QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended October 30, 2021
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______ TO ______
Commission File Number 001-34742
EXPRESS, INC.
(Exact name of registrant as specified in its charter)
Delaware
26-2828128
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
1 Express Drive
Columbus, Ohio
43230
(Address of principal executive offices)
(Zip Code)
Telephone: (614) 474-4001
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $.01 par value
EXPR
The New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☐
Accelerated filer
☒
Non-accelerated filer
☐
Smaller reporting company
☒
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of outstanding shares of the registrant’s common stock was 67,056,178 as of November 27, 2021.
This Quarterly Report on Form 10-Q (“Quarterly Report”) contains forward-looking statements within the “safe harbor” provisions of the Private Securities Reform Act of 1995 that are subject to risks and uncertainties. All statements other than statements of historical fact included in this Quarterly Report are forward-looking statements. Forward-looking statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance, and business. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as “anticipate,” “estimate,” “expect,” “project,” “plan,” “potential,” “intend,” “believe,” “may,” “will,” “should,” “can have,” “likely,” "continue to," and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events. For example, all statements we make relating to our estimated and projected costs, expenditures, cash flows, and financial results, our plans and objectives for future operations, growth, initiatives, or strategies, plans to repurchase shares of our common stock, or the expected outcome or impact of pending or threatened litigation are forward-looking statements. All forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those that we expected, including:
External Risks
▪changes in consumer spending and general economic conditions;
▪customer traffic at malls, shopping centers, and at our stores;
▪the COVID-19 pandemic has previously and may again adversely affect our business operations, store traffic, employee availability, financial condition, liquidity and cash flow;
▪competition from other retailers;
▪our dependence upon independent third parties to manufacture all of our merchandise;
▪changes in the cost of raw materials, labor, and freight;
▪labor shortages and the potential impacts of any vaccine mandates on our workforce;
▪supply chain disruption and increased tariffs;
▪difficulties associated with our distribution facilities;
▪natural disasters, extreme weather, public health issues, including pandemics, fire, and other events that cause business interruption; and
▪our reliance on third parties to provide us with certain key services for our business.
Strategic Risks
▪our ability to identify and respond to new and changing fashion trends, customer preferences, and other related factors;
▪fluctuations in our sales, results of operations, and cash levels on a seasonal basis and due to a variety of other factors, including our product offerings relative to customer demand, the mix of merchandise we sell, promotions, inventory levels, and sales mix between stores and eCommerce;
▪our dependence on a strong brand image;
▪our ability to adapt to changes in consumer behavior and develop and maintain a relevant and reliable omnichannel experience for our customers;
▪our dependence upon key executive management; and
▪our ability to execute our growth strategy, including but not limited to, engaging our customers and acquiring new ones, executing with precision to accelerate sales and profitability, putting product first, and reinvigorating our brand.
Information Technology Risks
▪the failure or breach of information systems upon which we rely;
▪the increase of our employees working remotely and use of technology for work functions; and
▪our ability to protect our customer data from fraud and theft.
Financial Risks
▪our substantial lease obligations;
▪restrictions imposed on us under the terms of our current credit facilities, including asset based requirements related to inventory levels, ability to make additional borrowings, and restrictions on our ability to repurchase shares of our common stock;
▪our inability to maintain compliance with covenants in our current credit facilities; and
▪impairment charges on long-lived assets and our lease assets.
Legal, Regulatory and Compliance Risks
▪claims made against us resulting in litigation or changes in laws and regulations applicable to our business;
▪our inability to protect our trademarks or other intellectual property rights that may preclude the use of our trademarks or other intellectual property around the world;
▪changes in tax requirements, results of tax audits, and other factors including timing of tax refund receipts, that may cause fluctuations in our effective tax rate and operating results; and
▪our failure to maintain adequate internal controls.
Stock Ownership Risk Factors
▪our inability to pay dividends and repurchase shares;
▪our charter documents and applicable law may discourage or delay acquisition attempts;
▪our shares of common stock may experience extreme volatility and purchases of our common stock could incur substantial losses;
▪our stock price may incur rapid and substantial increases or decreases that may not coincide in timing with the disclosure of news or developments affecting us;
▪potential short squeezes related to our common stock have led to, and could again lead to, extreme price volatility in shares of our common stock; and
▪information available in public media that is published by third parties, including blogs, articles, message boards and social and other media may include statements not attributable to us and may not be reliable or accurate.
We derive many of our forward-looking statements from our operating budgets and forecasts, which are based upon many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors that could affect our actual results. For a discussion of these risks and other risks and uncertainties that could cause actual results to differ materially from those contained in our forward-looking statements, please refer to “Item 1A. Risk Factors” included elsewhere in this Quarterly Report and in our Annual Report on Form 10-K for the year ended January 30, 2021 (“Annual Report”), filed with the Securities and Exchange Commission (“SEC”) on March 25, 2021. The forward-looking statements included in this Quarterly Report are made only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events, or otherwise, except as required by law.
Preferred stock – $0.01 par value; 10,000 shares authorized; no shares issued or outstanding
—
—
Common stock – $0.01 par value; 500,000 shares authorized; 93,632 shares and 93,632 shares issued at October 30, 2021 and January 30, 2021, respectively, and 67,050 shares and 64,971 shares outstanding at October 30, 2021 and January 30, 2021, respectively
936
936
Additional paid-in capital
218,239
222,141
Retained earnings
69,789
114,732
Treasury stock – at average cost; 26,582 shares and 28,661 shares at October 30, 2021 and January 30, 2021, respectively
(297,133)
(328,120)
Total stockholders’ (deficit)/equity
(8,169)
9,689
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$
1,324,128
$
1,458,457
See Notes to Unaudited Consolidated Financial Statements.
NOTE 1 | DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Business Description
Grounded in versatility and powered by a styling community, Express, Inc., together with its subsidiaries (“Express” or the “Company”), is a modern, multichannel apparel and accessories brand whose purpose is to Create Confidence & Inspire Self-Expression. Launched in 1980 with the idea that style, quality and value should all be found in one place, Express has been a part of some of the most important and culture-defining fashion trends. The Express Edit design philosophy ensures that the brand is always "of the now" so people can get dressed for every day and any occasion knowing that Express can help them look the way they want to look and feel the way they want to feel.
The Company operates 570 retail and factory outlet stores in the United States and Puerto Rico, the express.com online store and the Express mobile app. Express is comprised of the brands Express and UpWest. As of October 30, 2021, Express operated 363 primarily mall-based retail stores in the United States and Puerto Rico as well as 207 factory outlet stores.
Fiscal Year
The Company's fiscal year ends on the Saturday closest to January 31. Fiscal years are designated in the unaudited Consolidated Financial Statements and Notes, as well as the remainder of this Quarterly Report, by the calendar year in which the fiscal year commences. All references herein to the Company's fiscal years are as follows:
Fiscal Year
Year Ended
Number of Weeks
2021
January 29, 2022
52
2020
January 30, 2021
52
All references herein to “the third quarter of 2021” and “the third quarter of 2020” represent the thirteen weeks ended October 30, 2021 and October 31, 2020, respectively.
Basis of Presentation
The accompanying unaudited Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and the U.S. Securities and Exchange Commission’s Article 10, Regulation S-X and therefore do not include all of the information or footnotes required for complete financial statements. In the opinion of management, the accompanying unaudited Consolidated Financial Statements reflect all adjustments (which are of a normal recurring nature) necessary to state fairly the financial position, results of operations, and cash flows for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for the Company's 2021 fiscal year. Therefore, these statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto for the year ended January 30, 2021, included in the Company’s Annual Report on Form 10-K, filed with the SEC on March 25, 2021.
Principles of Consolidation
The unaudited Consolidated Financial Statements include the accounts of Express, Inc. and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.
Segment Reporting
The Company defines an operating segment on the same basis that it uses to evaluate performance internally. The Company has determined that, together, its Chief Executive Officer and its President, Chief Operating Officer and Interim Chief Financial Officer are the Chief Operating Decision Maker, and that there is one operating segment. Therefore, the Company reports results as a single segment, which includes the operation of its Express brick-and-mortar retail and outlet stores and eCommerce operations.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the unaudited Consolidated Financial Statements and the reported amounts of revenue and expense during the reporting period, as well as the related disclosure of contingent assets and liabilities as of the date of the unaudited Consolidated Financial Statements. Actual results may differ from those estimates. The Company revises its estimates and assumptions as new information becomes available.
Management's Assessment
The Company has seen significant recovery in sales and profitability through the third quarter of 2021 and continues to be in compliance with the financial covenants under its Amended Revolving Credit Facility (as defined below) and Term Loan Facility (as defined below). Based upon the improved results in the first three quarters of 2021, the terms of the Term Loan Facility and the Amended Revolving Credit Facility and the cash conservation and cost reduction measures taken to date, the Company is projecting sufficient liquidity to fund future operations and to meet its obligations as they become due for at least one year following the date that these unaudited Consolidated Financial Statements are issued.
NOTE 2 | REVENUE RECOGNITION
The following is information regarding the Company’s major product categories and sales channels:
Thirteen Weeks Ended
Thirty-Nine Weeks Ended
October 30, 2021
October 31, 2020
October 30, 2021
October 31, 2020
(in thousands)
Apparel
$
419,965
$
277,818
$
1,129,198
$
664,822
Accessories and other
38,721
34,586
111,840
81,854
Other revenue
13,295
9,657
34,329
31,363
Total net sales
$
471,981
$
322,061
$
1,275,367
$
778,039
Thirteen Weeks Ended
Thirty-Nine Weeks Ended
October 30, 2021
October 31, 2020
October 30, 2021
October 31, 2020
(in thousands)
Retail
$
339,369
$
222,093
$
901,436
$
546,375
Outlet
119,317
90,311
339,602
200,301
Other revenue
13,295
9,657
34,329
31,363
Total net sales
$
471,981
$
322,061
$
1,275,367
$
778,039
Other revenue consists primarily of revenue earned from our private label credit card agreement, shipping and handling revenue related to eCommerce activity, sell-off revenue related to marked-out-of-stock inventory sales to third parties, revenue from gift card breakage and revenue from franchise agreements.
Merchandise Sales
The Company recognizes sales for in-store purchases at the point-of-sale. Revenue related to eCommerce transactions is recognized upon shipment based on the fact that control transfers to the customer at that time. The Company has made a policy election to treat shipping and handling as costs to fulfill the contract, and as a result, any amounts received from customers are included in the transaction price allocated to the performance obligation of providing goods with a corresponding amount accrued within cost of goods sold, buying and occupancy costs in the unaudited Consolidated Statements of Income and Comprehensive Income for amounts paid to applicable carriers. Associate discounts on merchandise purchases are classified as a reduction of net sales. Net sales excludes sales tax collected from customers and remitted to governmental authorities.
The Company maintains a customer loyalty program in which customers earn points toward rewards for qualifying purchases and other marketing activities. Upon reaching specified point values, customers are issued a reward, which they may redeem on merchandise purchases at the Company’s stores or on its website. Generally, rewards earned must be redeemed within 60 days from the date of issuance. The Company defers a portion of merchandise sales based on the estimated standalone selling price of the points earned. This deferred revenue is recognized as certificates are redeemed or expire. To calculate this deferral, the Company makes assumptions related to card holder redemption rates based on historical experience. The loyalty liability is included in deferred revenue on the unaudited Consolidated Balance Sheets.
Thirteen Weeks Ended
Thirty-Nine Weeks Ended
October 30, 2021
October 31, 2020
October 30, 2021
October 31, 2020
(in thousands)
Beginning balance loyalty deferred revenue
$
8,814
$
9,869
$
8,951
$
14,063
Reduction in revenue/(revenue recognized)
1,083
(41)
946
(4,235)
Ending balance loyalty deferred revenue
$
9,897
$
9,828
$
9,897
$
9,828
Sales Returns Reserve
The Company reduces net sales and provides a reserve for projected merchandise returns based on prior experience. Merchandise returns are often resalable merchandise and are refunded by issuing the same payment tender as the original purchase. The sales returns reserve was $13.3 million and $6.4 million as of October 30, 2021 and January 30, 2021, respectively, and is included in accrued expenses on the unaudited Consolidated Balance Sheets. The asset related to projected returned merchandise is included in other assets on the unaudited Consolidated Balance Sheets.
Gift Cards
The Company sells gift cards in its stores, on its eCommerce website, and through third parties. These gift cards do not expire or lose value over periods of inactivity. The Company accounts for gift cards by recognizing a liability at the time a gift card is sold. The gift card liability balance was $20.5 million and $23.5 million, as of October 30, 2021 and January 30, 2021, respectively, and is included in deferred revenue on the unaudited Consolidated Balance Sheets. The Company recognizes revenue from gift cards when they are redeemed by the customer. The Company also recognizes income on unredeemed gift cards, referred to as “gift card breakage.” Gift card breakage is recognized proportionately using a time-based attribution method from issuance of the gift card to the time when it can be determined that the likelihood of the gift card being redeemed is remote and that there is no legal obligation to remit unredeemed gift cards to relevant jurisdictions. The gift card breakage rate is based on historical redemption patterns. Gift card breakage is included within the other revenue component of net sales.
Thirteen Weeks Ended
Thirty-Nine Weeks Ended
October 30, 2021
October 31, 2020
October 30, 2021
October 31, 2020
(in thousands)
Beginning gift card liability
$
20,734
$
20,865
$
23,478
$
24,142
Issuances
5,762
4,642
15,600
13,035
Redemptions
(5,561)
(4,988)
(16,860)
(15,134)
Gift card breakage
(482)
(444)
(1,765)
(1,968)
Ending gift card liability
$
20,453
$
20,075
$
20,453
$
20,075
Private Label Credit Card
The Company has an agreement with Comenity Bank (the “Bank”) to provide customers with private label credit cards (the “Card Agreement”) which was amended on August 28, 2017 to extend the term of the arrangement through December 31, 2024. Each private label credit card bears the logo of the Express brand and can only be used at the Company’s store locations and eCommerce channel. The Bank is the sole owner of the accounts issued
under the private label credit card program and absorbs the losses associated with non-payment by the private label card holders and a portion of any fraudulent usage of the accounts.
Pursuant to the Card Agreement, the Company receives amounts from the Bank during the term based on a percentage of private label credit card sales and is also eligible to receive incentive payments for the achievement of certain performance targets. These funds are recorded within the other revenue component of net sales. The Company also receives reimbursement funds from the Bank for certain expenses the Company incurs. These reimbursement funds are used by the Company to fund marketing and other programs associated with the private label credit card. The reimbursement funds received related to private label credit cards are recorded within the other revenue component of net sales in the Consolidated Statements of Income and Comprehensive Income.
In connection with the Card Agreement, the Bank agreed to pay the Company a $20.0 million refundable payment which the Company recognized upon receipt as deferred revenue within other long-term liabilities in the Consolidated Balance Sheets and began to recognize into income on a straight-line basis commencing January of 2018. As of October 30, 2021, the deferred revenue balance of $9.1 million will be recognized over the remaining term of the amended Card Agreement within the other revenue component of net sales.
Thirteen Weeks Ended
Thirty-Nine Weeks Ended
October 30, 2021
October 31, 2020
October 30, 2021
October 31, 2020
(in thousands)
Beginning balance refundable payment liability
$
9,833
$
12,711
$
11,272
$
14,150
Recognized in revenue
(719)
(719)
(2,158)
(2,158)
Ending balance refundable payment liability
$
9,114
$
11,992
$
9,114
$
11,992
NOTE 3 | EARNINGS PER SHARE
The following table provides a reconciliation between basic and diluted weighted-average shares used to calculate basic and diluted earnings per share:
Thirteen Weeks Ended
Thirty-Nine Weeks Ended
October 30, 2021
October 31, 2020
October 30, 2021
October 31, 2020
(in thousands)
Weighted-average shares - basic
67,006
64,868
66,244
64,515
Dilutive effect of stock options and restricted stock units
2,850
—
—
—
Weighted-average shares - diluted
69,856
64,868
66,244
64,515
Equity awards representing 0.7 million and 8.2 million shares of common stock were excluded from the computation of diluted earnings per share for the thirteen and thirty-nine weeks ended October 30, 2021, respectively, as the inclusion of these awards would have been anti-dilutive. Equity awards representing 10.9 million and 10.6 million shares of common stock were excluded from the computation of diluted earnings per share for the thirteen and thirty-nine weeks ended October 31, 2020, respectively, as the inclusion of these awards would have been anti-dilutive.
Additionally, for the thirteen weeks ended October 30, 2021, approximately 1.5 million shares were excluded from the computation of diluted weighted average shares because the number of shares that will ultimately be issued is contingent on the Company’s performance compared to pre-established performance goals which have not been achieved as of October 30, 2021.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Assets and liabilities measured at fair value are classified using the following hierarchy, which is based upon the transparency of inputs to the valuation as of the measurement date.
■Level 1 - Valuation is based upon quoted prices (unadjusted) for identical assets or liabilities in active markets.
■Level 2 - Valuation is based upon quoted prices for similar assets and liabilities in active markets or other inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
■Level 3 - Valuation is based upon other unobservable inputs that are significant to the fair value measurement.
Financial Assets
The following table presents the Company’s financial assets, recorded in cash and cash equivalents on the unaudited Consolidated Balance Sheets, measured at fair value on a recurring basis as of October 30, 2021 and January 30, 2021, aggregated by the level in the fair value hierarchy within which those measurements fall.
October 30, 2021
Level 1
Level 2
Level 3
(in thousands)
Money market funds
$
—
$
—
$
—
January 30, 2021
Level 1
Level 2
Level 3
(in thousands)
Money market funds
$
35,964
$
—
$
—
The money market funds are valued using quoted market prices in active markets.
The carrying amounts reflected on the unaudited Consolidated Balance Sheets for the remaining cash and cash equivalents, receivables, prepaid expenses, and payables as of October 30, 2021 and January 30, 2021 approximated their fair values.
Non-Financial Assets
Store Asset Impairment
Property and equipment, including the right of use assets, are not required to be measured at fair value on a recurring basis. However, if certain triggering events occur indicating the carrying value of these assets may not be recoverable, an impairment test is required. These events 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. The reviews are conducted at the store level, the lowest identifiable level of cash flow.
Stores that display an indicator of impairment are subjected to an impairment assessment. Such stores are tested for recoverability by comparing the sum of the estimated future undiscounted cash flows to the carrying amount of the asset. This recoverability test requires management to make assumptions and judgments related, but not limited, to management’s expectations for future cash flows from operating the store.
▪The key assumptions used in the 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 the 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 the fair value analysis may include discounted estimates of future store cash flows from operating the store and/or comparable market rents.
During the thirteen and thirty-nine weeks ended October 30, 2021 and October 31, 2020, the Company recognized impairment charges as follows:
Thirteen Weeks Ended
Thirty-Nine Weeks Ended
October 30, 2021
October 31, 2020
October 30, 2021
October 31, 2020
(in thousands)
Right of use asset impairment
$
—
$
6,861
$
—
$
22,423
Property and equipment asset impairment
—
1,509
—
7,430
Total asset impairment
$
—
$
8,370
$
—
$
29,853
Impairment charges are recorded in cost of goods sold, buying and occupancy costs in the unaudited Consolidated Statements of Income and Comprehensive Income.
NOTE 5 | INCOME TAXES
The provision for income taxes is based on a current estimate of the annual effective tax rate, adjusted to reflect the effect of discrete items. The Company’s effective income tax rate may fluctuate from quarter to quarter as a result of a variety of factors, including the estimate of annual pre-tax income, the related changes in the estimate, and the effect of discrete items. The impact of these items on the effective tax rate will be greater at lower levels of pre-tax earnings.
The Company evaluates whether deferred tax assets are realizable on a quarterly basis. The Company considers all available positive and negative evidence, including past operating results and expectations of future operating income. Accordingly, the Company continues to maintain a full valuation allowance on deferred tax assets as of October 30, 2021.
On March 27, 2020, the Coronavirus Aid Relief and Economic Security (“CARES”) Act was enacted into law. The CARES Act includes several provisions that impact the Company such as the establishment of a five-year carryback of net operating losses originating in the tax years 2018, 2019, and 2020, temporarily suspending the 80% limitation on the use of net operating losses, relaxing limitation rules on business interest deductions, and retroactively clarifying that businesses may immediately write-off certain qualified leasehold improvement property dating back to January 1, 2018.
The Company’s effective tax rate was 2.2% and 19.2% for the thirteen weeks ended October 30, 2021 and October 31, 2020, respectively. The effective tax rate for the thirteen weeks ended October 30, 2021 is driven by changes to the Company's full year forecasted effective tax rate due to improved operational forecast offset by a reduction to the forecasted valuation allowance needed for the current year results. The effective tax rate for the thirteen weeks ended October 31, 2020 reflects the impact of recording an additional valuation allowance of $16.0 million 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 $8.0 million of tax benefit related to the portion of the 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 Company’s effective tax rate was (1.0)% and 11.3% for the thirty-nine weeks ended October 30, 2021 and October 31, 2020, respectively. The effective tax rate for the thirty-nine weeks ended October 30, 2021 reflects the impact of non-deductible executive compensation and the release of a valuation allowance of $0.5 million against current year forecasted taxable earnings. The effective tax rate for the thirty-nine weeks ended October 31, 2020 reflects the impact of establishing a valuation allowance against the Company's net deferred tax assets, which includes $54.2 million of discrete tax expense from a valuation allowance on previously recognized deferred tax assets and $39.1 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 $36.6 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.
NOTE 6 | LEASES
The Company leases all of its store locations and its corporate headquarters, which also includes its distribution center, under operating leases. The store leases typically have initial terms of 5 to 10 years; however, most of the leases that are coming to the end of their lease lives are being renegotiated with shorter terms. The current lease term for the corporate headquarters expires in 2026, with one optional five-year extension period. The Company also leases certain equipment and other assets under operating leases, typically with initial terms of 3 to 5 years. The lease term includes the initial contractual term as well as any options to extend the lease when it is reasonably certain that the Company will exercise that option. Leases with an initial term of 12 months or less (short-term leases) are not recorded on the balance sheet. The Company does not currently have any material short-term leases. The Company is generally obligated for the cost of property taxes, insurance and other landlord costs, including common area maintenance charges, relating to its leases. If these charges are fixed, they are combined with lease payments in determining the lease liability; however, if such charges are not fixed, they are considered variable lease costs and are expensed as incurred. The variable payments are not included in the measurement of the lease liability or asset. The Company’s finance leases are immaterial. The Company did not make any amendments to its lease modification policies as a result of the COVID-19 pandemic.
Certain lease agreements include rental payments based on a percentage of retail sales over contractual levels and others include rental payments adjusted periodically for inflation. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
The Company’s lease agreements do not provide an implicit rate, so the Company uses an estimated incremental borrowing rate, which is derived from third-party information available at the lease commencement date, in determining the present value of lease payments. The rate used is for a secured borrowing of a similar term as the lease.
As a result of the impact of the COVID-19 pandemic, the Company did not initially make its store rent payments for certain stores in the first and second quarter of 2020. The Company established an accrual for rent payments that were not made and has continued to recognize accrued rent expense. As a result of negotiations with certain landlords, the Company has 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. Accrued rent is within accrued expenses on the unaudited Consolidated Balance Sheets. Accrued minimum rent as of October 30, 2021 and January 30, 2021, was $15.0 million and $56.3 million, respectively.
Supplemental cash flow information related to leases is as follows:
Thirty-Nine Weeks Ended
October 30, 2021
October 31, 2020
(in thousands)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases
$
220,707
$
128,563
Right-of-use assets obtained in exchange for operating lease liabilities
The following table summarizes the Company's outstanding debt as of the dates indicated:
October 30, 2021
January 30, 2021
(in thousands)
Term Loan Facility
$
96,737
$
90,000
Revolving Facility
25,000
106,050
Total outstanding borrowings
121,737
196,050
Less: unamortized debt issuance costs
(3,252)
(4,018)
Total debt, net
118,485
192,032
Less: current portion of long-term debt
10,091
—
Long-term debt, net
$
108,394
$
192,032
Outstanding letters of credit
$
34,636
$
36,099
Term Loan Facility
On January 13, 2021, Express Holding, LLC, a wholly-owned subsidiary of the Company (“Express Holding”), and its subsidiaries entered into the $140.0 million Asset-Based Term Loan Agreement (the “Term Loan Facility”), among the Loan Parties (as defined therein), Wells Fargo Bank, National Association (“Wells Fargo”), as administrative agent and collateral agent, and the other lenders named therein (the “Term Loan Lenders”).
The Term Loan Facility provides for a “first in, last out” term loan in an amount equal to $90.0 million (the “FILO Term Loan”) and a delayed draw term loan facility in an amount equal to $50.0 million (the “DDTL”). The Term Loan Facility is a senior secured obligation that ranks equally with the Loan Parties’ other senior secured obligations.
During the first quarter of 2021, the Company drew down the additional $50.0 million under the DDTL and repaid $12.4 million with proceeds from 2020 CARES Act tax refunds, as required under the Term Loan Facility.
During the second quarter of 2021, the Company paid an additional $30.9 million payment on the DDTL with proceeds from CARES Act refunds. As of October 30, 2021, the Company had $6.7 million in borrowings outstanding under the DDTL and $90.0 million in borrowings outstanding under the Term Loan Facility. The fair value of the $96.7 million total borrowings outstanding under the Term Loan Facility at October 30, 2021 was $95.1 million.
Amounts borrowed under the FILO Term Loan will be repaid in quarterly installments at a rate of 1.25% per quarter based on the original principal amount of the FILO Term Loan, commencing with the fiscal quarter beginning on or about January 30, 2022. All remaining amounts of the Term Loan Facility outstanding on the maturity date will be paid in full on the maturity date, May 24, 2024. The Loan Parties must repay amounts incurred under the Term Loan Facility with net proceeds from the incurrence of certain additional debt, after payment in full and termination of the $250.0 million asset-based loan credit facility, when outstanding loans under the Term Loan Facility and asset-based loan credit facility exceed the aggregate borrowing base under the Term Loan Facility and asset-based loan credit facility, and, in the case of the DDTL only, with tax refund proceeds payable to the Company pursuant to the CARES Act. Voluntary prepayments under the Term Loan Facility are permitted at any time upon proper notice and subject to minimum dollar amounts and, in certain instances, a prepayment fee.
Amounts borrowed under the Term Loan Facility bear interest at a variable rate indexed to LIBOR plus a pricing margin ranging from 8.00% to 8.25% per annum, as determined in accordance with the provisions of the Term Loan Facility based on EBITDA (as defined below), as of any date of determination, for the most recently ended twelve month period. Interest payments under the Term Loan Facility are due on the first day of each calendar month. As of October 30, 2021 the interest rate on the outstanding FILO Term Loan was 9.3%.
The Term Loan Facility is subject to a borrowing base which is calculated based on specified percentages of eligible inventory, credit card receivables, intellectual property and, after the advance of the DDTL, the lesser of the amount of the tax refund claim under the CARES Act and the outstanding amount of the DDTL.
The Term Loan Facility financial covenant requires the Borrower to maintain minimum excess availability of at least the greater of (i) $25.0 million or (ii) 10% of the sum of (x) the Amended Revolving Credit Facility (defined below) loan cap (calculated without giving effect to any term pushdown reserve) plus (y) the lesser of (A) the outstanding principal balance under the Term Loan Facility and (B) the term loan borrowing base. In addition, the Term Loan Facility contains customary covenants and restrictions on the Company’s and its subsidiaries’ activities, including, but not limited to, limitations on the amount of cash that can be held, the incurrence of additional indebtedness, liens, negative pledges, guarantees, investments, loans, asset sales, mergers, acquisitions, prepayment of other debt, distributions, dividends, the repurchase of capital stock, transactions with affiliates, the ability to change the nature of its business or its fiscal year, and permitted activities of the Company.
The Term Loan Facility includes customary events of default that include, among other things, non-payment defaults, inaccuracy of representations and warranties, covenant defaults, cross-default to material indebtedness, bankruptcy and insolvency defaults, material judgment defaults, ERISA defaults, structural defaults under the loan documents and a change of control default. The occurrence of an event of default could result in the acceleration of the obligations under the Term Loan Facility. Under certain circumstances, a default interest rate will apply on any amount payable under the Term Loan Facility during the existence of an event of default at a per annum rate equal to 2.00% above the applicable interest rate for any principal and 2.00% above the rate applicable for base rate loans for any other interest.
All obligations under the Term Loan Facility are guaranteed by the Loan Parties (other than the Borrower (as defined therein)) and secured by (a) a second priority lien on, substantially all of the Loan Parties’ working capital assets, including cash, accounts receivable, and inventory, and (b) a first priority lien on, substantially all of the Loan Parties’ non-working capital assets, including intellectual property, and the tax refund payable to the Company pursuant to the CARES Act, in each case, subject to certain permitted liens.
The Company recorded deferred financing costs associated with the issuance of the Term Loan Facility. The unamortized balance is $3.3 million as of October 30, 2021. These costs will be amortized over the respective contractual terms of the Term Loan Facility or written off ratably as the Term Loan Facility is extinguished. The Company’s Term Loan debt is presented on the Consolidated Balance Sheets, net of the unamortized fees.
Revolving Credit Facility
On May 24, 2019, Express Holding and its subsidiaries entered into a First Amendment to the Second Amended and Restated $250.0 million Asset-Based Loan Credit Agreement (as amended, the “Revolving Credit Facility”).
On March 17, 2020, the Company provided notice to the lenders under the Revolving Credit Facility of a request to borrow $165.0 million.
On January 13, 2021, Express Holding and its subsidiaries entered into the Second Amendment to the Second Amended and Restated $250.0 million Asset-Based Loan Credit Agreement and the Second Amendment to the Amended and Restated Security Agreement, among the Loan Parties (as defined therein), the lenders party thereto, and Wells Fargo, as administrative agent, as collateral agent, as issuing bank and as swing line lender (the “Revolving Credit Facility Amendment”). The Revolving Credit Facility Amendment amends the Loan Parties’ existing asset-based Revolving Credit Facility (as amended by the Revolving Credit Facility Amendment, the “Amended Revolving Credit Facility”), which is scheduled to expire on May 24, 2024.
The Revolving Credit Facility Amendment added the Company and Express Topco LLC as Loan Parties, fully obligated and bound by all of the respective covenants, representations, warranties and events of default.
Under the Amended Revolving Credit Facility, revolving loans may be borrowed, repaid and reborrowed until May 24, 2024, at which time all amounts borrowed must be repaid. Borrowings under the Amended Revolving Credit Facility bear interest at variable rates that are indexed, at the Borrower’s option, to LIBOR or the base rate as defined in the credit agreement governing the asset-based loan credit facility, in each case plus a pricing margin. The pricing margin for LIBOR loans ranges from 2.00% to 2.25% per annum, and the pricing margin for base rate loans ranges from 1.00% to 1.25% per annum, in each case as determined in accordance with the provisions of the
Amended Revolving Credit Facility based on average daily excess availability. The Amended Revolving Credit Facility has a maximum borrowing amount of $250.0 million, subject to a borrowing base which is calculated based on specified percentages of eligible inventory, credit card receivables and cash, less certain reserves. Commitment reductions and termination of the Amended Revolving Credit Facility prior to the maturity date is permitted, subject in certain instances to a prepayment fee. As of October 30, 2021, the interest rate on the outstanding borrowings of $25.0 million at LIBOR was approximately 2.5%.
The unused line fee payable under the Amended Revolving Credit Facility is 0.375% per annum when average daily excess availability during an applicable fiscal quarter is greater than or equal to 50% of the borrowing base and 0.20% per annum when average daily excess availability is less than 50% of the borrowing base, payable quarterly in arrears on the first day of each calendar month. The Borrower is also obligated to pay other customary closing fees, arrangement fees, administration fees and letter of credit fees for a credit facility of this size and type.
Interest payments under the Amended Revolving Credit Facility are due on the first day of each calendar month for base rate loans. Interest payments under the Amended Revolving Credit Facility are due on the last day of the interest period for LIBOR loans for interest periods of one and three months, and additionally every three months after the first day of the interest period for LIBOR loans for interest periods of greater than three months.
The Amended Revolving Credit Facility financial covenant requires the Borrower to maintain minimum excess availability of at least the greater of (i) $25 million or (ii) 10% of the sum of (x) Amended Revolving Credit Facility loan cap (calculated without giving effect to any term pushdown reserve) plus (y) the lesser of (A) the outstanding principal balance under the Term Loan Facility and (B) the term loan borrowing base. Subject to certain conditions, the Amended Revolving Credit Facility restricts prepayment of the Term Loan Facility, except in connection with a prepayment made solely from the tax refund payable to the Company pursuant to the CARES Act. In addition, the Amended Revolving Credit Facility contains customary covenants and restrictions on the Company’s and its subsidiaries’ activities, including, but not limited to, limitations on the amount of cash that can be held, incurrence of additional indebtedness, liens, negative pledges, guarantees, investments, loans, asset sales, mergers, acquisitions, prepayment of other debt, distributions, dividends, the repurchase of capital stock, transactions with affiliates, the ability to change the nature of its business or its fiscal year, and permitted activities of the Company.
The Amended Revolving Credit Facility includes customary events of default that, include among other things, non-payment defaults, inaccuracy of representations and warranties, covenant defaults, cross-default to material indebtedness, bankruptcy and insolvency defaults, material judgment defaults, ERISA defaults, structural defaults under the loan documents and a change of control default. The occurrence of an event of default could result in the acceleration of the obligations under the Amended Revolving Credit Facility. Under certain circumstances, a default interest rate will apply on any amount payable under the Amended Revolving Credit Facility during the existence of an event of default at a per annum rate equal to 2.00% above the applicable interest rate for any principal and 2.00% above the rate applicable for base rate loans for any other interest.
All obligations under the Amended Revolving Credit Facility are guaranteed by the Loan Parties (other than the Borrower) and secured by (a) a first priority lien on substantially all of the Loan Parties’ working capital assets, including cash, accounts receivable, and inventory, and (b) a second priority lien on substantially all of the Loan Parties’ non-working capital assets, including intellectual property, and the refund payable to the Company pursuant to the CARES Act, in each case, subject to certain permitted liens.
As of October 30, 2021, the Company had $25.0 million in borrowings outstanding under the Amended Revolving Credit Facility and approximately $155.3 million remained available for borrowing under the Amended Revolving Credit Facility after giving effect to outstanding letters of credit in the amount of $34.6 million and subject to certain borrowing base limitations as further discussed above. The fair value of the Amended Revolving Credit Facility at October 30, 2021 was $25.0 million.
Letters of Credit
The Company may enter into various trade letters of credit ("trade LCs") in favor of certain vendors to secure merchandise. These trade LCs are issued for a defined period of time, for specific shipments, and generally expire three weeks after the merchandise shipment date. As of October 30, 2021 and January 30, 2021, there were no outstanding trade LCs. Additionally, the Company enters into stand-by letters of credit ("stand-by LCs") on an as-needed basis to secure payment obligations for third party logistic services, merchandise purchases, and other
general and administrative expenses. As of October 30, 2021 and January 30, 2021, outstanding stand-by LCs totaled $34.6 million and $36.1 million, respectively.
NOTE 8 | LONG-TERM INCENTIVE COMPENSATION
The Company records the fair value of share-based payments to employees in the unaudited Consolidated Statements of Income and Comprehensive Income within selling, general, and administrative expenses as compensation expense, net of forfeitures, over the requisite service period. The Company issues shares of common stock from treasury stock, at average cost, upon exercise of stock options and vesting of restricted stock units, including those with performance conditions.
Long-Term Incentive Compensation Plans
In 2010, the Board approved, and the Company implemented, the Express, Inc. 2010 Incentive Compensation Plan (as amended, the "2010 Plan"). The 2010 Plan authorized the Compensation Committee (the "Committee") of the Board and its designees to offer eligible employees and directors cash and stock-based incentives as deemed appropriate in order to attract, retain, and reward such individuals.
On April 30, 2018, upon the recommendation of the Committee, the Board unanimously approved and adopted, subject to stockholder approval, the Express, Inc. 2018 Incentive Compensation Plan (the “2018 Plan”) to replace the 2010 Plan. On June 13, 2018, stockholders of the Company approved the 2018 Plan and all grants made subsequent to that approval will be made under the 2018 Plan. The primary change made by the 2018 Plan was to increase the number of shares of common stock available for equity-based awards by 2.4 million shares. In addition to increasing the number of shares, the Company also made several enhancements to the 2010 Plan to reflect best practices in corporate governance. The 2018 Plan incorporates these concepts and also includes several other enhancements which were practices the Company already followed but were not explicitly stated in the 2010 Plan. None of these changes will have a significant impact on the accounting for awards made under the 2018 Plan.
In the third quarter of 2019, in connection with updates made by the Company to its policy regarding the clawback of incentive compensation awarded to associates, the Board approved an amendment to the 2018 Plan, solely for the purpose of updating the language regarding the recoupment of awards granted under the 2018 Plan.
On March 17, 2020, upon the recommendation of the Committee, the Board unanimously approved and adopted, subject to stockholder approval, a second amendment to the 2018 Plan, which increased the number of shares of common stock available under the 2018 Plan by 2.5 million shares. On June 10, 2020, stockholders of the Company approved this plan amendment.
The following summarizes long-term incentive compensation expense:
Thirteen Weeks Ended
Thirty-Nine Weeks Ended
October 30, 2021
October 31, 2020
October 30, 2021
October 31, 2020
(in thousands)
Restricted stock units
$
1,436
$
2,022
$
5,093
$
6,349
Stock options
91
302
641
937
Performance-based restricted stock units
925
—
2,122
—
Total share-based compensation
$
2,452
$
2,324
$
7,856
$
7,286
Cash-settled awards
2,427
357
7,066
350
Total long-term incentive compensation
$
4,879
$
2,681
$
14,922
$
7,636
The stock compensation related income tax benefit, excluding consideration of valuation allowances, recognized by the Company during the thirteen and thirty-nine weeks ended October 30, 2021 was $0.2 million and $4.2 million, respectively. The stock compensation related income tax benefit, excluding consideration of valuation allowances, recognized by the Company during the thirteen and thirty-nine weeks ended October 31, 2020 was $0.1 million and $0.8 million, respectively.
The valuation allowances associated with these tax benefits were $0.2 million and $4.2 million for the thirteen and thirty-nine weeks ended October 30, 2021, respectively. There were no valuation allowances associated with the tax benefits for the thirteen and thirty-nine weeks ended October 31, 2020, respectively.
Equity Awards
Restricted Stock Units
During the thirty-nine weeks ended October 30, 2021, the Company granted restricted stock units (“RSUs”) under the 2018 Plan. The fair value of RSUs is determined based on the Company’s closing stock price on the day prior to the grant date in accordance with the 2018 Plan. The RSUs granted in 2021 vest ratably over one to three years and the expense related to these RSUs will be recognized using the straight-line attribution method over this vesting period.
The Company’s activity with respect to RSUs, including awards with performance conditions granted prior to 2018, for the thirty-nine weeks ended October 30, 2021 was as follows:
Number of
Shares
Grant Date Weighted Average Fair Value Per Share
(in thousands, except per share amounts)
Unvested - January 30, 2021
7,090
$
2.63
Granted
169
$
5.56
Vested
(3,051)
$
2.82
Forfeited
(407)
$
2.74
Unvested - October 30, 2021
3,801
$
2.59
The total fair value of RSUs that vested during the thirty-nine weeks ended October 30, 2021 and October 31, 2020 was $8.6 million and $7.1 million, respectively. As of October 30, 2021, there was approximately $6.7 million of total unrecognized compensation expense related to unvested RSUs, which is expected to be recognized over a remaining weighted-average period of approximately 1.1 years.
Stock Options
The Company’s activity with respect to stock options during the thirty-nine weeks ended October 30, 2021 was as follows:
Number of
Shares
Grant Date Weighted Average Exercise Price Per Share
Weighted-Average Remaining Contractual Life (in years)
Aggregate Intrinsic Value
(in thousands, except per share amounts and years)
Outstanding - January 30, 2021
3,324
$
6.65
Granted
—
$
—
Exercised
—
$
—
Forfeited or expired
(294)
$
17.24
Outstanding - October 30, 2021
3,030
$
5.62
6.7
$
2,877
Expected to vest at October 30, 2021
555
$
2.64
7.7
$
682
Exercisable at October 30, 2021
2,465
$
6.30
6.5
$
2,182
As of October 30, 2021, there was approximately $0.6 million of total unrecognized compensation expense related to stock options, which is expected to be recognized over a remaining weighted average period of approximately 1.3 years.
During the thirty-nine weeks ended October 30, 2021, the Company granted 1.5 million performance shares to a limited number of senior executive-level employees, which entitle these employees to receive a specified number of shares of the Company’s common stock upon vesting. The number of shares earned could range between 0% and 200% of the target amount depending upon performance achieved over a three-year vesting period beginning on the first day of the Company's 2021 fiscal year and ending on the last day of the Company's 2023 fiscal year. These awards are valued based on the fair value of the award at the grant date and do not vary based on changes in the Company's stock price or performance. The performance condition of the award is adjusted earnings before interest, taxes, depreciation, and amortization ("Adjusted EBITDA"). The number of shares that are expected to vest will change based on estimates of the Company’s Adjusted EBITDA performance in relation to the pre-established targets. As of October 30, 2021, $8.8 million of total unrecognized compensation cost is expected to be recognized on performance-based restricted stock units over a remaining weighted-average period of 2.5 years.
Cash-Settled Awards
Time-Based Cash-Settled Awards
During the thirty-nine weeks ended October 30, 2021 and October 31, 2020, the Company granted time-based cash-settled awards to employees that vest ratably over three years. These awards are classified as liabilities and do not vary based on changes in the Company's stock price or performance. The expense related to these awards will be accrued using a straight-line method over this vesting period. As of October 30, 2021, $10.5 million of total unrecognized compensation cost is expected to be recognized on cash-settled awards over a remaining weighted-average period of 1.6 years.
Performance-Based Cash-Settled Awards
In March 2020, the Company granted performance-based cash-settled awards to a limited number of senior executive-level employees. Due to the significant disruption caused by the COVID-19 pandemic on the Company’s business operations, as well as its adverse impact on consumer confidence and demand, the Committee determined that it could not set meaningful multi-year performance targets given the uncertain economic conditions.
Accordingly, the Committee delayed setting performance targets for the 2020 long-term performance-based awards until February 2021 when it believed it had a clearer outlook on the Company’s expected long-term performance. These awards are classified as liabilities, with the amount to be paid out estimated each reporting period. Expense is being recognized in proportion to the completed requisite period up until date of settlement. The amount of cash earned could range between 0% and 200% of the target amount depending upon performance achieved over a two-year performance period commencing on the first day of the Company’s 2021 fiscal year and ending on the last day of the Company’s 2022 fiscal year. The performance condition of the award is Adjusted EBITDA. The amount of cash earned will change based on estimates of the Company’s Adjusted EBITDA performance in relation to the pre-established targets. As of October 30, 2021, $7.5 million of total unrecognized compensation cost is expected to be recognized on performance-based cash-settled awards over a remaining weighted-average period of 1.5 years.
NOTE 9 | COMMITMENTS AND CONTINGENCIES
In a complaint filed in January 2017 by Mr. Jorge Chacon in the Superior Court for the State of California for the County of Orange, certain subsidiaries of the Company were named as defendants in a representative action alleging violations of California state wage and hour statutes and other labor standards. The lawsuit seeks unspecified monetary damages and attorneys’ fees.
In July 2018, former associate Ms. Christie Carr filed suit in Alameda County Superior Court for the State of California naming certain subsidiaries of the Company as defendants in a representative action alleging violations of California State wage and hour statutes and other labor standard violations. The lawsuit seeks unspecified monetary damages and attorneys’ fees.
In August 2018, former associate Ms. Leticia Rosete filed suit in Los Angeles County Superior Court for the State of California naming certain subsidiaries of the Company as defendants in a representative action alleging violations of
California state wage and hour statutes and other labor standard violations (including claims for discrimination, harassment, retaliation, etc.). On September 8, 2021, the Rosete case was settled.
On January 29, 2019, Mr. Jorge Chacon filed a second representative action in the Superior Court for the State of California for the County of Orange alleging violations of California state wages and hour statutes and other labor standard violations, which was removed to federal court by the Company and is now pending in the United States District Court for the Central District of California. The lawsuit seeks unspecified monetary damages and attorneys' fees. In June 2021, a portion of Mr. Chacon’s claims in this action were certified as a class action.
The Company is vigorously defending itself against these claims and, as of October 30, 2021, has established an estimated liability based on its best estimate of the outcome of the matters.
The Company is subject to various other claims and contingencies arising out of the normal course of business. Management believes that the ultimate liability arising from such claims and contingencies, if any, is not likely to have a material adverse effect on the Company’s results of operations, financial condition, or cash flows.
NOTE 10 | STOCKHOLDERS' EQUITY
Share Repurchase Programs
On November 28, 2017, the Company's Board of Directors ("Board") approved a share repurchase program that authorizes the Company to repurchase up to $150.0 million of the Company’s outstanding common stock using available cash (the "2017 Repurchase Program"). The Company may repurchase shares on the open market, including through Rule 10b5-1 plans, in privately negotiated transactions, through block purchases, or otherwise in compliance with applicable laws, including Rule 10b-18 of the Securities Exchange Act of 1934, as amended. The timing and amount of stock repurchases will depend on a variety of factors, including business and market conditions as well as corporate and regulatory considerations. The share repurchase program may be suspended, modified, or discontinued at any time and the Company has no obligation to repurchase any amount of its common stock under the program. During the thirteen and thirty-nine weeks ended October 30, 2021 and October 31, 2020, the Company did not repurchase shares of its common stock. As of October 30, 2021, the Company had approximately $34.2 million remaining under this authorization.
Stockholder Rights Agreement
On April 20, 2020, the Board adopted a Stockholder Rights Agreement (the “Rights Agreement”). Under the Rights Agreement, one preferred share purchase right was distributed for each share of common stock, par value $0.01, outstanding at the close of business on April 30, 2020 and one right was to be issued for each new share of common stock issued thereafter. The rights initially traded with common stock and generally became exercisable only if any person (or any persons acting as a group) acquired 10% (or 20% in the case of certain passive investors) or more of the Company’s outstanding common stock (the “triggering percentage”). In the event the rights became exercisable, each holder of a right, other than triggering person, was entitled to purchase additional shares of common stock at a 50% discount or the Company could exchange each right held by such holders for one share of common stock. Existing 10% or greater stockholders were grandfathered to the extent of their April 21, 2020 ownership levels. The Rights Agreement expired on April 19, 2021.
ATM Equity Offering
On June 3, 2021, the Company entered into an ATM Equity Offering Sales Agreement (the "Sales Agreement") with BofA Securities, Inc. ("BofA"), as the sales agent to sell up to 15.0 million shares of the Company's common stock, par value $0.01 per share, through an “at-the-market” offering program. Such shares are issued pursuant to the Company’s shelf registration statement on Form S-3 (Registration No. 333-253368). Sales of the shares are made by means of ordinary brokers’ transactions on The New York Stock Exchange at market prices or as otherwise agreed by the Company and BofA.
During the thirteen and thirty-nine weeks ended October 30, 2021, the Company did not sell any shares under the Sales Agreement. The Company intends to use net proceeds, if any, from the sale of the common stock pursuant to the Sales Agreement for general corporate purposes, which may include investments in working capital, or capital
expenditures, including the acceleration of investments to grow and enhance its eCommerce channel and omni-channel assets, the repayment of indebtedness, and other investments.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
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 ended January 30, 2021 ("Annual Report") 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.”
All references herein to “the third quarter of 2021” and “the third quarter of 2020” represent the thirteen weeks ended October 30, 2021 and October 31, 2020, respectively. Due to the significant impact of COVID-19 on our Fiscal 2020 results and continued impact on our first quarter 2021, comparisons to the third quarter of our fiscal year ended February 1, 2020 ("Fiscal 2019"), where meaningful, have been included for additional context.
Our management's discussion and analysis of financial condition and results of operations is presented in the following sections:
Grounded in versatility and powered by a styling community, Express is a modern, multichannel apparel and accessories brand whose purpose is to Create Confidence & Inspire Self-Expression. Launched in 1980 with the idea that style, quality and value should all be found in one place, Express has been a part of some of the most important and culture-defining fashion trends. The Express Edit design philosophy ensures that the brand is always "of the now" so people can get dressed for every day and any occasion knowing that Express can help them look the way they want to look and feel the way they want to feel. We operate 570 retail and factory outlet stores in the United States and Puerto Rico, the express.com online store and the Express mobile app.
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COVID-19 PANDEMIC
In March 2020, the World Health Organization declared the novel strain of coronavirus ("COVID-19") a global pandemic and recommended containment and mitigation measures. Our business operations and financial performance have been materially impacted by the COVID-19 pandemic. The COVID-19 pandemic has significantly impacted global economies, resulting in travel restrictions, business slowdowns or shutdowns and changes in consumer behavior. In March 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 fiscal year 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.
During the latter part of the first quarter of 2021 and throughout the second and third quarters of 2021, we have seen improved trends coinciding with the vaccination rollout and the lifting of COVID-19 related restrictions, especially in areas where COVID-19 guidelines were less restrictive. We continue to monitor and comply with all governmental regulations imposed.
The extent of the pandemic’s impact on our business and financial results will depend, however, on future developments, including the remaining duration and severity of the pandemic (including any variants of COVID-19), the distribution, rate of public acceptance and efficacy of vaccines and other treatments, as well as potential impacts of any vaccine mandates on our workforce, related impacts on consumer confidence and spending, and the effect of any additional governmental regulations imposed, all of which are highly uncertain. Additionally, COVID-19 has caused disruptions and rising costs to global supply chains. Although we have successfully managed these challenges thus far, our ability to continue to replenish our inventory to meet continued levels of consumer demand could be impacted by further delays or disruptions. We expect these impacts to continue for as long as the global supply chain is experiencing these challenges. Given the dynamic nature of the COVID-19 pandemic, we cannot reasonably estimate the impacts of the COVID-19 pandemic on our future financial condition, results of operations or cash flows. For additional information regarding risks related to the COVID-19 pandemic, see “Item 1A. Risk Factors: External Risk Factors” in our Annual Report.
FINANCIAL DETAILS FOR THE THIRD QUARTER OF 2021
•Net sales increased 47% to $472.0 million
◦Net sales decreased 3% compared to 2019
•Comparable sales increased 46%
◦Comparable sales increased 3% compared to 2019
•Comparable retail sales (includes both retail stores and eCommerce sales) increased 52%
•Comparable outlet sales increased 33%
•Gross margin percentage increased 2,890 basis points to 33.2%
◦Gross margin increased 500 basis points compared to 2019
•Operating income increased $127.2 million to $16.3 million
◦Operating income increased $22.9 million compared to 2019
•Net income increased $103.4 million to $13.1 million
•Diluted earnings per share increased $1.58 to $0.19
The following charts show key performance metrics for the third quarter of 2021 compared to the third quarter of 2020.
OUTLOOK & THIRD QUARTER UPDATE
Our strong third quarter 2021 results reflect the second consecutive quarter of profitable growth and positive consolidated comparable sales compared to the third quarter of 2019, and we significantly improved our operating cash flow by $329.9 million compared to the third quarter of 2020 and $45.5 million compared to the third quarter of 2019, respectively. We believe these results demonstrate the power of the EXPRESSway Forward strategy and provide tangible evidence that the versatility, quality, and value of our products are resonating with consumers.
The following defines each pillar of the EXPRESSway Forward strategy and provides an update on each priority:
PRODUCT
BRAND
CUSTOMER
EXECUTION
Product
We set out to completely reinvent our product across every category and each item, taking a more modern approach and building our assortments to reflect the way our customers build their wardrobes.
We established a design and merchandising philosophy called the Express Edit that has guided every one of our seasonal assortments to be sharp, smart, and focused. Versatility is one of the key ideas within the Express Edit,
and we identified denim and knits as two of the most important elements of a modern versatile wardrobe. Our new core of denim and Express Essentials are an integral part of the redefinition of Express, and customer response has been incredibly strong in both categories.
We reimagined our assortments in the categories we have long been known for and held strong market share such as dresses, suits and knits for women and suits and shirts for men. We brought innovation to each one of these categories and had strong performance as we moved through the third quarter of 2021.
Brand
We set out to reinvigorate our brand, clarify our message and articulate a clear, compelling brand purpose, to create confidence and inspire self-expression. Restoring the relevance of the Express brand is a top priority and we believe we have made good progress in a relatively short period of time.
We have reinvented our marketing model, optimized the investment and allocation of our marketing spend, and completely changed how and where our brand is presented.
We have increased our spending on customer acquisition, while decreasing spending related to store-wide and site-wide promotions, and reinvested those markdown dollars into marketing programs and activations that we believe drive customer traffic, engagement and conversion at much higher profits.
Customer
We believe that we can drive higher retention, frequency and spend. We also believe that our loyalty program is the most effective way to drive higher retention, frequency and spend; to that end we rebranded and relaunched Express Insider during the first quarter of 2021 to a strong reception from our customers. Since the relaunch, we have brought nearly 2.0 million new customers into the program and reactivated 1.8 million lapsed customers.
Execution
Execution is the through line across Product, Brand, and Customer that will drive our operating model. Our third quarter of 2021 results reflect the strength of our go-to-market model and our alignment as an organization. We effectively responded to the ongoing impacts of the pandemic, particularly navigating through the many supply chain challenges and disruptions, and applied discipline around our expenses and our investments. Outstanding execution is also what helped drive momentum in each one of our channels and reinforce the ability of our strategy to effectively advance our eCommerce, retail, and outlet businesses.
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.
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 in Times 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 the third quarter of 2021 was calculated using the thirteen weeks ended October 30, 2021 as compared to the thirteen weeks ended October 31, 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 our website, mobile 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.
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.
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.
The Third Quarter of 2021 compared to the Third Quarter of 2020
Net Sales
Thirteen Weeks Ended
October 30, 2021
October 31, 2020
Net sales (in thousands)
$
471,981
$
322,061
Comparable retail sales
52
%
(33)
%
Comparable outlet sales
33
%
(20)
%
Total comparable sales percentage change
46
%
(30)
%
Gross square footage at end of period (in thousands)
4,744
5,031
Number of:
Stores open at beginning of period
567
593
New retail stores
—
1
New outlet stores
1
—
New Express Edit concept stores
2
—
New UpWest stores
1
—
Retail stores converted to outlets
—
—
Closed stores
(1)
(2)
Stores open at end of period
570
592
Net sales in the third quarter of 2021 increased approximately $149.9 million compared to the third quarter of 2020, primarily attributed to our product and brand strategies resonating with our customers coupled with the vaccination rollout and the lifting of COVID-related restrictions during 2021, as compared to the material adverse impact the COVID-19 pandemic had during the third quarter of 2020. Our retail comparable sales percentage increases are lower than our total retail sales percentage increases for the third quarter of 2021. This is due to our comparable sales calculation excluding sales for stores that were closed in the comparable period last year due to the COVID-19 pandemic. Net sales decreased $16.5 million from $488.5 million in the third quarter of 2019 due primarily to reduced store count. Comparable sales increased 3% compared to the third quarter of 2019.
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 30, 2021
October 31, 2020
(in thousands, except percentages)
Cost of goods sold, buying and occupancy costs
$
315,173
$
308,115
Gross profit
$
156,808
$
13,946
Gross margin percentage
33.2
%
4.3
%
The 2,890 basis point increase in gross margin percentage, or gross profit as a percentage of net sales, in the third quarter of 2021 compared to the third quarter of 2020 was comprised of an increase in merchandise margin of 1,350 basis points and a decrease in buying and occupancy costs as a percentage of net sales of 1,540 basis points. The increase in merchandise margin was primarily driven by positive customer response to our new receipts and a significant reduction in promotional activity. The improvement in buying and occupancy costs leverage was due to increased sales and rent reductions. In addition, we had a $8.4 million impairment in the third quarter of 2020. Compared to the third quarter of 2019, gross margin percentage increased 500 basis points primarily driven by significant reductions in our buying and occupancy expense structure.
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 30, 2021
October 31, 2020
(in thousands, except percentages)
Selling, general, and administrative expenses
$
141,055
$
124,863
Selling, general, and administrative expenses, as a percentage of net sales
29.9
%
38.8
%
The $16.2 million increase in selling, general, and administrative expenses in the third quarter of 2021 as compared to the third quarter of 2020 was primarily driven last year's pandemic related store closures and current year investments in customer acquisition related marketing expense.
Interest Expense, Net
The following table shows interest expense in dollars for the stated periods:
Thirteen Weeks Ended
October 30, 2021
October 31, 2020
(in thousands)
Interest expense, net
$
2,879
$
936
The $1.9 million increase in interest expense in the third quarter of 2021 as compared to the third quarter of 2020 was the result of borrowing under our Amended Revolving Credit Facility and Term Loan Facility, which bear 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 thirteen weeks ended October 30, 2021.
Income Tax Expense/(Benefit)
The following table shows income tax expense/(benefit) in dollars for the stated periods:
Thirteen Weeks Ended
October 30, 2021
October 31, 2020
(in thousands)
Income tax expense/(benefit)
$
289
$
(21,503)
The effective tax rate was 2.2% and 19.2% for the thirteen weeks ended October 30, 2021 and October 31, 2020, respectively. The effective tax rate for the thirteen weeks ended October 30, 2021 is driven by changes to our full year forecasted effective tax rate due to improved operational forecast offset by a reduction to the forecasted valuation allowance needed for the current year results. The effective tax rate for the thirteen weeks ended October 31, 2020 reflects the impact of recording an additional valuation allowance of $16.0 million 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 $8.0 million of tax benefit related to the portion of the 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 Thirty-Nine Weeks Ended October 30, 2021 compared to the Thirty-Nine Weeks Ended October 31, 2020
Net Sales
Thirty-Nine Weeks Ended
October 30, 2021
October 31, 2020
Net sales (in thousands)
$
1,275,367
$
778,039
Comparable retail sales
39
%
(30)
%
Comparable outlet sales
21
%
(17)
%
Total comparable sales percentage change
34
%
(27)
%
Gross square footage at end of period (in thousands)
4,744
5,031
Number of:
Stores open at beginning of period
570
595
New retail stores
—
1
New outlet stores
1
1
New Express Edit concept stores
6
—
New UpWest stores
7
—
Retail stores converted to outlets
—
—
Closed stores
(14)
(5)
Stores open at end of period
570
592
Net sales for the thirty-nine weeks ended October 30, 2021 increased approximately $497.3 million compared to the thirty-nine weeks ended October 31, 2020. The sales increase is primarily attributed to our product and brand strategies resonating with our customers coupled with the vaccination rollout and the lifting of COVID-related restrictions during the thirty-nine weeks ended October 30, 2021, as compared to the material adverse impact the COVID-19 pandemic had during the thirty-nine weeks ended October 31, 2020. Our retail comparable sales percentage increases are lower than our total retail sales percentage increases for the thirty-nine weeks ended October 30, 2021. This is due to our comparable sales calculation excluding sales for stores that were closed in the comparable period last year due to the COVID-19 pandemic.
Gross Profit/(Loss)
The following table shows cost of goods sold, buying and occupancy costs, gross profit/(loss) in dollars, and gross margin percentage for the stated periods:
Thirty-Nine Weeks Ended
October 30, 2021
October 31, 2020
(in thousands, except percentages)
Cost of goods sold, buying and occupancy costs
$
890,448
$
854,357
Gross profit/(loss)
$
384,919
$
(76,318)
Gross margin percentage
30.2
%
(9.8)
%
The 4,000 basis point increase in gross margin percentage, or gross profit/(loss) as a percentage of net sales, for the thirty-nine weeks ended October 30, 2021 compared to the thirty-nine weeks ended October 31, 2020 was comprised of an increase in merchandise margin of 1,650 basis points and a decrease in buying and occupancy costs as a percentage of net sales of 2,350 basis points. The increase in merchandise margin was primarily driven by positive customer response to our new receipts and significant reduction in promotional activity. The improvement in buying and occupancy costs leverage was driven by increased sales and rent reductions. In addition, we had a $29.9 million impairment during the thirty-nine weeks ended October 31, 2020.
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
October 30, 2021
October 31, 2020
(in thousands, except percentages)
Selling, general, and administrative expenses
$
395,010
$
316,833
Selling, general, and administrative expenses, as a percentage of net sales
31.0
%
40.7
%
The $78.2 million increase in selling, general, and administrative expenses for the thirty-nine weeks ended October 30, 2021 compared to the thirty-nine weeks ended October 31, 2020 was primarily the result of an increase in variable costs driven by the sales increase, current year investments in customer acquisition related marketing expense, and our stores being fully open during the thirty-nine weeks ended October 30, 2021 while our stores were temporarily closed beginning in mid-March through the remainder of the first quarter of 2020 and continued partial closures through the third quarter of 2020 due to the COVID-19 pandemic.
Interest Expense, Net
The following table shows interest expense in dollars for the stated periods:
Thirty-Nine Weeks Ended
October 30, 2021
October 31, 2020
(in thousands)
Interest expense, net
$
12,246
$
2,015
The $10.2 million increase in interest expense for the thirty-nine weeks ended October 30, 2021 compared to the thirty-nine weeks ended October 31, 2020 was the result of borrowing under our Amended Revolving Credit Facility and Term Loan Facility, which bear 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 ended October 30, 2021.
Income Tax Expense/(Benefit)
The following table shows income tax expense/(benefit) in dollars for the stated periods:
Thirty-Nine Weeks Ended
October 30, 2021
October 31, 2020
(in thousands)
Income tax expense/(benefit)
$
227
$
(45,068)
The effective tax rate was (1.0)% and 11.3% for the thirty-nine weeks ended October 30, 2021 and October 31, 2020, respectively. The effective tax rate for the thirty-nine weeks ended October 30, 2021 reflects the impact of non-deductible executive compensation and the release of a valuation allowance of $0.5 million against current year forecasted taxable earnings. 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 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 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 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.
Operating Income/(Loss), Net Income/(Loss), Diluted Earnings Per Share and EBITDA
Included in the table below is operating income/(loss), net income/(loss), diluted earnings per share and earnings before interest, taxes, depreciation, and amortization ("EBITDA") for the thirteen and thirty-nine weeks ended October 30, 2021 and October 31, 2020, 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 income/(loss), adjusted net income/(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:
Thirteen Weeks Ended
October 30, 2021
October 31, 2020
(in thousands, except per share amounts)
Operating income/(loss)
$
16,254
$
(110,916)
Adjusted operating income/(loss) (Non-GAAP)
$
16,254
*
$
(102,546)
Net income/(loss)
$
13,086
$
(90,349)
Adjusted net income/(loss) (Non-GAAP)
$
11,601
$
(76,192)
Diluted earnings per share
$
0.19
$
(1.39)
Adjusted diluted earnings per share (Non-GAAP)
$
0.17
$
(1.17)
EBITDA (Non-GAAP)
$
31,916
$
(92,600)
* No adjustments were made to operating income for the thirteen weeks ended October 30, 2021.
Thirty-Nine Weeks Ended
October 30, 2021
October 31, 2020
(in thousands, except per share amounts)
Operating loss
$
(9,526)
$
(392,489)
Adjusted operating loss (Non-GAAP)
$
(9,526)
*
$
(362,636)
Net loss
$
(21,999)
$
(352,169)
Adjusted net loss (Non-GAAP)
$
(22,489)
$
(271,251)
Diluted earnings per share
$
(0.33)
$
(5.46)
Adjusted diluted earnings per share (Non-GAAP)
$
(0.34)
$
(4.20)
EBITDA (Non-GAAP)
$
38,892
$
(339,703)
* No adjustments were made to operating loss for the thirty-nine weeks ended October 30, 2021.
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 income/(loss), adjusted net income/(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 performance measures in our 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 income/(loss), operating income/(loss), or diluted earnings per share. These non-GAAP financial measures reflect an additional way of viewing our operations that, when viewed with the GAAP results and the below reconciliations to the corresponding GAAP financial measures, provide a more complete understanding of our business. Management strongly
encourages investors and stockholders to review our financial statements and publicly-filed reports in their entirety and not to rely on any single financial measure.
The following table reconciles the non-GAAP financial measures (adjusted operating income/(loss), adjusted net income/(loss), and adjusted diluted earnings per share) with the most directly comparable GAAP financial measures (operating income/(loss), net income/(loss), and diluted earnings per share, respectively) for the thirteen and thirty-nine weeks ended October 30, 2021 and October 31, 2020, respectively.
Thirteen Weeks Ended October 30, 2021
(in thousands, except per share amounts)
Operating Income
Income Tax Impact
Net Income
Diluted Earnings per Share
Weighted Average Diluted Shares Outstanding
Reported GAAP Measure
$
16,254
$
13,086
$
0.19
69,856
Valuation allowance on deferred taxes (a)
—
(1,485)
(1,485)
(0.02)
Adjusted Non-GAAP Measure
$
16,254
$
11,601
$
0.17
a.Valuation allowance released due to improvement in forecasted 2021 pre-tax results.
Thirty-Nine Weeks Ended October 30, 2021
(in thousands, except per share amounts)
Operating Loss
Income Tax Impact
Net Loss
Diluted Earnings per Share
Weighted Average Diluted Shares Outstanding
Reported GAAP Measure
$
(9,526)
$
(21,999)
$
(0.33)
66,244
Valuation allowance on deferred taxes (a)
—
(490)
(490)
(0.01)
Adjusted Non-GAAP Measure
$
(9,526)
$
(22,489)
$
(0.34)
a.Valuation allowance released due to improvement in forecasted 2021 pre-tax results.
Thirteen Weeks Ended October 31, 2020
(in thousands, except per share amounts)
Operating Loss
Income Tax Impact
Net Loss
Diluted Earnings per Share
Weighted Average Diluted Shares Outstanding
Reported GAAP Measure
$
(110,916)
$
(90,349)
$
(1.39)
64,868
Impairment of property, equipment and lease assets
8,370
(2,215)
(a)
6,155
0.09
Valuation allowance on deferred taxes (b)
—
15,998
15,998
0.25
Tax impact of the CARES Act (c)
—
(7,996)
(7,996)
(0.12)
Adjusted Non-GAAP Measure
$
(102,546)
$
(76,192)
$
(1.17)
a.Items tax affected at the applicable deferred or statutory rate.
b.Valuation allowance provided against previously recognized deferred tax assets and 2020 losses, 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 to years with a higher federal statutory tax rate than is currently enacted.
Impairment of property, equipment and lease assets
29,853
(7,901)
(a)
21,952
0.34
Equity method investment impairment (b)
—
(642)
2,091
0.03
Valuation allowance on deferred taxes (c)
—
93,317
93,317
1.45
Tax impact of the CARES Act (d)
—
(36,553)
(36,553)
(0.57)
Tax impact of executive departures (e)
—
111
111
—
Adjusted Non-GAAP Measure
$
(362,636)
$
(271,251)
$
(4.20)
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.
The following table reconciles the non-GAAP financial measure EBITDA with the most directly comparable GAAP financial measures for the thirteen and thirty-nine weeks ended October 30, 2021 and October 31, 2020, respectively.
Thirteen Weeks Ended
Thirty-Nine Weeks Ended
(in thousands)
October 30, 2021
October 31, 2020
October 30, 2021
October 31, 2020
Net income/(loss)
$
13,086
$
(90,349)
$
(21,999)
$
(352,169)
Interest expense, net
2,879
936
12,246
2,015
Income tax expense/(benefit)
289
(21,503)
227
(45,068)
Depreciation and amortization
15,662
18,316
48,418
55,519
EBITDA (Non-GAAP Measure)
$
31,916
$
(92,600)
$
38,892
$
(339,703)
LIQUIDITY AND CAPITAL RESOURCES
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.
Based upon the sales and profitability recovery seen during the thirty-nine weeks ended October 30, 2021, as well as the availability of additional liquidity under the Amended Revolving Credit Facility, and expense control and other measures taken to date, our liquidity position has improved significantly. We continue to be in compliance with the financial covenants under our Amended Revolving Credit Facility and Term Loan Facility and plan to continue our cost reduction measures taken to date, including rent concessions agreed to, and we are forecasting continued strength in both sales and profitability for the remainder of 2021. This will result in sufficient cash flows to support our ongoing operations and to meet our covenant requirements under the Amended Revolving Credit Facility and Term Loan Facility for one year following the date that these unaudited Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report are issued.
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 30, 2021
October 31, 2020
(in thousands)
Provided by (used in) operating activities
$
78,284
$
(251,602)
Used in investing activities
(18,095)
(13,550)
(Used in) provided by financing activities
(79,268)
165,360
Decrease in cash and cash equivalents
(19,079)
(99,792)
Cash and cash equivalents at end of period
$
36,795
$
107,347
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 30, 2021, our cash flows provided by operating activities were $78.3 million compared to $251.6 million used in operating activities for the thirty-nine weeks ended October 31, 2020. This $329.9 million improvement in cash flows from operating activities for the thirty-nine weeks ended October 30, 2021 as compared to the same period in 2020 was primarily driven by the temporary closure of our stores as a result of COVID-19 during the thirty-nine weeks ended October 31, 2020 and our improved operating results during the thirty-nine weeks ended October 30, 2021. In addition, we received approximately $60.0 million of CARES Act receivables during the thirty-nine weeks ended October 30, 2021 ($43.3 million and $13.7 million related to our 2020 and 2019 income tax returns, respectively, and $3.0 million related to the employee retention credit). This was partially offset by the fact that we did not initially make our store rent payments for April, May or June of 2020, as a result of the COVID-19 related 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 the majority of 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 $18.1 million and $13.6 million for the thirty-nine weeks ended October 30, 2021 and October 31, 2020, respectively. The $4.5 million increase in investing activities was primarily driven by investments in information technology to support our strategic business initiatives. We expect capital expenditures for the remainder of 2021 to be approximately $17.0 million, primarily driven by new and remodeled store construction and investments in information technology.
Financing Activities
Credit Facilities
On January 13, 2021, we entered into a definitive loan agreement with Sycamore Partners as lead lender, along with Wells Fargo and Bank of America Merrill Lynch. The new financing included a $90.0 million FILO Term Loan received in 2020, and a $50.0 million Delayed Draw Term Loan ("DDTL"), that was drawn down in March 2021. During the thirty-nine weeks ended October 30, 2021, we received approximately $43.3 million of CARES Act income tax refunds that was used to repay a portion of the DDTL. The remainder of the CARES Act tax refunds are expected to be received in 2022, at which time we will be required to repay the remaining balance on the DDTL. This financing is in addition to our existing $250.0 million Amended Revolving Credit Facility under which we drew down $165.0 million in the first quarter of 2020 in response to the COVID-19 outbreak. Upon the receipt of the proceeds from the FILO Term Loan, we repaid $59.0 million of the amount borrowed under our Amended Revolving Credit Facility, and during the thirty-nine weeks ended October 30, 2021, we repaid a net of an additional $81.1 million. The expiration date of the facilities is May 24, 2024.
As of October 30, 2021, the net amount outstanding under our facilities was $118.5 million, of which $10.1 million is classified as short-term debt and $108.4 million is classified as long-term debt on the unaudited Consolidated Balance Sheet, net of unamortized costs, and approximately $155.3 million was available for borrowing under our Amended Revolving Credit Facility subject to certain borrowing base limitations and after outstanding letters of credit in the amount of $34.6 million, primarily related to our third party logistics contract. Refer to Note 7 of our unaudited Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q for additional information on our Amended Revolving Credit Facility and Term Loan Facility.
Share Repurchases
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 thirteen and thirty-nine weeks ended October 30, 2021 and October 31, 2020, respectively, we did not repurchase shares under the stock repurchase program.
ATM Equity Offering
On June 3, 2021, we entered into the Sales Agreement with BofA, as the sales agent to sell up to 15.0 million shares of our common stock, par value $0.01 per share, through an “at-the-market” offering program. During the thirteen and thirty-nine weeks ended October 30, 2021, we did not sell any shares under the Sales Agreement. We intend to use net proceeds, if any, from the sale of the common stock pursuant to the Sales Agreement for general corporate purposes, which may include investments in working capital, or capital expenditures, including the acceleration of investments to grow and enhance our eCommerce channel and omni-channel assets, the repayment of indebtedness, and other investments.
CRITICAL ACCOUNTING POLICIES
Management has determined that our most critical accounting policies are those related to store asset impairment, merchandise inventory valuation and valuation allowance on deferred tax assets. 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
INTEREST RATE RISK
Our Amended Revolving Credit Facility and Term Loan Facility bear interest at variable rates. See Note 7 to our unaudited Consolidated Financial Statements included elsewhere in this Quarterly Report for further information on the calculation of the rates. The nature and amount of our long-term debt can be expected to vary as a result of future business requirements, market conditions, and other factors.
As of October 30, 2021, we had approximately $25.0 million in borrowings outstanding under our Amended Revolving Credit Facility and approximately $96.7 million in borrowings outstanding under our Term Loan Facility. Based on the levels of borrowings under our credit facilities at October 30, 2021, we estimate that a 100 basis point increase or decrease in underlying interest rates would increase or decrease annual interest expense by approximately $1.2 million. This hypothetical analysis may differ from the actual change in interest expense due to potential changes in interest rates or gross borrowings outstanding under our credit facilities. The expected transition from the widespread use of LIBOR rate to alternative rates over the next several years is not expected to have a material impact on interest expense on borrowings outstanding under our credit facilities.
With the exception of the changes in the levels of borrowings under our Amended Revolving Credit Facility and Term Loan Facility, discussed in Note 7 of our unaudited Consolidated Financial Statements included elsewhere in this Quarterly Report, there have been no material changes in our quantitative and qualitative market risks from those disclosed in our Annual Report.
We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Securities Exchange Act of 1934) that are designed to provide reasonable assurance that information required to be disclosed in our Securities Exchange Act of 1934 reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable, and not absolute, assurance of achieving the desired control objectives. In reaching a reasonable level of assurance, management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation prior to filing this report of our disclosure controls and procedures. Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of October 30, 2021.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) that occurred during the third quarter of 2021 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Information relating to legal proceedings is set forth in Note 9 to our unaudited Consolidated Financial Statements included in Part I of this Quarterly Report and is incorporated herein by reference.
ITEM 1A. RISK FACTORS.
In addition to the other information set forth in this Quarterly Report, careful consideration should be given to the risk factors set forth in “Item 1A. Risk Factors” of our Annual Report, any of which could materially affect our business, operations, financial position, stock price, or future results. The risks described herein and in our Annual Report, are important to an understanding of the statements made in this Quarterly Report, in our other filings with the SEC, and in any other discussion of our business. These risk factors, which contain forward-looking information, should be read in conjunction with “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations”, and the unaudited Consolidated Financial Statements and related Notes included in this Quarterly Report. Except as provided below, there have been no material changes to the risk factors contained in our Annual Report on Form 10-K for the year ended January 30, 2021.
As a result of the extreme volatility of the market prices and trading volume that our shares of common stock have recently experienced, and may in the future again experience, purchasers of our common stock could incur substantial losses.
The extreme volatility of the market prices and trading volume that our shares of common stock have recently experienced, and may continue to experience could cause purchasers of our common stock to incur substantial losses. For example, from January 1, 2021 to the date hereof, the market price of our common stock has fluctuated from an intra-day low on the NYSE of $0.86 per share on January 4, 2021 to an intra-day high of $13.97 on January 27, 2021. Significant fluctuations in the market price of our common stock have been accompanied by reports of strong and atypical retail investor interest, including on social media and online forums. The market volatility and trading patterns we have experienced create several risks for investors, including the following:
▪the market price of our common stock may experience rapid and substantial increases or decreases unrelated to our operating performance, financial condition or business prospects, or macro or industry fundamentals;
▪factors in the public trading market for our common stock may include the sentiment of retail investors (including as may be expressed on financial trading and other social media sites and online forums), the direct access by retail investors to broadly available trading platforms, the amount and status of short interest in our securities, access to margin debt, trading in options and other derivatives on our common stock and any related hedging and other trading factors;
▪our market capitalization, as implied by various trading prices, has reflected valuations that diverge significantly from those seen prior to recent volatility and that are significantly higher than our market capitalization immediately prior to such recent volatility, which began with a significant increase in the trading volume of our common stock on January 22, 2021, and to the extent these valuations reflect trading dynamics unrelated to our financial performance or business prospects, purchasers of our common stock could incur substantial losses if there are declines in market prices driven by a return to earlier valuations;
▪to the extent volatility in our common stock is caused by a “short squeeze” in which coordinated trading activity causes a spike in the market price of our common stock as traders with a short position make market purchases to avoid or to mitigate potential losses, investors may purchase at inflated prices unrelated to our financial performance or prospects, and may thereafter suffer substantial losses as prices decline once the level of short-covering purchases has abated; and
▪if the market price of our common stock declines, you may be unable to resell your shares at or above the price at which you acquired them. We cannot assure you that the equity issuance of our common stock will not fluctuate or decline significantly in the future, in which case you could incur substantial losses.
A “short squeeze” due to a sudden increase in demand for shares of our common stock that largely exceeds supply and/or focused investor trading in anticipation of a potential short squeeze have led to, and could again lead to, extreme price volatility in shares of our common stock.
Investors may purchase shares of our common stock to hedge existing exposure or to speculate on the price of our common stock. Speculation on the price of our common stock may involve long and short exposures. To the extent aggregate short exposure exceeds the number of shares of our common stock available for purchase on the open market, investors with short exposure may have to pay a premium to repurchase shares of our common stock for delivery to lenders of our common stock. Those repurchases may, in turn, dramatically increase the price of shares of our common stock until additional shares of our common stock are available for trading or borrowing. This is often referred to as a “short squeeze.” A large proportion of our common stock has been in the past and may be traded in the future by short sellers, which may increase the likelihood that our common stock will be the target of a short squeeze. A short squeeze and/or focused investor trading in anticipation of a short squeeze have led to and could again lead to volatile price movements in shares of our common stock that may be unrelated or disproportionate to our operating performance or prospectus and, once investors purchase the shares of our common stock necessary to cover their short positions, or if investors no longer believe a short squeeze is viable, the price of our common stock may rapidly decline. Investors that purchase shares of our common stock during a short squeeze may lose a significant portion of their investment.
Information available in public media that is published by third parties, including blogs, articles, message boards and social and other media may include statements not attributable to the Company and may not be reliable or accurate.
We have received, and may continue to receive, a high degree of media coverage that is published or otherwise disseminated by third parties, including blogs, articles, message boards and social and other media. This includes coverage that is not attributable to statements made by our directors, officers or employees. You should read carefully, evaluate and rely only on the information contained in this prospectus supplement, the accompanying prospectus or any applicable free writing prospectus filed with the SEC in determining whether to purchase our shares of common stock. Information provided by third parties may not be reliable or accurate and could materially impact the trading price of our common stock which may cause investors that purchase our common stock to lose a significant portion of their investment.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
The following table provides information regarding the purchase of shares of our common stock made by or on behalf of the Company or any “affiliated purchaser” as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934, during each month of the quarterly period ended October 30, 2021:
Month
Total Number of Shares Purchased(1)
Average Price Paid per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
Approximate Dollar Value of Shares that May Yet Be Purchased under the Plans or Programs(2)
(in thousands, except per share amounts)
August 1, 2021 - August 28, 2021
3
$
6.02
—
$
34,215
August 29, 2021 - October 2, 2021
30
$
5.37
—
$
34,215
October 3, 2021 - October 30, 2021
8
$
4.36
—
$
34,215
Total
41
—
1.Includes shares purchased in connection with employee tax withholding obligations under the Second Amended and Restated Express, Inc. 2010 Incentive Compensation Plan (the “2010 Plan”) and the Second Amended and Restated Express, Inc. 2018 Incentive Compensation Plan (the “2018 Plan”). Refer to Note 8 of our unaudited Consolidated Financial Statements included elsewhere in this Quarterly Report for further details of the 2010 Plan and 2018 Plan.
2.On November 28, 2017, the Board approved a share repurchase program that authorized the Company to repurchase up to $150.0 million of the Company’s outstanding common stock using available cash. The Company may repurchase shares on the open market, including through Rule 10b5-1 plans, in privately negotiated transactions, through block purchases, or otherwise in compliance with applicable laws, including Rule 10b-18 of the Securities Exchange Act of 1934, as amended. The timing and amount of stock repurchases will depend on a variety of factors, including business and market conditions as well as corporate and regulatory considerations. The share repurchase program may be suspended, modified, or discontinued at any time, and the Company has no obligation to repurchase any amount of its common stock under the program.
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*
Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document).
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date:
December 8, 2021
EXPRESS, INC.
By:
/s/ Matthew Moellering
Matthew Moellering
President, Chief Operating Officer, and Interim Chief Financial Officer
