Express, Inc. (NYSE:EXPR), a specialty retail apparel company, announced its financial results for the fourth quarter and full year 2016. These results, which cover the thirteen and fifty-two weeks ended January 28, 2017, are compared to the thirteen and fifty-two weeks ended January 30, 2016.

David Kornberg, the Company's president and chief executive officer, noted that, "Despite ongoing pressures in the retail sector, our fourth quarter earnings were in line with previously issued guidance. As expected, our store performance continued to be impacted by challenging mall traffic and a promotional retail environment. As our industry adapts to changing consumer preferences, we continue to invest in our omni-channel and marketing capabilities to ensure that we capitalize on this evolution. As a result, e-commerce sales made up 25% of fourth quarter net sales, with sales increasing 9% over the prior year period. We also remain intensely focused on managing our overall cost structure and optimizing our store footprint. Our balance sheet remains strong with more than $200 million in cash and we continue to have solid cash flow."

Mr. Kornberg went on to note that, "We enter 2017 with confidence that the actions we have taken and the initiatives underway will translate into stronger performance as we move through the year. These initiatives include improving the fashion clarity in our stores through reduced choice counts, launching a new brand campaign, introducing compelling new products, and improving upon key existing categories. We also expect to benefit from the relaunch of our customer loyalty program and our new IT systems, which will foster more efficient decision making and precise planning."

Fourth Quarter 2016 Operating Results:

  • Net sales decreased 11% to $678.8 million from $765.6 million in the fourth quarter of 2015.
  • Comparable sales (including e-commerce sales) decreased 13%, compared to a 4% increase in the fourth quarter of 2015.
  • E-commerce sales increased 9% to $170.1 million.
  • Merchandise margin declined by 330 basis points driven by increased promotional activity. Buying and occupancy as a percentage of net sales rose by 230 basis points. In combination, this resulted in a 560 basis point decline in gross margin, representing 28.4% of net sales compared to 34.0% in last year’s fourth quarter.
  • Selling, general, and administrative (SG&A) expenses were $154.0 million versus $167.4 million in last year's fourth quarter. As a percentage of net sales, SG&A expenses increased by 80 basis points to 22.7%.
  • Operating income was $38.8 million, or 5.7% of net sales, compared to $92.9 million, or 12.1% of net sales in the fourth quarter of 2015.
  • Income tax expense was $15.5 million, at an effective tax rate of 40.5%, compared to $35.1 million, at an effective tax rate of 38.5% in last year's fourth quarter.
  • Net income was $22.8 million, or $0.29 per diluted share. This compares to net income of $56.1 million, or $0.67 per diluted share, in the fourth quarter of 2015.
  • Real estate activity for the fourth quarter of 2016 is presented in Schedule 5.

Balance Sheet And Cash Flow Highlights:

  • Cash and cash equivalents totaled $207.4 million at the end of 2016 versus $186.9 million at the end of 2015. During the fifty-two weeks ended January 28, 2017, approximately $51.5 million was used to repurchase approximately 3.2 million shares of the Company's outstanding common stock.
  • Capital expenditures totaled $98.7 million for 2016 compared to $115.3 million for 2015.
  • Inventory was $241.4 million at the end of 2016 compared to $255.4 million at the end of 2015, a 5% decrease.

2017 Guidance:

The table below compares the Company's projected results for the thirteen week period ended April 29, 2017 to the actual results for the thirteen week period ended April 30, 2016.

  First Quarter 2017 Guidance   First Quarter 2016 Actual Results
Comparable Sales Negative high single digits (3)%
Effective Tax Rate Approximately 39% 38.0%
Interest Expense, Net $1 million

$11.7 million(1)

Net Income ($3) to $0 million $12.9 million(1)
Adjusted Net Income N/A $19.8 million(2)
Diluted Earnings Per Share (EPS) ($0.04) to $0.00

$0.16(1)

Adjusted Diluted EPS N/A

$0.25(2)

Weighted Average Diluted Shares Outstanding 78.7 million 79.9 million

(1) Includes approximately $11.4 million of non-core items related to an amendment to the Times Square Flagship store lease.

(2) Adjusted Net Income and Adjusted Diluted EPS are non-GAAP financial measures. Refer to Schedule 4 for a reconciliation of GAAP to Non-GAAP financial measures.

The table below compares the Company's projected results for the 53 week period ended February 3, 2018 to the actual results for the 52 week period ended January 28, 2017. The Company expects the 53rd week impact on Diluted EPS to be approximately $0.04.

  Full Year 2017 Guidance  

Full Year 2016 Actual Results

Comparable Sales Flat to low single digits (9)%
Effective Tax Rate Approximately 39% 36.6%
Interest Expense, Net $4 million $13.5 million(1)
Net Income $52 to $58 million $57.4 million

Adjusted Net Income

N/A $64.3 million(2)
Diluted EPS $0.65 to $0.73

$0.73(1)

Adjusted Diluted EPS N/A

$0.81(2)

Weighted Average Diluted Shares Outstanding 79.4 million 79.0 million
Capital Expenditures $62 to $67 million $98.7 million

(1) Includes approximately $11.4 million of non-core items related to an amendment to the Times Square Flagship store lease.

(2) Adjusted Net Income and Adjusted Diluted EPS are non-GAAP financial measures. Refer to Schedule 4 for a reconciliation of GAAP to Non-GAAP financial measures.

This guidance does not take into account any additional non-core items that may occur and excludes the impact of discrete items on the tax rate.

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

Conference Call Information:

A conference call to discuss fourth quarter 2016 results is scheduled for Wednesday, March 8, 2017 at 9:00 a.m. Eastern Time (ET). Investors and analysts interested in participating in the call are invited to dial (877) 705-6003 approximately ten minutes prior to the start of the call. The conference call will also be webcast live at: http://www.express.com/investor and remain available for 90 days. A telephone replay of this call will be available at 12:00 p.m. ET on March 8, 2017 until 11:59 p.m. ET on March 15, 2017 and can be accessed by dialing (844) 512-2921 and entering replay pin number 13654883.

An investor presentation with information regarding the fourth quarter and fiscal year 2016 results and outlook for 2017 will also be available at: http://www.express.com/investor at approximately 7:00 a.m. ET on Wednesday, March 8, 2017.

About Express, Inc.:

Express is a specialty apparel and accessories retailer of women's and men's merchandise, targeting the 20 to 30- year-old customer. Express has more than 35 years of experience offering a distinct combination of fashion and quality for multiple lifestyle occasions at an attractive value addressing fashion needs across work, casual, jeanswear, and going-out occasions. The Company currently operates more than 650 retail and factory outlet stores, located primarily in high-traffic shopping malls, lifestyle centers, and street locations across the United States, Canada, and Puerto Rico. Express merchandise is also available at franchise locations in Latin America. Express also markets and sells its products through its e-commerce website, www.express.com, as well as on its mobile app.

Forward-Looking Statements:

Certain statements are “forward-looking statements” made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include any statement that does not directly relate to any historical or current fact and include, but are not limited to, (1) guidance and expectations for the first quarter and full year 2017, including statements regarding expected comparable sales, effective tax rates, interest expense, net income, adjusted net income, diluted earnings per share, and capital expenditures, (2) statements regarding expected store openings, store closures, and gross square footage, and (3) statements regarding the Company's future plans and initiatives, including, but not limited to, results expected from such initiatives. Forward-looking statements are based on our current expectations and assumptions, which may not prove to be accurate. These statements are not guarantees and are subject to risks, uncertainties, and changes in circumstances that are difficult to predict, and significant contingencies, many of which are beyond the Company's control. Many factors could cause actual results to differ materially and adversely from these forward-looking statements. Among these factors are (1) changes in consumer spending and general economic conditions; (2) our ability to identify and respond to new and changing fashion trends, customer preferences, and other related factors; (3) fluctuations in our sales, results of operations, and cash levels on a seasonal basis and due to a variety of other factors, including, our product offerings relative to customer demand, the mix of merchandise we sell, promotions, and inventory levels; (4) competition from other retailers; (5) customer traffic at malls, shopping centers, and at our stores and online; (6) our dependence on a strong brand image; (7) our ability to develop and maintain a relevant and reliable omni-channel experience for our customers; (8) the failure or breach of information systems upon which we rely; (9) our ability to protect customer data from fraud and theft; (10) our dependence upon third parties to manufacture all of our merchandise; (11) changes in the cost of raw materials, labor, and freight; (12) supply chain disruption; (13) our dependence upon key executive management; (14) our growth strategy, including our ability to improve the productivity of our existing stores, open new stores, and grow our e-commerce business; (15) our substantial lease obligations; (16) our reliance on third parties to provide us with certain key services for our business; (17) claims made against us resulting in litigation or changes in laws and regulations applicable to our business; (18) our inability to protect our trademarks or other intellectual property rights which may preclude the use of our trademarks or other intellectual property around the world; (19) restrictions imposed on us under the terms of our asset-based loan facility; (20) impairment charges on long-lived assets; and (21) changes in tax requirements, results of tax audits, and other factors that may cause fluctuations in our effective tax rate. Additional information concerning these and other factors can be found in Express, Inc.'s filings with the Securities and Exchange Commission. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events, or otherwise, except as otherwise required by law.

   

Schedule 1

Express, Inc.

Consolidated Balance Sheets

(In thousands)

(Unaudited)

 
January 28, 2017 January 30, 2016
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 207,373 $ 186,903
Receivables, net 15,787 22,130
Inventories 241,424 255,350
Prepaid minimum rent 31,626 30,694
Other 17,923   18,342  
Total current assets 514,133 513,419
 
PROPERTY AND EQUIPMENT 1,029,176 948,608
Less: accumulated depreciation (577,890 ) (504,211 )
Property and equipment, net 451,286 444,397
 
TRADENAME/DOMAIN NAMES/TRADEMARKS 197,618 197,597
DEFERRED TAX ASSETS 7,926 21,227
OTHER ASSETS 14,226   2,004  
Total assets $ 1,185,189   $ 1,178,644  
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable $ 172,668 $ 149,884
Deferred revenue 29,428 30,895
Accrued expenses 80,301   126,624  
Total current liabilities 282,397 307,403
 
DEFERRED LEASE CREDITS 146,328 139,236
OTHER LONG-TERM LIABILITIES 120,777   114,052  
Total liabilities 549,502 560,691
 
COMMITMENTS AND CONTINGENCIES
 
Total stockholders’ equity 635,687   617,953  
Total liabilities and stockholders’ equity $ 1,185,189   $ 1,178,644  
   

Schedule 2

Express, Inc.

Consolidated Statements of Income

(In thousands, except per share amounts)

(Unaudited)

 
Thirteen Weeks Ended Fifty-Two Weeks Ended
January 28, 2017   January 30, 2016 January 28, 2017   January 30, 2016
NET SALES $ 678,781 $ 765,553 $ 2,192,547 $ 2,350,129
COST OF GOODS SOLD, BUYING AND OCCUPANCY COSTS 485,961   504,999   1,529,343   1,554,852
Gross profit 192,820 260,554 663,204 795,277
OPERATING EXPENSES:
Selling, general, and administrative expenses 153,994 167,413 559,541 587,747
Other operating expense, net 34   249   62   292
Total operating expenses 154,028 167,662 559,603 588,039
 
OPERATING INCOME 38,792 92,892 103,601 207,238
 
INTEREST EXPENSE, NET 623 1,131 13,468 15,882
OTHER (INCOME) EXPENSE, NET (80 ) 532   (484 ) 672
INCOME BEFORE INCOME TAXES 38,249 91,229 90,617 190,684
INCOME TAX EXPENSE 15,475   35,113   33,200   74,171
NET INCOME $ 22,774 $ 56,116 $ 57,417 $ 116,513
 
EARNINGS PER SHARE:
Basic $ 0.29 $ 0.68 $ 0.73 $ 1.39
Diluted $ 0.29 $ 0.67 $ 0.73 $ 1.38
 
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 78,414 82,561 78,669 83,980
Diluted 78,741 83,337 79,049 84,591
 

Schedule 3

Express, Inc.

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 
Fifty-Two Weeks Ended
January 28, 2017   January 30, 2016
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 57,417 $ 116,513
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 82,144 74,904
Loss on disposal of property and equipment 942 1,561
Impairment charge 5,108 2,657
Amortization of lease financing obligation discount 11,354 —
Excess tax benefit from share-based compensation — (347 )
Share-based compensation 12,858 18,438
Non-cash loss on extinguishment of debt — 5,314
Deferred taxes 20,065 (10,700 )
Landlord allowance amortization (11,280 ) (12,730 )
Payment of original issue discount — (2,812 )
Changes in operating assets and liabilities:
Receivables, net 6,371 1,097
Inventories 14,144 (14,625 )
Accounts payable, deferred revenue, and accrued expenses (15,857 ) 17,705
Other assets and liabilities 3,442   32,628  
Net cash provided by operating activities 186,708 229,603
 
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (98,712 ) (115,343 )
Purchase of intangible assets (21 ) (35 )
Investment in equity interests (10,133 ) —  
Net cash used in investing activities (108,866 ) (115,378 )
 
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt — (198,038 )
Costs incurred in connection with debt arrangements — (1,006 )
Payments on lease financing obligations (1,595 ) (1,552 )
Repayments of financing arrangements (3,274 ) —
Excess tax benefit from share-based compensation — 347
Proceeds from exercise of stock options 2,735 1,276
Repurchase of common stock under share repurchase program (51,538 ) (68,574 )
Repurchase of common stock for tax withholding obligations (4,599 ) (4,450 )
Net cash used in financing activities (58,271 ) (271,997 )
 
EFFECT OF EXCHANGE RATE ON CASH 899 (1,484 )
 
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 20,470 (159,256 )
CASH AND CASH EQUIVALENTS, Beginning of period 186,903   346,159  
CASH AND CASH EQUIVALENTS, End of period $ 207,373   $ 186,903  
 

Schedule 4

Supplemental Information - Consolidated Statements of Income

 

Reconciliation of GAAP to Non-GAAP Financial Measures

 

(Unaudited)

 

The Company supplements the reporting of its financial information determined under United States generally accepted accounting principles (GAAP) with certain non-GAAP financial measures: adjusted net income and adjusted diluted earnings per share. The Company believes that these non-GAAP measures provide additional useful information to assist stockholders in understanding its financial results and assessing its prospects for future performance. Management believes adjusted net income and adjusted diluted earnings per share are important indicators of the Company's business performance because they exclude items that may not be indicative of, or are unrelated to, the Company's underlying operating results, and provide a better baseline for analyzing trends in the business. In addition, adjusted diluted earnings per share is used as a performance measure in the Company's executive compensation program for purposes of determining the number of equity awards that are ultimately earned. Because non-GAAP financial measures are not standardized, it may not be possible to compare these financial measures with other companies' non-GAAP financial measures having the same or similar names. These adjusted financial measures should not be considered in isolation or as a substitute for reported net income and reported diluted earnings per share. These non-GAAP financial measures reflect an additional way of viewing the Company's operations that, when viewed with the GAAP results and the below reconciliations to the corresponding GAAP financial measures, provide a more complete understanding of the Company's business. Management strongly encourages investors and stockholders to review the Company's financial statements and publicly-filed reports in their entirety and not to rely on any single financial measure.

  Thirteen Weeks Ended April 30, 2016
(in thousands, except per share amounts) Net Income   Diluted Earnings per Share   Weighted Average Diluted Shares Outstanding
Reported GAAP Measure $ 12,882 $ 0.16 79,914
Interest Expense (a) 11,354 0.14
Income Tax Benefit (b) (4,428 ) (0.06 )
Adjusted Non-GAAP Measure $ 19,808   $ 0.25  

(a) Represents non-core items related to the amendment of the Times Square Flagship store lease.

(b) Represents the tax impact of the interest expense adjustment at our statutory rate of approximately 39% for the thirteen weeks ended April 30, 2016.

  Fifty-Two Weeks Ended January 28, 2017
(in thousands, except per share amounts) Net Income   Diluted Earnings per Share   Weighted Average Diluted Shares Outstanding
Reported GAAP Measure $ 57,417 $ 0.73 79,049
Interest Expense (a) 11,354 0.14
Income Tax Benefit (b) (4,428 ) (0.06 )
Adjusted Non-GAAP Measure $ 64,343   $ 0.81  

(a) Represents non-core items related to the amendment of the Times Square Flagship store lease.

(b) Represents the tax impact of the interest expense adjustment at our statutory rate of approximately 39% for the thirteen weeks ended January 28, 2017.

     

Schedule 5

Express, Inc.

Real Estate Activity

(Unaudited)

 
Fourth Quarter 2016 - Actual January 28, 2017 - Actual
Company-Operated Stores   Opened   Closed Conversion Store Count Gross Square Footage
United States - Retail Stores — (1 ) (1 ) 535
United States - Outlet Stores 4 — 1 104
Canada — —   —   17
Total 4 (1 ) — 656 5.7 million
 
First Quarter 2017 - Projected April 29, 2017 - Projected
Company-Operated Stores Opened Closed Conversion Store Count Gross Square Footage
United States - Retail Stores — (8 ) — 527
United States - Outlet Stores 5 — — 109
Canada — —   —   17
Total 5 (8 ) — 653 5.6 million
 
Full Year 2017 - Projected February 3, 2018 - Projected
Company-Operated Stores Opened Closed Conversion Store Count Gross Square Footage
United States - Retail Stores — (10 ) (20 ) 505
United States - Outlet Stores 19 — 20 143
Canada — —   —   17
Total 19 (10 ) — 665 5.7 million