
Financial Details 32
Outlook 32
How We Assess the Performance of Our Business 34
Results of Operations 37
Liquidity and Capital Resources 41
Critical Accounting E stimates 44
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 over 500 retail and
factory outlet stores in the United States and Puerto Rico , as well as an online
destination.
COVID-19 PANDEMIC
In March 2020 , the World 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. Effective March 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 throughout 2020, even after all of our stores
re-opened, as customer traffic continued to be depressed, especially in our
retail stores, and two of our key categories, wear to work and occasion wear,
saw significant declines in demand.
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In response to the uncertainty of the circumstances described above, and in
accordance with 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;
?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 took several actions intended to strengthen our
liquidity position. In the first quarter of 2020, we accessed $165.0 million
available to us under our Revolving Credit Facility and in the fourth quarter of
2020 we borrowed an additional $90.0 million under a Term Loan Facility and also
borrowed an additional $50.0 million in the first quarter of 2021. Upon receipt
of proceeds from the Term Loan Facility we repaid $59.0 million of our Revolving
Credit Facility. See Note 6 of our Consolidated Financial Statements
included elsewhere in this Annual Report on Form 10-K for more information.
To further manage 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 Annual Report on Form 10-K for more
information.
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
(including any mutations or related strains of the virus) 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, the availability of, and prevalence of
access to, effective medical treatments and vaccines for COVID-19, and the pace
of recovery when the pandemic subsides, all of which are highly uncertain and
cannot be predicted. 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.
FINANCIAL DETAILS FOR 2020
?Net sales decreased 40% to $1.2 billion
?Comparable sales decreased 27%
?Comparable retail sales (includes both retail stores and eCommerce sales) decreased 29%
?Comparable outlet sales decreased 21%
?Gross margin percentage decreased 2,770 basis points to (0.4)%
?Operating loss increased $237.4 million to a loss of $455.2 million
?Net loss increased $241.1 million to a loss of $405.4 million
?Diluted earnings per share decreased $3.78 to a loss of $6.27
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OUTLOOK
As previously mentioned, COVID-19 led to the temporary closure of all Express
stores in mid-March and into the second quarter of 2020, 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
2020 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 deal had been
accomplished such as:
?We completed a comprehensive restructuring of our organization, in order to
better align our teams with our objective;
?We implemented a more streamlined and efficient go-to-market process,
established a new design and merchandising vision, called Express Edit;
?We developed a new brand positioning based on what our customers told us would
be relevant and compelling to them; and
?We identified a total of $80.0 million in cost savings opportunities that were
announced in January of 2020 that we expect to achieve over a three-year period.
While we expect our results to remain challenging in the near-term, 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 area and provides an update on
each priority:
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 were disproportionately impacted during 2020, as occasions and celebrations
were cancelled or delayed and our customers continued to work from home. As a
result, during the third quarter of 2020, 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.
"Versatility Adds Value" is one of the core ideas within the Express Edit
philosophy, and we are seeing strength in our most versatile product categories
especially what is becoming our "new core" which is comprised of denim bottoms
and Express Essentials tops. In denim, we saw continued strength in our newest
fabric platforms Luxe Comfort Knit and Temp Control Hyperstretch that rolled out
in the third quarter of 2020 and Super Soft and 4-Way Hyperstretch that launched
in the fourth quarter of 2020. Express Essentials are our new foundational knit
tops for women and men, and they are represented across all of our channels.
This product is modern, relevant and versatile and beautifully meets the modern
weekday and weekend wardrobe needs.
These new deliveries have performed well 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 as occasions
and celebrations of all kinds come back, these occasion-based categories will
represent an opportunity for us going forward and we will continue to provide
dimensions of versatility and comfort within our assortments throughout 2021.
Brand
In 2020, we introduced our new brand purpose: to create confidence and inspire
self-expression. This is based on the belief that clothing can serve a higher
purpose in people's lives. We also introduced our new brand promise: to edit the
best of now for real-life versatility. Throughout the year, we presented our
brand and engaged with our customers in new and more creative ways as we
fulfilled our purpose and promise through social engagement, influencer
relationships, and customer co-creation. In addition, we implemented a wide
variety of initiatives and
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activations that created deeper, more meaningful connections with our most
loyal, and our newest, Express fans. 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 the
Express 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.
In 2020 we laid the foundation for our brand transformation, and in 2021, we
plan to accelerate our momentum by launching a new customer experience model in
our physical and digital stores, expanding and enhancing our styling
capabilities, and offering more localized assortments.
Customer
We know that to be successful we must remain focused on engaging our existing customers and acquiring new ones. As a result, in 2020, we refined our approach to identify and connect with our customers, sharpened our digital spend, and drove greater personalization of messages through owned and paid media channels. We more effectively engaged current customers and acquired new ones with increases in engagement across our paid social channels. We also engaged our customers in new, and creative ways during 2020. For example, these efforts included our beginning a dialogue with our top loyalty members to better understand their wardrobe needs and style preferences which led to our first-ever Express designer and Express customer co-created product capsule. We plan to launch additional co-created product capsules in 2021. 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, new Insider benefits, a digital wallet feature, and an easier way for customers to access and redeem benefits to incentivize and reward our best customers in a more timely and engaging manner.
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 2020, we advanced our eCommerce and omnichannel capabilities by introducing 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. Conversion is another key component of execution, and we have successfully driven increases in conversion across our channels during the fourth quarter of 2020. Another aspect of execution is our physical stores. We still intend to close the 100 stores we previously announced inJanuary 2020 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. At the end of 2020, our inventory position was not where we would like to be, but a plan is in place to improve inventory levels and improve profitability. Our margin has already improved on clearance merchandise which improves our inventory composition, and at the end of 2020, most of our legacy inventory has been sold through and the composition of our inventory we consider "aged" is primarily core, season-less product with low markdown risk. We expect our inventory to be more aligned with our sales trend as we move into the back half of 2021 and business continues to recover.EXPRESS, INC. | 2020 Form 10-K | 34 -------------------------------------------------------------------------------- Table of Contents 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 describes and discusses these measures.Net Sales Description Revenue from the sale of merchandise, less returns and discounts, as well as shipping and handling revenue related to eCommerce, revenue from the rental of our LED sign inTimes Square , gift card breakage, revenue earned from our private label credit card agreement, and revenue earned from our franchise agreements.
Discussion
Our business is seasonal, and we have historically realized a higher portion of our net sales in the third and fourth quarters, due primarily to the impact of the holiday season. Generally, approximately 45% of our annual net sales occur in the Spring season (first and second quarters) and 55% occur in the Fall season (third and fourth quarters). In 2020, this split was approximately 38% in the Spring and 62% in the Fall as a result of the COVID-19 pandemic and the related store closures in the Spring season. Comparable Sales Description Comparable sales is a measure of the amount of sales generated in a period relative to the amount of sales generated in the comparable prior year period. Comparable sales for 2020 was calculated using the 52-week period endedJanuary 30, 2021 as compared to the 52-week period endedFebruary 1, 2020 . Comparable retail sales includes: •Sales from retail stores that were open 12 months or more as of the end of the 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
Discussion
Our business and our comparable sales are subject, at certain times, to calendar shifts, which may occur during key selling periods close to holidays such as Easter,Thanksgiving , and Christmas, and regional fluctuations for events such as sales tax holidays. We believe comparable sales provides a useful measure for investors by removing the impact of new stores and closed stores. Management considers comparable sales a useful measure in evaluating continuing store performance. eCommerce Demand Description eCommerce demand is defined as gross orders for Express and/or third party merchandise that originate through our eCommerce platform, including the website, app, and buy online pick-up in store.
Discussion
We believe eCommerce demand is a useful operational metric for investors and management as it provides visibility for orders placed but not yet shipped.
EXPRESS, INC. | 2020 Form 10-K | 35 -------------------------------------------------------------------------------- Table of Contents Transactions Description Transactions are defined as the number of units sold as compared to the dollar amount of sales.
Discussion
We believe this metric is useful as it removes the impact of promotions and provides a better indicator of the acceptance of our product.
Cost of Goods Sold, Buying and Occupancy Costs Description Includes the following: •Direct cost of purchased merchandise •Inventory shrink and other adjustments •Inbound and outbound freight •Merchandising, design, planning and allocation, and manufacturing/production costs •Occupancy costs related to store operations (such as rent and common area maintenance, utilities, and depreciation on assets) •Logistics costs associated with our eCommerce business •Impairments on long-lived assets and right of use lease assets
Discussion
Our cost of goods sold typically increases in higher volume quarters because the direct cost of purchased merchandise is tied to sales.
The primary drivers of the costs of individual goods are raw materials, labor in the countries where our merchandise is sourced, and logistics costs associated with transporting our merchandise.
Buying and occupancy costs related to stores are largely fixed and do not necessarily 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 Description Gross profit/(loss) is net sales minus cost of goods sold, buying and occupancy costs. Gross margin measures gross profit/(loss) as a percentage of net sales.
Discussion
Gross profit/(loss)/gross margin is impacted by the price at which we are able to sell our merchandise and the cost of our product.
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 Administrative Expenses Description Includes operating costs not included in cost of goods sold, buying and occupancy costs such as: •Payroll and other expenses related to operations at our corporate offices •Store expenses other than occupancy costs •Marketing expenses, including production, mailing, print, and digital advertising costs, among other things
Discussion
With the exception of store payroll, certain marketing expenses, and incentive compensation,
selling, general, and administrative expenses generally do not vary proportionally with net
sales. As a result, selling, general, and administrative expenses as a percentage of net sales
are usually higher in lower volume quarters and lower in higher volume quarters.
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FISCAL YEAR COMPARISON
Net Sales
2020 2019
Net sales (in thousands) $ 1,208,374 $ 2,019,194
Comparable retail sales (29) % (6) %
Comparable outlet sales (21) % (1) %
Total comparable sales percentage change (27) % (5) %
Gross square footage at end of period (in thousands) 4,841
5,052
Number of:
Stores open at beginning of period 595 631 New retail stores 1 - New outlet stores 1 31 New Express Edit Concept stores 1
-
Retail stores converted to outlets -
(27)
Closed stores (28)
(40)
Stores open at end of period 570
595
Net sales decreased by approximately$810.8 million , or 40%, between 2020 and 2019. The sales decrease is primarily attributed to the temporary closure of all Express stores from mid-March into the second quarter of 2020 due to the COVID-19 pandemic and the continued material impact of COVID-19 through the remainder of the year, as customer traffic continued to be pressured, especially in our retail stores. In addition, our customers have shifted away from purchasing products in our occasion-based categories, such as suits, dress shirts and dresses, which previously made up a large portion of our sales. This had a negative impact on our comparable sales as well as our net sales during 2020. Gross (Loss)/Profit The following table shows cost of goods sold, buying and occupancy costs, gross (loss)/profit in dollars, and gross margin percentage for the stated periods: 2020 2019 (in thousands, except percentages) Cost of goods sold, buying and occupancy costs$ 1,213,281 $ 1,468,619 Gross (loss)/profit $ (4,907)$ 550,575 Gross margin percentage (0.4) % 27.3 % The 2,770 basis point decrease in gross margin percentage, or gross (loss)/profit as a percentage of net sales, in 2020 compared to 2019 was comprised of a 1,330 basis point decrease in merchandise margin and a 1,440 basis point 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$34.4 million in impairment charges related to certain long-lived store related assets and right of use assets. Refer to Note 2 in our Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for further discussion regarding the impairment charges for 2020. EXPRESS, INC. | 2020 Form 10-K | 37 -------------------------------------------------------------------------------- Table of Contents Selling, General, and Administrative Expenses The following table shows selling, general, and administrative expenses in dollars and as a percentage of net sales for the stated periods: 2020 2019 (in thousands, except percentages) Selling, general, and administrative expenses$ 450,834 $ 564,332
Selling, general, and administrative expenses, as a percentage of net sales
37.3 % 27.9 %
The $113.5 million decrease in selling, general, and administrative expenses in
2020 compared to 2019 was primarily payroll related and was the result of our
COVID-19 mitigation actions, a reduction in variable costs driven by the sales
decline, and the cost reductions associated with our corporate restructuring
announced in the fourth quarter of 2019.
Restructuring Costs
The following table shows restructuring costs for the stated periods:
2020 2019
(in thousands)
Restructuring costs $ - $ 7,337
Restructuring costs of $7.3 million in 2019 represent the costs in connection
with the announcement of the Company's new strategy and the restructuring of the
Company's work force to align to this strategy. Refer to Note 1 2 of the
Consolidated Financial Statements included elsewhere in this Annual Report on
Form 10-K for additional information regarding the restructuring costs.
Interest Expense/(Income), Net
The following table shows interest expense/(income) in dollars for the stated
periods:
2020 2019
(in thousands)
Interest expense/(income), net $ 3,401 $ (2,981)
The $6.4 million increase in interest expense, net in 2020 compared to 2019 is
the result of borrowing under our Revolving Credit Facility and Term Loan
Facility, which bear interest at variable rates. Refer to Note 6 in our
Consolidated Financial Statements included elsewhere in this Annual Report on
Form 10-K for further discussion regarding our borrowings during 2020.
Other Expense, Net
The following table shows other expense in dollars for the stated periods:
2020 2019
(in thousands)
Other expense, net $ 2,733 $ -
The $2.7 million increase in other expense in 2020 compared to 2019 was the
result of a $2.7 million pre-tax write-off of our remaining 2016 investment in
Homage, LLC , a privately held retail apparel company based in Columbus, Ohio
("Homage"). Refer to Note 2 in our Consolidated Financial Statements
included elsewhere in this Annual Report on Form 10-K for further discussion
regarding the write-off during 2020.
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Income Tax Benefit
The following table shows income tax benefit in dollars for the stated periods:
2020 2019
(in thousands)
Income tax benefit $ (55,900) $ (50,526)
The effective tax rate was 12.1% in 2020 compared to 23.5% in 2019. The
effective tax rate for 2020 was less than the statutory tax rate due to the
impact of establishing a valuation allowance against our net deferred tax
assets, which includes $54.3 million of discrete tax expense from a valuation
allowance against previously recognized deferred tax assets and $51.5 million
valuation allowance against 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 $42.1
million tax benefit related to the portion of the 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 2019 includes a non-cash tax benefit of approximately $49.7 million related
to the impairment of intangible assets, offset by a net tax expense of
approximately $2.0 million attributable to certain discrete items, predominately
related to a tax shortfall for share-based compensation. Refer to Note 5
of the Consolidated Financial Statements included elsewhere in this Annual
Report on Form 10-K for additional information regarding the tax rate.
Operating Loss, Net Loss, Diluted Earnings Per Share and EBITDA
Included in the table below is operating loss, net loss, diluted earnings per
share and Earnings before interest, taxes, depreciation, and amortization
("EBITDA") for 2020 and 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, adjusted diluted earnings per share
and EBITDA. The following table presents these financial measures, each a
non-GAAP financial measure, for the stated periods which eliminate certain
non-core operating costs:
2020 2019
(in thousands, except per share amounts)
Operating loss $ (455,215) $ (217,865)
Adjusted operating loss (Non-GAAP) $ (420,835) $ (6,764)
Net loss $ (405,449) $ (164,358)
Adjusted net loss (Non-GAAP) $ (314,343) $ (5,136)
Diluted earnings per share $ (6.27) $ (2.49)
Adjusted diluted earnings per share (Non-GAAP) $ (4.86) $ (0.08)
EBITDA (Non-GAAP) $ (384,689) $ (132,766)
How These Measures Are Useful
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, adjusted diluted earnings per share and EBITDA 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 may
provide a better baseline for analyzing trends in the business. In addition,
adjusted diluted earnings per share and EBITDA are used as a performance
measures in the Company's long-term executive compensation program for purposes
of determining the number of equity awards that are ultimately earned and EBITDA
is also a metric used in our short-term cash incentive compensation plan.
Limitations of the Usefulness of These Measures
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 net loss,
operating loss, or diluted earnings per share. These non-GAAP financial measures
reflect an additional way of viewing our operations
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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 2020 and 2019, respectively.
2020
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 $ (455,215) $ (405,449) $ (6.27) 64,624
Impairment of property, equipment
and lease assets 34,380 (9,111) (a) 25,269 0.39
Equity method investment impairment
(b) - (642) 2,091 0.03
Valuation allowance on deferred
taxes (c) - 105,695 105,695 1.64
Tax impact of the CARES Act (d) - (42,060) (42,060) (0.65)
Tax impact of executive departures
(e) - 111 111 -
Adjusted Non-GAAP Measure $ (420,835) $ (314,343) $ (4.86)
a.Items tax affected at the applicable deferred or statutory rate.
b.Impairment before tax was $2.7 million and was recorded in other expense, net.
c.Valuation allowance provided against previously recognized deferred tax assets
and 2020 losses, less net operating losses utilized under the CARES Act.
d.Income tax benefit primarily due to a net operating loss carryback under the
CARES Act to years with a higher federal statutory tax rate than is currently
enacted.
e.Represents the tax impact related to the expiration of former executive
non-qualified stock options.
2019
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 $ (217,865) $ (164,358) $ (2.49) 66,133
Impairment of intangible assets 197,618 (49,727) (a) 147,891 2.24
Impairment of property, equipment and
lease assets 4,430 (1,152) (a) 3,278 0.05
Impact of restructuring 7,337 (1,834) (a) 5,503 0.08
Impact of CEO departure - 822 (b) 822 0.01
Impact of other executive departures 1,716 12 (c) 1,728 0.03
Adjusted Non-GAAP Measure $ (6,764) $ (5,136) $ (0.08)
a.Items tax affected at the applicable deferred or statutory rate.
b.Represents the tax impact of the expiration of the former CEO's non-qualified
stock options.
c.Represents the tax impact of executive departure costs offset by the tax
impact related to the expiration of the executive non-qualified stock options.
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The following table reconciles the non-GAAP financial measure EBITDA with the
most directly comparable GAAP financial measures for 2020 and 2019,
respectively.
2020 2019
Net loss $ (405,449) $ (164,358)
Interest expense/(income), net 3,401 (2,981)
Income tax benefit (55,900) (50,526)
Depreciation and amortization 73,259 85,099
EBITDA (Non-GAAP Measure) $ (384,689) $ (132,766) LIQUIDITY AND CAPITAL RESOURCES
In 2020, we took a number of steps to manage liquidity during the COVID-19 pandemic. Examples of these actions include:
?Accessed$165.0 million from our$250.0 million Revolving Credit Facility; ?Secured$140.0 million in additional financing;$90.0 million that was received in the fourth quarter of 2020 (of which$59.0 million was used to pay down a portion of our Revolving Credit Facility) and$50.0 million of which was drawn down in 2021; ?Reduced$250.0 million of costs through expense reductions, capital reductions and inventory cuts; ?Negotiated$85.0 million in savings through rent abatements, deferrals, and rent reductions; and ?Expecting$120.0 million tax benefit from the CARES Act, including the expanded operating loss carry back, employer payroll tax credit and deferral provisions. The majority of these liquidity benefits are expected to be realized in 2021, including a$95.0 million income tax refund which is expected to be received at the end of the second quarter of 2021. We are required to repay$50.0 million of our term loan upon receipt of the tax refund.
In addition to the actions above, we also have contingency plans in which it would further reduce or defer additional expenses and cash outlays, should operations weaken beyond current forecasts 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 also have commitments under lease agreements and debt agreements that will require future cash outlays. For information on future payments required under lease agreements see N ote 4 of our Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K and for future payment information related to our long-term debt see Note 6 of our Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K. As previously disclosed, the COVID-19 pandemic has and continues to result in significant disruption to our business. As a result, our revenues, results of operations and cash flows continue to be materially adversely impacted. For the 52-week period endedJanuary 30, 2021 , we reported a net loss of$405.4 million and negative operating cash flows of$323.6 million . In response to the COVID-19 pandemic we borrowed$165.0 million under our Revolving Credit Facility and an additional$90.0 million under our Term Loan Facility. Upon receipt of proceeds from the Term Loan Facility we repaid$59.0 million of the Revolving Credit Facility. In addition, under the Term Loan Facility, we borrowed$50.0 million subsequent to year-end, that will be repaid upon receipt of the CARES Act receivable. The Revolving Credit Facility and the Term Loan Facility contain certain affirmative and negative covenants. Refer to Note 6 in our Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for further details regarding the Revolving Credit Facility and Term Loan Facility. We are currently in compliance with the covenants and expect to remain in compliance, however, due to the uncertainty related to the EXPRESS, INC. | 2020 Form 10-K | 41 -------------------------------------------------------------------------------- Table of Contents duration of the COVID-19 pandemic and its continuing impacts, we could experience material changes to forecasted revenues and cash flows and may experience difficulty remaining in compliance with financial covenants under the Revolving Credit Facility and the Term Loan Facility. When conditions and events, in the aggregate, impact an entity's ability to continue as a going concern, management evaluates the mitigating effect of its plans to determine if it is probable that the plans will be effectively implemented and, when implemented, the plans will mitigate the relevant conditions or events. Our plans are focused on improving our results and liquidity through increased sales and cost reductions. Our current forecasts include sales and profitability improvements over fiscal year 2020 results. In addition, we have entered into agreements, or are in discussions with, most of our retail landlords to modify rent payments, receive rent concessions or otherwise reduce operating costs. We also have$111.3 million in income tax refunds that are receivable from theU.S. government based primarily on provisions in the CARES Act. Any legislative changes to the CARES Act or significant delays in receiving this tax refund could adversely impact our financial position and results. We have contingency plans to further reduce or defer additional expenses and cash outlays, should operations weaken beyond current forecasts or if cash inflows from tax receivables are not received when expected. We believe these plans are probable of being successfully implemented, which will result in adequate cash flows to support our ongoing operations and to meet our covenant requirements under the Revolving Credit Facility and Term Loan Facility for one year following the date these financial statements are issued. Analysis of Cash Flows A summary of cash provided by or used in operating, investing, and financing activities is shown in the following table: 2020
2019
(in thousands)
(Used in) provided by operating activities
Used in investing activities (16,854) (37,039)
Provided by (used in) financing activities 189,215 (18,202)
(Decrease)/Increase in cash and cash equivalents (151,265) 35,469
Cash and cash equivalents at end of period
Operating Activities Our business historically 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. Net cash used in operating activities was$323.6 million in 2020 compared to$90.7 million provided by operating activities in 2019. The decrease in cash flows from operating activities in 2020 was primarily driven by the temporary closure of our stores as a result of COVID-19 and the continued impact of COVID-19 on our business. 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 and are reflected in the cash flows from operations. Investing Activities We also use cash for investing activities. Our capital expenditures consist primarily of new and remodeled store construction and fixtures and investments in information technology. We had capital expenditures of approximately$16.9 million in 2020 and$37.0 million in 2019. The decrease in 2020 was primarily driven by reduced capital expenditures as a result of COVID-19 and the aggressive management to improve our liquidity. Financing Activities Credit Facilities In addition to cash flow from operations, we have access to additional liquidity, as needed, through borrowings under our Revolving Credit Facility and Term Loan Facility. OnJanuary 13, 2021 , we entered into a definitive loan agreement withSycamore Partners as lead lender, along withWells Fargo andBank of America Merrill Lynch , that strengthens our liquidity position. The new financing includes a$90.0 million FILO Term Loan received in 2020, and EXPRESS, INC. | 2020 Form 10-K | 42 -------------------------------------------------------------------------------- Table of Contents a$50.0 million Delayed Draw Term Loan (DDTL), that was drawn down in March of 2021. The DDTL is to be repaid upon receipt of a CARES Act tax refund expected to be received in the second quarter of 2021. This financing is in addition to our existing$250.0 million Revolving Credit Facility under which we drew down$165.0 million in the first quarter of 2020 in response to the COVID-19 outbreak that led to the temporary closure of all of ourExpress and Express Factory Outlet stores. Upon the receipt of the proceeds from the FILO Term Loan we repaid$59.0 million of the amount borrowed under our Revolving Credit Facility. The expiration date of the facilities isMay 24, 2024 . As ofJanuary 30, 2021 , the net amount outstanding under our facilities was$196.1 million , which is classified as long-term debt on the Consolidated Balance Sheet, net of unamortized costs, and approximately$35.6 million was available for borrowing under our facilities subject to certain borrowing base limitations and after outstanding letters of credit in the amount of$36.1 million , primarily related to our third party logistics contract. Refer to Note 6 of our Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for additional information on our Revolving Credit Facility and Term Loan Facility. Share Repurchases 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 2020, we did not repurchase shares under the stock repurchase program. During 2019, we repurchased$15.6 million of common stock, including commissions, under the share repurchase program. EXPRESS, INC. | 2020 Form 10-K | 43 -------------------------------------------------------------------------------- Table of Contents CRITICAL ACCOUNTING ESTIMATES The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of our assets, liabilities, revenues, and expenses, as well as the related disclosure of contingent assets and liabilities at the date of the financial statements. Management evaluates its accounting policies, estimates, and judgments on an on-going basis. Management bases its estimates and judgments on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions and conditions. Management evaluated the development and selection of its critical accounting policies and estimates and believes that the following policies involve a higher degree of judgment or complexity and are most significant to reporting our results of operations and financial position and are, therefore, discussed as critical. The following critical accounting policies reflect the significant estimates and judgments used in the preparation of our Consolidated Financial Statements. More information on all of our significant accounting policies can be found in Note 2 to our Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K. Store Asset Impairment Description of Policy Store related Property and Equipment, including the right of use assets, are tested for recoverability whenever events or changes in circumstances indicate that the carrying amount of these assets might not be recoverable. These include, but are not limited to, material adverse changes in projected revenues and cost of goods sold (exclusive of buying and occupancy costs), present cash flow losses combined with a history of cash flow losses and a forecast that demonstrates significant continuing losses, significant negative economic conditions, a significant decrease in the market value of an asset and store closure or relocation decisions. We review for indicators of impairment at the individual store level, the lowest level for which cash flows are identifiable. Stores that display an indicator of impairment are subjected to an impairment assessment. Our impairment assessment requires management to make assumptions and judgments related, but not limited, to management's expectations for future operations and projected cash flows.
•The key assumptions used in our undiscounted future store cash flow models include sales growth rate and gross margin, exclusive of buying and occupancy costs.
An impairment loss may be recognized when these undiscounted future cash flows are less than the carrying amount of the asset group. In the circumstance of impairment, any loss would be measured as the excess of the carrying amount of the asset group over its fair value. Fair value of our store-related assets is determined at the individual store level based on the highest and best use of the asset group.
•The key assumptions used in our fair value analysis may include discounted estimates of future store cash flows from operating the store and/or comparable market rents.
Judgments and Uncertainties Our analysis for impairment requires judgment surrounding identification of appropriate triggering events and assumptions used in our fair value model. These judgments can be affected by factors such as expectations for future store performance, real estate demand, market rent and economic conditions that can be difficult to predict. Effect if Actual Results Differ from Assumptions We have no reason to believe that there will be a material change in the future estimates or assumptions we use in this evaluation. However, if we become aware of additional triggering events there is potential that additional stores could be required to be tested for impairment and could be impaired. These events could include further deterioration in store operating results, increased store labor costs, our inability to implement our cost savings initiatives or lower mall traffic. In addition, if market rent fair values deteriorate, our fair value test could determine additional right-of-use asset impairment. A 1% reduction in our store related assets would be approximately$8.0 million atJanuary 30, 2021 .EXPRESS, INC. | 2020 Form 10-K | 44
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Table of Contents Inventories - Lower of Cost or Net Realizable Value Description of Policy Inventories are principally valued at the lower of cost or net realizable value on a weighted-average cost basis. We record a lower of cost or net realizable value adjustment for our inventories if the cost of specific inventory items on hand exceeds the amount we expect to realize from the ultimate sale or disposal of the inventory. Judgments and Uncertainties Our accounting methodology for determining the lower of cost or net realizable value adjustment contains uncertainties because it requires management to make assumptions and estimates that are based on factors such as merchandise seasonality, historical trends, and estimated inventory levels, including sell-through of remaining units. Effect if Actual Results Differ from Assumptions We have no reason to believe that there will be a material change in the future estimates or assumptions we use to measure the lower of cost or net realizable value adjustment. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to losses or gains that could be material. A 100 basis point increase or decrease in the lower of cost or net realizable value adjustment would not have had a material impact on the inventory balance or pre-tax income as of and for the year endedJanuary 30, 2021 . Valuation Allowance on Deferred Tax Assets Description of Policy Deferred tax assets and liabilities are recognized for the estimated future tax consequences of temporary differences that currently exist between the tax basis and the financial reporting basis of our assets and liabilities. Valuation allowances are established against deferred tax assets when it is more likely than not that the realization of those deferred tax assets will not occur. Judgments and Uncertainties Our deferred tax asset and liability balances contain uncertainty because changes in tax laws, rates, or future taxable income may differ from estimates and judgments made by management. Assessing whether deferred tax assets are realizable requires significant judgment. We consider all available positive and negative evidence, including past operating results and expectations of future operating income. The ultimate realization of deferred tax assets is often dependent upon future profitability, which is inherently uncertain. While we have a full valuation allowance on our net deferred tax asset assets, future changes in assumptions could have an effect on our estimates. Effect if Actual Results Differ from Assumptions We have no reason to believe that there will be a material change in the future estimates or assumptions we use to calculate our deferred taxes. However, if future tax rates are changed, we do not achieve our cost savings initiatives, or if actual results are not consistent with our estimates, we may need to adjust the carrying value of our deferred tax balances. An increase or decrease in the valuation allowance would result in a respective increase or decrease in our effective tax rate in the period the increase or decrease occurs.
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