Express, Inc. (NYSE:EXPR), a specialty retail apparel company, announced its financial results for the third quarter of 2016. These results, which cover the thirteen and thirty-nine weeks ended October 29, 2016, are compared to the thirteen and thirty-nine weeks ended October 31, 2015.

David Kornberg, the Company’s president and chief executive officer, stated: “Our third quarter performance was highlighted by sales and earnings in line with our guidance and progress made addressing the areas noted for improvement during our second quarter call. This progress included refocusing our brand projection and marketing to be more consistent with our core demographic and additional steps taken to drive customer acquisition and retention. Notably, while mall traffic challenges continued to impact our store performance, we achieved a double digit increase in e-commerce sales.”

Mr. Kornberg, continued: "We expect the holiday season to remain challenging as mall traffic and a highly promotional retail environment continue to be headwinds. That being said, we believe our focus and execution against our key priorities, which include driving improved profitability through a balanced approach to growth, elevating our brand and customer experience, investing in the growth and development of our associates and achieving the benefits from our systems implementations, will position our Company to create shareholder value over the long term.”

Third Quarter 2016 Operating Results:

  • Net sales decreased 7% to $506.1 million from $546.6 million in the third quarter of 2015.
  • Comparable sales (including e-commerce sales) decreased 8%, compared to a 6% increase in the third quarter of 2015.
  • E-commerce sales increased 15% to $96.3 million.
  • Merchandise margin declined by 340 basis points driven by increased promotional activity. Buying and occupancy as a percentage of net sales rose by 160 basis points. In combination, this resulted in a 500 basis point decline in gross margin, representing 30.0% of net sales compared to 35.0% in last year’s third quarter.
  • Selling, general, and administrative (SG&A) expenses were $136.6 million versus $146.6 million in last year's third quarter. As a percentage of net sales, SG&A expenses increased by 20 basis points to 27.0%.
  • Operating income was $15.1 million, or 3.0% of net sales, compared to $44.5 million, or 8.1% of net sales in the third quarter of 2015.
  • Income tax expense was $2.8 million, at an effective tax rate of 19.6%, compared to $16.9 million, at an effective tax rate of 39.2% in last year's third quarter. The effective tax rate for the thirteen weeks ended October 29, 2016 includes a net tax benefit of approximately $2.9 million attributable to certain discrete items that occurred during the third quarter.
  • Net income was $11.6 million, or $0.15 per diluted share and includes a net $0.04 per diluted share benefit related to the aforementioned income tax items. This compares to net income of $26.3 million, or $0.31 per diluted share, in the third quarter of 2015.
  • Real estate activity for the third quarter of 2016 is presented in Schedule 5.

Third Quarter 2016 Balance Sheet Highlights:

  • Cash and cash equivalents totaled $101.9 million versus $91.2 million at the end of the third quarter of 2015. During the thirty-nine weeks ended October 29, 2016, approximately $51.5 million was used to repurchase approximately 3.2 million shares of the Company's outstanding common stock.
  • Capital expenditures totaled $80.9 million for the thirty-nine weeks ended October 29, 2016 compared to $85.0 million for the thirty-nine weeks ended October 31, 2015.
  • Inventory was $341.9 million compared to $364.7 million at the end of the prior year’s third quarter, a 6% decrease.

2016 Guidance:

The table below compares the Company's projected results for the thirteen week period ended January 28, 2017 to the actual results for the thirteen week period ended January 30, 2016.

      Fourth Quarter 2016 Guidance    

Fourth Quarter 2015

Actual Results

Comparable Sales Negative low double digits 4%
Effective Tax Rate Approximately 39% 38.5%
Interest Expense, Net $0.7 million $1.1 million
Net Income $20 to $23 million $56.1 million
Diluted Earnings Per Share (EPS) $0.26 to $0.30 $0.67
Weighted Average Diluted Shares Outstanding 78.8 million 83.3 million
 

The table below compares the Company's projected results for the 52 week period ended January 28, 2017 to the actual results for the 52 week period ended January 30, 2016.

      Full Year 2016 Guidance    

Full Year 2015

Actual Results

Comparable Sales Negative high single digits 6%
Effective Tax Rate Approximately 37% 38.9%
Interest Expense, Net $13.5 million(1) $15.9 million(2)
Net Income $55 to $58 million(1) $116.5 million(2)
Adjusted Net Income $62 to $65 million(3) $122.4 million(3)
Diluted EPS $0.70 to $0.74(1) $1.38(2)
Adjusted Diluted EPS $0.78 to $0.82(3) $1.45(3)
Weighted Average Diluted Shares Outstanding 79.1 million 84.6 million
Capital Expenditures $100 to $105 million $115.3 million
      (1)   Includes approximately $11.4 million of non-core items related to an amendment to the Times Square Flagship store lease that allows for early termination at the landlord's option.
 
(2) Includes approximately $9.7 million of non-core items in connection with the redemption of our Senior Notes. These items consist of the redemption premium paid, the write-off of unamortized debt issuance costs, and the write-off of the unamortized debt discount.
 
(3)

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.

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

Conference Call Information:

A conference call to discuss third quarter 2016 results is scheduled for Thursday, December 1, 2016 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 December 1, 2016 until 11:59 p.m. ET on December 8, 2016 and can be accessed by dialing (877) 870-5176 and entering replay pin number 13650225.

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 and the Middle East. 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 fourth quarter and full year 2016, including statements regarding expected comparable sales, effective tax rates, interest expense, net income, adjusted net income, diluted earnings per share, adjusted 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, including restrictions on our ability to repurchase our common stock; (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)

           
October 29, 2016 January 30, 2016 October 31, 2015
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 101,855 $ 186,903 $ 91,215
Receivables, net 16,274 22,130 25,810
Inventories 341,936 255,350 364,662
Prepaid minimum rent 31,434 30,694 30,660
Other 21,786   18,342   28,788  
Total current assets 513,285 513,419 541,135
 
PROPERTY AND EQUIPMENT 1,017,259 948,608 928,434
Less: accumulated depreciation (550,725 ) (504,211 ) (484,929 )
Property and equipment, net 466,534 444,397 443,505
 
TRADENAME/DOMAIN NAMES/TRADEMARKS 197,618 197,597 197,597
DEFERRED TAX ASSETS 21,612 21,227 11,718
OTHER ASSETS 12,696   2,004   2,990  
Total assets $ 1,211,745   $ 1,178,644   $ 1,196,945  
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable $ 222,818 $ 149,884 $ 209,874
Deferred revenue 25,322 30,895 22,302
Accrued expenses 166,953   126,624   106,925  
Total current liabilities 415,093 307,403 339,101
 
DEFERRED LEASE CREDITS 145,507 139,236 139,203
OTHER LONG-TERM LIABILITIES 40,451   114,052   112,518  
Total liabilities 601,051 560,691 590,822
 
COMMITMENTS AND CONTINGENCIES
 
Total stockholders’ equity 610,694   617,953   606,123  
Total liabilities and stockholders’ equity $ 1,211,745   $ 1,178,644   $ 1,196,945  
 
 

Schedule 2

Express, Inc.

Consolidated Statements of Income

(In thousands, except per share amounts)

(Unaudited)

       
Thirteen Weeks Ended Thirty-Nine Weeks Ended

October 29,
2016

  

October 31,
2015

October 29,
2016

  

October 31,
2015

NET SALES $ 506,090 $ 546,616 $ 1,513,766 $ 1,584,576
COST OF GOODS SOLD, BUYING AND OCCUPANCY COSTS 354,373   355,527   1,043,382   1,049,853
Gross profit 151,717 191,089 470,384 534,723
OPERATING EXPENSES:
Selling, general, and administrative expenses 136,633 146,585 405,547 420,334
Other operating (income) expense, net (17 ) (29 ) 28   43
Total operating expenses 136,616 146,556 405,575 420,377
 
OPERATING INCOME 15,101 44,533 64,809 114,346
 
INTEREST EXPENSE, NET 567 1,207 12,845 14,751
OTHER EXPENSE (INCOME), NET 90   70   (404 ) 140
INCOME BEFORE INCOME TAXES 14,444 43,256 52,368 99,455
INCOME TAX EXPENSE 2,827   16,949   17,725   39,058
NET INCOME $ 11,617 $ 26,307 $ 34,643 $ 60,397
 
EARNINGS PER SHARE:
Basic $ 0.15 $ 0.31 $ 0.44 $ 0.72
Diluted $ 0.15 $ 0.31 $ 0.44 $ 0.71
 
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 78,401 84,240 78,754 84,453
Diluted 78,595 84,849 79,151 85,009
 
 

Schedule 3

Express, Inc.

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

     
Thirty-Nine Weeks Ended
October 29, 2016     October 31, 2015
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 34,643 $ 60,397
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 58,960 56,103
Loss on disposal of property and equipment 907 1,313
Impairment charge 829 —
Amortization of lease financing obligation discount 11,354 —
Excess tax benefit from share-based compensation — (334 )
Share-based compensation 10,783 15,114
Non-cash loss on extinguishment of debt — 5,314
Deferred taxes (385 ) (6,805 )
Landlord allowance amortization (8,345 ) (9,208 )
Payment of original issue discount — (2,812 )
Changes in operating assets and liabilities:
Receivables, net 5,883 (2,546 )
Inventories (86,468 ) (123,806 )
Accounts payable, deferred revenue, and accrued expenses 28,749 42,514
Other assets and liabilities 2,954   20,389  
Net cash provided by operating activities 59,864 55,633
 
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (80,900 ) (85,013 )
Purchase of intangible assets (21 ) (35 )
Investment in equity interests (10,133 ) —  
Net cash used in investing activities (91,054 ) (85,048 )
 
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 (1,186 ) (1,168 )
Excess tax benefit from share-based compensation — 334
Proceeds from exercise of stock options 2,735 1,265
Repurchase of common stock under share repurchase program (51,538 ) (22,020 )
Repurchase of shares for tax withholding obligations (4,498 ) (4,400 )
Net cash used in financing activities (54,487 ) (225,033 )
 
EFFECT OF EXCHANGE RATE ON CASH 629 (496 )
 
NET DECREASE IN CASH AND CASH EQUIVALENTS (85,048 ) (254,944 )
CASH AND CASH EQUIVALENTS, Beginning of period 186,903   346,159  
CASH AND CASH EQUIVALENTS, End of period $ 101,855   $ 91,215  
 
 

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.
 
      Thirty-Nine Weeks Ended October 29, 2016
(in thousands, except per share amounts) Net Income    

Diluted Earnings per

Share

    

Weighted Average

Diluted Shares

Outstanding

Reported GAAP Measure $ 34,643 $ 0.44 79,151
Interest Expense (a) 11,354 0.14
Income Tax Benefit (b) (4,428 ) (0.06 )
Adjusted Non-GAAP Measure $ 41,569   $ 0.53  
      (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 thirty-nine weeks ended October 29, 2016.
 
      Thirty-Nine Weeks Ended October 31, 2015
(in thousands, except per share amounts) Net Income    

Diluted Earnings per

Share

    

Weighted Average

Diluted Shares

Outstanding

Reported GAAP Measure $ 60,397 $ 0.71 85,009
Interest Expense (a) 9,657 0.11
Income Tax Benefit (b) (3,741 ) (0.04 )
Adjusted Non-GAAP Measure $ 66,313   $ 0.78  
      (a)   Includes the redemption premium paid, the write-off of unamortized debt issuance costs, and the write-off of the unamortized debt discount related to the redemption of all $200.9 million of our Senior Notes.
 
(b) Represents the tax impact of the interest expense adjustment at our statutory rate of approximately 39% for the thirty-nine weeks ended October 31, 2015.
 
 

Schedule 4 (Continued)

Supplemental Information - Consolidated Statements of Income

Reconciliation of GAAP to Non-GAAP Financial Measures

(Unaudited)

   
Fifty-Two Weeks Ended January 28, 2017
(in thousands, except per share amounts)

Projected Net

Income

    

Projected Diluted

Earnings per Share

    

Projected Weighted

Average Diluted

Shares Outstanding

Projected GAAP Measure * $ 56,500 $ 0.71 79,068
Interest Expense (a) 11,354 0.14
Income Tax Benefit (b) (4,428 ) (0.06 )
Projected Adjusted Non-GAAP Measure * $ 63,426   $ 0.80  
      (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 fifty-two weeks ended January 28, 2017.
 

* Represents mid-point of guidance range.

 
      Fifty-Two Weeks Ended January 30, 2016
(in thousands, except per share amounts) Net Income    

Diluted Earnings per

Share

    

Weighted Average

Diluted Shares

Outstanding

Reported GAAP Measure $ 116,513 $ 1.38 84,591
Interest Expense (a) 9,657 0.11
Income Tax Benefit (b) (3,741 ) (0.04 )
Adjusted Non-GAAP Measure $ 122,429   $ 1.45  
      (a)   Includes the redemption premium paid, the write-off of unamortized debt issuance costs, and the write-off of the unamortized debt discount related to the redemption of all $200.9 million of our Senior Notes.
 
(b) Represents the tax impact of the interest expense adjustment at our statutory rate of approximately 39% for the fifty-two weeks ended January 30, 2016.
 
 

Schedule 5

Express, Inc.

Real Estate Activity

(Unaudited)

       
Third Quarter 2016 - Actual October 29, 2016 - Actual
Company-Operated Stores   Opened   Closed   Conversion Store Count  

Gross Square

Footage

United States - Retail Stores   —   — — 537
United States - Outlet Stores 5 — — 99
Canada —   —   — 17
Total 5 — — 653 5.6 million
 
Fourth Quarter 2016 - Projected January 28, 2017 - Projected
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
 
Full Year 2016 - Projected
Company-Operated Stores   Opened   Closed   Conversion
United States - Retail Stores — (16) (4)
United States - Outlet Stores 19 — 4
Canada —   —   —
Total 19 (16) —