2013 Q1 10-Q
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 
 
FORM 10-Q
 
 
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended May 4, 2013
OR
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______ TO ______
Commission File Number 001-34742
 
EXPRESS, INC.
(Exact name of registrant as specified in its charter)
 
Delaware
 
26-2828128
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
1 Express Drive
Columbus, Ohio
 
43230
(Address of principal executive offices)
 
(Zip Code)
Telephone: (614) 474-4001
(Registrant’s telephone number, including area code)
 
 
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  x    No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x   No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
x
Accelerated filer
o
 
 
 
 
Non-accelerated filer
o  (Do not check if a smaller reporting company)
Smaller reporting company
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  x
The number of outstanding shares of the registrant’s common stock was 85,406,418 as of May 31, 2013.

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FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q ("Quarterly Report") contains forward-looking statements 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,” “intend,” “believe,” “may,” “will,” “should,” “can have,” “likely,” and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events. For example, all statements we make relating to our estimated and projected costs, expenditures, cash flows, and financial results, our plans and objectives for future operations, growth or initiatives, strategies, or the expected outcome or impact of pending or threatened litigation are forward-looking statements. All forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those that we expected, including:
changes in consumer spending and general economic conditions;
our ability to identify and respond to new and changing fashion trends, customer preferences, and other related factors;
fluctuations in our sales and results of operations on a seasonal basis and due to a variety of other factors;
increased competition from other retailers;
the success of the malls and shopping centers in which our stores are located;
our dependence upon independent third parties to manufacture all of our merchandise;
the availability constraints and price volatility of raw materials and labor used to manufacture our products;
interruptions of the flow of merchandise from international manufacturers causing disruptions in our supply chain;
shortages of inventory, delayed shipments to our online customers, and harm to our reputation due to difficulties or shut-down of distribution facilities;
our reliance upon independent third-party transportation providers for substantially all of our product shipments;
our dependence upon key executive management;
our growth strategy, including our international expansion plan;
our dependence on a strong brand image;
our leasing substantial amounts of space;
our reliance on third parties to provide us with certain key services for our business;
our reliance on information systems and any failure, inadequacy, interruption or security failure of those systems;
claims made against us resulting in litigation;
changes in laws and regulations applicable to our business;
our inability to protect our trademarks or other intellectual property rights;
our substantial indebtedness and lease obligations;
restrictions imposed by our indebtedness on our current and future operations and our ability to pay dividends;
fluctuations in energy costs;
changes in taxation requirements or the results of tax audits; and
impairment charges on long-lived assets.

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 the 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” in our Annual Report on Form 10-K for the year ended February 2, 2013 ("Annual Report"), filed with the Securities and Exchange Commission (“SEC”) on April 2, 2013. 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 otherwise required by law.


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INDEX

 
 
 
PART I
 
 
 
ITEM 1.
 
 
 
ITEM 2.
 
 
 
ITEM 3.
 
 
 
ITEM 4.
 
 
 
PART II
 
 
 
ITEM 1.
 
 
 
ITEM 1A.
 
 
 
ITEM 2.
 
 
 
ITEM 3.
 
 
 
ITEM 4.
 
 
 
ITEM 5.
 
 
 
ITEM 6.




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PART I – FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS.

EXPRESS, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in Thousands, Except Per Share Amounts)
(Unaudited)
 
May 4, 2013
 
February 2, 2013
ASSETS
 
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
244,214

 
$
256,297

Receivables, net
10,773

 
11,024

Inventories
226,329

 
215,082

Prepaid minimum rent
25,362

 
25,166

Other
9,850

 
8,293

Total current assets
516,528

 
515,862

 
 
 
 
PROPERTY AND EQUIPMENT
650,899

 
625,344

Less: accumulated depreciation
(354,879
)
 
(346,975
)
Property and equipment, net
296,020

 
278,369

 
 
 
 
TRADENAME/DOMAIN NAME
197,734

 
197,719

DEFERRED TAX ASSETS
16,808

 
16,808

OTHER ASSETS
9,773

 
10,441

Total assets
$
1,036,863

 
$
1,019,199

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
CURRENT LIABILITIES:
 
 
 
Accounts payable
$
158,394

 
$
176,125

Deferred revenue
22,117

 
27,851

Accrued bonus
468

 
336

Accrued expenses
94,857

 
108,464

Total current liabilities
275,836

 
312,776

 
 
 
 
LONG-TERM DEBT
198,923

 
198,843

OTHER LONG-TERM LIABILITIES
154,497

 
136,418

Total liabilities
629,256

 
648,037

 
 
 
 
COMMITMENTS AND CONTINGENCIES (Note 11)

 

 
 
 
 
STOCKHOLDERS’ EQUITY:
 
 
 
Preferred stock – $0.01 par value; 10,000 shares authorized; no shares issued or outstanding

 

Common stock – $0.01 par value; 500,000 shares authorized; 89,586 shares and 89,322 shares issued at May 4, 2013 and February 2, 2013, respectively, and 85,390 shares and 85,224 shares outstanding at May 4, 2013 and February 2, 2013, respectively
896

 
893

Additional paid-in capital
110,732

 
105,012

Accumulated other comprehensive gain (loss)
50

 
(20
)
Retained earnings
364,358

 
331,921

Treasury stock – at average cost; 4,196 shares and 4,098 shares at May 4, 2013 and February 2, 2013, respectively
(68,429
)
 
(66,644
)
Total stockholders’ equity
407,607

 
371,162

Total liabilities and stockholders’ equity
$
1,036,863

 
$
1,019,199

See notes to unaudited consolidated financial statements.

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EXPRESS, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Amounts in Thousands, Except Per Share Amounts)
(Unaudited)

 
Thirteen Weeks Ended
 
May 4,
2013
 
April 28,
2012
NET SALES
$
508,524


$
495,952

COST OF GOODS SOLD, BUYING AND OCCUPANCY COSTS
337,747


307,185

Gross profit
170,777


188,767

OPERATING EXPENSES:



Selling, general, and administrative expenses
112,623


114,195

Other operating (income) expense, net
(540
)

15

Total operating expenses
112,083


114,210

 



OPERATING INCOME
58,694


74,557

 



INTEREST EXPENSE, NET
4,805


4,782

OTHER EXPENSE (INCOME), NET
229


(208
)
INCOME BEFORE INCOME TAXES
53,660


69,983

INCOME TAX EXPENSE
21,223


27,910

NET INCOME
$
32,437


$
42,073

 



OTHER COMPREHENSIVE INCOME:



Foreign currency translation gain (loss)
70


(78
)
COMPREHENSIVE INCOME
$
32,507


$
41,995

 
 
 
 
EARNINGS PER SHARE:



Basic
$
0.38


$
0.47

Diluted
$
0.38


$
0.47

 



WEIGHTED AVERAGE SHARES OUTSTANDING:



Basic
85,095


88,846

Diluted
85,490


89,310

See notes to unaudited consolidated financial statements.

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EXPRESS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands)
(Unaudited)

 
Thirteen Weeks Ended
 
May 4, 2013
 
April 28, 2012
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
32,437


$
42,073

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
Depreciation and amortization
17,441


17,049

Loss on disposal of property and equipment
64


17

Excess tax benefit from share-based compensation
(1
)

(273
)
Share-based compensation
5,011


3,856

Deferred taxes


(188
)
Changes in operating assets and liabilities:
 

 
Receivables, net
287


(263
)
Inventories
(11,296
)

12,468

Accounts payable, deferred revenue, and accrued expenses
(44,776
)

(32,333
)
Other assets and liabilities
6,194


3,216

Net cash provided by operating activities
5,361


45,622

 



CASH FLOWS FROM INVESTING ACTIVITIES:



Capital expenditures
(16,853
)

(16,932
)
Purchase of intangible assets


(185
)
Net cash used in investing activities
(16,853
)

(17,117
)
 



CASH FLOWS FROM FINANCING ACTIVITIES:
 


Payments on capital lease obligation
(15
)

(13
)
Excess tax benefit from share-based compensation
1


273

Proceeds from share-based compensation
1,082


623

Repurchase of common stock
(1,785
)

(1,349
)
Net cash used in financing activities
(717
)

(466
)
 





EFFECT OF EXCHANGE RATE ON CASH
126


38

 





NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
(12,083
)
 
28,077

CASH AND CASH EQUIVALENTS, Beginning of period
256,297


152,362

CASH AND CASH EQUIVALENTS, End of period
$
244,214


$
180,439

 
 
 
 
See notes to unaudited consolidated financial statements.

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Notes to Unaudited Consolidated Financial Statements
(unaudited)

1. Description of Business and Basis of Presentation
Business Description

Express, Inc., together with its subsidiaries ("Express" or the "Company"), is a specialty apparel and accessories retailer of women's and men's merchandise, targeting the 20 to 30 year old customer. Express merchandise is sold through retail stores and the Company's website, www.express.com. As of May 4, 2013, Express operated 620 primarily mall-based stores in the United States, Canada, and Puerto Rico. Additionally, the Company earned revenue from 18 franchise stores. These franchise stores are operated by franchisees pursuant to franchise agreements covering the Middle East, Mexico, and certain other Latin American countries. Under the franchise agreements, the franchisees operate stores that sell Express-branded apparel and accessories purchased directly from the Company.

Fiscal Year

The Company's fiscal year ends on the Saturday closest to January 31. Fiscal years are referred to by the calendar year in which the fiscal year commences. References herein to "2013" and "2012" represent the 52-week period ended February 1, 2014 and the 53-week period ended February 2, 2013, respectively. All references herein to “the first quarter of 2013” and “the first quarter of 2012” represent the thirteen weeks ended May 4, 2013 and April 28, 2012, 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. Accordingly, they do not include all of the information and footnotes required by GAAP 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 2013. Therefore, these statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto for the year ended February 2, 2013, included in the Company's Annual Report on Form 10-K, filed with the SEC on April 2, 2013.


Principles of Consolidation

The unaudited Consolidated Financial Statements include the accounts of Express, Inc. and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.


Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting period, as well as the related disclosure of contingent assets and liabilities as of the date of the Consolidated Financial Statements. Actual results may differ from those estimates. The Company revises its estimates and assumptions as new information becomes available.


Reclassifications

Certain prior period amounts have been reclassified or adjusted to conform to the current year presentation.

2. Segment Reporting
The Company defines an operating segment on the same basis that it uses to evaluate performance internally. The Company has determined that, together, its Chief Executive Officer and its Chief Operating Officer are the Chief Operating Decision Maker

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and that there is 1 operating segment. Therefore, the Company reports results as a single segment, which includes the operation of its Express brick-and-mortar retail stores, e-commerce operations, and international operations.
 
The following is information regarding the Company's sales channels:
 
Thirteen Weeks Ended
 
May 4, 2013
 
April 28, 2012
 
(in thousands)
Stores
$
430,557

 
$
443,446

E-commerce
70,722

 
47,876

Other revenue
7,245

 
4,630

Total net sales
$
508,524

 
$
495,952

Other revenue consists primarily of shipping and handling revenue related to e-commerce activity, gift card breakage, and revenue from franchise agreements.

Revenues and long-lived assets relating to the Company's international operations for the thirteen weeks ended May 4, 2013 and April 28, 2012 and as of May 4, 2013 and February 2, 2013, respectively, were not material and, therefore, not reported separately from domestic revenues and long-lived assets.

3. Earnings Per Share
The following table provides a reconciliation between basic and diluted weighted-average shares used to calculate basic and diluted earnings per share:
 
 
Thirteen Weeks Ended
 
May 4, 2013
 
April 28, 2012
 
(in thousands)
Weighted-average shares - basic
85,095

 
88,846

Dilutive effect of stock options, restricted stock units, and restricted stock
395

 
464

Weighted-average shares - diluted
85,490

 
89,310







Equity awards representing 2.8 million and 2.0 million shares of common stock were excluded from the computation of diluted earnings per share for the thirteen weeks ended May 4, 2013 and April 28, 2012, respectively, as the effects of the awards would have been anti-dilutive.

Additionally, for the thirteen weeks ended May 4, 2013 and April 28, 2012, there were 0.5 million and 0.3 million shares, respectively, of restricted stock excluded from the computation of diluted weighted average shares because the number of shares that will ultimately be issued is contingent on the Company's performance compared to pre-established annual performance goals.

4. Fair Value of Financial Assets
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.

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The following table presents the Company's assets measured at fair value on a recurring basis as of May 4, 2013 and February 2, 2013, aggregated by the level in the fair value hierarchy within which those measurements fall.
 
 
May 4, 2013
 
Level 1
Level 2
Level 3
 
(in thousands)
U.S. treasury securities money market funds
$
220,104

$

$

 
 
 
February 2, 2013
 
Level 1
Level 2
Level 3
 
(in thousands)
U.S. treasury securities money market funds
$
236,086

$

$

The carrying amounts reflected on the unaudited Consolidated Balance Sheets for cash, cash equivalents, receivables, prepaid expenses, and payables as of May 4, 2013 and February 2, 2013 approximated their fair values.

5. Intangible Assets
The following table provides the significant components of intangible assets:
 
 
May 4, 2013
 
Cost
 
Accumulated
Amortization 
 
 
Ending Net Balance
 
(in thousands)
Tradename
$
196,144

 
$

 
$
196,144

Internet domain name/other
1,590

 

 
1,590

Net favorable lease obligations
19,750

 
18,116

 
1,634

 
$
217,484

 
$
18,116

 
$
199,368


 
February 2, 2013
 
Cost
 
Accumulated
Amortization 
 
 
Ending Net Balance
 
(in thousands)
Tradename
$
196,144

 
$

 
$
196,144

Internet domain name/other
1,575

 

 
1,575

Net favorable lease obligations
19,750

 
17,811

 
1,939

 
$
217,469

 
$
17,811

 
$
199,658


The Company's tradename and internet domain name/other have indefinite lives. Net favorable lease obligations are amortized over a period between 5 and 7 years, which represent the remaining life of each respective lease at the evaluation date, and are included in other assets on the unaudited Consolidated Balance Sheets. Amortization expense totaled $0.3 million and $0.4 million during the thirteen weeks ended May 4, 2013 and April 28, 2012, respectively.


6. Related Party Transactions
The transactions described in this note are transactions between the Company and entities affiliated with Golden Gate Private Equity, Inc. ("Golden Gate"). Prior to July 2007, the Company operated as a division of L Brands, Inc. ("L Brands"). In July 2007, a Golden Gate affiliate acquired approximately 75% of the outstanding equity interests in the Company from L Brands, and the Company began its transition to a stand-alone company. In May 2010, the Company completed an Initial Public Offering ("IPO") whereby Golden Gate and L Brands sold a portion of their shares. Following the IPO, both Golden Gate and L Brands gradually reduced their ownership interest in the Company. On July 29, 2011, L Brands disposed of its remaining

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ownership interest in the Company and, as a result of this disposition, ceased to be a related party as of the end of the second quarter of 2011. On March 19, 2012, Golden Gate sold its remaining ownership interest in the Company and, as of May 31, 2012, Golden Gate no longer had representation on the Company's Board of Directors ("Board"). As a result, Golden Gate ceased to be a related party as of June 1, 2012. The related party activity with Golden Gate affiliates described in this note includes only expenses incurred and income earned through the date which Golden Gate ceased to be a related party.

Transactions with Other Golden Gate Affiliates
The Company transacts with Golden Gate affiliates for e-commerce warehouse and fulfillment services, software license purchases, and consulting and software maintenance services.
The Company incurred the following charges from Golden Gate affiliates for various services, which are included primarily in cost of goods sold, buying and occupancy costs in the unaudited Consolidated Statements of Income and Comprehensive Income:
 
Thirteen Weeks Ended
 
April 28, 2012
 
(in thousands)
E-commerce warehouse and fulfillment
$
6,750

Software licenses and consulting and software maintenance services
$
40

The Company provides real estate services to certain Golden Gate affiliates. Income recognized during the thirteen weeks ended April 28, 2012 was $0.1 million.

Interest expense incurred on the 8 3/4% Senior Notes attributable to the $40.0 million of Senior Notes previously owned by a Golden Gate affiliate was $0.2 million during the thirteen weeks ended April 28, 2012.

7. Income Taxes
 
The provision for income taxes is based on a current estimate of the annual effective tax rate adjusted to reflect the impact of discrete items.  The Company's quarterly effective tax rate does not reflect a benefit associated with losses related to certain foreign subsidiaries and foreign tax credit carryovers. The Company's effective tax rate was 39.6% and 39.9% for the thirteen weeks ended May 4, 2013 and April 28, 2012, respectively.
8. Lease Financing Obligations

In certain lease arrangements, the Company is involved with the construction of the building. To the extent the Company is involved in the construction of structural improvements or takes construction risk prior to commencement of a lease, it is deemed the owner of the project for accounting purposes. Therefore, the Company records an asset in property and equipment on the unaudited Consolidated Balance Sheets, including any capitalized interest costs, and related liabilities in accrued interest and lease financing obligation in other long-term liabilities on the unaudited Consolidated Balance Sheets, for the replacement cost of the Company's portion of the pre-existing building plus the amount of construction-in-progress incurred by the landlord as of the balance sheet date. Once construction is complete, the Company considers the requirements for sale-leaseback treatment, including the transfer of all risks of ownership back to the landlord, and whether the Company has any continuing involvement in the leased property. If the arrangement does not qualify for sale-leaseback treatment, the building assets subject to these obligations remain on the Company's unaudited Consolidated Balance Sheets at their historical cost, and such assets are depreciated over their remaining useful lives. The replacement cost of the pre-existing building, as well as the costs of construction paid by the landlord, are recorded as lease financing obligations, and a portion of the lease payments are applied as payments of principal and interest. The interest rate selected for lease financing obligations is evaluated at lease inception based on the Company's incremental borrowing rate. At the end of the initial lease term, should the Company decide not to renew the lease, the Company would reverse equal amounts of the net book value of the assets and the corresponding lease financing obligations.   The initial lease terms related to these lease arrangements are expected to expire in 2023 and 2029. As of May 4, 2013 and February 2, 2013, the Company has recorded $26.7 million and $16.2 million, respectively, of construction-in-progress, with a corresponding amount to lease financing obligations, each of which is reflected in the unaudited Consolidated Balance Sheets. These assets and liabilities are classified as non-cash items for purposes of the unaudited Consolidated Statements of Cash Flow.


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Rent expense relating to the land is recognized on a straight-line basis once construction begins. Once the store opens, the Company will not report rent expense for the portion of the rent payment determined to be related to the properties which are owned for accounting purposes. Rather, this portion of rent payment under the lease will be recognized as a reduction of the lease financing obligations and as interest expense.

9. Debt
Borrowings outstanding consisted of the following:
 
 
May 4, 2013
 
February 2, 2013
 
(in thousands)
8 3/4% Senior Notes
$
200,850

 
$
200,850

Debt discount on Senior Notes
(1,927
)
 
(2,007
)
Total long-term debt
$
198,923

 
$
198,843


Revolving Credit Facility

On July 29, 2011, Express Holding, LLC, a wholly-owned subsidiary ("Express Holding"), and its subsidiaries entered into an Amended and Restated $200.0 million secured Asset-Based Credit Facility ("Revolving Credit Facility"). As of May 4, 2013, there were no borrowings outstanding and approximately $197.9 million available under the the Revolving Credit Facility.

The Revolving Credit Facility requires Express Holding and its subsidiaries to maintain a fixed charge coverage ratio of at least 1.0:1.0 if excess availability plus eligible cash collateral is less than 10% of the borrowing base for 15 consecutive days. In addition, the Revolving Credit Facility contains customary covenants and restrictions on Express Holding and its subsidiaries' activities, including, but not limited to, limitations on the incurrence of additional indebtedness; liens, negative pledges, guarantees, investments, loans, asset sales, mergers, acquisitions, and prepayment of other debt; distributions, dividends, and the repurchase of capital stock; transactions with affiliates; and the ability to change the nature of its business or its fiscal year. All obligations under the Revolving Credit Facility are guaranteed by Express Holding and its domestic subsidiaries (that are not borrowers) and secured by a lien on substantially all of the assets of Express Holding and its domestic subsidiaries.
Senior Notes

On March 5, 2010, Express, LLC and Express Finance Corp. ("Express Finance"), wholly-owned subsidiaries of the Company, co-issued, in a private placement, $250.0 million of 8 3/4% Senior Notes due in 2018 (the "Senior Notes") at an offering price of 98.6% of the face value.

Prior to March 1, 2014, the Senior Notes may be redeemed in part or in full at a redemption price equal to the principal amount plus a make-whole premium, calculated in accordance with the indenture governing the Senior Notes, and accrued and unpaid interest. On or after March 1, 2014, the Senior Notes may be redeemed in part or in full at the following percentages of the outstanding principal amount prepaid: 104.38% prior to March 1, 2015; 102.19% on or after March 1, 2015, but prior to March 1, 2016; and at the principal amount on or after March 1, 2016.

The indenture governing the Senior Notes contains customary covenants and restrictions on the activities of Express, LLC, Express Finance, and Express, LLC's restricted subsidiaries, including, but not limited to, the incurrence of additional indebtedness; payment of dividends or distributions in respect of capital stock or certain other restricted payments or investments; entering into agreements that restrict distributions from restricted subsidiaries; the sale or disposal of assets, including capital stock of restricted subsidiaries; transactions with affiliates; the incurrence of liens; and mergers, consolidations or the sale of substantially all of Express, LLC's assets. Certain of these covenants will be suspended if the Senior Notes are assigned an investment grade rating by both Standard & Poor's and Moody's Investors Service and no default has occurred or is continuing. If either rating on the Senior Notes should subsequently decline to below investment grade, the suspended covenants will be reinstated.
Fair Value of Debt
The fair value of the Senior Notes was estimated using a number of factors, such as recent trade activity, size, timing, and yields of comparable bonds and is, therefore, within Level 2 of the fair value hierarchy. As of May 4, 2013, the estimated fair value of the Senior Notes was $218.2 million.
Letters of Credit

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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 3 weeks after the merchandise shipment date. As of May 4, 2013 and February 2, 2013, there were no outstanding trade LCs. Additionally, the Company enters into stand-by letters of credit ("stand-by LCs") on an as-need basis to secure merchandise and fund other general and administrative costs. As of May 4, 2013 and February 2, 2013, outstanding stand-by LCs totaled $2.1 million.

10. Share-Based Compensation

The Company records the fair value of share-based payments to employees in the unaudited Consolidated Statements of Income and Comprehensive Income as compensation expense, net of forfeitures, over the requisite service period.

Share-based Compensation Plans

The following summarizes our share-based compensation expense:
 
Thirteen Weeks Ended
 
May 4, 2013
 
April 28, 2012
 
(in thousands)
Restricted stock units and restricted stock
$
2,778

 
$
1,948

Stock options
2,232

 
1,898

Restricted shares (equity issued pre-IPO)
1

 
10

Total share-based compensation
$
5,011

 
$
3,856


The stock compensation related income tax benefit recognized by the Company during the thirteen weeks ended May 4, 2013 and April 28, 2012 was $1.9 million and $1.5 million, respectively.

Stock Options

During the thirteen weeks ended May 4, 2013, the Company granted stock options under the Amended and Restated Express, Inc. 2010 Incentive Compensation Plan (the "2010 Plan"). The fair value of the stock options is determined using the Black-Scholes-Merton option-pricing model as described later in this note. The majority of stock options granted under the 2010 Plan vest 25% per year over 4 years and have a 10 year contractual life, however those granted to the Chief Executive Officer vest ratably over 3 years. The expense for stock options is recognized using the straight-line attribution method.
The Company's activity with respect to stock options during the thirteen weeks ended May 4, 2013 was as follows:
 
 
Number of
Shares 
 
Grant Date
Weighted Average
Exercise Price
 
Weighted-Average Remaining Contractual Life
 
Aggregate Intrinsic Value
 
(in thousands, except per share amounts and years)
Outstanding, February 2, 2013
3,092

 
$
18.99

 
 
 
 
Granted
612

 
$
17.49

 
 
 
 
Exercised
(62
)
 
$
16.98

 
 
 
 
Forfeited or expired
(68
)
 
$
19.45

 
 
 
 
Outstanding, May 4, 2013
3,574

 
$
18.76

 
8.1
 
$
3,127

Expected to vest at May 4, 2013
2,095

 
$
18.85

 
8.4
 
$
2,025

Exercisable at May 4, 2013
1,397

 
$
18.62

 
7.6
 
$
1,014

The following provides additional information regarding the Company's stock options:

12

Table of Contents

 
Thirteen Weeks Ended
 
May 4, 2013

April 28, 2012
 
(in thousands, except per share amounts)
Weighted average grant date fair value of options granted
$
9.27

 
$
13.47

Total intrinsic value of options exercised
$
93

 
$
267

As of May 4, 2013, there was approximately $17.5 million of total unrecognized compensation expense related to stock options, which is expected to be recognized over a weighted-average period of approximately 1.7 years.
The Company uses the Black-Scholes-Merton option-pricing model to value stock options granted to employees and directors. The Company's determination of the fair value of stock options is affected by the Company's stock price as well as a number of subjective and complex assumptions. These assumptions include the risk-free interest rate, the Company's expected stock price volatility over the term of the awards, expected term of the award, and dividend yield.
The fair value of stock options was estimated at the grant date using the Black-Scholes-Merton option pricing model with the following weighted-average assumptions:

 
Thirteen Weeks Ended
 
May 4, 2013
 
April 28, 2012
Risk-free interest rate (1)
1.06
%
 
1.14
%
Price Volatility (2)
56.0
%
 
55.9
%
Expected term (years) (3)
6.19

 
6.16

Dividend yield (4)

 


(1)
Represents the yield on U.S. Treasury securities with a term consistent with the expected term of the stock options.
(2)
For the first 2 years following the Company's IPO, this was based on the historical volatility of selected comparable companies over a period consistent with the expected term of the stock options because the Company had a limited history of being publicly traded. Comparable companies were selected primarily based on industry, stage of life cycle, and size. Beginning with the second anniversary of the IPO in May 2012, the Company began using its own volatility as an additional input in the determination of expected volatility.
(3)
Calculated utilizing the “simplified” methodology prescribed by Staff Accounting Bulletin No. 107 due to the lack of historical exercise data necessary to provide a reasonable basis upon which to estimate the term.
(4)
The Company does not currently plan on paying regular dividends.
Restricted Stock Units and Restricted Stock
During the thirteen weeks ended May 4, 2013, the Company granted restricted stock units (“RSUs”) under the 2010 Plan, including 0.5 million RSUs with performance conditions. The fair value of the RSUs is determined based on the Company's stock price on the grant date. The expense for RSUs is recognized using the straight-line attribution method, except for RSUs with performance conditions, for which the graded vesting method is used. The RSUs with performance conditions are also subject to time-based vesting with requisite service periods of 2 years for the Chief Executive Officer and 3 years for other employees. RSUs without performance conditions vest ratably over 4 years.

The Company's activity with respect to RSUs and restricted stock for the thirteen weeks ended May 4, 2013 was as follows:
 

13

Table of Contents

 
Number of
Shares 
Grant Date
Weighted Average
Fair Value 
 
(in thousands, except per share amounts)
Unvested, February 2, 2013
1,218

$
21.49

Granted
839

$
17.49

Vested
(273
)
$
21.33

Forfeited
(53
)
$
20.99

Unvested, May 4, 2013
1,731

$
19.00

The total fair value/intrinsic value of RSUs and restricted stock that vested was $5.8 million during the thirteen weeks ended May 4, 2013. As of May 4, 2013, there was approximately $25.6 million of total unrecognized compensation expense related to unvested RSUs and restricted stock, which is expected to be recognized over a weighted-average period of approximately 1.9 years.

11. Commitments and Contingencies

In a complaint filed on July 7, 2011 in the United States District Court for the Northern District of Illinois styled as Eric Wynn, et al., v. Express, LLC, Express was named as a defendant in a purported nationwide collective action alleging violations of the Fair Labor Standards Act and of applicable Illinois state wage and hour statutes related to alleged off-the-clock work. The lawsuit sought unspecified monetary damages and attorneys' fees. In March 2012, the court granted conditional collective action certification.

To avoid the expense and uncertainty of further litigation with respect to this matter, in January 2013, the Company entered into a settlement agreement to resolve all wage and hour claims that were asserted or could have been asserted by the plaintiffs and other similarly situated employees and former employees who opted-in to the collective action. The settlement was subsequently approved by the court in the first quarter of 2013. Under the terms of the approved settlement, the Company will pay approximately $0.4 million in the aggregate to (i) plaintiffs and other employees and former employees who opted-in to the collective action, and (ii) certain legal fees and expenses on behalf of the plaintiffs and other employees and former employees who opted-in to the collective action. As of May 4, 2013, the unaudited Consolidated Balance Sheets included a reserve for the settlement amount, which is expected to be paid out by August 2013.

The Company is subject to various other claims and contingencies arising out of the normal course of business. Management believes that the ultimate liability arising from such claims and contingencies, if any, is not likely to have a material adverse effect on the Company's results of operations, financial condition, or cash flows.

12. Guarantor Subsidiaries
On March 5, 2010, Express, LLC and Express Finance (the “Subsidiary Issuers”), both wholly-owned indirect subsidiaries of Express, Inc., issued the Senior Notes. Express, Inc. (“Guarantor”) and certain of its indirect 100% owned subsidiaries (“Guarantor Subsidiaries”) have guaranteed, on a joint and several basis, the obligations under the Senior Notes. The guarantees are not full and unconditional because Guarantor Subsidiaries can be released and relieved of their obligations under certain customary circumstances contained in the indenture governing the Senior Notes. These circumstances include the following, so long as other applicable provisions of the indenture are adhered to: any sale or other disposition of all or substantially all of the assets of any Guarantor Subsidiary, any sale or other disposition of capital stock of any Guarantor Subsidiary, or designation of any restricted subsidiary that is a Guarantor Subsidiary as an unrestricted subsidiary. On August 26, 2012, Express, LLC contributed certain assets and liabilities to a newly created Guarantor Subsidiary. As a result, the current and prior period condensed consolidating financial information has been revised to retroactively give effect to the new structure in place as of August 26, 2012.
The following consolidating schedules present the condensed financial information on a combined basis.

14

Table of Contents

EXPRESS, INC.
CONDENSED CONSOLIDATING BALANCE SHEET
(Amounts in thousands)
(Unaudited)

 
May 4, 2013
 
Express, Inc.
 
Subsidiary
Issuers
 
Guarantor
Subsidiaries
 
Other
Subsidiaries
 
Eliminations
 
Consolidated
Total
Assets
 
 
 
 
 
 
 
 
 
 
 
Current assets
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
1,974

 
$
218,329

 
$
22,831

 
$
1,080

 
$

 
$
244,214

Receivables, net

 
5,282

 
3,727

 
1,764

 

 
10,773

Inventories

 
12,919

 
209,993

 
3,417

 

 
226,329

Prepaid minimum rent

 
471

 
23,828

 
1,063

 

 
25,362

Intercompany loan receivable

 
20,556

 

 

 
(20,556
)
 

Intercompany receivable

 

 
103,431

 
5,783

 
(109,214
)
 

Other
57

 
5,712

 
3,960

 
121

 

 
9,850

Total current assets
2,031

 
263,269

 
367,770

 
13,228

 
(129,770
)
 
516,528

Property and equipment, net

 
36,243

 
243,737

 
16,040

 

 
296,020

Tradename/domain name

 
197,734

 

 

 

 
197,734

Investment in subsidiary
404,441

 
393,189

 

 
398,657

 
(1,196,287
)
 

Deferred tax assets
738

 
10,369

 
5,701

 

 

 
16,808

Other assets

 
7,375

 
2,392

 
6

 

 
9,773

Total assets
$
407,210

 
$
908,179

 
$
619,600

 
$
427,931

 
$
(1,326,057
)
 
$
1,036,863

Liabilities and stockholders’ equity

 

 

 

 

 
 
Current liabilities

 

 

 

 

 
 
Accounts payable
$

 
$
154,929

 
$
2,782

 
$
683

 
$

 
$
158,394

Deferred revenue

 
1,168

 
20,841

 
108

 

 
22,117

Accrued bonus

 

 
428

 
40

 

 
468

Accrued expenses
(655
)
 
15,458

 
79,041

 
1,013

 

 
94,857

Intercompany payable

 
109,214

 

 

 
(109,214
)
 

Intercompany loan payable

 

 

 
20,556

 
(20,556
)
 

Total current liabilities
(655
)
 
280,769

 
103,092

 
22,400

 
(129,770
)
 
275,836

Long-term debt

 
198,923

 

 

 

 
198,923

Other long-term liabilities
258

 
29,830

 
118,423

 
5,986

 

 
154,497

Total liabilities
(397
)
 
509,522

 
221,515

 
28,386

 
(129,770
)
 
629,256

Commitments and Contingencies (Note 11)

 

 

 

 

 

Total stockholders’ equity
407,607

 
398,657

 
398,085

 
399,545

 
(1,196,287
)
 
407,607

Total liabilities and stockholders’ equity
$
407,210

 
$
908,179

 
$
619,600

 
$
427,931

 
$
(1,326,057
)
 
$
1,036,863









15

Table of Contents

EXPRESS, INC.
CONDENSED CONSOLIDATING BALANCE SHEET
(Amounts in thousands)
(Unaudited)


 
 
February 2, 2013
 
Express, Inc.
 
Subsidiary
Issuers
 
Guarantor
Subsidiaries
 
Other
Subsidiaries
 
Eliminations
 
Consolidated
Total
Assets
 
 
 
 
 
 
 
 
 
 
 
Current assets
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
938

 
$
230,174

 
$
22,924

 
$
2,261

 
$

 
$
256,297

Receivables, net

 
5,612

 
3,147

 
2,265

 

 
11,024

Inventories

 
13,597

 
198,094

 
3,391

 

 
215,082

Prepaid minimum rent

 
451

 
23,697

 
1,018

 

 
25,166

Intercompany loan receivable

 
20,754

 

 

 
(20,754
)
 

Intercompany receivable

 

 
98,304

 
5,783

 
(104,087
)
 

Other

 
5,085

 
3,162

 
46

 

 
8,293

Total current assets
938

 
275,673

 
349,328

 
14,764

 
(124,841
)
 
515,862

Property and equipment, net

 
46,913

 
215,829

 
15,627

 

 
278,369

Tradename/domain name

 
197,719

 

 

 

 
197,719

Investment in subsidiary
369,140

 
371,084

 

 
363,356

 
(1,103,580
)
 

Deferred tax assets
738

 
10,369

 
5,701

 

 

 
16,808

Other assets

 
7,710

 
2,727

 
4

 

 
10,441

Total assets
$
370,816

 
$
909,468

 
$
573,585

 
$
393,751

 
$
(1,228,421
)
 
$
1,019,199

Liabilities and stockholders’ equity
 
 
 
 
 
 
 
 
 
 
 
Current liabilities
 
 
 
 
 
 
 
 
 
 
 
Accounts payable
$

 
$
173,395

 
$
1,132

 
$
1,598

 
$

 
$
176,125

Deferred revenue

 
1,223

 
26,507

 
121

 

 
27,851

Accrued bonus

 

 
334

 
2

 

 
336

Accrued expenses
(346
)
 
34,490

 
72,963

 
1,357

 

 
108,464

Intercompany payable

 
104,087

 

 

 
(104,087
)
 

Intercompany loan payable

 

 

 
20,754

 
(20,754
)
 

Total current liabilities
(346
)
 
313,195

 
100,936

 
23,832

 
(124,841
)
 
312,776

Long-term debt

 
198,843

 

 

 

 
198,843

Other long-term liabilities

 
34,074

 
96,706

 
5,638

 

 
136,418

Total liabilities
(346
)
 
546,112

 
197,642

 
29,470

 
(124,841
)
 
648,037

Commitments and Contingencies (Note 11)

 

 

 

 

 

Total stockholders’ equity
371,162

 
363,356

 
375,943

 
364,281

 
(1,103,580
)
 
371,162

Total liabilities and stockholders’ equity
$
370,816

 
$
909,468

 
$
573,585

 
$
393,751

 
$
(1,228,421
)
 
$
1,019,199




16

Table of Contents

EXPRESS, INC.
CONDENSED CONSOLIDATING STATEMENT OF INCOME AND COMPREHENSIVE INCOME
(Amounts in thousands)
(Unaudited)

 
Thirteen Weeks Ended May 4, 2013
 
 
 
Subsidiary
 
Guarantor
 
Other
 
 
 
Consolidated
 
Express, Inc.
 
Issuers
 
Subsidiaries
 
Subsidiaries
 
Eliminations
 
Total
Net sales
$

 
$
227,992

 
$
496,902

 
$
6,862

 
$
(223,232
)
 
$
508,524

Cost of goods sold, buying and occupancy costs

 
151,571

 
405,116

 
4,315

 
(223,255
)
 
337,747

Gross profit

 
76,421

 
91,786

 
2,547

 
23

 
170,777

Selling, general, and administrative expenses
112

 
38,294

 
71,804

 
2,412

 
1

 
112,623

Other operating expense (income), net

 

 
(562
)
 

 
22

 
(540
)
Operating income (loss)
(112
)
 
38,127

 
20,544

 
135

 

 
58,694

Interest expense, net

 
5,262

 
(469
)
 
12

 

 
4,805

(Income) loss in subsidiary
(32,505
)
 
(12,614
)
 

 
(32,505
)
 
77,624

 

Other expense (income), net

 

 

 
229

 

 
229

Income (loss) before income taxes
32,393

 
45,479

 
21,013

 
32,399

 
(77,624
)
 
53,660

Income tax expense (benefit)
(44
)
 
12,974

 
8,293

 

 

 
21,223

Net income (loss)
$
32,437

 
$
32,505

 
$
12,720

 
$
32,399

 
$
(77,624
)
 
$
32,437

Foreign currency translation gain (loss)
70

 
70

 

 
140

 
(210
)
 
70

Comprehensive income
$
32,507

 
$
32,575

 
$
12,720

 
$
32,539

 
$
(77,834
)
 
$
32,507

EXPRESS, INC.
CONDENSED CONSOLIDATING STATEMENT OF INCOME AND COMPREHENSIVE INCOME
(Amounts in thousands)
(Unaudited)
 
Thirteen Weeks Ended April 28, 2012
 
 
 
Subsidiary
 
Guarantor
 
Other
 
 
 
Consolidated
 
Express, Inc.
 
Issuers
 
Subsidiaries
 
Subsidiaries
 
Eliminations
 
Total
Net sales
$

 
$
298,049

 
$
492,453

 
$
3,111

 
$
(297,661
)
 
$
495,952

Cost of goods sold, buying and occupancy costs

 
198,995

 
402,042

 
3,696

 
(297,548
)
 
307,185

Gross profit

 
99,054

 
90,411

 
(585
)
 
(113
)
 
188,767

Selling, general, and administrative expenses
270

 
43,107

 
69,646

 
1,285

 
(113
)
 
114,195

Other operating expense (income), net

 
1,509

 
17

 
(1,511
)
 

 
15

Operating income (loss)
(270
)
 
54,438

 
20,748

 
(359
)
 

 
74,557

Interest expense, net

 
4,696

 

 
86

 

 
4,782

(Income) loss in subsidiary
(42,343
)
 
26,784

 

 
(42,343
)
 
57,902

 

Other expense (income), net

 

 

 
(208
)
 

 
(208
)
Income (loss) before income taxes
42,073

 
22,958

 
20,748

 
42,106

 
(57,902
)
 
69,983

Income tax expense (benefit)

 
(19,385
)
 
47,295

 

 

 
27,910

Net income (loss)
$
42,073

 
$
42,343

 
$
(26,547
)
 
$
42,106

 
$
(57,902
)
 
$
42,073

Foreign currency translation gain (loss)
(78
)
 
(78
)
 

 
(156
)
 
234

 
(78
)
Comprehensive income
$
41,995

 
$
42,265

 
$
(26,547
)
 
$
41,950

 
$
(57,668
)
 
$
41,995


17

Table of Contents

EXPRESS, INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(Amounts in thousands)
(Unaudited)

 
Thirteen Weeks Ended May 4, 2013
 
 
 
Subsidiary
 
Guarantor
 
Other
 
 
 
Consolidated
 
Express, Inc.
 
Issuers
 
Subsidiaries
 
Subsidiaries
 
Eliminations
 
Total
Operating Activities
 
 
 
 
 
 
 
 
 
 
 
Net cash provided by (used in) operating activities
$
1,739

 
$
(5,805
)
 
$
9,120

 
$
307

 
$

 
$
5,361

Investing Activities
 
 
 
 
 
 
 
 
 
 
 
Capital expenditures

 
(6,224
)
 
(9,213
)
 
(1,416
)
 

 
(16,853
)
Net cash provided by (used in) investing activities

 
(6,224
)
 
(9,213
)
 
(1,416
)
 

 
(16,853
)
Financing Activities
 
 
 
 
 
 
 
 
 
 
 
Payments on capital lease obligation

 
(15
)
 

 

 

 
(15
)
Excess tax benefit from share-based compensation

 
1

 

 

 

 
1

Proceeds from share-based compensation
1,082

 

 

 

 

 
1,082

Repayment of intercompany loan

 
1,972

 

 
(1,972
)
 

 

Borrowings under intercompany loan

 
(1,774
)
 

 
1,774

 

 

Repurchase of common stock
(1,785
)
 

 

 

 

 
(1,785
)
Net cash provided by (used in) financing activities
(703
)
 
184

 

 
(198
)
 

 
(717
)
 
 
 
 
 
 
 
 
 
 
 
 
Effect of exchange rate on cash

 

 

 
126

 

 
126

 
 
 
 
 
 
 
 
 
 
 
 
Net increase (decrease) in cash and cash equivalents
1,036

 
(11,845
)
 
(93
)
 
(1,181
)
 

 
(12,083
)
Cash and cash equivalents, beginning of period
938

 
230,174

 
22,924

 
2,261

 

 
256,297

Cash and cash equivalents, end of period
$
1,974

 
$
218,329

 
$
22,831

 
$
1,080

 
$

 
$
244,214












18

Table of Contents

EXPRESS, INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(Amounts in thousands)
(Unaudited)

 
Thirteen Weeks Ended April 28, 2012
 
 
 
Subsidiary
 
Guarantor
 
Other
 
 
 
Consolidated
 
Express, Inc.
 
Issuers
 
Subsidiaries
 
Subsidiaries
 
Eliminations
 
Total
Operating Activities
 
 
 
 
 
 
 
 
 
 
 
Net cash provided by (used in) operating activities
$
(32
)
 
$
33,335

 
$
12,242

 
$
77

 
$

 
$
45,622

Investing Activities
 
 
 
 
 
 
 
 
 
 
 
Capital expenditures

 
(3,780
)
 
(13,369
)
 
217

 

 
(16,932
)
Purchase of intangible assets

 
(185
)
 

 

 

 
(185
)
Net cash provided by (used in) investing activities

 
(3,965
)
 
(13,369
)
 
217

 

 
(17,117
)
Financing Activities
 
 
 
 
 
 
 
 
 
 
 
Payments on capital lease obligation

 
(13
)
 

 

 

 
(13
)
Excess tax benefit from share-based compensation

 
273

 

 

 

 
273

Proceeds from share-based compensation
623

 

 

 

 

 
623

Repayment of intercompany loan

 
140

 

 
(140
)
 

 

Repurchase of common stock
(1,349
)
 

 

 

 

 
(1,349
)
Net cash provided by (used in) financing activities
(726
)
 
400

 

 
(140
)
 

 
(466
)
 
 
 
 
 
 
 
 
 
 
 
 
Effect of exchange rate on cash

 

 

 
38

 

 
38

 
 
 
 
 
 
 
 
 
 
 
 
Net increase (decrease) in cash and cash equivalents
(758
)
 
29,770

 
(1,127
)
 
192

 

 
28,077

Cash and cash equivalents, beginning of period
1,575

 
121,273

 
27,964

 
1,550

 

 
152,362

Cash and cash equivalents, end of period
$
817

 
$
151,043

 
$
26,837

 
$
1,742

 
$

 
$
180,439










19

Table of Contents

13. Subsequent Events
On May 24, 2012, the Company's Board authorized the repurchase of up to $100 million of the Company's common stock, which may be made from time to time in open market or privately negotiated transactions. Subsequent to the first quarter of 2013, the Company repurchased 0.2 million shares of its common stock at an average price of $21.41 per share, totaling $3.3 million, including commissions.


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion summarizes the significant factors affecting the consolidated operating results, financial condition, liquidity, and cash flows of the Company as of the dates and for the periods presented below. The following discussion and analysis should be read in conjunction with our Annual Report on Form 10-K for the year ended February 2, 2013 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.”

Overview
Express is a specialty apparel and accessories retailer offering both women's and men's merchandise. We have over 30 years of experience offering a distinct combination of style and quality at an attractive value, targeting women and men between 20 and 30 years old. We offer our customers an assortment of fashionable apparel and accessories to address fashion needs across multiple wearing occasions, including work, casual, jeanswear, and going-out occasions.

The mixed results that we experienced in 2012 continued into the first quarter of 2013. We generally saw traffic in the malls remain slow early in the quarter as a result of, we believe, higher payroll taxes, delayed tax refunds, and uncertainty about the economy as a whole. This led to higher promotional activity throughout the mall in which we too participated in an effort to remain competitive. This higher promotional activity led to decreased merchandise margins and lower diluted earnings per share of $0.38 compared to $0.47 in the first quarter of 2012. We did, however, see strong responses to certain of our promotional activities in terms of volume, and our customers responded positively to our Spring product line. These factors, in addition to our continued growth in e-commerce, allowed us to increase revenues by 3% over the first quarter of 2012. As we look ahead to the remainder of 2013, we are confident in our product line and look forward to making additional progress against our 4 pillars of growth. Our results with respect to these pillars in the first quarter of 2013 and plans for the near future are as follows.

Improve Productivity of Our Retail Stores

Net sales per average gross square foot decreased from $357 for the twelve months ended April 28, 2012 to $344 for the twelve months ended May 4, 2013, primarily driven by decreased traffic and higher promotional activity. Net sales per average gross square foot is determined by dividing net sales (excluding e-commerce sales, shipping and handling revenue related to e-commerce, gift card breakage, and franchise revenue) for the period by average gross square feet during the period.

Expand Our Store Base
In the first quarter of 2013, we opened 3 new Company-operated stores, including 1 store in Canada, and closed 8 stores in the United States. As of May 4, 2013, we operated 620 locations. For the remainder of 2013, we expect to open approximately 13 additional stores, including 3 in Canada, and close 1 store in the United States. The planned store openings include 1 Company-owned flagship store in the United States. Another flagship location is planned to open in Spring 2014. These flagships will result in approximately $9 million in incremental pre-opening rent expense in 2013, of which $4.0 million was recognized in the first quarter and approximately $5 million is expected to be recognized in the second and third quarters of 2013. Our projected store closure is related to a dual- gender store conversion.

Expand Our e-Commerce Platform
In the first quarter of 2013, our e-commerce sales increased 48% over the first quarter of 2012, which was incremental to a 28% increase in the first quarter of 2012 over the first quarter of 2011. The growth in e-commerce sales in the first quarter of 2013 occurred in both men's and women's merchandise. We believe the significant drivers of our continued e-commerce

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growth were as follows: improving our website, from the look and feel to the overall functionality; offering a larger product assortment, with sizes, colors, and styles available exclusively online; and implementing free shipping everyday with a minimum purchase of $125. For the remainder of 2013, we will continue to look for ways to improve the e-commerce experience and generate additional e-commerce sales. E-commerce sales represented 14% of our total net sales in the first quarter of 2013. We continue to expect to see this channel grow to be at least 15% of net sales.

Expand Internationally
In the first quarter of 2013, we continued our international expansion with 2 additional franchise store openings in the Middle East and 1 additional franchise store opening in Latin America. At quarter end, we were earning revenue from 18 franchise locations, a net increase of 11 stores from the first quarter of 2012. For the remainder of 2013, we plan to sign deals with 2 additional franchise partners and open between 10 and 13 franchise store locations.
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 and other individual store performance factors, gross profit, and selling, general, and administrative expenses. We also review other metrics, such as EBITDA and Adjusted EBITDA.
Net Sales. Net sales reflects revenues from the sale of our merchandise, less returns and discounts, as well as shipping and handling revenue related to e-commerce, gift card breakage, and revenue earned from our franchise agreements.
Comparable Sales and Other Individual Store Performance Factors. Comparable sales are calculated based upon stores that were open at least thirteen full months as of the end of the reporting period. In the fourth quarter of 2010, we began including e-commerce sales in our comparable sales results and adjusted comparable sales figures retroactively back to the second quarter of 2009. A store is not considered a part of the comparable sales base if the square footage of the store changed by more than 20% due to remodel or relocation activities, or if we execute a phased remodel in place whereby a portion of the store is under construction and, therefore, that portion of the store is not productive selling space. Under the latter scenario, the store is excluded from comparable sales during the construction period only, and is then considered a comparable store when construction is complete. As we continue to increase our store count, we expect that non-comparable sales will begin to contribute more to our total net sales than they currently contribute. We also review sales per gross square foot, average unit retail price, units per transaction, average dollar sales per transaction, traffic, and conversion, among other things, to evaluate the performance of individual stores and on a company-wide basis.
Gross Profit. Gross profit is equal to net sales minus cost of goods sold, buying and occupancy costs. Gross margin measures gross profit as a percentage of net sales. Cost of goods sold, buying and occupancy costs includes the direct cost of purchased merchandise, inventory shrinkage, inventory adjustments, inbound freight to our distribution center and outbound freight to our stores, merchandising, design, planning and allocation, and manufacturing/production costs, occupancy costs related to store operations (such as rent, real estate taxes, landlord charges, common area maintenance, utilities, and depreciation on assets), and all logistics costs associated with our e-commerce business.
 Our cost of goods sold, buying and occupancy costs increase in higher volume quarters because the direct cost of purchased merchandise is tied to sales. Buying and occupancy costs are largely fixed and do not necessarily increase as volume increases. Changes in the mix of our products, such as changes in the proportion of accessories, which are higher margin, may impact our overall cost of goods sold, buying and occupancy costs. 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. We use third-party vendors and company-owned outlet stores to dispose of mark-out-of-stock merchandise. The primary drivers of the costs of the merchandise costs are raw materials, labor in the countries where our merchandise is sourced, and logistics costs associated with transporting our merchandise.
Selling, General, and Administrative Expenses. Selling, general, and administrative expenses include all operating costs not included in cost of goods sold, buying and occupancy costs, with the exception of costs such as proceeds received from insurance claims and gain/loss on disposal of assets, which are included in other operating (income) expense, net. These costs include payroll and other expenses related to operations at our corporate home office, store expenses other than occupancy, and marketing expenses, which primarily include production, mailing, and print advertising costs. With the exception of store payroll and marketing, these expenses generally are fixed and do not vary proportionally with net sales. As a result, selling, general, and administrative expenses as a percentage of net sales is typically higher in lower volume quarters and lower in higher volume quarters.


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Results of Operations
The table below sets forth the various line items in the unaudited Consolidated Statements of Income and Comprehensive Income as a percentage of net sales for the first quarter of 2013 and the first quarter of 2012.
 
Thirteen Weeks Ended
 
May 4, 2013
 
April 28, 2012
Net sales
100
 %
 
100
 %
Cost of goods sold, buying and occupancy costs
66
 %
 
62
 %
Gross profit
34
 %
 
38
 %
Selling, general, and administrative expenses
22
 %
 
23
 %
Other operating (income) expense, net
 %
 
 %
Operating income
12
 %
 
15
 %
Interest expense
1
 %
 
1
 %
Other expense (income), net
 %
 
 %
Income before income taxes
11
 %
 
14
 %
Income tax expense
4
 %
 
6
 %
Net income
6
 %
 
8
 %
Net Sales
 
Thirteen Weeks Ended
 
May 4, 2013
 
April 28, 2012
Net sales (in thousands)
$
508,524

 
$
495,952

Comparable sales percentage change
 %
 
4
%
Comparable sales percentage change (excluding e-commerce sales)
(5
)%
 
2
%
Gross square footage at end of period (in thousands)
5,389

 
5,222

Number of:
 
 
 
Stores open at beginning of period
625

 
609

New stores
3

 
4

Closed stores
(8
)
 
(7
)
Stores open at end of period
620

 
606


Net sales increased approximately $12.6 million, or 3%. Comparable sales were flat in the first quarter of 2013 compared to the first quarter of 2012. The flat comparable sales resulted from continued growth in e-commerce and an increase in store transactions offset by a decrease in store average dollar sales. We attribute the decrease in average dollar sales to additional promotional activity throughout the first quarter to remain competitive in a highly promotional landscape and to sell through slower-moving inventory. Non-comparable sales increased $11.8 million, driven by new store openings and remodels.
Gross Profit
The following table shows cost of sales and gross profit in dollars for the stated periods:
 
Thirteen Weeks Ended
 
May 4, 2013

April 28, 2012
 
(in thousands)
Cost of goods sold, buying and occupancy costs
$
337,747

 
$
307,185

Gross profit
$
170,777

 
$
188,767


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The 450 basis point decrease in gross margin, or gross profit as a percentage of net sales, in the first quarter of 2013 compared to the first quarter of 2012 was comprised of a 240 basis point deterioration in merchandise margin and a 210 basis point increase in buying and occupancy costs. The decrease in merchandise margin was primarily driven by increased promotional activity in the first quarter of 2013, as noted previously. The increase in buying and occupancy costs was primarily driven by rent, including the impact of approximately $4.0 million of pre-opening rent expense associated with the 2 flagship stores under construction, as well as increased e-commerce fulfillment costs resulting from additional e-commerce sales.

Selling, General, and Administrative Expenses
The following table shows selling, general, and administrative expenses in dollars for the stated periods:
 
Thirteen Weeks Ended
 
May 4, 2013

April 28, 2012
 
(in thousands)
Selling, general, and administrative expenses
$
112,623

 
$
114,195


The $1.6 million decrease in selling, general, and administrative expenses in the first quarter of 2013 compared to the first quarter of 2012 was driven by a $3.4 million decrease in marketing, including direct mail and point-of-sale visual marketing, and a $2.5 million decrease in incentive compensation. These decreases were partially offset by a $2.3 million increase in payroll, which was primarily related to additional headcount at our home office to support the international expansion and e-commerce growth pillars, merit increases, and stock compensation expense.

Income Tax Expense

The following table shows income tax expense in dollars for the stated periods:
 
Thirteen Weeks Ended
 
May 4, 2013
 
April 28, 2012
 
(in thousands)
Income tax expense
$
21,223

 
$
27,910


The effective tax rate was 39.6% for the first quarter of 2013 compared to 39.9% for first quarter of 2012. We anticipate our effective tax rate will be between 39.3% and 39.8% in 2013.

Liquidity and Capital Resources
General

Our business relies on cash flows from operations as our primary source of liquidity. We do, however, have access to additional liquidity, if needed, through borrowings under our Revolving Credit Facility. Our primary cash needs are for merchandise inventories, payroll, store rent, and capital expenditures, primarily associated with opening new stores, remodeling existing stores, and information technology projects. The most significant components of our working capital are merchandise inventories, accounts payable, and other accrued expenses. Our liquidity position benefits from the fact that we generally collect cash from sales to customers the same day or, in the case of credit or debit card transactions, within 3 to 5 days of the related sale, and have up to 75 days to pay certain merchandise vendors and 45 days to pay the majority of our non-merchandise vendors.

Our cash position is seasonal as a result of building up inventory for the next selling season and, as a result, our cash flows from operations during the Spring are usually lower when compared to the rest of the year. Our cash balances generally increase during the summer selling season and then increase further during the Fall and holiday seasons. We believe that cash generated from operations and the availability of borrowings under our Revolving Credit Facility will be sufficient to meet working capital requirements, anticipated capital expenditures, and scheduled interest payments for at least the next 12 months.
Cash Flow Analysis
A summary of cash provided by or used in operating, investing and financing activities are shown in the following table:

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Thirteen Weeks Ended
May 4, 2013
 
April 28, 2012
 
(in thousands)
Provided by operating activities
$
5,361

 
$
45,622

Used in investing activities
(16,853
)
 
(17,117
)
Used in financing activities
(717
)
 
(466
)
Increase (decrease) in cash and cash equivalents
(12,083
)
 
28,077

Cash and cash equivalents at end of period
$
244,214

 
$
180,439


Net Cash Provided by Operating Activities
The majority of our operating cash inflows are derived from sales. Our operating cash outflows generally consist of payments to vendors for merchandise, employees for wages, salaries, and other employee benefits, and landlords for rent. Operating cash outflows also include payments for income taxes and interest on long-term debt.

Net cash provided by operating activities was $5.4 million for the thirteen weeks ended May 4, 2013 compared to $45.6 million for the thirteen weeks ended April 28, 2012, a decrease of $40.3 million. The decrease in cash provided by operations primarily related to the following:

Items included in net income provided $55.0 million of cash for the thirteen weeks ended May 4, 2013 compared to $62.5 million for the thirteen weeks ended April 28, 2012. The reduction in the current year was primarily driven by the decreased performance of the business as discussed in "Overview" and "Results of Operations".

In addition to the decrease in cash provided by items included in net income discussed above, there was $49.6 million of cash used due to working capital changes during the thirteen weeks ended May 4, 2013 compared to $16.9 million of cash used in the thirteen weeks ended April 28, 2012