UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the Quarterly Period Ended July 29, 2023
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
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
| (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 | ||||||||||||
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 | ☐ | ☒ | |||||||||
| 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 3,745,226 as of September 5, 2023.
EXPRESS, INC. | Q2 2023 Form 10-Q | 1
EXPRESS, INC.
INDEX TO FORM 10-Q
EXPRESS, INC. | Q2 2023 Form 10-Q | 2
FORWARD-LOOKING STATEMENTS
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, liquidity, cash flows, and financial results, our plans and objectives for future operations, growth, initiatives, or strategies, the anticipated financial benefits (and the timing of the realization of such benefits) from our cost reduction actions, plans to repurchase shares of our common stock, the expected outcome or impact of pending or threatened litigation, or our strategic partnership with WHP Global or any transactions arranged as part of that partnership, including the Bonobos acquisition, and the anticipated benefits or effects of such transactions, 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:
Operational and Industry Risks | ||
▪general economic conditions and changes in consumer spending, including as a result of recent high inflation and fears of a potential recession or instability in the financial markets and banking industry; | ||
▪customer traffic at malls, shopping centers, and at our stores; | ||
▪the COVID-19 pandemic has had, and may in the future have, an adverse effect on our business operations, 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 availability and cost of raw materials, labor, and freight; | ||
▪labor shortages; | ||
▪supply chain disruption and increased tariffs; | ||
▪geopolitical risks, including impacts from the ongoing conflict between Russia and Ukraine and increased tensions between China and Taiwan; | ||
▪difficulties associated with our third-party owned 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 including selling through inventory at an appropriate price; | ||
▪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 ability to realize the expected strategic and financial benefits of the Bonobos acquisition; | ||
▪our dependence upon key executive management; and | ||
▪our ability to execute our growth strategy, including but not limited to, achieving profitable growth in our core Express business, optimizing our omnichannel platform, accelerating our growth and profitability through the WHP strategic partnership and operating with financial discipline. | ||
Risks Related to Our Strategic Partnership with WHP | ||
▪our ability to realize success in our strategic partnership with WHP and the potential for the relationship with WHP to divert resources away from existing operations or expose us to liabilities; and | ||
▪our inability to realize the benefits and synergies of the strategic partnership or any transactions arranged as part of that partnership. | ||
EXPRESS, INC. | Q2 2023 Form 10-Q | 3
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; | ||
▪the financial and other effects of our workforce reduction and other cost reduction actions, including our ability to realize the benefits from such actions within the anticipated timeframe; | ||
▪restrictions imposed on us under the terms of our current credit facility, 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 facility; and | ||
▪impairment charges on property and equipment and our right of use 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 failure to regain compliance with the continued listing requirements of the New York Stock Exchange, or any future failure to meet those requirements, could result in the delisting of our common stock; | ||
▪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 28, 2023 (“Annual Report”), filed with the Securities and Exchange Commission (“SEC”) on March 31, 2023. 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.
EXPRESS, INC. | Q2 2023 Form 10-Q | 4
PART I – FINANCIAL INFORMATION
ITEM 1.FINANCIAL STATEMENTS.
EXPRESS, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in Thousands, Except Per Share Amounts) (Unaudited)
| July 29, 2023 | January 28, 2023 | ||||||||||
| ASSETS | |||||||||||
| Current Assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Receivables, net | |||||||||||
| Income tax receivable | |||||||||||
| Inventories | |||||||||||
| Prepaid royalty | |||||||||||
| Prepaid rent | |||||||||||
| Other | |||||||||||
| Total current assets | |||||||||||
| Right of Use Asset, Net | |||||||||||
| Property and Equipment | |||||||||||
| Less: accumulated depreciation | ( | ( | |||||||||
| Property and equipment, net | |||||||||||
| Non-Current Income Tax Receivable | |||||||||||
| Equity Method Investment | |||||||||||
| Other Assets | |||||||||||
| TOTAL ASSETS | $ | $ | |||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
| Current Liabilities: | |||||||||||
| Short-term lease liability | $ | $ | |||||||||
| Accounts payable | |||||||||||
| Deferred royalty income | |||||||||||
| Deferred revenue | |||||||||||
| Accrued expenses | |||||||||||
| Total current liabilities | |||||||||||
| Long-Term Lease Liability | |||||||||||
| Long-Term Debt | |||||||||||
| Other Long-Term Liabilities | |||||||||||
| Total Liabilities | |||||||||||
| Stockholders’ Equity: | |||||||||||
Preferred stock – $ | |||||||||||
Common stock – $ | |||||||||||
| Additional paid-in capital | |||||||||||
| Retained earnings | |||||||||||
Treasury stock – at average cost; | ( | ( | |||||||||
| Total stockholders’ equity | |||||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | $ | |||||||||
EXPRESS, INC. | Q2 2023 Form 10-Q | 5
EXPRESS, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Amounts in Thousands, Except Per Share Amounts) (Unaudited)
| Thirteen Weeks Ended | Twenty-Six Weeks Ended | |||||||||||||||||||||||||||||||
| July 29, 2023 | July 30, 2022 | July 29, 2023 | July 30, 2022 | |||||||||||||||||||||||||||||
| Net Sales | $ | $ | $ | $ | ||||||||||||||||||||||||||||
| Cost of Goods Sold, Buying and Occupancy Costs | ||||||||||||||||||||||||||||||||
| GROSS PROFIT | ||||||||||||||||||||||||||||||||
| Operating Expenses (Income): | ||||||||||||||||||||||||||||||||
| Selling, general, and administrative expenses | ||||||||||||||||||||||||||||||||
| Royalty income | ( | ( | ||||||||||||||||||||||||||||||
| Other operating expense (income), net | ( | ( | ||||||||||||||||||||||||||||||
| TOTAL OPERATING EXPENSES | ||||||||||||||||||||||||||||||||
| OPERATING (LOSS) INCOME | ( | ( | ||||||||||||||||||||||||||||||
| Interest Expense, Net | ||||||||||||||||||||||||||||||||
| Other Income, Net | ( | ( | ||||||||||||||||||||||||||||||
| (LOSS) INCOME BEFORE INCOME TAXES | ( | ( | ( | |||||||||||||||||||||||||||||
| Income Tax Expense (Benefit) | ( | |||||||||||||||||||||||||||||||
| NET (LOSS) INCOME | $ | ( | $ | $ | ( | $ | ( | |||||||||||||||||||||||||
| COMPREHENSIVE (LOSS) INCOME | $ | ( | $ | $ | ( | $ | ( | |||||||||||||||||||||||||
| EARNINGS PER SHARE: | ||||||||||||||||||||||||||||||||
| Basic | $ | ( | $ | $ | ( | $ | ( | |||||||||||||||||||||||||
| Diluted | $ | ( | $ | $ | ( | $ | ( | |||||||||||||||||||||||||
| WEIGHTED AVERAGE SHARES OUTSTANDING: | ||||||||||||||||||||||||||||||||
| Basic | ||||||||||||||||||||||||||||||||
| Diluted | ||||||||||||||||||||||||||||||||
EXPRESS, INC. | Q2 2023 Form 10-Q | 6
EXPRESS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Amounts in Thousands) (Unaudited)
| Common Stock | Treasury Stock | |||||||||||||||||||||||||
| Shares Outstanding | Par Value | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Shares | At Average Cost | Total | |||||||||||||||||||
| BALANCE, January 28, 2023 | $ | $ | $ | $ | $ | ( | $ | |||||||||||||||||||
| Net loss | — | — | — | ( | — | — | — | ( | ||||||||||||||||||
| Exercise of stock options and vesting of restricted stock | — | ( | ( | — | ( | |||||||||||||||||||||
| Share-based compensation | — | — | — | — | — | — | ||||||||||||||||||||
| Repurchase of common stock | ( | — | — | — | — | ( | ( | |||||||||||||||||||
| BALANCE, April 29, 2023 | $ | $ | $ | $ | $ | ( | $ | |||||||||||||||||||
| Net loss | — | — | — | ( | — | — | — | ( | ||||||||||||||||||
| Exercise of stock options and vesting of restricted stock | — | ( | ( | — | ( | |||||||||||||||||||||
| Share-based compensation | — | — | ( | — | — | — | — | ( | ||||||||||||||||||
| Repurchase of common stock | — | — | — | — | — | — | ( | ( | ||||||||||||||||||
| BALANCE, July 29, 2023 | $ | $ | $ | $ | $ | ( | $ | |||||||||||||||||||
| Common Stock | Treasury Stock | |||||||||||||||||||||||||
| Shares Outstanding | Par Value | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Shares | At Average Cost | Total | |||||||||||||||||||
| BALANCE, January 29, 2022 | $ | $ | $ | $ | $ | ( | $ | |||||||||||||||||||
| Net loss | — | — | — | ( | — | — | — | ( | ||||||||||||||||||
| Exercise of stock options and vesting of restricted stock | — | ( | ( | — | ( | |||||||||||||||||||||
| Share-based compensation | — | — | — | — | — | — | ||||||||||||||||||||
| Repurchase of common stock | ( | — | — | — | — | ( | ( | |||||||||||||||||||
| BALANCE, April 30, 2022 | $ | $ | $ | $ | $ | ( | $ | ( | ||||||||||||||||||
| Net income | — | — | — | — | — | — | ||||||||||||||||||||
| Exercise of stock options and vesting of restricted stock | — | ( | ( | — | ( | |||||||||||||||||||||
| Share-based compensation | — | — | — | — | — | — | ||||||||||||||||||||
| Repurchase of common stock | ( | — | — | — | — | ( | ( | |||||||||||||||||||
| BALANCE, July 30, 2022 | $ | $ | $ | $ | $ | ( | $ | ( | ||||||||||||||||||
EXPRESS, INC. | Q2 2023 Form 10-Q | 7
EXPRESS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands) (Unaudited)
| Twenty-Six Weeks Ended | |||||||||||
| July 29, 2023 | July 30, 2022 | ||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | |||||||||||
| Net loss | $ | ( | $ | ( | |||||||
Adjustments to reconcile net loss to net cash used in operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| Loss on disposal of property and equipment | |||||||||||
| Impairment of property, equipment and lease assets | |||||||||||
| Share-based compensation | ( | ||||||||||
| Landlord allowance amortization | ( | ( | |||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Receivables, net | ( | ( | |||||||||
| Income tax receivable | ( | ( | |||||||||
| Prepaid royalty | |||||||||||
| Inventories | |||||||||||
| Deferred royalty income | ( | ||||||||||
| Accounts payable, deferred revenue, and accrued expenses | ( | ||||||||||
| Other assets and liabilities | ( | ( | |||||||||
NET CASH USED IN OPERATING ACTIVITIES | ( | ( | |||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | |||||||||||
| Capital expenditures | ( | ( | |||||||||
| Acquisition, net of cash acquired | ( | ||||||||||
| Costs related to WHP transaction | ( | ||||||||||
NET CASH USED IN INVESTING ACTIVITIES | ( | ( | |||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | |||||||||||
| Proceeds from borrowings under the revolving credit facility | |||||||||||
| Repayment of borrowings under the revolving credit facility | ( | ( | |||||||||
| Repayment of borrowings under the term loan facility | ( | ||||||||||
| Repurchase of common stock for tax withholding obligations | ( | ( | |||||||||
NET CASH PROVIDED BY FINANCING ACTIVITIES | |||||||||||
NET DECREASE IN CASH AND CASH EQUIVALENTS | ( | ( | |||||||||
| CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | |||||||||||
| CASH AND CASH EQUIVALENTS, END OF PERIOD | $ | $ | |||||||||
EXPRESS, INC. | Q2 2023 Form 10-Q | 8
| EXPRESS, INC. | ||||||||||||||
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS | ||||||||||||||
Page | |||||||||||
EXPRESS, INC. | Q2 2023 Form 10-Q | 9
NOTE 1 | DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION | ||||||||||||||
Business Description
Express, Inc., together with its subsidiaries (“Express” or the “Company”), is a multi-brand fashion retailer whose portfolio includes Express, Bonobos and UpWest. The Company operates an omnichannel platform, including both physical and online stores. Grounded in a belief that style, quality and value should all be found in one place, Express is a brand with a purpose - We Create Confidence. We Inspire Self-Expression. - powered by a styling community. Bonobos is a menswear brand known for exceptional fit and an innovative retail model. UpWest is an apparel, accessories and home goods brand with a purpose to Provide Comfort for People & Planet.
As of July 29, 2023, the Company operated 601 stores in the United States and Puerto Rico, the Express.com online store, the Express mobile app, the Bonobos.com online store and the UpWest.com online store. As of July 29, 2023, the composition of Express operated stores was as follows:
| Store Count | |||||
| EXPRESS | |||||
| Retail stores | |||||
| Outlet stores | |||||
| Edit stores | |||||
| Total retail and outlet stores | |||||
| Bonobos | |||||
| UpWest | |||||
| Total stores | |||||
Bonobos Acquisition
On May 23, 2023, the Company completed the acquisition of the operating assets of Bonobos, a menswear brand known for exceptional fit and an innovative retail model. The acquisition is intended to expand the Company's brand portfolio and leverage the Company's fully integrated omnichannel operating platform to drive financial efficiencies, operational synergies and additional economies of scale. Refer to Note 6 for further discussion regarding the acquisition.
WHP Strategic Partnership
In the fourth quarter of 2022, Express closed the strategic partnership transaction with WHP Global (“WHP”), a leading global brand management firm. The mutually transformative strategic partnership advances the Company's omnichannel platform which is expected to drive accelerated, long-term growth through the acquisition and operation of a portfolio of brands. In connection with the closing of this transaction in January 2023, the Company and WHP also formed an intellectual property joint venture (the “Joint Venture”), intended to scale the Express brand through new domestic category licensing and international expansion opportunities. Refer to Note 5 for further discussion regarding the WHP strategic partnership.
Reverse Stock Split and Recasting of Per-Share Amounts
On August 14, 2023, the Company’s Board of Directors (the "Board") approved the implementation of a 1-for-20 reverse stock split of the Company’s common stock, par value $0.01 per share (“Common Stock”), and a corresponding proportional reduction in the number of authorized shares of Common Stock. The reverse stock split was effected after market close on August 30, 2023 (the “Effective Date”), and shares of Common Stock began trading on a split-adjusted basis as of market open on August 31, 2023.
All shares of Common Stock, stock option awards and per share amounts contained in the unaudited Consolidated Financial Statements and Notes have been retroactively adjusted to reflect the 1-for-20 reverse stock split. Refer to Note 12 for further discussion regarding the reverse stock split.
EXPRESS, INC. | Q2 2023 Form 10-Q | 10
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 | ||||||||||||
| 2023 | February 3, 2024 | 53 | ||||||||||||
| 2022 | January 28, 2023 | 52 | ||||||||||||
All references herein to “the second quarter of 2023” and “the second quarter of 2022” represent the thirteen weeks ended July 29, 2023 and July 30, 2022, 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 future interim periods or 2023 fiscal year. Therefore, these statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto for the year ended January 28, 2023, included in the Annual Report.
Express, Inc., through its indirect, wholly owned subsidiaries, including Express Fashion Operations, LLC, conducts the operations of the Company and Express Fashion Investments, LLC which owns a 40 % economic interest with significant influence in the Joint Venture.
Segment Reporting
The Company defines an operating segment on the same basis that it uses to evaluate performance internally. The Company has determined that its Chief Executive Officer is 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, Bonobos and UpWest 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.
Going Concern Assessment and Management’s Plans
The Company’s revenues, results of operations and cash flows have been materially adversely impacted by negative macroeconomic factors beginning in the third and fourth quarters of 2022 and continuing into 2023. The persistently challenging macroeconomic and retail apparel environments, including reduced consumer spending
EXPRESS, INC. | Q2 2023 Form 10-Q | 11
and increased price sensitivity in discretionary categories, has significantly impacted the Company's performance. Net sales during the twenty-six weeks ended July 29, 2023 decreased approximately $97.1 million compared to the twenty-six weeks ended July 30, 2022 and this decline, coupled with aggressive promotional activity, drove gross margin and operating loss below the Company's expectations. For the twenty-six weeks ended July 29, 2023, the Company reported a net operating loss of $109.7 million and negative operating cash flows of $60.8 million.
As of July 29, 2023, the Company was in compliance with the financial covenants under the agreements governing its indebtedness, however, due to ongoing negative macroeconomic factors and their uncertain impacts on the Company’s business, results of operations and cash flows, the Company could experience further material decreases to net sales and operating cash flows and materially higher operating losses and may experience difficulty remaining in compliance with such covenants. Refer to Note 9 for further details regarding the terms of the ABL Credit Agreement (as defined therein) and the Revolving Credit Facility provided to the Company thereunder.
Under GAAP, management is required to perform an initial assessment of an entity’s ability to continue as a going concern. When conditions and events, in the aggregate, raise substantial doubt about an entity's ability to continue as a going concern, management considers the mitigating effect of its plans to the extent it is probable that the plans will be effectively implemented within the assessment period and, when implemented, it is probable the plans will mitigate the relevant conditions or events and alleviate substantial doubt.
Management's plans are focused on improving its results of operations, operating cash flows and liquidity through expense reduction initiatives and improved sales trends during the balance of fiscal year 2023 and fiscal year 2024. Additionally, the Company is conducting a comprehensive review of its business model to identify actions that are expected to meaningfully reduce pre-tax costs and enable a more efficient and effective organization and has engaged external advisors to assist in this effort. Management believes these plans are probable of being effectively implemented and, when implemented, that it is probable they will mitigate the negative impacts of the current ongoing negative macroeconomic conditions on the Company’s business. On September 5, 2023, the Company entered into a definitive loan agreement with ReStore Capital for a $65.0 million first-in-last-out asset-based term loan, receiving $32.5 million in gross proceeds from the term loan upon entering into the agreement, with the remaining $32.5 million to be funded on or prior to September 13, 2023. Additionally, the Company has contingency plans which would further reduce or defer additional expenses and cash outlays should its results of operations weaken beyond management’s current forecasts.
Consequently, management believes that cash flows from operations, together with the proceeds from the new FILO Term Loan Facility (refer to Note 13 for further details regarding the terms of the FILO Term Loan Facility), will result in adequate cash flows to support the Company’s ongoing operations and to meet its obligations as they become due under the agreements governing its indebtedness for at least one year following the date these interim financial statements are issued.
The accompanying unaudited Consolidated Financial Statements are prepared in accordance with generally accepted accounting principles applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.
NOTE 2 | REVENUE RECOGNITION | ||||||||||||||
The following is information regarding the Company’s major product categories and sales channels:
| Thirteen Weeks Ended | Twenty-Six Weeks Ended | |||||||||||||||||||||||||||||||
| July 29, 2023 | July 30, 2022 | July 29, 2023 | July 30, 2022 | |||||||||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||||||||
| Apparel | $ | $ | $ | $ | ||||||||||||||||||||||||||||
| Accessories and other | ||||||||||||||||||||||||||||||||
| Other revenue | ||||||||||||||||||||||||||||||||
| Total net sales | $ | $ | $ | $ | ||||||||||||||||||||||||||||
EXPRESS, INC. | Q2 2023 Form 10-Q | 12
| Thirteen Weeks Ended | Twenty-Six Weeks Ended | |||||||||||||||||||||||||||||||
| July 29, 2023 | July 30, 2022 | July 29, 2023 | July 30, 2022 | |||||||||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||||||||
| Retail | $ | $ | $ | $ | ||||||||||||||||||||||||||||
| Outlet | ||||||||||||||||||||||||||||||||
| Other revenue | ||||||||||||||||||||||||||||||||
| Total net sales | $ | $ | $ | $ | ||||||||||||||||||||||||||||
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 and revenue from gift card breakage.
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.
Loyalty Program
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 loyalty point and certificate redemption rates based on historical experience. The loyalty liability is included in deferred revenue on the unaudited Consolidated Balance Sheets.
| Thirteen Weeks Ended | Twenty-Six Weeks Ended | |||||||||||||||||||||||||
| July 29, 2023 | July 30, 2022 | July 29, 2023 | July 30, 2022 | |||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||
| Beginning balance loyalty deferred revenue | $ | $ | $ | $ | ||||||||||||||||||||||
| Net revenue recognized | ( | ( | ( | ( | ||||||||||||||||||||||
| Ending balance loyalty deferred revenue | $ | $ | $ | $ | ||||||||||||||||||||||
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 $13.0 million and $9.0 million as of July 29, 2023 and January 28, 2023, 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 $30.4 million and $25.6 million, as of July 29, 2023 and January 28, 2023, respectively, and is included in deferred revenue on the unaudited Consolidated Balance Sheets. As part of the acquisition of Bonobos, the Company acquired $7.5 million in gift card liability. Refer to Note 6 for
EXPRESS, INC. | Q2 2023 Form 10-Q | 13
| Thirteen Weeks Ended | Twenty-Six Weeks Ended | |||||||||||||||||||||||||||||||
| July 29, 2023 | July 30, 2022 | July 29, 2023 | July 30, 2022 | |||||||||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||||||||
| Beginning gift card liability | $ | $ | $ | $ | ||||||||||||||||||||||||||||
| Issuances and acquired | ||||||||||||||||||||||||||||||||
| Redemptions | ( | ( | ( | ( | ||||||||||||||||||||||||||||
| Gift card breakage | ( | ( | ( | ( | ||||||||||||||||||||||||||||
| Ending gift card liability | $ | $ | $ | $ | ||||||||||||||||||||||||||||
Private Label Credit Card
The Company has an agreement with Comenity Bank (the “Bank”) to provide customers with private label credit cards (as amended, the “Card Agreement”). The term of the Card Agreement expires on 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 in the unaudited Consolidated Statements of Income and Comprehensive Income. 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 paid 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 July 29, 2023, the deferred revenue balance of $4.1 million will be recognized over the remaining term of the Card Agreement within the other revenue component of net sales.
| Thirteen Weeks Ended | Twenty-Six Weeks Ended | |||||||||||||||||||||||||||||||
| July 29, 2023 | July 30, 2022 | July 29, 2023 | July 30, 2022 | |||||||||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||||||||
| Beginning balance refundable payment liability | $ | $ | $ | $ | ||||||||||||||||||||||||||||
| Recognized in revenue | ( | ( | ( | ( | ||||||||||||||||||||||||||||
| Ending balance refundable payment liability | $ | $ | $ | $ | ||||||||||||||||||||||||||||
EXPRESS, INC. | Q2 2023 Form 10-Q | 14
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. All shares of Common Stock in the table below have been retrospectively restated to reflect the effect of the reverse stock split:
| Thirteen Weeks Ended | Twenty-Six Weeks Ended | |||||||||||||||||||||||||||||||
| July 29, 2023 | July 30, 2022 | July 29, 2023 | July 30, 2022 | |||||||||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||||||||
| Weighted-average shares - basic | ||||||||||||||||||||||||||||||||
| Dilutive effect of stock options and restricted stock units | ||||||||||||||||||||||||||||||||
| Weighted-average shares - diluted | ||||||||||||||||||||||||||||||||
Equity awards representing 0.2 0.2 million and 0.3 million shares of Common Stock were excluded from the computation of diluted earnings per share for the thirteen and twenty-six weeks ended July 30, 2022, respectively, as the inclusion of these awards would have been anti-dilutive.
Additionally, for the thirteen weeks ended July 29, 2023, equity awards representing 0.1 million shares of Common Stock were excluded from the computation of diluted weighted average shares because the number of shares of Common Stock that will ultimately be issued is contingent on the Company’s performance compared to pre-established performance goals which had not been achieved as of July 29, 2023.
NOTE 4 | FAIR VALUE MEASUREMENTS | ||||||||||||||
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
EXPRESS, INC. | Q2 2023 Form 10-Q | 15
| July 29, 2023 | |||||||||||||||||
| Level 1 | Level 2 | Level 3 | |||||||||||||||
| (in thousands) | |||||||||||||||||
| Money market funds | $ | $ | $ | ||||||||||||||
| January 28, 2023 | |||||||||||||||||
| Level 1 | Level 2 | Level 3 | |||||||||||||||
| (in thousands) | |||||||||||||||||
| Money market funds | $ | $ | $ | ||||||||||||||
The money market funds are valued using quoted market prices in active markets.
Non-Financial Assets
The Company's non-financial assets, which include fixtures, equipment, improvements, right of use assets, and an equity method investment, 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, or annually in the case of indefinite-lived intangibles, an impairment test is required to be performed by the Company.
The carrying amounts reflected on the unaudited Consolidated Balance Sheets for the remaining cash, cash equivalents, receivables, prepaid expenses, and payables as of July 29, 2023 and January 28, 2023 approximated their fair values. The equity method investment is reflected at cost, and is the result of a market participant transaction with WHP whereby the Company received proceeds of $260.0 million and a 40 % ownership interest in the Joint Venture in exchange for contributing certain intellectual property to the Joint Venture.
The Company reviews its equity method investment by comparing its fair value to its carrying value. If the carrying value of the investment exceeds its fair value and the loss in value is other than temporary, the investment is considered impaired and reduced to fair value, and the impairment is recognized in the period identified. Factors providing evidence of such a loss include changes in the investee's operations or financial condition, significant continuing losses, significant negative economic conditions or a significant decrease in the market value. Impairment charges are recorded in other expense (income), net in the unaudited Consolidated Statements of Income and Comprehensive Income. During the thirteen and twenty-six weeks ended July 29, 2023, there were no
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, 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 assumption used in the undiscounted future store cash flow models is the sales growth rate.
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.
EXPRESS, INC. | Q2 2023 Form 10-Q | 16
Impairment charges are recorded in cost of goods sold, buying and occupancy costs in the unaudited Consolidated Statements of Income and Comprehensive Income.
During the thirteen and twenty-six weeks ended July 29, 2023 and July 30, 2022, the Company recognized impairment charges as follows:
| Thirteen Weeks Ended | Twenty-Six Weeks Ended | |||||||||||||||||||||||||||||||
| July 29, 2023 | July 30, 2022 | July 29, 2023 | July 30, 2022 | |||||||||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||||||||
| Right of use asset impairment | $ | $ | $ | $ | ||||||||||||||||||||||||||||
| Property and equipment asset impairment | ||||||||||||||||||||||||||||||||
| Total asset impairment | $ | $ | $ | $ | ||||||||||||||||||||||||||||
NOTE 5 | EQUITY METHOD INVESTMENT | ||||||||||||||
The following table is a summary of the Company’s equity method investment with WHP:
| % of Ownership | Balance Sheet Location | July 29, 2023 | |||||||||
| (in thousands) | |||||||||||
| EXP Topco, LLC | Equity Method Investment | $ | |||||||||
The Company accounts for its 40 % economic interest in the Joint Venture, through which it exercises significant influence but does not have control over the investee, under the equity method. Under the equity method, the Company records its investment in the investee on the balance sheet initially at cost, and subsequently adjusts the carrying amount based on its share of the investee's net income or loss. Royalty distributions received from the investee are recognized as a reduction of the carrying amount of the investment. The Company's share of equity (income) losses and other adjustments associated with this equity method investment is included in royalty income in the unaudited Consolidated Statements of Income and Comprehensive Income. The carrying value for the Company's equity investment is reported in Equity Method Investment on the unaudited Consolidated Balance Sheets. The Company reports its share of earnings using a one-month lag because results are not available in time for it to record them in the concurrent period. This convention has not historically materially impacted the Company's results.
Equity Method Investment with WHP
On January 25, 2023, the Company closed the strategic partnership transaction with WHP. In connection with the closing of this transaction, the Company and WHP formed the Joint Venture. The Company contributed certain intellectual property of the Company in exchange for 40 % ownership of the Joint Venture and $235.0 million. WHP paid the $235.0 million for a 60 % ownership of the Joint Venture, implying a fair value of the Company’s 40 % interest in the Joint Venture of approximately $156.7 million.
During the fourth quarter of 2022, under the derecognition guidance from Accounting Standards Codification ("ASC") Topic 810, Consolidation, the Company derecognized the intellectual property assets at their carrying amount upon their contribution to the Joint Venture. Because the carrying amount of the contributed intellectual property assets was zero , a $391.7 million gain was recognized at the time of contribution, of which $156.7 million was related to the Company’s 40 % interest in the Joint Venture. The gain was recorded in gain on transaction with WHP on the Consolidated Statements of Income and Comprehensive Income. Transaction costs capitalized in the cost of the equity method investment totaled $9.4 million.
Separately, on December 8, 2022, the Company and WH Borrower, LLC, an affiliate of WHP ("WH Borrower) entered into an investment agreement (the “Investment Agreement”) pursuant to which the Company issued and sold 5.4 million newly issued shares of Common Stock to WH Borrower in private placement for a purchase price of $4.60 per share, or an aggregate purchase price of approximately $25.0 million, representing an approximate pro forma ownership of 7.4 % of the outstanding shares of Common Stock. The difference between the purchase price paid and the trading price of the Common Stock on the day of the completion of the transaction resulted in a gain of
EXPRESS, INC. | Q2 2023 Form 10-Q | 17
$17.8 million and was recorded in gain on transaction with WHP on the Consolidated Statements of Income and Comprehensive Income.
In connection with the strategic partnership with WHP, on January 25, 2023, the Company and the Joint Venture entered into an Intellectual Property License Agreement (the “License Agreement”). The License Agreement provides the Company with an exclusive license in the United States to the intellectual property contributed in connection with the membership interest purchase agreement and certain other intellectual property. The initial term of the License Agreement is 10 years, and the License Agreement automatically renews for successive renewal terms of 10 years (unless the Company provides notice of non-renewal at least 24 months prior to the end of the initial or applicable renewal term). Except for the Company’s right not to renew the License Agreement, the License Agreement is not terminable by either party. The Company will pay the Joint Venture a royalty on net sales of certain licensed goods and will commit to an annual guaranteed minimum annual royalty during the term of the License Agreement (i.e., $60.0 million in the first contract year, increasing by $1.0 million per year for the next contract years, and remaining at $65.0 million following the sixth contract year). The Company will pay the Joint Venture royalties at a rate of (i) 3.25 % of net sales arising from retail sales of certain licensed goods in the first through fifth contract years (and 3.5 % thereafter), and (ii) 8 % of net sales arising from wholesale sales of such goods. The Company prepaid the Joint Venture’s first contract year guaranteed minimum royalty of $60.0 million with a portion of the transaction proceeds, which was recorded as a prepaid royalty on the Consolidated Balance Sheets.
Pursuant to the agreement governing the operations of the Joint Venture (the “Operating Agreement”), cash earnings of the Joint Venture will be distributed quarterly to the Company and WH Borrower on a pro rata basis based on their respective equity ownership interests.
As the Chairman and Chief Executive Officer of WHP was appointed to the Company’s board of directors upon the closing of the Investment Agreement discussed above, the agreements entered into in connection with the WHP strategic partnership transaction, including the Operating Agreement, the Investment Agreement and the License Agreement (including related royalty payments) are considered related party transactions.
During the thirteen and twenty-six weeks ended July 29, 2023, the Company recognized $6.2 million and $10.6 million of royalty income, respectively, from the Joint Venture, which is recorded in royalty income in the unaudited Consolidated Statements of Income and Comprehensive Income.
Summary Financial Information for Equity Method Investment
Summarized financial information related to the Company's equity method investment on a one-month lag is reflected below:
Thirteen Weeks Ended July 29, 20231 | Twenty-Six Weeks Ended July 29, 20231 | ||||||||||
| (in thousands) | |||||||||||
| Revenue | $ | $ | |||||||||
| Gross profit | |||||||||||
| Operating expenses | |||||||||||
| Interest income | ( | ( | |||||||||
| Income before taxes | |||||||||||
| Net income | $ | $ | |||||||||
| Income attributable to the equity method investment | $ | $ | |||||||||
1.Reflects a one-month
EXPRESS, INC. | Q2 2023 Form 10-Q | 18
July 29, 20231 | |||||
| (in thousands) | |||||
| Current assets | $ | ||||
| Non-current assets | |||||
| Total assets | $ | ||||
| Current liabilities | |||||
| Non-current liabilities | |||||
| Total liabilities | $ | ||||
| Equity method investment | $ | ||||
1.Reflects a one-month lag
NOTE 6 | ACQUISITIONS | ||||||||||||||
The Company accounts for business combinations in accordance with ASC Topic 805, Business Combinations. Consistent with ASC Topic 805, the Company accounts for each business combination by applying the acquisition method. Under the acquisition method, the Company records the identifiable assets acquired and liabilities assumed at their respective fair values on the acquisition date. There are various estimates and judgments related to the valuation of identifiable assets acquired and liabilities assumed. These estimates and judgments have the potential to materially impact the Company’s unaudited Consolidated Financial Statements.
The acquisition method permits the Company a period of time after the acquisition date during which the Company may adjust the provisional amounts recognized in a business combination. This period of time is referred to as the “measurement period”. The measurement period provides an acquirer with a reasonable time to obtain the information necessary to identify and measure the assets acquired and liabilities assumed. If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, the Company reports in its consolidated financial statements provisional amounts for the items for which the accounting is incomplete. Accordingly, the Company is required to recognize adjustments to the provisional amounts in the reporting period in which the adjustments to the provisional amounts are determined. Thus, the Company would adjust its consolidated financial statements as needed as a result of the change to the provisional amounts calculated as if the accounting had been completed at the acquisition date.
Acquisition-related costs are costs the Company incurs to affect a business combination. Those costs may include such items as finder’s fees, advisory, legal, accounting, valuation, and other professional or consulting fees, and general administrative costs. The Company accounts for such acquisition-related costs as expenses in the period in which the costs are incurred and the services are received.
Bonobos Asset Acquisition
On May 23, 2023, the Company completed the acquisition of the operating assets and liabilities of Bonobos, a menswear brand known for exceptional fit and an innovative retail model, for total cash consideration of approximately $28.3 million, which represents (i) the $25.0 million purchase price, plus (ii) $2.0 million of certain customary adjustments related to net working capital and $1.3 million of prepaid rent expense. The acquisition was funded with cash earnings from the Joint Venture/borrowings under the Revolving Credit Facility described in Note 9. The acquisition is intended to provide the following strategic and financial benefits:
•The Company plans to unlock additional growth for the Bonobos brand by leveraging its strength in men’s to address underpenetrated categories, and its strength in marketing to drive greater awareness and customer acquisition
•Bonobos expands the Company's brand portfolio, accelerating the Company’s sales growth and profitability
•The Company expects to leverage its fully integrated omnichannel operating platform to drive financial efficiencies, operational synergies and additional economies of scale across Production & Sourcing, Logistics, Real Estate, Technology, and other areas of its existing and new businesses
EXPRESS, INC. | Q2 2023 Form 10-Q | 19
Bonobos License Agreement
On May 23, 2023, the Company and WHP entered into a license agreement that provides the Company with an exclusive license in the United States to intellectual property related to the Bonobos brand, including intellectual property rights for the Bonobos brand that was separately acquired by WHP (the “Bonobos License Agreement”). The Bonobos License Agreement has an initial term of 10 years from its effective date, and automatically renews for successive renewal terms of 10 years unless (i) the Company provides notice of non-renewal at least 24 months prior to the end of the initial or applicable renewal term, or (ii) WHP exercises its right to not renew in the event of certain failures by the Company to pay the annual guaranteed minimum royalty. Except for such non-renewal rights, the Bonobos License Agreement is not terminable by either party. The Company will pay WHP a royalty on net sales of certain licensed goods and is committed to pay an annual guaranteed minimum royalty during the term of the Bonobos License Agreement (ranging from $6.5 million in the first contract year to $11.5 million in the tenth contract year and each contract year thereafter). The Company will pay royalties at a rate of (i) 3.25 % of net sales arising from retail sales of certain licensed goods in the first through the fifth contract years (and 3.5 % thereafter), and (ii) 8 % of net sales arising from wholesale sales of such goods. Refer to Note 5 for further details regarding the Company’s equity method investment with WHP.
Purchase Price Allocation
The Bonobos acquisition was accounted for as a business combination in accordance with ASC Topic 805. Consistent with ASC Topic 805, Bonobos was consolidated into the Company's unaudited Consolidated Financial Statements starting on the closing date of the acquisition. The purchase price allocation as of the closing date of the acquisition was based on a preliminary valuation and is subject to change as more detailed analyses are completed and additional information about the fair value of assets acquired and liabilities assumed becomes available. The purchase price consideration was allocated to assets acquired and liabilities assumed based on their respective fair values as follows:
| Bonobos | |||||
| (in thousands) | |||||
| Purchase Price | |||||
| Cash paid | $ | ||||
| Allocation | |||||
| Receivables, net | $ | ||||
| Inventory | |||||
| Right of use asset, net | |||||
| Property and equipment, net | |||||
| Other assets acquired | |||||
| Assets acquired | $ | ||||
| Short-term lease liability | ( | ||||
| Accounts payable | ( | ||||
| Deferred revenue | ( | ||||
| Long-term lease liability | ( | ||||
| Accrued expenses and other liabilities assumed | ( | ||||
| Liabilities assumed | $ | ( | |||
| Net cash paid | $ | ||||
The Company recorded an allocation of the purchase price to the tangible assets acquired and liabilities assumed based on their fair value at the acquisition date. The fair value of inventories, which is made up of finished goods, was determined based on market assumptions for realizing a reasonable profit after selling costs. Goodwill is determined as the excess of the purchase price over the fair value of the net assets acquired. The Company recognized an immaterial amount of goodwill recognized related to the acquisition.
During the twenty-six weeks ended July 29, 2023, the Company incurred $4.6 million of acquisition-related and integration costs in connection with the acquisition of Bonobos, which was included in selling, general and
EXPRESS, INC. | Q2 2023 Form 10-Q | 20
administrative expenses in the unaudited Consolidated Statements of Income and Comprehensive Income and are included in pro forma earnings.
Pro Forma Financial Information (unaudited)
The aggregate net sales and operating income of Bonobos was $40.9 2.3 The following financial information presents the Company's consolidated results as if the acquisition had occurred on January 30, 2022:
| Thirteen Weeks Ended | Twenty-Six Weeks Ended | |||||||||||||||||||||||||||||||
| July 29, 2023 | July 30, 2022 | July 29, 2023 | July 30, 2022 | |||||||||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||||||||
| Net sales | $ | $ | $ | $ | ||||||||||||||||||||||||||||
| Net (loss) income | $ | ( | $ | $ | ( | $ | ( | |||||||||||||||||||||||||
The Company did not have any nonrecurring pro forma adjustments directly attributable to the Bonobos acquisition included in the reported pro forma earnings and revenue.
These pro forma results have been calculated after applying the Company's accounting policies. These pro forma results were based on estimates and assumptions, which the Company believes are reasonable. They are not the results that would have been realized had the acquisition actually occurred on January 30, 2022 and are not necessarily indicative of the Company's consolidated results of operations in future periods. The pro forma results include adjustments related to purchase accounting.
NOTE 7 | 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 pre-tax levels.
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 maintains a valuation allowance against the amount of deferred tax assets not expected to be realized as of July 29, 2023.
The Company’s effective tax rate was (1.4 )% and 3.5 % for the thirteen weeks ended July 29, 2023 and July 30, 2022, respectively. The effective tax rate for the thirteen weeks ended July 29, 2023 reflects the impact of non-deductible executive compensation and the recording of an additional valuation allowance against the Company's current year losses. The effective tax rate for the thirteen weeks ended July 30, 2022 reflects the impact of non-deductible executive compensation, offset by a reversal of the valuation allowance against the Company's deferred tax assets.
The Company’s effective tax rate was (0.8 )% and 4.5 % for the twenty-six weeks ended July 29, 2023 and July 30, 2022, respectively. The effective tax rate for the twenty-six weeks ended July 29, 2023 and July 30, 2022 reflects the impact of non-deductible executive compensation and the recording of an additional valuation allowance against the Company's current year losses.
The Company's unaudited Consolidated Balance Sheets as of July 29, 2023 and January 28, 2023 reflect $52.3
NOTE 8 | 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
EXPRESS, INC. | Q2 2023 Form 10-Q | 21
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.
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.
Supplemental cash flow information related to leases is as follows:
| Twenty-Six Weeks Ended | ||||||||
| July 29, 2023 | July 30, 2022 | |||||||
| (in thousands) | ||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||
Operating cash flows for operating leases | $ | $ | ||||||
| Right of use assets obtained in exchange for operating lease liabilities | $ | $ | ||||||
NOTE 9 | DEBT | ||||||||||||||
The following table summarizes the Company's outstanding debt as of the dates indicated:
| July 29, 2023 | January 28, 2023 | ||||||||||||||||
| (in thousands) | |||||||||||||||||
| Revolving Credit Facility | $ | $ | |||||||||||||||
| Less: unamortized debt issuance costs | |||||||||||||||||
| Total long-term debt, net | $ | $ | |||||||||||||||
| Outstanding letters of credit | $ | $ | |||||||||||||||
Revolving Credit Facility
Express, LLC (the "Borrower") and its subsidiaries are party to an Asset-Based Loan Credit Agreement (the "ABL Credit Agreement") entered into with the lenders party thereto, Wells Fargo Bank, National Association, as administrative agent and collateral agent ("Wells Fargo"), and Bank of America, N.A., as documentation agent (“Bank of America”) pursuant to which revolving loans, up to a maximum borrowing amount of $290.0 million (the “Revolving Credit Facility”), may be borrowed, repaid and reborrowed until the maturity date of November 26, 2027, at which time all amounts borrowed must be repaid. Amounts borrowed under the Revolving Credit Facility bear interest at a variable rate indexed to SOFR (as defined in the ABL Credit Agreement) plus a pricing margin ranging from 1.75 % to 2.25 % per annum, as determined in accordance with the provisions of the ABL Credit Agreement based on average daily excess availability, as of any date of determination, for the most recently ended fiscal quarter, commencing April 30, 2023.
EXPRESS, INC. | Q2 2023 Form 10-Q | 22
Amounts borrowed under the Revolving Credit Facility are 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 Revolving Credit Facility prior to the maturity date is permitted, subject in certain instances to a prepayment fee. As of July 29, 2023, the interest rate on the outstanding borrowings of $220.8 million was approximately 7.7 %.
The unused line fee payable under the Revolving Credit Facility is 0.25 % per annum regardless of the average daily excess availability, payable in arrears monthly 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.
The ABL Credit Agreement 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 the Revolving Credit Facility loan cap. From and after the date on which EBITDA (as defined in the ABL Credit Agreement) has exceeded $50.0 million for two consecutive fiscal quarters (each of which consecutive fiscal quarters shall have commenced after November 2, 2024), at any time the excess availability is less than the greater of (i) $25.0 million or (ii) 10 % of the Revolving Credit Facility loan cap, and until the excess availability exceeds such amount for consecutive days, the Borrower is required to maintain a fixed charge coverage ratio (as further described in the ABL Credit Agreement) of at least 1.00 :1.00, calculated as of the last day of each fiscal quarter (as further described in the ABL Credit Agreement).
The ABL Credit Agreement 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 Borrower’s obligations under the Revolving Credit Facility. Under certain circumstances, a default interest rate will apply on any amounts payable under the 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 Revolving Credit Facility are guaranteed by the loan parties (other than the Borrower) and secured by a first priority lien on substantially all of the Loan Parties’ assets, subject to certain permitted liens.
As of July 29, 2023, the Company had $220.8 million in borrowings outstanding under the Revolving Credit Facility and approximately $47.5 million remained available for borrowing under the Revolving Credit Facility after giving effect to outstanding letters of credit in the amount of $20.3 million and subject to certain borrowing base limitations as further discussed above. The fair value of the outstanding borrowings under the Revolving Credit Facility is estimated using Level 2 inputs and at July 29, 2023 and January 28, 2023 was $203.0 million and $115.0 million, respectively.
Letters of Credit
From time to time, 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 July 29, 2023 and January 28, 2023, there were no 20.3 million and $19.6 million, respectively.
NOTE 10 | LONG-TERM INCENTIVE COMPENSATION | ||||||||||||||
EXPRESS, INC. | Q2 2023 Form 10-Q | 23
Long-Term Incentive Compensation
The following summarizes long-term incentive compensation expense:
| Thirteen Weeks Ended | Twenty-Six Weeks Ended | |||||||||||||||||||||||||||||||
| July 29, 2023 | July 30, 2022 | July 29, 2023 | July 30, 2022 | |||||||||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||||||||
| Restricted stock units | $ | $ | $ | $ | ||||||||||||||||||||||||||||
| Stock options | ||||||||||||||||||||||||||||||||
| Performance-based restricted stock units | ( | ( | ||||||||||||||||||||||||||||||
| Total share-based compensation | $ | ( | $ | $ | ( | $ | ||||||||||||||||||||||||||
| Cash-settled awards | ||||||||||||||||||||||||||||||||
| Total long-term incentive compensation | $ | ( | $ | $ | $ | |||||||||||||||||||||||||||
There was no stock compensation related income tax benefit, excluding consideration of valuation allowances, for the thirteen weeks ended July 29, 2023. The stock compensation related income tax benefit, excluding consideration of valuation allowances, recognized by the Company during the twenty-six weeks ended July 29, 2023 was $4.1 million. The stock compensation related income tax benefit, excluding consideration of valuation allowances, recognized by the Company during the thirteen and twenty-six weeks ended July 30, 2022 was $0.2 million and $2.9 million, respectively.
For the thirteen weeks ended July 29, 2023, there was no valuation allowance associated with the tax benefit. The valuation allowance associated with the tax benefit for the twenty-six weeks ended July 29, 2023 was $4.1 million. The valuation allowances associated with these tax benefits were $0.2 million and $2.9 million for the thirteen and twenty-six weeks ended July 30, 2022, respectively.
Equity Awards
Restricted Stock Units
During the twenty-six weeks ended July 29, 2023, the Company granted restricted stock units (“RSUs”) under the Second Amended and Restated Express, Inc. 2018 Incentive Compensation Plan (the "Plan"). The fair value of RSUs is generally determined based on the Company’s closing stock price on the day prior to the grant date in accordance with the Plan. The RSUs granted generally vest ratably over to three years and the expense related to these RSUs is recognized using the straight-line attribution method over this vesting period.
The Company’s activity with respect to RSUs for the twenty-six weeks ended July 29, 2023 was as follows:
Number of Shares | Grant Date Weighted Average Fair Value Per Share | |||||||
| (in thousands, except per share amounts) | ||||||||
Unvested - January 28, 2023 | $ | |||||||
| Granted | $ | |||||||
| Vested | ( | $ | ||||||
| Forfeited | ( | $ | ||||||
Unvested - July 29, 2023 | $ | |||||||
The total fair value of RSUs that vested during the twenty-six weeks ended July 29, 2023 and July 30, 2022 was $3.4 million and $4.9 million, respectively. As of July 29, 2023, there was approximately $0.1 million of total unrecognized compensation expense related to unvested RSUs, which is expected to be recognized over a remaining weighted-average period of approximately 1.0 year.
EXPRESS, INC. | Q2 2023 Form 10-Q | 24
Stock Options
The Company’s activity with respect to stock options during the twenty-six weeks ended July 29, 2023 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 28, 2023 | $ | ||||||||||||||||||||||
| Granted | $ | ||||||||||||||||||||||
| Exercised | $ | ||||||||||||||||||||||
| Forfeited or expired | ( | $ | |||||||||||||||||||||
Outstanding - July 29, 2023 | $ | $ | |||||||||||||||||||||
Expected to vest at July 29, 2023 | $ | $ | |||||||||||||||||||||
Exercisable at July 29, 2023 | $ | $ | |||||||||||||||||||||
As of July 29, 2023, there was no unrecognized compensation expense related to stock options.
Performance-Based Restricted Stock Units
During 2022, the Company granted performance-based RSUs to a limited number of senior executive-level employees, which entitle these employees to receive a specified number of shares of the Common Stock upon vesting based upon the achievement of certain performance conditions. The number of shares of Common Stock earned could range between 0 % and 200 % of the target amount of shares underlying the award depending upon performance achieved over a three-year performance period. The performance conditions of the awards include adjusted earnings before interest, taxes, depreciation, and amortization ("Adjusted EBITDA") targets and the Company's total shareholder return ("TSR") relative to a select group of peer companies. A Monte Carlo valuation model was used to determine the fair value of the awards. The TSR performance condition is a market condition. Therefore, the fair value of the portion of the awards which vest based on the TSR performance condition is fixed at the measurement date and is not revised based on actual performance during the three-year vesting period. The number of shares of Common Stock underlying the portion of the awards which vest based on the Company’s Adjusted EBITDA performance in relation to the pre-established targets will change during the three-year vesting period based on estimates. As of July 29, 2023, $1.2 million of total unrecognized compensation cost is expected to be recognized on performance-based RSUs over a remaining weighted-average period of 1.7 years.
Cash-Settled Awards
Time-Based Cash-Settled Awards
During the twenty-six weeks ended July 29, 2023, 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 financial performance. The expense related to these awards will be accrued using a straight-line method over this vesting period. As of July 29, 2023, $16.8 million of total unrecognized compensation cost is expected to be recognized on cash-settled awards over a remaining weighted-average period of 1.5 years.
Performance-Based Cash-Settled Awards
During the twenty-six weeks ended July 29, 2023, the Company granted performance-based cash-settled awards to a limited number of senior executive-level employees. These awards are classified as liabilities, are valued based on the fair value of the award at the grant date and are remeasured at each reporting date until settlement with compensation expense being recognized in proportion to the completed requisite service period up until date of settlement. The amount of cash earned ranges between 0 % and 200 % of the target amount depending upon performance achieved over a three-year performance period commencing on the first day of the Company’s 2023 fiscal year and ending on the last day of the Company’s 2025 fiscal year. The performance conditions of the award include Adjusted EBITDA targets and the Company's TSR relative to a select group of peer companies. The fair value of the awards will change based on estimates of the Company’s Adjusted EBITDA performance in relation to
EXPRESS, INC. | Q2 2023 Form 10-Q | 25
NOTE 11 | COMMITMENTS AND CONTINGENCIES | ||||||||||||||
The Company is presently, and from time to time, subject to various claims and contingencies arising in the normal course of its business. The Company currently 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.
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 sought 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 sought unspecified monetary damages and attorneys’ fees.
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 wage and hour statutes and other labor standard violations, which was removed to federal court by the Company. The lawsuit sought 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. Plaintiff and the Company both filed Motions for Summary Judgment on February 28, 2022.
In June 2022, as a result of a mediation process overseen by an independent mediator, the parties agreed, subject to approval by the District Court, to settle these matters for an amount not material to the Company. The proposed settlement will resolve the Chacon and Carr matters in their entirety and also provide for a broad release of claims asserted therein on behalf of the Company’s current and former employees in California for wage and hour violations. On August 18, 2023, the Court granted preliminary approval of the settlement. A final approval hearing is scheduled in January 2024.
Any legal proceedings are subject to inherent uncertainties, and the Company’s view of these matters and their potential effects may change in the future. In accordance with applicable accounting standards, the Company establishes an accrued liability for loss contingencies related to legal proceedings when the loss is both probable and reasonably estimable. As of July 29, 2023, the Company's unaudited Consolidated Balance Sheet includes an estimated liability based on its best estimate of the outcome of the unresolved matters.
NOTE 12 | STOCKHOLDERS' EQUITY | ||||||||||||||
Share Repurchase Program
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 Common Stock using available cash (the "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 Exchange Act of 1934, as amended (the "Exchange Act"). 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 Repurchase Program may be suspended, modified, or discontinued at any time and the Company has no obligation to repurchase any amount of Common Stock under the program. During the thirteen and twenty-six weeks ended July 29, 2023 and July 30, 2022, the Company did no 34.2 million remaining under this Board authorization.
EXPRESS, INC. | Q2 2023 Form 10-Q | 26
Reverse Stock Split
On August 30, 2023, the Company filed a Certificate of Amendment to the Company’s Certificate of Incorporation, as amended, with the Secretary of State of the State of Delaware to effect a 1-for-20 reverse stock split of the Common Stock. Pursuant to the Certificate of Amendment, effective as of 5:00 p.m., Eastern Time, on August 30, 2023, (i) every 20 shares of Common Stock issued and outstanding, including shares of Common Stock held by the Company as treasury shares, were automatically combined into one share of Common Stock, and (ii) the number of authorized shares of Common Stock was reduced from 500.0 million authorized shares to 25.0 million authorized shares of Common Stock. The Company’s stockholders of record will receive a cash payment (without interest) in lieu of any fractional shares they would have otherwise been entitled to receive in the reverse stock split.
Shares of the Common Stock began trading on a split-adjusted basis at market open on August 31, 2023. Shares of the Common Stock continue to trade on New York Stock Exchange ("NYSE") under the symbol “EXPR” with the new CUSIP number, 30219E 202. Based on the resulting increase in the per share trading price of the Common Stock following the implementation of the reverse stock split, the Company is expected to regain compliance with the minimum price criteria set forth in the continued listing standards of the NYSE at the end of the six-month cure period on September 28, 2023. The $0.01 par value per share of Common Stock and any other rights associated the Common Stock were not affected by the reverse stock split.
All shares of Common Stock, stock option awards and per share amounts in the accompanying unaudited Consolidated Financial Statements and related Notes have been retrospectively restated to reflect the effect of the reverse stock split.
Preferred shares outstanding were not affected by the reverse stock split and as such, those shares have not been adjusted.
NOTE 13 | SUBSEQUENT EVENTS | ||||||||||||||
1-for-20 Reverse Stock Split
Refer to Note 12 for a discussion of the 1-for-20 reverse stock split of the Common Stock, which was implemented by the Board effective following the close of market on August 30, 2023.
Restructuring Costs
On July 14, 2023 and August 17, 2023, the company announced and implemented respective phases of a workforce reduction. During the thirteen weeks ended July 29, 2023, in connection with the restructuring of the Company’s work force, the Company recognized $4.7 million in restructuring and related reorganization charges with $2.7 million recorded in cost of goods sold, buying and occupancy costs and $2.0 million recorded in selling, general and administrative expense in the unaudited Consolidated Statements of Income and Comprehensive Income. The charges were primarily related to employee severance and benefit costs. The restructuring costs that the Company expects to incur in connection with the work force restructuring are estimates only and subject to a number of assumptions, and actual results may differ materially and adversely from such estimates.
Term Loan
On September 5, 2023, the Company, the Borrower and certain other direct or indirect, wholly-owned subsidiaries of the Company (collectively, the “Loan Parties”) entered into an asset-based term loan agreement (the “Term Loan Agreement”) with ReStore Capital LLC, as administrative agent, collateral agent and lender, and the other lenders from time to time party thereto. The Term Loan Agreement provides the Borrower with a $65.0 million “first-in, last-out” term loan (the “FILO Term Loan”). The Borrower received $32.5 million in gross proceeds upon entering into the Term Loan Agreement, with the remaining $32.5 million principal amount from the FILO Term Loan to be received on or before September 13, 2023. The net proceeds of the FILO Term Loan will be used to paydown outstanding borrowings under the ABL Credit Agreement without corresponding commitment reductions.
EXPRESS, INC. | Q2 2023 Form 10-Q | 27
The FILO Term Loan will mature on the earlier of (a) November 26, 2027 and (b) the date of termination of the commitments under the ABL Credit Agreement. The FILO Term Loan will bear interest at a variable rate based on the Secured Overnight Financing Rate (“SOFR”) plus an applicable margin of 10.00 %.
The Term Loan Agreement requires the Borrower to maintain certain financial covenants and also contains customary affirmative and negative covenants and events of default. Obligations under the Term Loan Agreement are guaranteed by the Loan Parties (other than the Borrower) and secured by a second priority lien on substantially all personal property of the Loan Parties, including cash, accounts receivable, and inventory, and share the same collateral as the Revolving Credit Facility.
Amendment of ABL Credit Agreement
On September 5, 2023, the Loan Parties entered into a Fifth Amendment to the ABL Credit Agreement, which, among other things, permitted the entry by the Loan Parties into the Term Loan Agreement on a second-priority basis to the Revolving Credit Facility.
EXPRESS, INC. | Q2 2023 Form 10-Q | 28
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 and our unaudited Consolidated Financial Statements and the related Notes included in Item 1 of this 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 second quarter of 2023” and “the second quarter of 2022” represent the thirteen weeks ended July 29, 2023 and July 30, 2022, respectively.
Our management's discussion and analysis of financial condition and results of operations is presented in the following sections:
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OVERVIEW | ||||||||||||||
Express is a multi-brand fashion retailer whose portfolio includes Express, Bonobos and UpWest. The Company operates an omnichannel platform, including both physical and online stores. Grounded in a belief that style, quality and value should all be found in one place, Express is a brand with a purpose - We Create Confidence. We Inspire Self-Expression. - powered by a styling community. Bonobos is a menswear brand known for exceptional fit and an innovative retail model. UpWest is an apparel, accessories and home goods brand with a purpose to Provide Comfort for People & Planet. We operate 601 stores in the United States and Puerto Rico, the express.com online store, the Express mobile app, the Bonobos.com online store and the UpWest.com online store.
Acquisition
On May 23, 2023, we completed the acquisition of the operating assets of Bonobos, a menswear brand known for exceptional fit and an innovative retail model. The acquisition is intended to provide the following strategic and financial benefits:
•We plan to unlock additional growth for the Bonobos brand by leveraging its strength in men’s to address underpenetrated categories, and its strength in marketing to drive greater awareness and customer acquisition
•Bonobos expands our brand portfolio, accelerating ours sales growth and profitability
•We expect to leverage our fully integrated omnichannel operating platform to drive financial efficiencies, operational synergies and additional economies of scale across Production & Sourcing, Logistics, Real Estate, Technology, and other areas of its existing and new businesses
Refer to Note 6 included elsewhere in this Quarterly Report for further discussion regarding the acquisition.
EXPRESS, INC. | Q2 2023 Form 10-Q | 29
WHP Strategic Partnership
On January 25, 2023, we closed the strategic partnership transaction with WHP Global ("WHP"), a leading global brand management firm. Pursuant to the transaction, WHP acquired 5.4 million newly issued shares of our common stock at a purchase price of $4.60 per share, or $25.0 million in the aggregate, representing approximately 7.4% of our outstanding shares of Common Stock, on a pro forma basis, as of the closing of the transaction. The mutually transformative strategic partnership advances our omnichannel platform which is expected to drive accelerated, long-term growth through the acquisition and operation of a portfolio of brands. The Company and WHP also formed a Joint Venture valued at approximately $400.0 million, with WHP committing $235.0 million to the Joint Venture for 60% ownership of the Joint Venture and the Company contributing certain intellectual property in exchange for 40% ownership of the Joint Venture. The Joint Venture is intended to scale the Express brand through new domestic category licensing and international expansion opportunities. Refer to Note 5 included elsewhere in this Quarterly Report for further discussion regarding the WHP strategic partnership.
1-for-20 Reverse Stock Split
On August 14, 2023, our Board of Directors (the "Board") approved the implementation of a 1-for-20 reverse stock split of our common stock, par value $0.01 per share (“Common Stock”), and a corresponding proportional reduction in the number of authorized shares of Common Stock. The reverse stock split was effected after market close on August 30, 2023 (the “Effective Date”), and shares of Common Stock began trading on a split-adjusted basis as of market open on August 31, 2023.
All shares of Common Stock, stock option awards and per share amounts contained in the unaudited Consolidated Financial Statements have been retroactively adjusted to reflect the 1-for-20 reverse stock split. Refer to Note 12 included elsewhere in this Quarterly Report for further discussion regarding the reverse stock split.
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BUSINESS TRENDS | ||||||||||||||
Macroeconomic Outlook
The macroeconomic environment in which we operate remains uncertain as a result of numerous factors, including inflationary pressures, rising interest rates and fears of a potential recession impacting consumer spending behavior, and aggressive promotional activity which constrained revenue and increased margin pressure. Given uncertainty related to the impact of ongoing negative macroeconomic factors and their impact on our business, results of operations and cash flows, we are implementing plans to mitigate these adverse conditions, including actions to reduce expenses and improve the operating efficiency of our business, including identifying and implementing significant additional expense savings. We are conducting a comprehensive review of our business model to identify actions that are expected to meaningfully reduce pre-tax costs and enable a more efficient and effective organization and have engaged external advisors to assist in this effort. We have a stated goal to deliver over $200.0 million in annualized cost savings by 2025 versus 2022. Specifically, these plans include $150.0 million in annualized expense reductions by 2025 versus 2022 and at least $50.0 million in gross margin expansion opportunities by leveraging efficiencies in sourcing, production and the supply chain. We have already identified and implemented $80.0 million of annualized cost reductions for fiscal 2023, and for fiscal 2024, have identified annualized cost reductions of $120.0 million including cost benefits from a recently-announced workforce reduction which is expected to generate savings of approximately $30.0 million.
The continued effect of these macroeconomic conditions may impact mid-term and longer-term consumer discretionary spending behavior and the promotional landscape in which we operate. We believe that these macroeconomic and other factors have contributed to the slowdown in demand that we have experienced in our business over the last several fiscal quarters and could result in further material decreases to net sales and operating cash flows and materially higher operating losses
For additional information regarding risks related to these related operational and industry risks, see “Item 1A. Risk Factors: Operational and Industry Risk Factors” in our Annual Report.
EXPRESS, INC. | Q2 2023 Form 10-Q | 30
FINANCIAL DETAILS FOR THE SECOND QUARTER OF 2023 | ||||||||||||||
•Consolidated net sales decreased 6% to $435.3 million from $464.9 million in the second quarter of 2022 | ||
•Consolidated comparable sales decreased 14% compared to the second quarter of 2022 | ||
•Comparable retail sales (includes both retail stores and eCommerce sales) decreased 13% compared to the second quarter of 2022 | ||
•Comparable outlet sales decreased 17% compared to the second quarter of 2022 | ||
•Gross margin was 23.1% of net sales compared to 33.1% of net sales in last year's second quarter, a decrease of approximately 1,000 basis points | ||
•Operating loss was $39.6 million compared to operating income of $10.4 million in the second quarter of 2022 | ||
•Net loss was $44.1 million, or a loss of $11.79 per diluted share, compared to net income of $7.0 million, or $2.05 per diluted share, in the second quarter of 2022 | ||
Key Performance Metrics
The following charts show key performance metrics for the second quarter of 2023 compared to the second quarter of 2022.
SECOND QUARTER UPDATE & OUTLOOK | ||||||||||||||
We are transforming Express to create shareholder value guided by a new corporate strategy, inclusive of the following four components:
•Achieving profitable growth and delivering positive free cash flow in our core Express business
•Leveraging our omnichannel platform
•Accelerating our growth and profitability through the WHP strategic partnership
•Operating with financial discipline
Achieve Profitable Growth and Delivering Positive Free Cash Flow in Our Core Express Business
The first component of our new corporate strategy is achieving profitable growth and delivering positive free cash flow in our core Express business. We expect to achieve profitable growth in our core Express business through our EXPRESSway Forward strategy which has four foundational pillars:
| PRODUCT | BRAND | CUSTOMER | EXECUTION | ||||||||||||||
Product
We are committed to being a product-first organization and our design and merchandising approach is to edit the best of now for real-life versatility. The best of now speaks to our history as a trend-right brand, and versatility is about covering the full spectrum of a customer's wearing occasions and wardrobe requirements. Express customers expect newness, versatility, quality, and value and providing these qualities drives our decisions around product.
EXPRESS, INC. | Q2 2023 Form 10-Q | 31
During the second quarter of 2023, we continued to take corrective actions designed to address the three most significant challenges we have faced. First, poor results in our women’s business due to imbalances across the assortment. Second, challenging comparable sales in our men’s business and outlet stores as we lap record top- and bottom-line performances in 2022. And third, the ongoing dynamic macroeconomic environment and related consumer pressure on discretionary categories like apparel and accessories.
These actions are working and we delivered sequential improvement in net sales as the quarter progressed. This improvement was most significant in our women’s business, where our new deliveries reflect a more appropriate balance across categories, price points and wearing occasions. Our men’s business also delivered sequential improvement throughout the second quarter of 2023.
From a channel perspective, the assortment actions we have taken also drove sequential improvements in eCommerce, retail stores and outlet stores. The momentum in eCommerce was a key factor in partially offsetting our performance in both stores’ channels, where traffic continues to be very challenged. We have put strategies in place to mitigate the traffic challenge by driving increases in conversion, units per transaction and average dollar sales.
Brand
We are transforming Express from being known as a store in the mall to a brand with a purpose, powered by a styling community. We have created a compelling brand purpose: We Create Confidence. We Inspire Self-Expression. We believe we can accomplish this by editing the best of now for real life versatility.
The Express styling community is an authentic way to bring our brand purpose to life. Members of the Express styling community - customers, associates, Style Editors, content creators, influencers and brand partners - interact with each other in the physical and digital worlds. Building, activating and amplifying this styling community is one of our key priorities in 2023.
Customer
We continually aim to successfully engage existing customers and acquire new ones. Loyalty program members are our best customers, making over two more visits and spending over twice as much per year as non-loyalty customers.
Execution
We are continuing to conduct a comprehensive review of our business model to identify actions that are expected to meaningfully reduce pre-tax costs and enable a more efficient and effective organization and have engaged external advisors to assist in this effort. We have a stated goal to deliver over $200.0 million in annualized savings by 2025 versus 2022.
In May 2023, we announced that we have identified and implemented $65.0 million of annualized cost reductions for fiscal 2023 versus fiscal 2022.
In August 2023, we announced an additional $15.0 million of savings for a total of $80.0 million in annualized cost reductions identified and implemented for fiscal 2023. Also in August 2023, we announced and implemented a workforce reduction which is expected to generate approximately $30.0 million in annualized savings.
In addition, we announced that $120.0 million in annualized expense reductions for fiscal 2024 versus 2022 had been identified and implemented, which are inclusive of the savings effectuated for fiscal 2023. We are also aggressively pursuing at least $50.0 million in gross margin expansion opportunities by leveraging efficiencies in sourcing, production and the supply chain.
Within our eCommerce channel, the advancements we have made to our express.com website and mobile app over the last three years have strengthened our omnichannel offering. Through website and mobile app enhancements, new features, personalization, user-generated content, and other initiatives, we believe we have more seamlessly connected our channels and built a platform on which all parts of the Express styling community can connect.
EXPRESS, INC. | Q2 2023 Form 10-Q | 32
We design our stores to create a distinctive, engaging shopping environment and project our image of Express as a fashion authority. Our stores are located primarily in high-traffic shopping malls, lifestyle centers, outlet centers, and street locations. Our Express Edit stores present a highly curated and uniquely merchandised product assortment to customers in key fashion and influencer markets, with each store's presentation tailored to the relevant location.
Leveraging our Omnichannel Platform
The second component of our new corporate strategy is to leverage our fully integrated omnichannel platform, with the aim of operating and growing a portfolio of fashion brands. We expect to leverage our existing strengths and capabilities in production and sourcing, logistics, technology, real estate, finance, legal and HR to achieve synergies and drive efficiencies across this portfolio.
We are now a platform company operating a portfolio of omnichannel brands that is comprised today of Express, Bonobos, and UpWest. We have positioned Express to generate positive free cash flow which will be strategically reinvested in our existing business and future acquisitions, while both Bonobos and UpWest will be top and bottom-line growth engines. As previously disclosed, we expect to deliver at least $50.0 million in gross margin expansion through efficiencies in sourcing, production, and the supply chain.
Accelerate Growth and Profitability Through Our Strategic Partnership with WHP
The third component of our new corporate strategy is to accelerate our growth and profitability through our strategic partnership with WHP through domestic non-core category and international licensing opportunities. In May 2023, we and WHP completed our joint acquisition of Bonobos, with Express acquiring the operating assets (and assuming the related liabilities) of the Bonobos business and licensing the intellectual property acquired by WHP for the operation of the Bonobos business in the U.S. Bonobos launched in 2007 as a digitally native menswear brand and quickly became known for exceptional fit and an innovative guide shop retail model. We intend to build upon Bonobos' strengths in eCommerce, marketing and customer loyalty, leverage our expertise in product design and merchandising and omnichannel retail, and unlock additional growth for Bonobos by extending the brand into underpenetrated categories. We also plan to grow Bonobos through WHP's expertise in licensing and international distribution. Bonobos sales exceeded our expectations during the second quarter of 2023 and delivered operating income accretive to our total. We expect it to be accretive to operating income and to deliver positive free cash flow for the full year 2023. Bonobos is a good example of the highly disciplined financial approach we intend to take with any future acquisition and represents a significant growth opportunity for Express.
Operate with Financial Discipline
The fourth component of our new corporate strategy is operating with financial discipline. We plan to build upon a foundation of strong, rigorous financial discipline and redesign the financial architecture of our Company to create a more agile expense framework that will allow us to be more flexible in a dynamic macroeconomic environment.
EXPRESS, INC. | Q2 2023 Form 10-Q | 33
HOW WE ASSESS THE PERFORMANCE OF OUR BUSINESS | ||||||||||||||
In assessing the performance of our business, we consider a variety of performance and financial measures. These key measures include net sales, comparable sales, eCommerce demand, transactions, cost of goods sold, buying and occupancy costs, gross profit/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 and revenue earned from our private label credit card agreement. | ||||||||
| 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). | ||||||||
| 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 second quarter of 2023 was calculated using the thirteen weeks ended July 29, 2023 as compared to the thirteen weeks ended July 30, 2022. Comparable retail sales includes: •Sales from retail stores that were open 12 months or more as of the end of the reporting period •eCommerce shipped sales Comparable outlet sales includes: •Sales from outlet stores that were open 12 months or more as of the end of the reporting period, including conversions Comparable sales excludes: •Sales from stores where the square footage has changed by more than 20% due to remodel or relocation activity •Sales from stores in a phased remodel where a portion of the store is under construction and therefore not productive selling space •Sales from stores where the store cannot open due to weather damage or other catastrophes, including pandemics | ||||||||
| Discussion | ||||||||
| Our business and our comparable sales are subject, at certain times, to calendar shifts, which may occur during key selling periods close to holidays such as Easter, Thanksgiving, and Christmas, and regional fluctuations for events such as sales tax holidays. We believe comparable sales provides a useful measure for investors by removing the impact of new stores and closed stores. Management considers comparable sales a useful measure in evaluating continuing store performance. | ||||||||
| eCommerce Demand | ||||||||
| Description | ||||||||
| eCommerce demand is defined as gross orders for Express and/or third party merchandise that originate through our eCommerce platform, including the website, app, and buy online pick-up in store. | ||||||||
| Discussion | ||||||||
| We believe eCommerce demand is a useful operational metric for investors and management as it provides visibility for orders placed but not yet shipped. | ||||||||
EXPRESS, INC. | Q2 2023 Form 10-Q | 34
| Transactions | ||||||||
| Description | ||||||||
| Transactions are defined as the number of customer point of sale interactions with customers. | ||||||||
| Discussion | ||||||||
| We believe this metric is useful as it 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 •Royalties paid to the Joint Venture •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/Gross Margin | ||||||||
| Description | ||||||||
Gross profit is net sales minus cost of goods sold, buying and occupancy costs. Gross margin measures gross profit as a percentage of net sales. | ||||||||
| Discussion | ||||||||
| Gross profit/gross margin is impacted by the price at which we are able to sell our merchandise and the cost of our product. We review our inventory levels on an on-going basis in order to identify slow-moving merchandise and generally use markdowns to clear such merchandise. The timing and level of markdowns are driven primarily by seasonality and customer acceptance of our merchandise and have a direct effect on our gross margin. Any marked down merchandise that is not sold is marked-out-of-stock. We use third-party vendors to dispose of this marked-out-of-stock merchandise. | ||||||||
| Selling, General, and Administrative Expenses | ||||||||
| Description | ||||||||
Includes operating costs not included in cost of goods sold, buying and occupancy costs such as: •Payroll and other expenses related to operations at our corporate offices •Store expenses other than occupancy costs •Marketing expenses, including production, mailing, print, and digital advertising costs, among other things | ||||||||
| Discussion | ||||||||
| With the exception of store payroll, certain marketing expenses, and incentive compensation, selling, general, and administrative expenses generally do not vary proportionally with net sales. As a result, selling, general, and administrative expenses as a percentage of net sales are usually higher in lower volume quarters and lower in higher volume quarters. | ||||||||
EXPRESS, INC. | Q2 2023 Form 10-Q | 35
RESULTS OF OPERATIONS | ||||||||||||||
The Second Quarter of 2023 compared to the Second Quarter of 2022
The financial results of Bonobos have been included in our results from the closing date of the acquisition on May 23, 2023.
Store Activity
The following table shows store activity for the stated periods:
| Thirteen Weeks Ended July 29, 2023 | Thirteen Weeks Ended July 30, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Retail1 | Outlet | UpWest | Bonobos3 | Total | Retail2 | Outlet | UpWest | Total | |||||||||||||||||||||||||||||||||||||||||||||
| Beginning stores | 337 | 195 | 13 | — | 545 | 349 | 202 | 10 | 561 | ||||||||||||||||||||||||||||||||||||||||||||
| New stores | 1 | — | 1 | 60 | 62 | — | — | 4 | |||||||||||||||||||||||||||||||||||||||||||||